First Trust Portfolios has agreed to pay a $10 million fine and submit to censure after the Financial Industry Regulatory Authority found the firm provided excessive gifts and entertainment to representatives of retail broker-dealers, in violation of industry rules.
The settlement, announced Monday, also requires First Trust to certify its compliance with non-cash compensation rules for the next three years.
According to a release from Finra, between 2018 and February 2024, First Trust wholesalers routinely gave gifts, meals, and entertainment to client firm representatives that far exceeded regulatory limits. In some cases, these perks were tied to sales targets for First Trust products, such as exchange-traded funds and unit investment trusts. The firm also falsified expense records and sent client firms inaccurate reports about the value and frequency of non-cash compensation.
“Finra’s non-cash compensation rule is designed to protect investors by preventing financial recommendations from being unduly influenced by excessive gifts, entertainment or other perks supplied to broker-dealers or their registered representatives,” said Bill St. Louis, executive vice president and head of enforcement at Finra.
Finra Rule 2341 prohibits member firms from making or offering non-cash compensation, except for certain limited exceptions. These include gifts that do not exceed $100 per person annually and occasional meals or entertainment, as long as they are not tied to sales performance.
Despite these restrictions, First Trust’s practices went well beyond permitted boundaries. For example, two wholesalers provided client firm representatives with more than 25 pairs of courtside basketball tickets, each pair costing about $3,200.
In another instance, a representative received tickets to over 20 concerts and sporting events, valued at more than $31,000, over an 18-month period. That included luxury suite tickets to an NBA All-Star game, according to the full AWC letter from Finra.
The AWC also described how two First Trust wholesalers provided a client firm's representatives tickets to a Broadway show, at a cost of more than $1,800, during a New York trip.
In all those occasions, the clients were not accompanied by First Trust employees.
"Certain First Trust wholesalers provided bottles of alcohol as gifts to Client Firm representatives at a cost of up to $400 or more per bottle," Finra added.
Finra’s investigation also found that First Trust wholesalers sometimes preconditioned gifts on achieving specific sales targets. In one case, a client firm representative was given hockey tickets after selling $1 million in First Trust products.
The firm’s internal controls failed to prevent or detect these violations, and expense reports were routinely falsified. Some reports listed individuals as event attendees who were either deceased or no longer in the industry.
"At times, First Trust wholesalers coordinated with one another to falsify expense reports through text messages on personal devices, which were not subject to the Firm’s surveillance," Finra said.
"In addition, at least two supervisors suggested to wholesalers ways to submit expense reports so that the expenses merely appeared (but were not in fact) compliant with Client Firms’ internal limits on non-cash compensation."
During the relevant period, First Trust omitted more than $500,000 in gifts, meals, and entertainment from reports provided to client firms. The settlement notes that First Trust has since taken steps to address these issues, including creating a new compliance audit function and disciplining employees involved in the misconduct.
In settling the matter, First Trust did not admit or deny the findings but consented to the entry of Finra’s findings. The firm agreed to provide annual compliance certifications for three years as part of the settlement.
In June, Finra proposed raising the annual gift limit for member firms from $100 to $250, and then to $300, to account for inflation and codify existing guidance. However, the conduct at First Trust far exceeded even these proposed limits.
“First Trust has taken numerous actions to remediate the misconduct described,” the settlement states, including implementing new supervisory systems and tracking mechanisms for event tickets.
The sanctions are effective as of October 31.
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