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January 10, 2018 - Source: ACA Insight

Jennifer Daly comments on holiday gift policy compliance

© 2018 ACA Insight and ACA Compliance Group. All rights reserved. Reproduced with written permission of the publisher.

Don’t Fear the Grinch: Catch Employees Who Violate Holiday Gift Policies

With the holiday season upon us, the question of compliance with gift and entertainment policies and procedures rises anew. Advisory firms with strong cultures of compliance may believe that they have few, if any, violators of their firms’ gift requirements. Yet even with a 99 percent compliance rate, a firm with 100 employees will still have one violator.

Firms without strong and entrenched cultures of compliance will doubtless find higher percentages of non-compliance from those who intentionally or unintentionally violate gift policies and procedures. Preventative measures, such as training or sending reminders of advisory firm gifting policies as the holiday season approaches, will help these from  occurring.

But compliance is not complete without monitoring and, when necessary, catching those who commit the violations and then taking appropriate action. With that in mind, the question becomes, what are the best methods to determine when gift violations occurs and who violated them?

Start with the assumption that you won’t catch every violation or every violator, said Pepper Hamilton partner John Falco. “It’s difficult in any compliance program to catch things that happen outside the office. A lot depends on the honesty and integrity of the people that you hire.”

Making all this a bit more complicated is that the SEC does not have a specific rule saying that gifts shall not be given. This is an area where the agency has made a point of not being prescriptive. It did issue guidance in February 2015 about gifts and fund advisory personnel, and it will come down hard on an adviser that violates its own compliance rules on gifts, as it did in at least one enforcement action.

Otherwise, the Investment Company Act regulates fund advisory personnel in regard to accepting gifts and entertainment, and FINRA limits the practice for brokerdealers under its Rule 3220. There are also various local anti-bribery and/or anti-corruption statutes that come into play. When doing business overseas, these include the Foreign Corrupt Practices Act, which prohibits bribery of public officials.

Catching the violators

Here are some suggested practices that an adviser might employ to find gift violations:

Monitor email and instant messenger activity. “Around holiday season, step up the monitoring of email,” said King & Spalding partner Jennifer Daly, who previously served as chief compliance officer at a hedge fund and a broker-dealer. “Work keywords and phrases into your search, like ‘gift,’ ‘thoughtful gift,’ and ‘thinking of me.’” Words and terms like these, as well as others like “tickets,” “please accept this gift,” and “complimentary” “will bring up a lot of hits, much of it is just noise,” said Falco, but they may also help to narrow down the results. Morrison & Foerster counsel Kelley Howes suggested avoiding phrases like “happy holidays,” which she said will “get a lot of false hits.”

Monitor social media. People on social media sites like Facebook, Twitter or LinkedIn tend to be a bit more informal than on email and may reveal more, said Day Pitney attorney Michael Cummings. You may not be able to do keyword searches here, but visits to employee sites, subject to applicable state and federal law, may be occasional spot checks. “Ultimately, it’s just another method of communication,” he said.

Work with the mailroom. When gifts are sent during the holiday, they may be sent to a number of individuals at the firm. “Set up a process so that the mailroom, prior to bulk sets of packages being delivered to the employee, contacts you,” said Daly. “If people catch wind that compliance is visiting the mailroom periodically, they will become more cautious.” Also consider visiting the mailroom periodically yourself, she said.

Maintain communication with the chief financial officer. “Start a dialogue with the CFO during the holiday season,” said Falco. “Ask about strange requests.” The CCO isn’t the only gatekeeper at an advisory firm, he said, and working in tandem with the CFO can produce results. This step can also be employed alongside email monitoring, so that a suspicious email might lead a CCO to check with the CFO about unusual expense requests at about the same time.

Check expense reports. “These are always a good way to find ‘blips,’ spikes in spending on individual employee expense reports,” said Howes. “If someone seems to be trending upward around the holidays, this might be a good time to pull the report.”

Tap professional assistants. This might sound a bit much, but if it is done in an open manner as part of an overall culture of compliance, it can help, said Daly. “People’s professional assistants around holiday time can be your best friend,” she said. “Be very transparent and inclusive about it. Tell the bosses that you would like to ask the assistants to send gifts they receive and open for their professionals to compliance for approval. They might appreciate the help in not having to make the determinations themselves around what to report.”

Walk the floor. “Be more of a presence and keep an eye out for bottles of alcohol, anything that has gift wrapping, and then have a conversation with that person,” Daly said. “If you do it once, word gets around.”

Big ticket items

The methods listed above may work well for smaller gifts, whether they are being sent to clients or vendors, or are being received from those parties. But such gifts also may be perfectly acceptable and fall within an adviser’s de minimis gift policy. Such policies allow the exchange of gifts below certain dollar amounts, such as $100 to $250.

But what about larger gifts that result from long-term relationships between the adviser and vendors, or that may be sent from the adviser to a big client or to a prospective client?

These may be more difficult to catch, said Howes. “Increase the surveillance of email and IM traffic between employees and vendors that are already big relationships or those on the verge becoming big relationship.” As for clients, she said that her experience is that most clients will not send advisers large gifts, that it is the other way around – and advisers should step up email and IM monitoring here, as well.

Don’t forget to spread the net. “There is a tendency for these checks to focus on the investment staff and the trading staff,” Howes said. “This is not necessarily the right approach. Mid-level people in other roles, for example those dealing with large printing and mailing vendors might be where big-ticket gifts are sent from vendors like printers.” Nor should you fall into the trap of believing that upper management, because they make more money than employees, is less likely to be influenced by lowdollar-value gifts. Consider including them in your monitoring efforts.

When you catch them

What should you do when you find a violation and identify the employee? “If you do find something, make an example of the situation, but in a nice way,” said Daly. “For instance, go down to the trading floor and ask the person when he or she has time to meet with you so you can review the gift policy together in light of that gift he or she received. Don’t chastise the person in public or run afoul of Human Resources requirements, of course. But others will see and hear that you brought it to the employee’s attention.”

“You don’t want to create an environment where people aren’t effective in their jobs because they feel like someone is hovering over them,” said Falco.

Keep a record

Memorialize what you uncover. Consider keeping track of gifts given or received that you uncover. If any cross your firm’s de minimis threshold, they are required by regulation to be noted on a violations log. CCOs should also keep copies of emails or other communications sent to these employees to remind them that it is against the firm’s policy to give or accept these gifts.

Finally, consider this: If executives and employees are reminded that a violation to the gift policy must be logged and maintained, and can also be requested and reviewed by SEC examiners, they may be less likely to violate the gift policy. If they know that CCOs will keep copies of memos sent to executives and employees when they violate that policy, they may be more likely to think twice. Such documentation will also serve as good protection for the CCO against potential SEC charges.

In the end, though, “the best you can do is to create a culture of compliance and let everyone know that there will be consequences if they violate it and, perhaps just as importantly, that you are there to help solve the problem, not create awkward or unpleasant situations,” said Daly. Self-reporting will always be the most efficient and effective way to catch violations.” Howes agreed. “If you create a culture of compliance, your employees will do the right thing,” she said.