The Financial Industry Regulatory Authority (FINRA) recently sanctioned First Trust Portfolios L.P., a Wheaton, Illinois-based securities wholesaler, imposing a $10 million fine for serious violations involving non-cash compensation and misleading reporting. This enforcement highlights underscores the importance of strict compliance with gift and entertainment rules in the securities industry.

      I.            Background

First Trust has operated as a wholesale distributor of securities issued mainly by affiliated investment companies since 1991. It employs approximately 700 registered representatives across four branch offices nationwide.

   II.            The Violations: What Went Wrong?

A.    Unauthorized and Excessive Gifts

First Trust wholesalers routinely provided lavish perks that far exceeded FINRA’s annual $100 per person non-cash gift limit. These included:

• Multiple instances of courtside basketball tickets valued at around $3,200 per pair, given without an accompanying First Trust employee.
• Tickets to a Broadway musical costing more than $1,800, again without firm accompaniment.
• Bottles of alcohol priced at $400 or higher, given repeatedly to client representatives.
• Luxury suite tickets for NBA and NHL playoff and professional football games worth tens of thousands of dollars.

Additionally, one representative received over $31,000 in tickets and entertainment within 18 months, such as NBA All-Star game luxury suite access. Another was given more than $50,000 in gifts and entertainment over a four-year period, including meals, concerts, and golf outings, with seventeen events exceeding $21,000 in one year.

Furthermore, six wholesalers explicitly linked gifts to sales targets, such as promising hockey game tickets contingent on a broker selling $1 million in Unit Investment Trusts (UITs) or offering to pay for future events if sales goal of $1 million to $10 million were achieved.

These actions violate FINRA Rules 2341(l)(5) and 2010, which prohibit excessive gifts and sales-based inducements.

B.     Falsification of Expense Reports and Records

More than 40 expense reports were falsified involving more than $650,000. Violations included:

• Listing deceased or inactive individuals as attendees.
• Omitting actual attendees from reports to lower apparent costs.
• Coordinating false reports through private texts, evading firm surveillance.

Supervisors occasionally advised wholesalers on how to disguise true expenses, violating FINRA Rules 4511 and 2010, Section 17(a) of the Securities Exchange Act of 1934, and Exchange Act Rule 17a-3.

C.    Failure to Accurately Report to Client Firms

First Trust submitted at least 25 quarterly reports to client firms, understating or omitting non-cash perks benefits over $500,000, including a failure to report luxury suite tickets costing $20,000 for football games in late 2019. Despite improvements after October 2021, some omissions continued, violating FINRA Rule 2010.

D.    Lack of Adequate Supervision Supervisory Failures

Despite having written policies, First Trust failed to supervise the provision and reporting of non-cash compensation properly. The supervisory system relied on wholesalers’ unverified self-reporting and permitted modifying approved reports without internal checks. Notably, the firm failed to supervise Firm-paid tickets prior to October 2021, significantly compounding compliance failures.

These supervisory failures violated FINRA Rules 3110(a), 3110(b), and 2010.

III.            Remedial Actions Taken by First Trust

To address these issues, First Trust implemented several corrective measures, including:

• Establishing a dedicated compliance audit function reporting directly to executive management focused on non-cash compensation and sales practices.
• Enhancing tracking systems for event ticket distributions.
• Disciplining employees through suspensions without pay, fines, and increased supervision.

IV.            Sanctions and Undertakings

First Trust agreed to:

• A censure.
• A $10 million fine.
• An undertaking mandating the firm’s senior management, identified as a registered principal, to certify annually for three years that it complies with FINRA Rules 2010, 2341, 3110, and 4511 as well as Exchange Act 17(a) and Exchange Act Rule 17a-3.

The firm voluntarily waived any right to claim an inability to pay, now or at any time after the execution of this AWC, the monetary sanction imposed in this matter.

   V.            Why This Matters?

This case underscores the importance of ethical practices and cautious supervision in brokerage operations. It reflects FINRA’s dedication to protecting investors by holding firms accountable for improper gift and entertainment practices that may skew financial advice.

For firms operating in the securities industry, First Trust’s penalty is a stark reminder to maintain transparent records, enforce reasonable gift limits, and foster a culture of compliance to ensure trusted client relationships and market integrity. The statements in this blog post are allegations as set forth in the AWC.

Herskovits PLLC represents broker-dealer and registered persons in defense of FINRA investigations and disciplinary actions.  Feel free to contact us for a consultation at (12) 897-5410.