FINRA Fines First Trust $10M for Exceeding Gift Limits, Falsifying Records

First Trust, a wholesale distributor of securities issued primarily by affiliated investment companies, has been censured and fined $10 million by the Financial Industry Regulatory Authority for an alleged six-year scheme involving excessive non-cash compensation, falsified records, and misleading its retail broker-dealer partners.

First Trust accepted and consent to FINRA’s findings without admitting or denying them.

FINRA found that between at least 2018 and February 2024, First Trust routinely violated rules designed to protect investors from undue influence by providing lavish gifts, meals, and entertainment to representatives of broker-dealers who sold First Trust products.

The core of the violation centered on breaches of FINRA Rule 2341, which strictly limits non-cash compensation to retail broker-dealer representatives. Despite FINRA rules, First Trust wholesalers allegedly provided gifts that significantly exceeded the $100 annual limit per person. Examples included

• Over 25 instances of two courtside professional basketball tickets (worth approximately $3,200 per pair) given to representatives to use alone;
• Tickets to a Broadway show valued at over $1,800 given to representatives to use alone; and
• Bottles of high-end alcohol costing up to $400 or more.

Wholesalers provided entertainment that was deemed “so frequent and extensive as to raise questions of propriety.” One representative received over $31,000 in tickets to more than 20 concerts and sporting events, including luxury suite tickets to an NBA All-Star game, over an 18-month period.

Over a four-year period, FINRA found that various First Trust wholesalers provided meals and entertainment to another client firm representative on dozens of occasions, including tickets to luxury suites at multiple professional sporting events, concerts and golf outings, valued at more than $50,000. In one 12-month period, First Trust wholesalers provided meals and entertainment to this client firm representative on at least 17 occasions, valued at more than $21,000.

In multiple instances, non-cash compensation, including entertainment and gifts, was preconditioned on achieving sales targets for First Trust products. In one example, a wholesaler allegedly tied hockey tickets to a representative selling $1 million in First Trust unit investment trusts, or UITs.

In addition to the excessive spending, the firm and its wholesalers engaged in widespread misconduct concerning recordkeeping. More than 40 First Trust wholesalers allegedly created and submitted false internal expense reports for over $650,000 worth of non-cash compensation. These reports falsely listed representatives as event attendees who did not actually attend, were deceased, or were no longer in the securities industry.

First Trust also allegedly generated and submitted at least 25 quarterly reports to its client firms that were materially false and misleading, omitting over $500,000 in non-cash compensation to evade the client firms’ internal limits. In one case, a quarterly report omitted over $20,000 spent on entertaining representatives in a luxury suite at professional football games.

In addition, FINRA charged First Trust with violating supervisory rules, finding the firm failed to establish a system reasonably designed to achieve compliance with non-cash compensation rules and recordkeeping requirements.

The firm consented to the censure and $10 million fine. It also agreed to a three-year undertaking requiring it to provide annual certifications to FINRA regarding its implementation of a supervisory system designed to achieve full compliance with the rules identified in the settlement. The firm has also reported taking disciplinary action against dozens of employees involved in the misconduct.

First Trust, headquartered in Wheaton, Ill., has been a FINRA member firm since 1991 and has approximately 700 registered representatives and four branch offices.

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