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Question

Difficulty: MediumGifts, Gratuities, Political Contributions, and Outside Business Activities

A registered representative at a broker-dealer hosts a business dinner costing $300 per person for three executives of an institutional client to discuss upcoming underwriting services. The representative attends the dinner in full and pays for the expense through the broker-dealer's corporate account. Under FINRA rules and guidance governing gifts, gratuities, and business entertainment, which of the following statements correctly describes the regulatory treatment of this expenditure?

  1. The dinner is treated as legitimate business entertainment rather than a gift, provided the representative attends and the expenditure complies with the broker-dealer's supervisory policies.Answer
  2. B
    The expenditure is a violation of FINRA rules because any meal or entertainment benefit exceeding $100 per recipient is strictly prohibited.
  3. C
    The expenditure triggers an automatic two-year ban on municipal underwriting business under federal pay-to-play regulations.
  4. D
    The expenditure is permitted only if the representative obtains prior written authorization and regulatory clearance from FINRA.

Answer

The expenditure is classified as legitimate business entertainment rather than a gift, provided the registered representative attends the event and it complies with the member firm's internal supervisory procedures.
Under FINRA Rule 3220 and related regulatory guidance, when an associated person accompanies a client to an event (such as a dinner, show, or sporting event), the activity is treated as business entertainment rather than a gift. Business entertainment is not subject to the statutory $100 annual gift limit, provided the entertainment is neither so frequent nor so extensive as to raise questions of propriety, and aligns with the firm's written supervisory procedures.

Step-by-Step Solution

1
Identify whether the activity is classified as an unconditional gift or business entertainment.
Because the registered representative hosted and attended the dinner, the activity falls under business entertainment guidance rather than the FINRA Rule 3220 unconditional gift rules.
FINRA Rule 3220 restricts gifts and gratuities to $100 per person per year, but host-attended events (where a firm representative accompanies the guest) are considered business entertainment.
2
Evaluate the regulatory constraints on business entertainment.
Business entertainment is permitted as long as it is reasonable, not overly lavish or frequent, and complies with the firm's written supervisory procedures.
FINRA does not set an explicit dollar cap on business entertainment but requires firms to maintain written procedures to prevent improper influences.

Key Concept

Distinction Between Gifts ($100 Limit) and Hosted Business Entertainment under FINRA Rule 3220
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Topics

Gifts, Gratuities, Political Contributions, and Outside Business Activities