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News February 7, 2005 Issue

Gifts and Entertainment: The New Hot Topic

Does your personal trading code of ethics include a gift policy?

Perhaps it should. If an adviser hasn’t addressed gifts in its code, said a CCO at a Pennsylvania firm, "I think it would be a comment from the SEC." She said that she recently sent a "big e-mail" about gifts to her firm’s marketing and sales department. "I’m concerned about it," said the CCO, noting that she’s recently lowered her firm’s $150 de minimis limit on gifts to $100, to bring it in line with the NASD’s limit.

In particular, the CCO said that she is concerned with gifts offered by brokers that her firm is directing business to. "The appearance of conflicts of interest is just too great," she said. Despite the fact that "the brokers should know" that they are subject to NASD limits, she said that employees at her firm have been offered lavish gifts, such as Superbowl tickets. "An occasional sporting event ticket is fine," she said. "That’s customary in the industry." But her view is that employees at her firm should not be accepting tickets to major sporting events.

The CCO also noted that the SEC is currently focusing on the role of pension consultants and other consultants that assist clients in selecting advisers. Gifts to and from such consultants, she said, may draw additional scrutiny.

Clearly, gifts have become a compliance "hot button." For the first time, SEC Division of Investment Management director Paul Roye mentioned the topic — albeit in passing — in a recent speech: "I strongly encourage you to step back and review the unique kinds of conflicts your employees may face, such as entertainment and the receipt of gifts, and tailor your codes of ethics to your firms’ particular circumstances," he said.

There’s no explicit requirement that advisers adopt a gift policy. In the Advisers Act code of ethics releases, the SEC said only that advisers "should consider" whether to add a gift policy to their code

If you do want to add one, the place to start is the Investment Counsel Association of America’s Best Practices for Investment Adviser Code of Ethics, which contain a number of suggestions for drafting gift policies.

How does Pickard and Djinis partner Mari-Anne Pisarri approach the issue? Pisarri says that the gift policies she prepares for clients are roughly based on the NASD rules, and that she generally recommends that advisers and their employees not give or receive gifts in the excess of $100. Unlike the ICAA’s guidelines, she generally excludes gifts provided to clients from the de minimis limit.

As for entertainment, her approach is that the value of entertainment can exceed $100 provided that it is appropriate, reasonable, and customary, and is hosted by either the adviser (if the adviser is providing the entertainment) or by the person providing the entertainment (if the adviser is on the receiving end).

Pisarri illustrated all of this using the example of a pair of Orioles tickets. Let’s say an adviser wants to provide two regular season tickets to a broker who has referred clients to the firm in the past. If the dollar cost of the two tickets combined was less than $100, that would seem to be fine. If the two tickets were club seats worth more than $100 in aggregate, however, the adviser couldn’t simply hand them over to the broker and say, "Have fun at the park." Instead, the adviser could arrange for an employee of the adviser to treat the broker to a night at the park — even if the value of the each ticket alone was over $100.

But what if we’re talking about the World Series? In that case, the entertainment might be considered simply too lavish, even if the adviser was accompanying the broker.

What if we’re talking about a client of the firm, rather than a broker? Under Pisarri’s approach, the adviser could hand over the tickets — regardless of whether they were nosebleed seats or for the best box in the park — and say to the client, "Have fun."

Let’s flip the scenario and put the adviser on the receiving end. If someone (client, broker, or other service provider) offers the adviser the tickets, the adviser could accept them if the two tickets together were less than $100. If the combined value of the tickets was more than $100, the adviser should decline the tickets. However, if the client, broker, or other party giving the tickets planned to accompany the advisory firm employee attending the game, that would not seem to be a problem, assuming the entertainment was not otherwise lavish (i.e., no World Series).

Pisarri also noted that she typically makes an exception for personal gifts to or from a person who has a personal relationship "separate and apart from the advisory relationship."

There are other approaches to gifts, as well. Pisarri recounts the approach of one advisory firm she has worked with: "If you can’t eat it, don’t take it." (In other words, meals are okay, material gifts are not.)

If you’re looking for models, you’ll find several gift policies on the web. (Type this search string into Google™: code of ethics gifts and entertainment adviser.) Here’s some basic language to get you started:

You may not offer, give, provide, or receive any gift or entertainment unless it:

  • is not a cash gift;
  • is not excessive in value (not more than $100 annually to or from one person);
  • is consistent with customary business practices;
  • cannot be construed as a bribe or payoff;
  • does not violate any laws or regulations; and
  • would not be embarrassing to either you or the firm if made public.