Quick Facts
Overview
FINRA fined First Trust Portfolios L.P., a wholesale distributor of investment company securities, $10 million and imposed a censure for violations involving non-cash compensation provided to representatives of retail broker-dealers.
The firm exceeded limits on gifts, meals, and entertainment, preconditioned some on sales targets, falsified internal expense reports, provided misleading information to client firms, and failed to maintain reasonable supervisory systems.
First Trust also agreed to annual compliance certifications for three years.
Details of the Case
The violations stemmed from wholesalers providing excessive non-cash compensation, such as gifts, meals, and entertainment, to representatives of client firms selling First Trust products, often without accompaniment, which reclassified them as gifts under FINRA guidance.
Some compensation was tied to sales targets, creating point-of-sale incentives that could compromise customer suitability. Additionally, over 40 wholesalers submitted falsified expense reports totaling more than $650,000, including listing non-attendees or underreporting values, leading to inaccurate books and records.
First Trust also sent at least 25 quarterly reports to client firms that omitted over $500,000 in non-cash compensation, misleading those firms about compliance with their internal limits. The firm's supervisory system lacked guidance on evaluating excessive compensation, failed to verify expense report accuracy, allowed post-approval modifications, and initially excluded firm-paid tickets from oversight until October 2021, with ongoing omissions thereafter.
First Trust has remediated by creating a new compliance audit function, updating systems to track tickets, and disciplining employees through suspensions, fines and heightened supervision.
WORKED EXAMPLES
Excessive Basketball Game Tickets
On more than 25 occasions, two First Trust wholesalers provided client firm representatives with pairs of courtside tickets to professional basketball games costing approximately $3,200 each pair, for use without a First Trust employee present.
- This exceeded the $100 annual per-person gift limit under FINRA Rule 2341(l)(5)(A).
- Representatives attended unaccompanied, classifying the tickets as gifts rather than business entertainment.
Broadway Show Tickets Gift
Two First Trust wholesalers gave a client firm representative tickets to a Broadway show valued at more than $1,800 for use during a New York trip, without accompaniment by a First Trust employee. The representative used the tickets independently, reclassifying them as a gift per FINRA Notice 06-06.
Hockey Playoff Tickets Preconditioned on Sales
A First Trust wholesaler offered tickets to a professional hockey game to a client firm representative, preconditioned on selling $1 million in First Trust unit investment trusts (UITs) to customers; the target was met, and tickets were provided post-transaction as a gift.
Extensive Entertainment Over 18 Months
Over an 18-month period, various First Trust wholesalers provided one client firm representative with tickets to more than 20 concerts and sporting events valued at over $31,000, including luxury suite tickets to an NBA All-Star game.
Falsified Expense Reports with Deceased Attendees
In dozens of instances, First Trust wholesalers submitted expense reports listing client firm representatives as attendees who were deceased or out of the securities industry at the event time, relating to over $650,000 in non-cash compensation. Wholesalers coordinated falsifications via personal text messages, evading firm surveillance.
Fines and Penalties
The total fine imposed was $10,000,000. Additional penalties included a censure and an undertaking to provide annual certifications for three years confirming implementation of a supervisory system compliant with the violated rules.
Key Quotes
"the increased use of non-cash compensation creates significant point-of-sale incentives that may compromise the requirement to match the investment needs of the customer with the most appropriate investment product." (From Notice to Members 98-75)
"a member must accompany or participate in an event for it to be business entertainment. Thus, for example, if a member gives tickets to a sporting event but does not accompany the recipient to the event, the tickets are deemed to be a gift rather than business entertainment." (From Notice to Members 06-06)
"I’ll keep you informed of at least the fun events. $1M turns on the green light of support. $10M and I never say no." (From a First Trust wholesaler communication preconditioning non-cash compensation on sales targets)
Sources
