According to FINRA, First Trust Portfolios L.P. was fined $10 million for providing excessive non-cash compensation including gifts, meals, and entertainment in connection with the distribution of First Trust investment company securities, and for related misconduct including falsifying expense records and sending false information to client firms.
Between at least 2018 and February 2024, First Trust wholesalers regularly violated FINRA Rule 2341 by providing to client firm representatives gifts that significantly exceeded the annual limit and meals and entertainment that were so frequent and extensive as to raise questions of propriety. FINRA Rule 2341 prohibits payments or offers of non-cash compensation subject to specified exceptions, including gifts not exceeding $100 per person and occasional meals or entertainment that are not preconditioned on achievement of sales targets.
The violations were egregious and systematic. On more than 25 occasions, two First Trust wholesalers provided client firm representatives courtside basketball tickets at a cost of approximately $3,200 per pair. Over an 18-month period, various First Trust wholesalers provided one client firm representative entertainment including tickets to more than 20 concerts and sporting events with a total value exceeding $31,000.
The gifts far exceeded even the higher limits recently proposed by FINRA. In May 2025, FINRA filed a proposal with the SEC to increase the gift limit to $250 annually, and in September 2025, FINRA filed an amended proposal further increasing the limit to $300 annually. First Trust's gifts exceeded even these proposed higher limits by substantial margins.
Additionally, First Trust wholesalers preconditioned gifts on sales targets. A First Trust wholesaler preconditioned a gift of tickets to a professional hockey game on a client firm representative selling $1 million in First Trust products to his customers. This preconditioning violates the rule's prohibition on tying non-cash compensation to achievement of sales targets.
The firm's misconduct extended beyond providing excessive gifts and entertainment. First Trust wholesalers falsified internal expense records relating to more than $650,000 worth of non-cash compensation provided to client firm representatives. This falsification concealed the true nature and extent of the gifts and entertainment from the firm's internal controls.
Furthermore, First Trust sent client firms false and misleading information about non-cash compensation provided to their representatives. First Trust omitted more than $500,000 worth of gifts, meals, and entertainment from reports to client firms, preventing those firms from supervising their representatives' receipt of non-cash compensation.
First Trust also failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with non-cash compensation rules and expense-related recordkeeping requirements. The firm's inadequate supervision enabled the widespread violations to continue for years.
Non-cash compensation rules exist to protect investors by preventing financial recommendations from being unduly influenced by excessive gifts, entertainment, or other perks. When representatives receive substantial gifts and entertainment from product sponsors, their recommendations may be influenced by gratitude or desire for future benefits rather than solely by customers' best interests.
