Gifts and Entertainment

When Compliance Officers build and assess their firms’ compliance programs, there is often significant emphasis placed on ensuring codes of ethics, outside business activities oversight, and personal trading procedures and requirements that are designed to prevent and detect potential conflicts of interest. These aspects of a compliance program can play key roles in keeping firms conflict free. Yet, there’s another source of potential conflicts some firms don’t emphasize enough: Gifts and Entertainment.

A Gap in Understanding

Employees can usually tell you that their firm has a policy governing gifts and entertainment and may be able to recite key provisions of the policy. As a general rule, employees who have been in the industry for any significant amount of time understand that:

  • the firm prohibits the receipt of gifts over a specific dollar amount
  • employees must memorialize gifts on a gift log
  • employees require pre-approval before they can give a gift or extend an invitation for entertainment (dinner, sporting event, concert, etc.)
  • employees require pre-approval before they can attend a conference, dinner, sporting event, concert, or other event at a third party’s expense

Most firms’ policies tend to be similar in these regards. Where employees and the compliance department often struggle is in understanding why the policy is in place, and how supervisors or the compliance department monitor and oversee gifts and entertainment compliance.

Help Employees Understand the “Why”

Firms can strengthen their gifts and entertainment programs by helping employees better understand the reasons behind the policy.

For broker-dealers and investment company advisory personnel, it’s simple enough to point to FINRA rule 3220 and section 17(e)(1) of the Investment Company Act and draw from published guidance. For retail investment advisers, the lack of a specific rule governing gifts and entertainment makes such policies more nebulous. Compliance can help employees understand that firm policies are designed to help ensure the firm meets its fiduciary duty to avoid conflicts and complies with the anti-fraud provisions of the Investment Adviser’s Act.

Break it Down to Help Employees Understand the “How”

Firms can further improve the likelihood that employees will comply with gifts and entertainment policies by including the following elements in training programs:

  • Provide definitions and example of “gifts” and “entertainment”. First, let employees know what constitutes a gift and what falls under the category of “entertainment.” Give examples of each, including tangible things and more subtle gifts like private discounts offered only to firm personnel. Help employees understand when tickets to a concert or game are considered “gifts” vs. “entertainment.”
  • Exclude nominal gifts and entertainment from firm pre-approval requirements. Many firms require pre-approval of gifts over a certain dollar amount (often $100) but allow employees to give or receive gifts under that amount without obtaining prior authorization. Help employees understand why that rule is in place and explain the exclusion for nominal gifts merely relates to the pre-approval requirement; small gifts must still be reported on the gift log. If your firm’s policy excludes gifts of promotional merchandise from the policy, explain that too so the compliance team won’t end up reviewing lists full of branded pens and coffee mugs.
  • Include gifts and entertainment in initial and ongoing training efforts. Every new employee should be trained on the firm’s gifts and entertainment policy initially. This is often included in a larger code of ethics training module, but it can also be effective as stand-alone training. As with any type of compliance policy, one-time training is not likely to be effective over the long term. Include gifts and entertainment compliance in annual or more frequent training and communications, to help keep it on employees’ radar screens.

Give Your Supervisors and the Compliance Department the Tools They Need

In firms that still rely on paper or spreadsheet-based gift logs, periodic reviews may do little more than verify that an employee is maintaining a log. It can be nearly impossible to spot patterns of gifts that could pose potential conflicts. If employees realize this, they may be haphazard about recording gifts and entertainment out of a belief that it simply doesn’t matter one way or the other.

Using an electronic solution for gifts and entertainment compliance can alleviate these issues while eliminating process inefficiencies and roadblocks. Employees can use the solution to report gifts and obtain pre-approval when necessary, streamlining and speeding up the process. Compliance staff can report at the employee, office, team, or entire firm level, helping identify issues so they can be addressed appropriately. This is where a compliance monitoring software can add so much value.

Strengthening your firm’s gifts and entertainments policy by helping employees understand the “why” and “how”, and by giving employees and reviewers the tools they need to effectively do their jobs, can help your firm avoid potential risk.

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