The financial advisory industry has rigorous rules that apply specifically to the acceptance of gifts from clients. These regulations help uphold a transparent and ethical financial advisor-client relationship, which can minimize potential conflicts of interest. Financial advisors who dismiss these rules may face repercussions, including fines and license suspensions or revocations. Here’s what you need to know about gift acceptance rules and how to effectively navigate these regulations.
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Rules on Accepting Gifts as a Financial Advisor
Gift acceptance regulations in the financial advisory industry primarily focus on hindering unethical behavior and maintaining a certain level of honesty between advisors and clients.
According to FINRA Rule 3220, financial advisors are only allowed to accept gifts valued up to $100 annually per person. This rule aims to “avoid improprieties that may arise when a member firm or its associated persons give anything of value to an employee of a customer or counterparty and to preserve an employee’s duty to act in the best interests of that customer.”
Excluding the $100 limit set by the FINRA Board of Governors, there are three other exceptions to this rule:
- Occasional meals, tickets to sporting events, theater or comparable entertainment that is neither frequent nor extensive.
- Payment or reimbursement by product issuers, advisors, underwriters and their affiliates in connection with training or education meetings.
- Internal firm non-cash compensation arrangements that are based on total production and equal weighting of product sales.
Neither of these can be preconditioned on the achievement of sales targets.
SEC Rules for RIA Firms
According to the federal agency, “employees may not accept, directly or indirectly, from clients gifts in excess of $100 per calendar year per client.”
Additionally, RIA employees must:
- Report a business meal, tickets to a non-major sporting event or other similar entertainment, including the name of the client, the date of the event and the type of activity that took place.
- Never accept any gift, even under $100, if it’s intended or reasonably judged as causing an RIA to act inconsistently with their fiduciary duty or make an employee feel beholden to a client or representative.
- Never accept cash gifts in any amount.
RIAs should also take note that if an employee gets a gift over $100 sent unbeknownst to them, their supervisor should arrange to return and report it.Gifts under $100 could be shared with all employees, and promotional items valued under $30 will not get counted against the $100 limit.
Rules for Municipal Dealers, Advisors and Staff
Municipal Securities Rulemaking Board (MSRB) also imposes a $100 limit on gifts “in relation to the municipal securities or municipal advisory activities of the employer of the recipient of the payment or service.”
However, this general rule does not apply to occasional meals or theatrical, sporting and entertainment tickets that are hosted by the firm or associated persons as part of a business event.
Other gifts excluded are decorative items commemorating a business transaction, promotional items valued under $100, bereavement gifts and personal gifts like a wedding gift or a congratulatory gift for the birth of a child.
Tips for Following Gift Rules
No matter which approach a firm takes, here are four common things that your gift compliance policy should include:
- Define differences between gifts and entertainment. Different regulations apply to gifts and entertainment. For example, a bottle of wine may be considered a gift, while a concert ticket could qualify as entertainment. Understanding the difference can help clients avoid inadvertent mistakes that place their advisors in compromising situations.
- Make gifts and entertainment policies part of your training. Employees must fully understand your compliance rules to make them effective. Therefore gifts and entertainment policies should be incorporated into code of ethics training to ensure awareness.
Understanding and complying with gift acceptance regulations is vital for financial advisors. Not only does it promote ethical conduct and preserve trust in the advisor-client relationship, but it also safeguards advisors from fines and license suspensions or revocations.
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