Non-Cash Compensation

To thank a bank employee who has referred several mutual fund customers to him during the year, Aurelio wants to send a gift. Under FINRA Rule 3220, the ceiling on gifts given in relation to the business of the recipient employer is:

1. A.There is no dollar limit provided the gift is recorded on the firm gift log.Recording is required in addition to the limit, not instead of it.
2. B.100 dollars per recipient per year, in the aggregate.Correct. Rule 3220 sets a 100 dollar annual per-person ceiling.
3. C.250 dollars per recipient per year.250 dollars is not the figure in Rule 3220.
4. D.100 dollars per gift, with no annual limit on the number of gifts.The cap is an annual aggregate, which is exactly the trap in splitting gifts up.

Why: FINRA Rule 3220 caps gifts at 100 dollars per individual per year where the gift is in relation to the business of the recipient employer, and requires firms to keep a record of all such gifts. Ordinary and usual business entertainment in which the associated person participates is treated separately from gifts, and separate rules govern non-cash compensation in connection with the sale of investment company securities.

In FINRA's rules governing compensation in the distribution of investment company shares and variable contracts, what does the term non-cash compensation mean?

1. A.Compensation deferred to a later tax year under a written arrangement between the firm and the representative.Wrong. Deferring a cash payment changes only when the cash arrives; the compensation is still cash and the rule does not reach it.
2. B.Equity of the employing member firm awarded to a representative as part of an annual bonus.Wrong. This describes an internal pay arrangement between a firm and its own employee, not compensation tied to distributing a sponsor's product.
3. C.Anything of value that an associated person provides to a customer in the course of servicing the account.Wrong. This describes the direction of a gift to a customer, whereas non-cash compensation flows to the person doing the selling.
4. D.Any form of compensation received in connection with the sale and distribution of securities that is not cash, such as merchandise, prizes, or travel.Correct. The definition is intentionally broad so that recasting an inducement as a prize or an award does not take it outside the rule.

Why: Non-cash compensation is any form of compensation received in connection with the sale and distribution of securities that is not cash. Merchandise, prizes, trips, tickets, and gifts all qualify, which is why the rules had to address them separately from cash concessions that appear in the prospectus. Because these items never show up in a sales load or a commission schedule, they are the natural channel for inducements that would distort product recommendations. The definition is deliberately broad so that relabelling an inducement as a reward or an award does not remove it from the rule.

A fund sponsor invites representatives from unaffiliated broker-dealers to a training and education meeting and pays their travel costs. Which condition must be satisfied for that payment to be permissible non-cash compensation?

1. A.The sponsor must extend the same invitation to every representative registered with the attending member firm.Wrong. Universal invitation is not required; a sponsor may invite a subset so long as the selection is not based on sales production.
2. B.The sponsor must also pay travel costs for each attendee's spouse or guest so that no attendee is advantaged.Wrong. Guest expenses are exactly what the rule forbids the sponsor to cover, because they serve no educational purpose.
3. C.The attending representative must reimburse the sponsor for any portion of the trip devoted to recreation.Wrong. No reimbursement mechanism appears in the rule; permissibility is judged by the conditions on the meeting itself.
4. D.Attendance may not be conditioned on the representative having met a sales target, and the employing member must approve it in advance.Correct. Removing production from the selection criteria is what keeps the payment educational rather than an incentive to sell.

Why: Payment for attendance at a training and education meeting is permitted only under conditions designed to keep it educational rather than promotional. The representative's employing member must approve the attendance in advance, the location must be appropriate to the purpose of the meeting, and attendance may not be conditioned on the representative having achieved a sales target. The sponsor may not pay the expenses of a representative's guests, since those costs have no educational justification. Condition the invitation on production and the payment stops being reimbursement for training and becomes a sales incentive the rule forbids.

A member firm wants to run an internal sales contest awarding non-cash prizes to its own registered representatives. What does the non-cash compensation rule require of the contest's design?

1. A.The prize must be modest in value and awarded no more than once in any calendar year.Wrong. Frequency and value limits are not what the rule imposes here; it regulates how credit is assigned across products.
2. B.Credit must weight all products within a category equally, and the award must rest on total production rather than sales of one product.Correct. Equal weighting removes the differential that would otherwise pay a representative to prefer one sponsor's product.
3. C.The contest must be open to every associated person of the firm, whether registered or not.Wrong. Eligibility breadth is not the rule's concern; the corrupting feature is unequal credit among competing products.
4. D.Each participating product sponsor must fund the portion of the prize attributable to sales of its own products.Wrong. Sponsor funding is the arrangement the rule most wants to avoid, since it is a sponsor paying for favourable distribution.

Why: An internal non-cash sales contest is permitted only where the credit given weights all variable contracts, or all investment company securities, equally, and where the award is based on total production across those products rather than on sales of any particular one. The rule works this way because a contest that pays more for one sponsor's fund pays the representative to recommend that fund, corrupting the recommendation at its source. The prize must also come from the member firm itself or an affiliate, not from an outside sponsor buying favourable distribution. Weight one product family more heavily and the contest stops being a productivity incentive and becomes a payment for preferring a product.