Know When to Hold 'Em, Know When to Fold 'Em

Q: I've been a certified financial planner and investment advisor rep for six years, but have worked in the industry for 15 years. I'm planning a client-appreciation event and I've been polling my clients. They say that they'd like to get together for a night of Texas Hold 'Em, but I want to make it worth their while by offering extra value to the finalists. I understand that I'm limited in how much

Q:

I've been a certified financial planner and investment advisor rep for six years, but have worked in the industry for 15 years. I'm planning a client-appreciation event and I've been polling my clients. They say that they'd like to get together for a night of Texas Hold 'Em, but I want to make it worth their while by offering extra value to the finalists.

I understand that I'm limited in how much I can spend per attendee and don't want to get into trouble. How do I allocate the cost of any cash prize or other gift, like a golf bag, awarded to winners of the tournament? What are some do's and don'ts for a client-appreciation event that I might not know about? Can I amortize these costs over all of the attendees — which I would prefer — or do I have to amortize them over tournament participants, or even winners, only?

A:

With apologies to Kenny Rogers, you've got to know when to hold 'em and know when to fold 'em. There is nothing like a good poker game to raise all types of ethical quandaries for people in the securities business. We are certain that our questioner is not “bluffing” us (pardon the pun) because so many in the securities industry find themselves in similar positions.

Registered reps and investment advisors have traditionally provided their clients with gifts in appreciation of their business — things like tickets to games or the theater, or smaller trinkets like golf balls, pens and clothing. These gifts received very little attention until the hedge fund market-timing and late-trading investigations revealed that some very expensive gifts were being tossed around like pocket change.

Many reps had conveniently forgotten the dictates of NASD Conduct Rule 3060, which prohibited making gifts in excess of $100. That rule exempts such gifts as meals, theater and sports tickets, so long as they are given only occasionally. In January, the NASD proposed amendments to the rule that would require stricter procedures and compliance over a firm's business entertainment program, but the amendment has not yet been approved.

Initially — and this may seem simplistic — the registered rep or investment advisor must decide whether holding such a poker tournament is worth the potential ethical hassles. Many would suggest that such events do not really generate customer loyalty. Providing exceptional service is really the truest way to obtain or retain a client's business.

However, if he decides to go ahead with the tournament, the advisor must determine whether any of his institutional, public or corporate clients have internal ethics guidelines that would prohibit participation in such an activity. Additionally, the advisor should inquire into any restrictions that his firm may have placed on providing gifts to clients. Over the last few years, some firms have reviewed and rewritten their gift-giving practices to cut costs and comply with NASD Conduct Rule 3060. Some firms have placed significant limits on gift giving and begun to require manager or compliance approval.

Once written approval has been sought from both the firm and the client, the advisor should establish a budget for the event and the poker game. Although just one person may “win” the “grand prize” and others take home smaller winnings, the cost of said prizes would be best spread out over all of the tournament participants, assuming they will have the same opportunity to win the grand prize. The budget itself then may need to be approved, and proper documentation should be made of those who are invited and those who attend, as well as the final cost of the event.

In sum, our poker-playing friend should make sure he's got his cards all in order before he shows his hand.

Ernest Badway
Saiber, Schlesinger Satz & Goldstein
Newark, N.J.
973-622-3333

[email protected]

A:

As an investment advisor representative (IAR), you should start by reviewing your investment-advisory firm's code of ethics regarding client gifts, appreciation events or other business entertainment. Many investment-advisory firms limit the value of client gifts/entertainment and require an IAR to receive advance approval from — or provide written disclosure — to his or her supervisory principal. To the extent that your firm doesn't have any written policies regarding client gifts/entertainment, you should contact your firm's compliance officer to clarify its policy.

Although the SEC does not have a specific rule limiting the value of a gift or entertainment offered by an IAR to a client, it should be understood that an IAR could very well breach his fiduciary duty to a client by offering a luxurious gift or extravagant entertainment to an employee of that client, if it could be reasonably characterized as an attempt to induce the employee of the client to act in a manner that's not in the best interest of the client.

Moreover, if a third-party money manager underwrites the expense of your client event, this should be disclosed in your investment-advisory firm's Form ADV with an explanation that this could influence your recommendation of money managers.

Finally, in the event that you are also a registered rep of a broker/dealer, you are subject to NASD Rule 3060, which limits gifts to less than $100 for employees of a client. The NASD has interpreted ordinary and usual business entertainment as not constituting a gift “so long as it is neither so frequent nor so extensive as to raise any question of propriety.”

However, this rule is currently subject to a proposed amendment, which would eliminate the $100 limit for a gift but require the b/d to avoid entertainment with the “likely effect of causing such employee to act in a manner that is inconsistent with the best interests of the customer.” Most b/ds have applied Rule 3060 in a broad fashion to prohibit any gift over $100 to even individual retail clients. As a result, it's critical to also consult with your b/d's compliance officer.

Bryan Hill
RIA Compliance Consultants
Omaha, Neb.
402-345-4034

[email protected]

Not sure whether you have to pay back a forgiveable loan? Witnessed a work colleague do something that makes you squeamish?

Don't fret. Send your questions to Registered Rep. Contributing Editor Ann Therese Palmer at [email protected]. Then, look for an answer in a future Ethical Rep column. Anonymity guaranteed.

The Ethical Rep.
Registered Rep.
249 West 17th Street, Third Floor
New York, N.Y. 10011-5300
[email protected]
Fax: 913-514-3890.

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