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FINRA Fines First Trust $10 Million for Non-Cash Compensation Violations: A Warning on Supervisory Oversight and Cultural Drift

FINRA’s latest $10 million sanction against First Trust Portfolios L.P. marks one of the largest penalties tied to non-cash compensation practices in recent years—and underscores how seemingly routine client-entertainment activity can evolve into systemic supervisory failure.

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The Case and Its Scope

On November 3, 2025, FINRA announced that First Trust consented to findings that it violated FINRA Rule 2341 governing investment-company securities, along with related supervisory and recordkeeping obligations. The conduct spanned from 2018 through early 2024 and involved widespread gifts, meals, and entertainment provided by the firm’s wholesalers to registered representatives of retail broker-dealers.

According to the settlement, these non-cash benefits—totaling hundreds of thousands of dollars—frequently exceeded the $100 per-recipient annual limit and, in many instances, were directly or indirectly conditioned on sales of First Trust products. Wholesalers falsified expense reports, omitted significant gifts from client-firm disclosures, and failed to maintain accurate records.

While First Trust did not admit or deny the findings, it agreed to the censure, a $10 million fine, and a three-year requirement to provide annual compliance certifications to FINRA.

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The Broader Message

This case illustrates that FINRA’s enforcement focus has shifted back toward sales incentives and cultural controls—areas that had received comparatively less attention during the post-Reg BI transition period. The size of the fine suggests a clear intent to reinforce that non-cash compensation remains a core investor-protection priority.

The violations here are not novel. Rule 2341’s parameters are well established: limited gifts under $100, occasional meals or entertainment that are “not frequent,” and, crucially, never conditioned on sales performance. But the First Trust matter shows how internal pressure to capture or maintain distribution channels can blur those lines. When entertainment becomes habitual, or when “relationship management” is coupled to sales targets, a firm’s compliance culture begins to drift.

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Supervisory Systems and Accountability

FINRA’s order highlights that the problem extended beyond individual misconduct. The firm’s supervisory structure—its expense-approval process, data controls, and internal certifications—failed to detect or prevent falsified submissions and misleading disclosures to retail broker-dealers.

In FINRA’s language, that equates to a failure “to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance.” That formulation, standard in many settlements, signals that the regulator views the misconduct as systemic rather than episodic.

For other firms, the lesson is not simply to tighten entertainment logs but to reassess whether their internal review mechanisms actually correlate data across departments. Expense approvals that operate in isolation from sales reporting and branch supervision create blind spots that auditors are increasingly unwilling to overlook.

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Implications for Arbitration and Litigation

For counsel handling customer or employment disputes, this enforcement action provides fertile ground for inquiry. Non-cash compensation practices can influence sales recommendations in subtle ways—and evidence of undisclosed perks or entertainment can bolster claims of conflicts of interest, unsuitable recommendations, or supervisory negligence.

Expect arbitration claimants to reference this case as an example of how entrenched entertainment cultures undermine investor protection. Even where no direct tie to First Trust exists, respondents may face tougher scrutiny on whether their firms’ supervisory frameworks genuinely prevented similar behavior.

On the defense side, the case reinforces the importance of document integrity. Where compliance records are inconsistent or incomplete, credibility erodes quickly. Demonstrating that a firm’s controls were reasonable in design and application—rather than merely on paper—becomes central to mitigating liability.

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Compliance Takeaways

• Reassess “relationship-building” practices. Occasional meals or modest events may remain permissible, but any activity linked—explicitly or implicitly—to sales metrics violates both the rule and the spirit of fair dealing.
• Centralize oversight of expense and sales data. Integration between compliance, finance, and supervisory teams reduces the risk of falsified or incomplete reporting.
• Refresh annual training. Wholesalers and marketing personnel should understand that gifts and entertainment can carry regulatory consequences equivalent to cash incentives.
• Document and audit. Firms should maintain contemporaneous records that demonstrate compliance with Rule 2341 and verify that supervisory reviews are substantive, not perfunctory.
• Prepare for retrospective scrutiny. As this case shows, FINRA is willing to look back several years; firms cannot assume old practices are insulated by time.

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Looking Ahead

This action continues a pattern of enforcement emphasizing firm-wide accountability for cultural and supervisory breakdowns. It serves as a cautionary tale for broker-dealers that operate complex wholesaler networks or rely heavily on relationship-driven sales channels.

The takeaway is straightforward: a firm’s entertainment policy can be a window into its culture. When compliance boundaries erode quietly over time, the eventual consequences—financial, reputational, and operational—can be severe. The First Trust case should prompt every compliance department to ask a simple but revealing question: Could this happen here?

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