Rulings Class: Rules for Proper Incentive Events

Maribel Gerstner; photo by Greg Puls

You want your corporate event to be remembered for its great camaradie and the great experience it provided. You do not want your event to be remembered because it broke the rules and wound up costing your company plenty in fines and bad publicity.

As assistant vice president and chief compliance officer for Allstate Distributors in North-brook, Ill., Maribel Gerstner is an expert on U.S. Financial Industry Regulatory Authority rules covering meetings and gifts. FINRA is the largest nongovernmental regulator for securities firms doing business in the U.S. Its goal is to ensure market integrity and protect the investing public. Here are her tips for playing by the FINRA rules at incentive events:

Q: To whom do FINRA rules apply?

A: Banks and broker/dealers that sell securities products and are registered with FINRA. The rules typically come into play when your company is a product provider, and you want to get registered reps who work for other companies to sell your products.

Q: What's the intent of the rules?

A: They are guidelines for companies to avoid improperly influencing someone to sell products that might not be in the best interest of a customer.

Q: How can a company structure a FINRA-compliant meeting?

A: There are different, interrelated rules that need to be considered. Which rules apply depends on the nature of the trip or meeting and the relationship of the firm hosting the event to the [potential attendee]. Also, FINRA rules aren't the only ones in force. There are IRS [federal Internal Revenue Service] and state insurance regulations that apply to planning meetings for financial services reps. And beyond that, there are your company's rules and the potential attendees' companies' rules. But the bottom line is, “What is the influence on the rep?”

Q: Is there any situation in which a planner is on safe ground when booking a pure incentive trip?

A: Yes. The key to meeting the FINRA rule for “award trips” is that similar types of products must have similar weights. In other words, it's not just a company's proprietary products that can count toward qualification for the trip but all products in a specific category. Take a step back and you can see the reason for this rule. The whole purpose of FINRA rules is to protect the consumer. If the rep qualifies to win a fabulous trip only if he/she sells certain products, then that could improperly influence the rep to offer customers the products that count toward the trip. Reps need to offer customers products that are suitable for their financial circumstances.

Q: What other rules come into play?

A: State insurance regulations and federal and state income tax rules must be considered as well. If the rep sells insurance products, such as variable annuities and variable life insurance, which are regulated at the state level, the state rules that apply to that rep must also be consulted. Allstate actually has a separate company for New York reps because the rules are so complex. For example, New York does not permit pure incentive trips for financial services agents; there must be educational content for a substantial part of each day. Is the trip taxable for attendees? That usually depends on whether there is business content or not. If the trip has no business content, its value could be included in taxable income.

Q: As companies work through their own FINRA compliance, could some incentive trips be recast as education conferences?

A: Yes, but it wouldn't be an incentive trip; it would be a training and education [T&E] meeting.

Q: What is the most important information planners should record?

A: The meeting planner has to ensure that the reps have properly qualified to attend the trip. This includes confirmation that they qualified based on the sales requirements and that they are approved by the compliance department to attend. Then, all of the expenses of the trip have to be tracked and, if they are taxable, this information has to be reported to the financial area that is responsible for rep compensation.

Q: Does your company hold incentive trips?

A: Yes, we have incentive trips for our own reps. We also sponsor T&E conferences for our reps and for reps of other firms.

Q: If I work for a financial services company, can I invite registered reps of other firms to attend my T&E meeting?

A: Yes, you are allowed to pay for their expenses to attend a T&E meeting.

Q: Can I hold that meeting at a resort?

A: FINRA rules require a T&E meeting be held in a location “appropriate” to the purpose of the meeting. That has been interpreted to mean where your company is located or a nearby facility, or in an office or location near where the reps are located. We're lucky at Allstate because Chicago is an attractive destination for meetings. That said, there could be times I would get a better rate at a resort than I would in downtown Chicago, so the resort could be “appropriate” if it's proximate to where the reps attending are located. If multiple regional meetings are being held, other appropriate locations can be considered; for example, Los Angeles or San Francisco for West Coast reps, Atlanta or Orlando [Fla.] for Southeast reps, and New York or D.C. for Northeast reps. You can still pick a nice location. But you typically can't send the Georgia reps to California.

Q: Can I do a three-day meeting with training in the morning, lunch, followed by golf or a spa in the afternoon, and then dinner each day?

A: Probably not. FINRA interprets the T&E exception to the non-cash-compensation rule as an event that is first and foremost intended for education. Training should occupy substantially all of the workday, which means three hours for a half-day meeting and six hours for a full-day meeting. So, in this example, it would be reasonable for the meeting to last 1.5 days, not three days. Of course there is a gray area here, too, which is: What makes sense on travel days? For example, if travel takes a substantial part of the day, I can pay for the hotel room on arrival night and the second night if they have a full day of education.

Q: Can spouses attend T&E meetings?

A: No. The host company cannot pay for any expenses of a guest of a registered rep of another firm.

Q: Should I inform the reps' firms that they are invited?

A: Yes. You must receive prior approval because there could be a disciplinary issue with a rep that you are not aware of, or the firm may limit the number of T&E events their reps can attend. Firms may also have any number of other specific policies that must be followed. For example, their reps may not be allowed to travel more than 200 miles, or they can't attend a meeting for more than two days. As a sponsor of a meeting, you have to follow the rep's firm's rules. This gets especially difficult when you have many reps from many different firms attending the same event.

This article originally appeared in our sister publication Financial & Insurance Meetings. To learn more about FINRA, visit www.finra.org.