Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Interpretive Material to NASD Rule 3060 To Require Members To Adopt Policies and Procedures Addressing Business Entertainment, 28743-28752 [E7-9742]
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
sunset one year after the Pilot Stocks
Phase Date, currently scheduled to
occur on July 9, 2007. NASD has filed
the proposed rule change for immediate
effectiveness.12 The proposed rule
change will become operative upon
filing with the Commission.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,13 which
requires, among other things, that NASD
rules be designed to prevent fraudulent
and manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. NASD
believes that the proposed exemptive
authority is appropriate because it will
allow NASD to address certain
implementation issues as they arise.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
jlentini on PROD1PC65 with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
While NASD did not solicit comments
on the proposed rule change, as
discussed above, NASD did receive a
comment letter in connection with SR–
NASD–2007–002.14 NASD is filing the
proposed rule change specifically to
address this comment letter and the
concerns raised by the commenter about
the burdens associated with
implementation of the new Regulation
NMS-related trade report modifiers. As
noted above, NASD has determined that
the Regulation NMS-related modifiers
required under the NASD trade
reporting rules are crucial to its
regulatory program and does not agree
with the commenter that the self-help
modifier should be optional. NASD
believes that the proposed exemptive
authority strikes a fair balance between
the needs of NASD’s regulatory program
and member concerns regarding the
timing and burdens of the necessary
systems changes. The proposed rule
change should alleviate such burdens by
affording members additional time, if
needed, to make the necessary systems
12 NASD is filing this proposed rule change for
immediate effectiveness to allow NASD to address
exemptive requests immediately without regard to
when the changes to the underlying trade reporting
rules are operational.
13 15 U.S.C. 78o–3(b)(6).
14 See FIF Letter, supra note 11.
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changes relating to the self-help
modifier, the qualified contingent trade
modifier, the sub-penny modifier, and
the modifier used to distinguish
inbound and outbound intermarket
sweep orders.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change
has become effective pursuant to
Section 19(b)(3)(A)(i) of the Act 15 and
subparagraph (f)(1) of Rule 19b–4
thereunder,16 because it constitutes a
stated policy, practice, or interpretation
with respect to the meaning,
administration, or enforcement of an
existing rule. At any time within 60
days of the filing of the proposed rule
change, the Commission may summarily
abrogate such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2007–032 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASD–2007–032. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
15 15
16 17
PO 00000
U.S.C. 78s(b)(3)(A)(i).
CFR 240.19b–4(f)(1).
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28743
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of the filing also will be
available for inspection and copying at
the principal office of NASD. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2007–032 and
should be submitted on or before June
12, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7–9741 Filed 5–21–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55765; File No. SR–NASD–
2006–044]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing of
Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto
Relating to Interpretive Material to
NASD Rule 3060 To Require Members
To Adopt Policies and Procedures
Addressing Business Entertainment
May 15, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 11,
2006, the National Association of
Securities Dealers, Inc. (‘‘NASD’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by NASD. On April
17, 2007, NASD filed Amendment No.
1 to the proposed rule change.3 On May
1, 2007, NASD filed Partial Amendment
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 replaced and superseded the
original rule filing in its entirety.
1 15
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
No. 2 to the proposed rule change.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.5
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD is proposing to adopt
Interpretive Material (‘‘IM’’) to NASD
Rule 3060 to require members to adopt
policies and procedures addressing
business entertainment. Below is the
text of the proposed rule change.
Proposed new language is in italics.
*
*
*
*
*
IM–3060. Business Entertainment
The NASD Board of Governors is
issuing this interpretation concerning
the obligations of a member in
connection with any business
entertainment of a customer
representative. This interpretation does
not apply to any non-cash
compensation that falls within Rule
2820(g) or Rule 2830(l) (i.e.,
entertainment provided by offerors to
associated persons of a member in
connection with the sale and
distribution of variable contracts or
investment company securities). This
interpretation does not apply to any
member that does not engage in
business entertainment. For any
member that engages in business
entertainment, this interpretation
applies only with respect to business
entertainment provided to customer
representatives. This interpretation
supersedes any prior interpretive letters
or statements of NASD staff regarding
business entertainment under Rule
3060.
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(a) General Requirements
No member or person associated with
a member shall, directly or indirectly,
provide any business entertainment to a
customer representative pursuant to the
establishment of, or during the course
of, a business relationship with any
customer that is intended or designed to
cause, or would be reasonably judged to
have the likely effect of causing, such
4 Partial Amendment No. 2 attached Exhibit 4 of
Amendment No. 1, which shows changes of the
proposed rule text from the immediately preceding
filing.
5 The Commission also is separately publishing a
notice by the New York Stock Exchange LLC
(‘‘NYSE’’) to propose new NYSE Rule 350A on
business entertainment, which is substantially
similar to NASD’s proposed rule text. See Securities
Exchange Act Release No. 55766 (May 15, 2007)
(SR–NYSE–2006–06). The NYSE proposal and the
NASD proposal primarily differ in that the NYSE
proposal contains a ‘‘Notice to Customers’’
provision. See discussion infra Part IV, Solicitation
of Comments section.
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customer representative to act in a
manner that is inconsistent with:
(1) The best interests of the customer;
or
(2) The best interests of any person to
whom the customer owes a fiduciary
duty.
(b) Definitions
For purposes of this interpretation,
the following definitions shall apply:
(1) The term ‘‘customer’’ means:
(A) A person that maintains a
business relationship with a member via
the maintenance of an account, through
the conduct of investment banking, or
pursuant to other securities-related
activity; or
(B) A person whose customer
representative receives business
entertainment for the purpose of
encouraging such person to establish a
business relationship with the member
by opening an account with the member
or by conducting investment banking or
other securities-related activity with the
member.
(2) The term ‘‘customer
representative’’ means a person who is
an employee, officer, director, or agent
of a customer, unless such person is a
family member of the customer.
(3) The term ‘‘family member’’ means
a person’s parents, mother-in-law or
father-in-law, spouse, brother or sister,
brother-in-law or sister-in-law, son-inlaw or daughter-in-law, and children.
(4) The term ‘‘business
entertainment’’ means any social event,
hospitality event, sporting event,
entertainment event, meal, leisure
activity, or event of like nature or
purpose, including business
entertainment offered in connection
with a charitable event, educational
event or business conference, as well as
any transportation or lodging related to
such activity or event, in which an
associated person of a member
accompanies a customer representative.
(A) If a customer representative is not
accompanied by an appropriate
associated person of the member, any
expenses associated with the business
entertainment will be considered a gift
under Rule 3060 unless exigent
circumstances make it impractical for
an associated person of the member to
attend. All instances where such exigent
circumstances are invoked must be
clearly and thoroughly documented and
be subject to the prior written approval
of a designated supervisory person or, in
very limited circumstances where such
prior approval cannot reasonably be
obtained, to a prompt post-event review
to be conducted and documented by
such supervisory person.
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(B) Anything of value given or
provided to a customer representative
that does not fall within the definition
of ‘‘business entertainment’’ is a gift
under Rule 3060.
(C) In valuing business entertainment
expenses pursuant to this interpretation,
a member’s written policies and
procedures must specify the
methodology to be used by the member
to calculate the value of business
entertainment. In general, business
entertainment expenses should be
valued at the higher of face value or cost
to the member.
(c) Written Policies and Procedures
(1) Each member must have written
policies and supervisory procedures
that:
(A) Define forms of business
entertainment that are appropriate and
inappropriate using quantitative and/or
qualitative standards that address the
nature and frequency of the
entertainment provided, as well as the
type and class of any accommodations
or transportation provided in
connection with such business
entertainment; and
(B) Make clear that anything of value
given or otherwise provided to a
customer representative that does not
fall within the definition of ‘‘business
entertainment’’ is a gift under Rule
3060; and
(C) Impose either specific dollar limits
on business entertainment or require
advance written supervisory approval
beyond specified dollar thresholds; and
(D) Are designed to detect and
prevent business entertainment that is
intended as, or could reasonably be
perceived to be intended as, an
improper quid pro quo or that could
otherwise give rise to a potential conflict
of interest or undermine the
performance of a customer
representative’s duty to a customer or
any person to whom the customer owes
a fiduciary duty; and
(E) Establish standards to ensure that
persons designated to supervise and
administer the written policies and
procedures are sufficiently qualified;
and
(F) Require appropriate training and
education for all personnel who
supervise, administer, or are subject to
the written policies and procedures.
(2) A member’s written policies and
procedures may distinguish, and set
specifically tailored standards for,
business entertainment in connection
with events that are deemed to be
primarily educational, charitable, or
philanthropic in nature, provided that
such standards comply with the
requirements of this interpretation and
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
are explicitly addressed in the written
policies and procedures.
(d) Recordkeeping
(1) Each member’s written policies
and procedures must require the
maintenance of detailed records of
business entertainment expenses
provided to any customer
representative. The member is not
required to maintain records of:
(A) Business entertainment when the
total value of the business
entertainment, including all expenses
associated with the business
entertainment, does not exceed $50 per
day; or
(B) Additional expenses incurred in
connection with otherwise recorded
business entertainment that do not, in
the aggregate, exceed $50 per day.
(2) Each member’s written policies
and procedures must include provisions
reasonably designed to prevent
associated persons of the member from
circumventing the recordkeeping
requirements in contravention of the
spirit and purpose of this interpretation
(e.g., a pattern of providing a customer
representative with business
entertainment valued at $48).
(3) Each member’s written policies
and procedures must require that, upon
a customer’s written request, the
member will promptly make available to
the customer any business
entertainment records regarding
business entertainment provided to
customer representatives of that
customer.
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(e) Exemption for Members With
Business Entertainment Expenses Below
$7,500
A member whose business
entertainment expenses in the course of
its fiscal year are below $7,500 shall be
subject only to paragraphs (a), (b), and
(c)(1)(D) and (E) of this interpretation,
and shall be exempt from paragraphs (c)
(other than (c)(1)(D) and (E) as noted
above) and (d). Each member that relies
on this exemption must evidence that its
business entertainment expenses are
below the $7,500 threshold.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASD included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NASD has prepared
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summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
(A) Background: NASD Rule 3060
prohibits any member or person
associated with a member, directly or
indirectly, from giving anything of value
in excess of $100 per year to any person
where such payment is in relation to the
business of the recipient’s employer. In
1999, NASD staff issued an interpretive
letter stating that Rule 3060 does not
prohibit ‘‘ordinary and usual business
entertainment’’ (such as an occasional
meal, sporting event, theater
production, or comparable
entertainment event) provided that the
entertainment ‘‘is neither so frequent
nor so extensive as to raise any question
of propriety.’’ 6 The 1999 Letter noted
that the interpretation was based, in
part, on NASD’s rules governing noncash compensation in connection with
the offer and sale of investment
company shares and variable annuities.
Recently, NASD members have
requested more guidance on the rules
concerning gifts and business
entertainment in the wake of press
reports of enforcement actions regarding
gifts and gratuities.7 In response to these
requests, NASD is proposing
interpretive material to NASD Rule 3060
to outline the policies and procedures
that a member must adopt in connection
with its business entertainment
practices.8 The proposed rule change
would supersede any prior guidance of
NASD staff regarding business
entertainment under Rule 3060,
including the 1999 Letter. The proposed
rule change would not supersede any
guidance provided under other NASD
6 Letter to Henry H. Hopkins and Sarah
McCafferty, T. Rowe Price Investment Services,
Inc., from R. Clark Hooper, NASD, dated June 10,
1999 (‘‘1999 Letter’’), available at https://
www.nasd.com/web/idcplg?IdcService=
SS_GET_PAGE&ssDocName=NASDW_002715.
7 See, e.g., Jenny Anderson, Fidelity Disciplines
16 Traders Over Gifts From Brokers, N.Y. Times,
Dec. 17, 2004, at C5; Andrew Caffrey & Jeffrey
Krasner, Probe of Gifts Said to Focus on Fidelity,
Boston Globe, Dec. 7, 2004, at A1; Probe on Gifts
to Fund Officials Is Said to Include Jefferies, Los
Angeles Times, Dec. 3, 2004, at C4; Jenny
Anderson, On Wall Street, A Closer Look At Giving
Gifts, N.Y. Times, Nov. 24, 2004, at C1; Greg Farrell,
Brokerages’ gifts to mutual fund managers
scrutinized, USA Today, Nov. 24, 2004, at B2.
8 In addition, NASD also recently published
guidance concerning gifts and gratuities under Rule
3060. See Notice to Members 06–69 (December
2006).
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28745
rules.9 NASD has also clarified that any
non-cash compensation falling under
Rule 2820(g) or Rule 2830(l) would be
subject to the standards imposed by
those rules.10
Rule 3060 is intended to prevent
improprieties that may arise when a
member or an associated person of a
member gives gifts or gratuities to
employees of a customer. To guard
against these improprieties, Rule 3060
imposes a $100 annual limit on gifts and
gratuities that a member or person
associated with a member can give to an
employee of a customer in relation to
the employer firm’s business. However,
ordinary and usual business
entertainment is not considered a gift or
gratuity and is permitted ‘‘so long as it
is neither so frequent nor so extensive
as to raise any question of propriety.’’ 11
The proposed rule change is intended to
replace this statement regarding
business entertainment with an
approach that permits each member to
adopt specific policies and procedures
tailored to its business needs. The
proposed rule change also seeks to
provide members with general guidance
concerning the types of issues that a
firm’s policies and procedures must
address and mandates that each member
maintain appropriate records to ensure
that persons associated with the
member are complying with the written
policies and procedures.
In general, NASD, working closely
with the New York Stock Exchange (the
‘‘NYSE’’), concluded that, in clarifying a
member’s obligation under Rule 3060, a
specific standard was unworkable and
impractical.12 As NASD noted in the
Notice to Members seeking comment on
the proposed rule change, ‘‘the
proposed IM does not impose hard
limits, nor does it require that all
members adopt the same limits or even
treat all recipients equally.’’ 13 Rather,
the proposed rule change requires that
each member assess its use of business
entertainment, determine what
limitations are appropriate and meet the
general guidelines set forth in the
proposed rule change, and adopt written
9 For example, the proposed rule change would
not supersede the guidance given by NASD staff in
Notice to Members 99–55 (July 1999) concerning
NASD Rules 2820 and 2830.
10 NASD published a Notice to Members
requesting comment on a proposed rule change to
replace Rules 2820(g) and 2830(l), among others,
with a new Rule 2311. See Notice to Members 05–
40 (June 2005). If such a rule change is proposed
and approved, NASD will amend the language of
proposed IM–3060 to reflect the change.
11 See 1999 Letter.
12 The NYSE also has filed a proposed rule
change with the Commission addressing business
entertainment. See supra note 5.
13 See Notice to Members 06–06 (January 2006).
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
jlentini on PROD1PC65 with NOTICES
policies and procedures to ensure that
persons associated with the member are
following those limitations. The
introductory paragraph in the proposed
interpretation also makes clear that the
interpretation does not apply to any
member that does not engage in
business entertainment.
While, as discussed below, some
commenters criticized a general,
principles-based approach as lacking
clarity and uniform standards, NASD
and the NYSE both concluded that such
an approach was more appropriate. The
proposed rule change expands upon the
existing principles-based approach to
business entertainment established in
the 1999 Letter but specifically
addresses the content of a member’s
written policies and procedures.
(B) General Requirements: The
observance of ‘‘high standards of
commercial honor and just and
equitable principles of trade’’ required
of a member in the conduct of its
business under NASD Rule 2110
includes the obligation of a member not
to act in a manner contrary to the best
interests of a customer in the conduct of
business with or for such customer.
Consequently, when a member interacts
with an employee—or any other agent—
of a customer, the member should not
give that person anything of value that
is intended or designed to cause, or
otherwise would be reasonably judged
to have the likely effect of causing, such
person to act in a manner that is
inconsistent with the best interests of
the customer or any person to whom the
customer owes a fiduciary duty.14
Paragraph (a) of the proposed rule
change codifies this concept by
explicitly setting forth the general
purpose behind proposed IM–3060.
NASD believes that the guiding
principle in navigating the concern of
placing a customer representative in
conflict with his duty to a customer is
that members should compete for
business on the basis of providing the
best professional services. While it is
not inappropriate for business
entertainment to foster an environment
for the member to promote or educate
the customer representative with respect
to such professional services, it is
inconsistent with the terms of proposed
IM–3060 to use business entertainment
to provide incentives to customer
14 NASD Rule 2110 precludes the offering of any
thing of value, including but not limited to business
entertainment, that comprises conduct that, to any
degree, is either illegal under any applicable law or
would expose the member, customer, or recipient
of the member’s business entertainment to any civil
liability. For example, any business entertainment
that violated the Foreign Corrupt Practices Act or
any commercial bribery statutes and laws would, in
turn, violate Rule 2110.
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18:21 May 21, 2007
Jkt 211001
representatives to conduct customer
business with and/or through the
member without due consideration as to
whether the nature and terms of such
professional services meet the objectives
and are in the best interests of the
account.
(C) Definitions: There are three
defined terms that are integral to an
understanding of the proposed rule
change.15 First, ‘‘customer’’ is defined as
(1) ‘‘a person that maintains a business
relationship with a member via the
maintenance of an account, through the
conduct of investment banking, or
pursuant to other securities-related
activity’’ or (2) ‘‘a person whose
customer representative receives
business entertainment for the purpose
of encouraging such person to establish
a business relationship with the member
by opening an account with the member
or by conducting investment banking or
other securities-related activity with the
member.’’ 16 The definition of
‘‘customer’’ has been amended from the
previous rule filing; however, the
changes do not affect those persons
considered ‘‘customers’’ for the purpose
of the proposed rule change.
Second, for purposes of the proposed
rule change, a ‘‘customer
representative’’ means ‘‘a person who is
an employee, officer, director, or agent
of a customer, unless such person is a
family member of the customer.’’ The
term ‘‘customer representative’’ replaces
the term ‘‘employee’’ in the previous
rule filing to clarify that the term
includes persons other than employees.
The term also now conforms to the
terminology in the NYSE’s proposed
rule change. Moreover, the definition
has been amended to exclude certain
family members from the definition of
customer representative.17 This
exclusion has been added to the
definition to address situations where a
close family member has power-ofattorney or similar authority over
another family member’s account (e.g.,
an adult child with authority over his or
her elderly parent’s account). NASD
believes that these situations are
unlikely to result in the types of
conflicts of interest the proposed rule
change seeks to address.
This definition, when coupled with
the general requirements set forth in
15 Terms
used in the interpretation have the same
meaning as those defined in NASD’s By-Laws and
rules unless otherwise specified.
16 NASD Rule 0120(n) defines the term ‘‘person’’
to ‘‘include any natural person, partnership,
corporation, association, or other legal entity.’’
17 The term ‘‘family member’’ means a person’s
parents, mother-in-law or father-in-law, spouse,
brother or sister, brother-in-law or sister-in-law,
son-in-law or daughter-in-law, and children.
PO 00000
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Fmt 4703
Sfmt 4703
paragraph (a) of the proposed rule
change, limit the proposed rule change
to business entertainment provided to a
customer representative. This point is
explicitly addressed in the preamble to
the interpretation, which states: ‘‘This
interpretation does not apply to any
member that does not engage in
business entertainment. For any
member that engages in business
entertainment, this interpretation
applies only with respect to business
entertainment provided to customer
representatives.’’ Thus, the proposed
rule change does not address business
entertainment provided to a natural
person customer.18 It addresses only
business entertainment provided to a
customer representative of the customer
(although such customer may be a
natural or non-natural person).
Third, ‘‘business entertainment’’ is
defined as ‘‘any social event, hospitality
event, sporting event, entertainment
event, meal, leisure activity, or event of
like nature or purpose, including
entertainment offered in connection
with a charitable event, educational
event or business conference, as well as
any transportation or lodging related to
such activity or event, in which an
associated person of a member
accompanies a customer
representative.’’ This definition codifies
NASD’s long-standing position that an
associated person of a member must
accompany or participate in an event for
it to be deemed ‘‘business
entertainment’’ rather than a ‘‘gift.’’ In
addition, NASD has deleted the portion
of the definition that stated that it is not
necessary for business to be conducted
for an event to be ‘‘business
entertainment.’’ The definition of
business entertainment encompasses all
the events enumerated provided that the
customer representative is accompanied
by an associated person of the member;
because the clause did not further
define business entertainment, it has
been deleted.
As noted above, the definition of
‘‘business entertainment’’ generally
prescribes that if a customer
representative is not accompanied by an
appropriate associated person of a
member, any expenses associated with
the business entertainment will be
18 As discussed in footnote 5 of Notice to
Members 06–06, and as noted below, natural
persons who are both natural person customers and
customer representatives should be treated as
customer representatives. That is, associated
persons of a member cannot avoid the application
of the firm’s business entertainment policies by
claiming that business entertainment provided to a
person who is both a natural person customer and
a customer representative was provided to that
individual solely in his or her ‘‘personal,’’ rather
than business, capacity.
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considered a gift under Rule 3060. An
exception to this requirement is
proposed to address instances when
exigent circumstances make it
impractical for an associated person of
a member to attend a business
entertainment event. All instances
where such exigent circumstances are
invoked must be clearly and thoroughly
documented and be subject to the prior
written approval of a designated
supervisory person or, in very limited
circumstances where such prior
approval cannot reasonably be obtained,
to a prompt post-event review to be
conducted and documented by such
supervisory person.
NASD believes that the ‘‘exigent
circumstances’’ exception provides
necessary flexibility in light of realworld, last minute emergency situations
that could arise that would make it
difficult, if not impossible, for an
appropriate associated person of a
member to attend a business
entertainment event with a customer
representative. Examples of exigent
circumstances would be a sick child, an
accident, or some other sudden,
overriding circumstance. NASD does
not believe this provision would lead to
circumvention of the spirit or substance
of the proposed rule change since all
such occurrences are subject to detailed
documentation such that any patterns of
abuse would become quickly apparent
to supervisory personnel.
Paragraph (b)(4)(C) of the proposed
rule change provides guidance to
members on the valuation of business
entertainment. The proposed rule
change requires that a member’s written
policies and procedures specify how the
firm will calculate the value of business
entertainment. In general, business
entertainment items should be valued at
the greater of face value or cost to the
member.
NASD has been asked about the
extent to which the proposed rule
change reaches business entertainment
conducted outside the United States,
particularly entertainment provided by
persons who are employed in
commonly controlled affiliates of a
financial services company operating in
the United States and/or foreign
jurisdictions. As an initial matter,
proposed IM–3060 reaches all business
entertainment of a member firm and
persons associated with a member, even
if such entertainment occurs outside of
the United States or is provided to
foreign individuals. However, NASD
does not believe that all persons who
are employed in commonly controlled
affiliates of a financial services company
operating in the United States and/or
foreign jurisdictions are necessarily
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associated persons of the member, even
if they report to a person who, in
another capacity, is an associated
person of a member.
An associated person of a member
may have management and supervisory
responsibilities for non-member
affiliates of a financial services
company, located within or outside of
the United States, without the result
that the persons being managed and
supervised in the non-member affiliates
would necessarily be deemed associated
persons of the member. It is the view of
NASD that in such instances the
following factors establish that an
employee of a non-member affiliate is
not an associated person of the member:
(1) The manager/supervisor of that
employee is recognized in the
organization as having a scope of
responsibilities outside of the member
firm; (2) the exercise of the management
and supervision over that employee by
such manager/supervisor is not
controlled by the member, is reviewable
for purposes of performance and
compensation outside of the member,
and is not conducted for the benefit of
the member; and (3) the employee of the
non-member affiliates is not otherwise
employed or engaged in the investment
banking or securities business of the
member and controlled by the member
in respect of such activities.
(D) Written Policies and Procedures:
A member’s policies and procedures
must be designed to promote conduct
consistent with NASD Rule 2110 and
should not undermine the performance
of a customer representative’s duty to a
customer. The proposed rule change
requires members to adopt written
policies and procedures concerning
business entertainment that: (1) Define
forms of business entertainment that are
appropriate and inappropriate using
quantitative and/or qualitative
standards that address the nature and
frequency of the entertainment
provided, as well as the type and class
of any accommodation or transportation
provided in connection with such
business entertainment; (2) impose
either specific dollar limits on business
entertainment or require advance
written supervisory approval beyond
specified dollar thresholds; (3) are
designed to detect and prevent business
entertainment that is intended as, or
could reasonably be perceived to be
intended as, an improper quid pro quo
or that could otherwise give rise to a
potential conflict of interest or
undermine the performance of a
customer representative’s duty to a
customer; (4) establish standards to
ensure that persons designated to
supervise and administer the written
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28747
policies and procedures are sufficiently
qualified; and (5) require appropriate
training and education for all personnel
who supervise, administer, or are
subject to the written policies and
procedures.
(i) Define Forms of Appropriate and
Inappropriate Business Entertainment:
A member’s written policies and
procedures concerning business
entertainment must define forms of
business entertainment that are
appropriate and inappropriate using
quantitative and/or qualitative
standards that address the nature and
frequency of the entertainment
provided, as well as the type and class
of any accommodations or
transportation provided in connection
with such business entertainment. A
member’s policies and procedures
should include provisions regarding
appropriate venues, nature, frequency,
and types and class of accommodation
and transportation.
A member may determine that certain
activities, though legal, are nevertheless
inappropriate for business
entertainment. NASD believes that the
standards of business entertainment
adopted by members must meet the
requirements of Rule 2110 that members
and persons associated with a member
adhere to high standards of commercial
honor. Consequently, a member would
violate proposed IM–3060 not only if it
failed to adopt procedures, but also if
the procedures set standards that are so
unbounded or vague that no reasonable
determination of propriety can be
discerned.
The proposed rule change also would
allow, but not require, members to
establish different standards for
business entertainment in connection
with events that are educational,
charitable, or philanthropic in nature. If
a member chooses to distinguish
between forms of business
entertainment in its policies and
procedures, it should ensure that these
types of business entertainment
nonetheless comply with Rule 2110 and
the general requirements set forth in
paragraph (a) of the proposed rule
change.
(ii) Impose Either Specific Dollar
Limits on Business Entertainment or
Require Advance Written Supervisory
Approval Beyond Specified Dollar
Thresholds: A member’s written
policies and procedures must impose
either specific dollar limits on business
entertainment or require advance
written supervisory approval beyond
specified dollar thresholds. The
proposed rule change does not impose
hard dollar limits or require that all
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members adopt the same dollar limits or
treat all recipients equally.
(iii) Designed to Detect and Prevent
Business Entertainment That Is
Intended As, or Could Reasonably Be
Perceived To Be Intended As, an
Improper Quid Pro Quo: A member’s
written policies and procedures must
include procedures designed to detect
and prevent business entertainment that
is intended as, or could reasonably be
perceived to be intended as, an
improper quid pro quo. For example,
members should develop written
policies and procedures reasonably
designed to preclude providing business
entertainment that is so lavish or
extensive in nature that a customer
representative would likely feel
compelled to place order flow on behalf
of the customer without due regard to
best execution or other transaction
pricing considerations. NASD does not
intend that this standard would
establish a per se violation of the
proposed IM if a customer
representative who received business
entertainment from the member is later
found to have violated his or her
obligations to his or her employer;
however, such actions by a customer
representative may warrant further
investigation by the member firm as to
whether the member’s policies and
procedures are, in fact, reasonably
tailored to prevent these types of
violations.19 While an NASD member is
not ultimately responsible for the
conduct of its customers’ employees or
agents, the member is responsible for
ensuring that persons associated with
the member do not engage in activities
that are designed to, or reasonably likely
to, cause the recipient to engage in
improper conduct. Moreover, a
member’s compliance with its policies
and procedures would not serve to
automatically shield the member from
all liability under the proposed IM for
any misconduct by a customer
representative.
(iv) Supervision: As is the case with
every NASD rule, supervision is a
critical component of business
entertainment policies and procedures.
Members are free to define the approach
and method of their written policies and
procedures provided they are
reasonably designed to comport with
the principles stated in the proposed
rule filing. Irrespective of the manner in
which a member crafts its procedures, it
must be clear from the supervisory
policies and procedures what factors
19 NASD Rule 3012(a) requires members to test
and verify their supervisory procedures and ‘‘create
additional or amend supervisory procedures where
the need is identified by such testing and
verification.’’
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determine appropriate levels of business
entertainment and how those
determinations are executed, monitored,
and enforced. This is particularly true if
members elect to use qualitative, rather
than quantitative, standards. In
addition, such supervisory procedures
should provide a method for evidencing
both the breadth of supervisory
activities as well as the information
upon which such supervision is
conducted. For example, a member’s
policies and procedures must evidence
the basis upon which a supervisor will
determine that business entertainment
does not violate a member’s standards
as to the nature, frequency, and dollar
amounts of entertainment. A member’s
policies and procedures must establish
standards to ensure that persons
designated to supervise and administer
the member’s written policies and
procedures are sufficiently qualified.
The requirement that the persons
designated to supervise business
entertainment expenses be ‘‘sufficiently
qualified’’ is not intended to impose a
registration requirement or similar
obligation on these individuals; rather,
the requirement is intended to ensure
that the member’s designation is of
persons who are familiar with the
applicable regulatory requirements and
are sufficiently senior and experienced
to entrust with the approval obligations
envisioned by the member’s policies
and procedures.
(v) Training and Education: A
member’s business entertainment
policies and procedures must require
appropriate training and education to all
applicable personnel. A member also
must be able to demonstrate that it
trains persons associated with the
member who supervise, administer, and
are subject to such written business
entertainment policies and procedures
in all applicable requirements.
(E) Recordkeeping: The only effective
way for a member to ensure that persons
associated with the member are
following the firm’s policies and
procedures is to establish a system to
track their business entertainment
expenses. Consequently, a member’s
policies and procedures are required to
include procedures regarding the
maintenance of detailed records of
business entertainment expenses
provided to any customer
representative.
NASD recognizes that recordkeeping
requirements present compliance
burdens for firms, and NASD has sought
to address the potential burden by
providing a recordkeeping carve-out for
small expenditures, none of which
would reasonably be expected to
influence the behavior of the recipient.
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Consequently, the proposed rule change
provides that members are not required
to maintain records of (1) Business
entertainment when the total value of
the business entertainment, including
all expenses associated with the
business entertainment, does not exceed
$50 per day or (2) additional expenses
incurred in connection with otherwise
recorded business entertainment that do
not, in the aggregate, exceed $50 per
day.20
The $50 threshold would apply only
to events or activities with a total cost
that did not exceed $50 per day (e.g., an
inexpensive lunch) or to minor
expenses related to an otherwise
reported business entertainment event
(such as a hot dog at an NBA basketball
game, where the basketball game ticket
is reported as a business entertainment
expense). Firms may not allow persons
associated with the member to
disaggregate business entertainment
expenses relating to an activity or event
in an effort to avoid recordkeeping
obligations. Thus, a dinner expense of
$40 followed by a sporting event with
a ticket price of $40 would need to be
tracked under the member’s
recordkeeping system.
The proposed rule change also
requires that a member’s written
policies and procedures include
provisions reasonably designed to
prevent persons associated with the
member from circumventing the
recordkeeping requirements in
contravention of the spirit and purpose
of proposed IM–3060. Thus, for
example, members should seek to
prevent associated persons of the
member from engaging in patterns of
providing business entertainment that
falls below the $50 reporting threshold.
One of the key elements of the
proposed rule change is the ability of a
customer to request from the member
information regarding the business
entertainment expenses provided to the
customer representatives of the
customer. Although members are
permitted to establish reasonable
guidelines regarding a customer’s ability
to request this information, such
guidelines must not impair the ability of
the customer to obtain, on a reasonable
and regular basis, information
concerning the member’s business
entertainment expenses pertaining to
20 Members should be aware, however, that they
may need to track such expenses under other NASD
or SEC rules. There is no express exclusion from
Rule 3060 for gifts given during the course of
business entertainment. See Notice to Members 06–
69 (December 2006). NASD staff has, however,
provided guidance that Rule 3060 does not apply
to certain promotional items of nominal value that
display the firm’s logo. See id.
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the customer representatives of such
customer.
(F) Exemption for Members with
Business Entertainment Expenses Below
$7,500: The concerns that the proposed
interpretation seeks to address are not
presented by those members that, in the
aggregate, do not devote significant
resources to business entertainment.
Consequently, the interpretation
provides for a partial exemption for
those members with annual business
entertainment expenses below $7,500.
The provision provides that the $7,500
ceiling should be measured on a fiscal
year basis. Each member that relies on
the exemption must evidence that its
business entertainment expenses were
below the threshold.
Importantly, the exemption is not a
total exemption from all aspects of the
proposed interpretation. All members
(except those members that do not
engage in any business entertainment)
are required to abide by the
interpretation’s general requirements as
set forth in paragraph (a) and are
required to have written policies and
supervisory procedures that are
designed to detect and prevent business
entertainment that is intended as, or
could reasonably be perceived to be
intended as, an improper quid pro quo
or that could otherwise give rise to a
potential conflict of interest or
undermine the performance of a
customer representative’s duty to a
customer or any person to whom the
customer owes a fiduciary duty, and
establish standards to ensure that
persons designated to supervise and
administer such policies and procedures
are sufficiently qualified.
The effective date of the proposed
rule change will be six months
following Commission approval. NASD
will announce the effective date of the
proposed rule change in a Notice to
Members to be published no later than
60 days following Commission
approval.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,21 which
requires, among other things, that NASD
rules must be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
NASD believes that the proposed rule
change clarifies existing obligations of
members with respect to the provision
of business entertainment and will help
prevent conduct by associated persons
21 15
U.S.C. 78o–3(b)(6).
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of a member that could undermine the
performance of an employee’s duty to
the member’s customer.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in NASD Notice
to Members 06–06 (January 2006).
NASD received 28 comments in
response to the Notice.22 A copy of the
Notice to Members was attached to the
original rule filing as Exhibit 2a. Copies
of the comment letters received in
response to the Notice were attached to
the original rule filing as Exhibit 2b. Of
the 28 comment letters received, 12
were generally in favor of the proposed
22 Letter from Pinnacle Taxx Advisors, Inc.
(‘‘Pinnacle’’), dated Jan. 26, 2006; Letter from Keefe,
Bruyette & Woods (‘‘KBW’’), dated Jan. 26, 2006;
Letter from J.P. Morgan, dated Jan. 30, 2006; Letter
from Evolve Securities, Inc. (‘‘Evolve’’), dated Jan.
31, 2006; Letter from Seasongood & Mayer, LLC
(‘‘Seasongood’’), dated Feb. 2, 2006; Letter from
Plexus Consulting (‘‘Plexus’’) o/b/o International
Association of Small Broker Dealers and Advisers,
dated Feb. 6, 2006; Letter from Dominion Investor
Services, Inc. (‘‘Dominion’’), dated Feb. 13, 2006;
Letter from National Regulatory Services (‘‘NRS’’),
dated Feb. 6, 2006; Letter from T. Rowe Price
Investment Services, Inc. (‘‘T. Rowe Price’’), dated
Feb. 17, 2006. Letter from Maplewood Investment
Advisors, Inc. (‘‘Maplewood’’), dated Feb. 22, 2006;
Letter from Financial Services Institute, Inc.
(‘‘FSI’’), dated Feb. 23, 2006; Letter from
Transamerica Financial Advisors, Inc.
(‘‘Transamerica’’), dated Feb. 23, 2006; Letter from
H.D. Vest Financial Services (‘‘H.D. Vest’’), dated
Feb. 23, 2006; Letter from ING U.S. Financial
Services (‘‘ING’’), dated Feb. 23, 2006; Letter from
The Investment Company Institute (‘‘ICI’’), dated
Feb. 23, 2006; Letter from Hines Real Estate
Securities, Inc. (‘‘Hines’’), dated Feb. 21, 2006;
Letter from The National Society of Compliance
Professionals (‘‘NSCP’’), dated Feb. 23, 2006; Letter
from Financial Network, dated Feb. 23, 2006; Letter
from Coker Palmer, dated Feb. 23, 2006; Letter from
Griffin, Kubik, Stephens & Thompson, Inc.
(‘‘Griffin’’), dated Mar. 2, 2006; Letter from
Debevoise & Plimpton LLP (‘‘Debevoise’’) o/b/o The
Midtown Regulatory Group, dated Mar. 3, 2006;
Letter from Transamerica Capital, Inc.
(‘‘Transamerica Capital’’), dated Mar. 3, 2006; Letter
from The Bond Market Association (‘‘BMA’’), dated
Mar. 3, 2006; Letter from Goodwin Browning &
Luna Securities, Inc. (‘‘GB&L’’), dated Mar. 3, 2006;
Letter from The ABA Securities Association
(‘‘ABASA’’), dated Mar. 3, 2006; Letter from
Wachovia Capital Markets, LLC (‘‘Wachovia’’),
dated Mar. 3, 2006; Letter from Neal E. Nakagiri
(‘‘Nakagiri’’), dated Mar. 3, 2006; and Letter from
The Self-Regulation and Supervisory Practices
Committee of the Securities Industry Association
(‘‘SIA’’), dated Mar. 7, 2006.
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28749
rule change, 13 were opposed, and three
took no clear position.
A number of commenters raised
concerns with NASD’s general,
principles-based approach to the
proposed rule change 23 and questioned
the overall need for the IM.24 As
indicated above, the proposed rule
change was undertaken in response to
requests by NASD members for clarity
concerning appropriate business
entertainment. Both NASD and the
NYSE undertook to provide members
with additional guidance following
these requests. To the extent some
commenters questioned whether NASD
should seek to ‘‘regulate’’ the employees
of their members’ customers, these
commenters fail to recognize that NASD
staff guidance in the 1999 Letter already
prohibits business entertainment for
employees of customers that is so
frequent or excessive as to raise
questions of propriety. Moreover, as
discussed above, NASD is not seeking to
regulate the behavior of the
representatives of a member’s
customers; 25 rather, NASD is requiring
each member to develop and enforce
some appropriate degree of limitation
on the business entertainment that
persons associated with the member
provide to its customers’
representatives. In achieving this end,
both NASD and the NYSE believe that
a general, principles-based approach is
more appropriate than a restrictive, onesize-fits-all regulatory scheme. Given
the significant variation in broker-dealer
business models and size, and regional
differences in what may be considered
appropriate business entertainment,
NASD concluded that a fixed-dollar
standard or similar specific mandate
would prove unworkable.
One commenter suggested that NASD
exempt certain small broker-dealers, at
23 See, e.g., Letters from Dominion, Financial
Network, H.D. Vest, Hines, Plexus, and NRS.
24 See, e.g., Letters from Evolve, Financial
Network, FSI, GB&L, H.D. Vest, ING, Maplewood,
Nakagiri, and Transamerica Capital. Several
commenters indicated that the proposed rule
change should be made through notice and
comment rulemaking with the Commission. As the
Notice to Members stated, Section 19 of the
Securities Exchange Act of 1934 requires that
proposed rule changes such as IM–3060 be
approved by the Commission following publication
for public comment in the Federal Register. See
Notice to Members 06–06, at 2 & n.2.
25 NASD recognizes that customers whose
representatives receive business entertainment have
the responsibility to ensure that their
representatives do not engage in improper conduct.
However, NASD believes that the person providing
business entertainment cannot disclaim any
responsibility for improper conduct that flows
directly from business entertainment its employee
provided when the employee either intended for
the business entertainment to have that effect or
could reasonably have judged that the business
entertainment would be likely to have that effect.
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least in part because they lack the
resources to affect decision-making in
the manner the IM seeks to prohibit and
that such extravagant and extensive
business entertainment is localized
among larger firms and does not occur
in rural or small-market areas.26 In
response to this comment, NASD has
included a limited exemption for
members whose total business
entertainment expenses in the course of
their fiscal year are below $7,500. The
exemption provides relief from the
recordkeeping requirements of the rule,
as well as many of the specific
requirements regarding written policies
and supervisory procedures. NASD
believes, however, that the general
requirements of the proposed rule
change should apply to all members that
engage in business entertainment. In
addition, members that engage in
business entertainment should have
written policies and supervisory
procedures that are designed to detect
and prevent improper conduct. As
noted above, the proposed rule change
does not apply to any member firm that
does not engage in any form of business
entertainment.
Several commenters suggested that
NASD identify in the IM the specific
factors to be considered by firms in
developing their written policies and
procedures, such as those identified by
the NYSE in its rule filing. NASD staff
does not believe it is necessary to
identify specific factors in the IM and
that doing so may undermine the
flexibility the proposed rule change is
designed to achieve.27 NASD staff will
consider whether additional guidance
concerning the IM is necessary when
announcing the proposed rule change in
a Notice to Members.
Several commenters expressed
concern that the proposed rule change,
including some of the defined terms,
was too vague and may, in application,
prove overly broad. Among other things,
these commenters suggested that the
proposed rule change could
disadvantage firms with more
conservative policies and procedures,28
effectively require pre-approval of all
business entertainment,29 and introduce
disadvantages among different types of
firms and other industry participants.30
Other commenters believed that the
principles-based approach proposed by
NASD is the appropriate manner to
26 Letter
from Evolve.
Letter from BMA.
28 See, e.g., Letters from Hines and ING.
29 See Letter from Transamerica Capital.
30 See, e.g., Letters from Dominion and
Seasongood.
27 See
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Jkt 211001
address the needed clarification of
business entertainment.31
While NASD recognizes that there
will be distinctions among each
member’s written policies and
procedures, NASD concluded that
member firms were in the best position
to determine appropriate limitations
and restrictions on the business
entertainment provided by persons
associated with a member. After
considering the various comments
concerning the definitions of
‘‘customer’’ and ‘‘business
entertainment’’ in the proposed rule
change,32 NASD has determined not to
amend the definitions substantively.33
While several commenters
recommended that the definition of
customer track the definition of
‘‘accredited investor’’ as defined in SEC
Rule 501 under the Securities Act of
1933, NASD staff does not believe that
the application of the IM should be
dependent on any particular level of
assets. While member firms may choose
to treat certain types of customers or
certain types of business entertainment
differently for purposes of their written
policies and procedures, NASD believes
that, for purposes of the proposed rule
change, a broad definition of each is
appropriate.
With respect to one comment, NASD
believes that it would be appropriate for
a member’s written policies and
procedures to allow case-by-case review
and approval for types of entertainment
not specifically set forth in the
member’s policies and procedures.34
One commenter was concerned that a
registered representative may not be
aware whether a recipient of business
entertainment is a representative of a
customer of the firm.35 If a person is
entertained in his personal capacity as
a natural person client, and the firm has
information barriers that would prevent
the person providing the business
entertainment from knowing that the
person represents another customer as a
representative, and the person providing
business entertainment has no
knowledge that such person is a
representative of a customer at the time
of the business entertainment, then such
entertainment would fall outside the
scope of the IM.
Several commenters raised
suggestions concerning Rule 3060’s
31 See Letters from BMA, Griffin, NSCP, and
Wachovia.
32 See, e.g., Letters from BMA, Financial Network,
FSI, ING, and Transamerica Capital.
33 As noted in footnote 2 above, although the
language in the definitions has been modified, the
substance and breadth has been retained.
34 See Letter from Debevoise.
35 See Letter from FSI.
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limitation on gifts and gratuities,
ranging from comments focused on
increasing the $100 limitation, moving
from a hard figure standard to a
principles-based approach, and
providing guidance on the types of gifts
and incidental expenses that should be
included or excluded from any
limitation.36 The proposed rule change
is focused on business entertainment,
which is excepted from the limitation
on ‘‘gifts,’’ and NASD is not currently
considering amending the rule regarding
gifts and gratuities.37 NASD has long
recognized that gifts—in contrast to
business entertainment—are not
incidental to the transaction of business.
NASD requires that any gifts be de
minimis and sees no reason to depart
from this long-held view. NASD does
not believe that the proposed rule
change is the appropriate forum for
providing interpretive advice on other
aspects of Rule 3060; however, NASD
staff recently published additional
guidance on Rule 3060 regarding gifts
and gratuities. See Notice to Members
06–69 (December 2006).
Two commenters expressed concern
that the IM shifts the burden of proof
required under NASD Rules and
suggested that any change to Rule 3060
be done through a separate rule
proposal rather than through an IM.38
As discussed in footnote 2 and the
accompanying text of Notice to
Members 06–06, the IM, which is the
equivalent of a rule provision, is being
proposed in accordance with the
procedures for a proposed rule change
under Section 19 of the Act.39 Rule 3060
and IM–3060 are two separate
provisions, and the burden of proof
under Rule 3060 is not affected by the
proposed IM.
Several commenters appeared
concerned that the discussion in
footnote 5 of Notice to Members 06–06
would prohibit entertaining friends and
relatives. This misconstrues the
meaning of footnote 5, which says:
‘‘Members cannot circumvent this
proposed interpretive material by
providing business entertainment to a
natural person customer who also is an
employee, agent or representative of a
customer by claiming that such business
36 See, e.g., Letters from ABASA, BMA,
Debevoise, Evolve, Financial Network, and
Wachovia.
37 The one exception is the one noted above with
respect to exigent circumstances. Numerous
commenters requested that NASD adopt the exigent
circumstances exception from the gift rule similar
to the exception that the NYSE has proposed. See,
e.g., Letters from ABASA, BMA, and Wachovia. As
discussed above, NASD has determined that it is
appropriate to provide for such an exception.
38 See Letters from Financial Network and ING.
39 15 U.S.C. 78s.
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
entertainment applies only to the
‘natural person’ relationship.’’ What is
required by footnote 5 is that an
associated person of a member not avoid
the application of the firm’s business
entertainment policies by claiming such
entertainment is ‘‘personal’’ rather than
business. Firms are, however, likely to
include policies in their business
entertainment procedures to address
personal entertainment of a customer
representative where there is a family or
some other personal relationship, much
the way firms do today for gifts and
gratuities under Rule 3060 that are not
in relation to the business of the
employer of the recipient.
Many commenters requested
clarification on whether an
‘‘independent’’ review could be
conducted by an independent
department within, or affiliated with,
the member.40 NASD has removed the
specific review sections of the proposed
rule change because it was redundant of
existing obligations. A member firm’s
responsibility to supervise business
entertainment exists under Rule 3010(a),
and a member firm’s responsibility to
test and verify that its supervisory
policies and procedures are achieving
their intended purpose and complying
with the federal securities laws and
regulations and NASD rules exists
under Rule 3012(a)(1).
Many commenters expressed concern
with the breadth of the recordkeeping
requirement and requested a lengthy
implementation time for the
recordkeeping requirements.41 In
response to these comments, NASD
provided an exception from the
recordkeeping obligations for expenses
under $50. However, as discussed
above, NASD believes that a member’s
policies and procedures should prevent
persons associated with the member
from intentionally avoiding the $50
requirement by breaking up what are
otherwise connected costs or by
engaging in frequent, repeated business
entertainment at amounts below the $50
threshold. For example, a firm’s policies
and procedures may require associated
persons of the member to submit all
business entertainment expenses for
review; however, the firm may decide to
record and track only amounts over $50.
NASD also is providing for an effective
date of six months following the
Commission’s approval of the proposed
rule change. Members should provide
the Commission with specific comments
40 See,
e.g., Letters from Debevoise, Evolve, ICI,
KBW, NRS, Transamerica Capital, and Wachovia.
41 See, e.g., Letters from Evolve, Financial
Network, FSI, H.D. Vest, ICI, ING, Maplewood, and
Transamerica Capital.
VerDate Aug<31>2005
18:21 May 21, 2007
Jkt 211001
as to whether this is sufficient time to
implement recordkeeping systems to
comply with the proposed rule change
and, if it is not sufficient, offer reasons
why and suggest an appropriate
implementation period.
One commenter suggested that NASD
permit a member’s procedures to
include prompt review of business
entertainment after the event.42 The
commenter offered an example of a
dinner that unexpectedly exceeds the
firm’s threshold. NASD does not believe
that a member’s policies and procedures
should allow for post-event approval
because there does not appear to be an
effective means of rescinding business
entertainment that has already been
provided. Rather, persons associated
with a member who are concerned that
the cost of an event may exceed the
threshold should request approval in
advance to go over the firm’s limit. In
such a situation, the member should
impose another dollar limit rather than
simply waive the requirement.
Finally, several commenters requested
that NASD and the NYSE harmonize
their proposed rule changes or, in the
alternative, include a provision that a
dual member that complies with one of
the SRO’s rule will be deemed to be in
compliance with the other SRO’s rule.43
In filing this Amendment No. 1, NASD
has sought to address substantive
disparities between its rule and that of
the NYSE.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
As the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
The Commission notes that the
NYSE’s proposed Rule 350A(e) provides
that a NYSE member organization must
42 See
Letter from T. Rowe Price.
e.g., Letters from BMA and SIA.
43 See,
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
28751
have a system in place to give notice
(e.g., via the member organization’s Web
site, a disclosure document, or other
appropriate means) to customers that
use customer representatives that upon
a customer’s written request, the NYSE
member organization will provide
detailed information regarding the
manner and expense of any business
entertainment provided by the NYSE
member organization to the customer
representative,44 while the NASD’s
proposal does not contain a similar
notice provision.45 The Commission is
soliciting comment on this difference
between the NYSE and NASD proposed
rules and specifically whether NASD
should have a similar notification
provision for customers utilizing
customer representatives.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2006–044 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASD–2006–044. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of the filing also will be
available for inspection and copying at
44 NYSE believes that the notice provision would
encourage the expansion of monitoring and controls
on business entertainment beyond broker-dealers to
the employers of business entertainment recipients.
See supra note 5.
45 See supra note 5.
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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2006–044 and
should be submitted on or before June
12, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.46
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E7–9742 Filed 5–21–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55770; File No. SR–NSCC–
2007–05]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Its Ability To
Receive Transaction Data From Trade
Reporting Facilities That Are Facilities
of a Self-Regulatory Organization
May 15, 2007.
jlentini on PROD1PC65 with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’), 1 notice is hereby given that on
March 26, 2007, the National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change described in Items
I, II, and III below, which items have
been prepared primarily by NSCC.
NSCC filed the proposed rule change
pursuant to Section 19(b)(3)(A)(i) of the
Act 2 and Rule 19b–4(f)(1) thereunder 3
so that the proposal was effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested parties.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The purpose of the proposed rule
change is to clarify NSCC’s Rule 7,
‘‘Comparison and Trade Recording
Operation,’’ in order to make clear that
NSCC may accept transaction data on
behalf of NSCC members from trade
reporting facilities that are affiliated
46 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78s(b)(3)(A)(i).
3 17 CFR 240.19b–4(f)(1).
with and operated as a facility of a selfregulatory organization (‘‘Trade
Reporting Facilities’’ or ‘‘TRFs’’).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NSCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NSCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.4
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The purpose of this filing is to clarify
NSCC’s Rule 7, ‘‘Comparison and Trade
Recording Operation,’’ in order to make
clear that NSCC may accept transaction
data on behalf of NSCC Members from
Trade Reporting Facilities.
Background
NSCC’s Rule 7 permits NSCC in its
discretion to accept transaction data
from self-regulatory organizations
(‘‘SROs’’), as defined in the Securities
Exchange Act of 1934 (and, similarly,
from derivatives clearing organizations
registered or deemed registered with the
Commodities Futures Trading
Commission). Such data may be
provided directly by an SRO or through
subsidiary or affiliated organizations.
In conjunction with the recent
separation of the National Association
of Securities Dealers, Inc. (‘‘NASD’’) and
The Nasdaq Stock Market, Inc.
(‘‘Nasdaq’’), the Commission approved
the establishment by NASD and Nasdaq
of the NASD/Nasdaq Trade Reporting
Facility, which provides NASD
members with an alternative means for
reporting transactions in exchangelisted securities effected otherwise than
on an exchange. Since then, NASD has
established several additional new TRFs
in conjunction with other registered
securities exchanges, each of which
provides NASD members with alternate
means for reporting transactions in
exchange-listed securities effected
otherwise than on an exchange. All of
these TRFs will operate as joint ventures
with the relevant exchanges, but NASD,
the ‘‘SRO Member’’ of each such
venture, will have sole regulatory
1 15
VerDate Aug<31>2005
18:21 May 21, 2007
4 The Commission has modified the text of the
summaries prepared by NSCC.
Jkt 211001
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
responsibility for each TRF. As such,
the TRFs are facilities ‘‘of NASD and
subject to NASD’s registration as a
national securities association.’’5
At the current time, NASD filed
proposed rule changes with the
Commission relating to the
establishment of the following TRFs:
The NASD/Nasdaq TRF; the NASD/
National Securities Exchange (NSX)
TRF; the NASD/Boston Stock Exchange
(BSE) TRF; and the NASD/New York
Stock Exchange (NYSE) TRF. Currently,
all the TRFs are operational. The rules
governing the operations of these
facilities are contained in NASD Rule
4000 and 6100 Series for the NASD/
Nasdaq TRF, NASD Rule 4000C and
6000C Series for the NASD/NSX TRF,
NASD Rule 4000D and 6000D Series for
the NASD/BSE TRF, and NASD Rule
4000E and 6000E Series for the NASD/
NYSE TRF. With the exception of the
NASD/NYSE TRF, the applicable rules
permit the TRFs, at the option of their
NASD member participant, to submit
the data relating to reported trades to
NSCC for clearance and settlement.
In order to accommodate the NASD
and to promote the efficient processing
of securities transactions, NSCC
proposes to clarify its Rule 7, Section 5 6
to make clear that it may accept
transaction data from such TRFs as
facilities of the NASD, the applicable
SRO. For this purpose, the proposed
clarification provides that the TRF be
affiliated with and operated as a facility
of the SRO and that the rules and
operation of the TRF be the subject of
a rule change of the SRO that has been
duly filed with the Commission and is
effective.7 By allowing NSCC to receive
transaction data for clearing purposes
from these facilities with respect to
NSCC’s members, broker-dealers will be
able to report transactions for both
reporting/regulatory and clearing
purposes in a single report to the TRFs.
5 See e.g., Securities Exchange Act Release Nos.
54084 (June 30, 2006), 71 FR 38935 (July 10, 2006)
[SR–NASD–2005–087] (establishment of the NASD/
Nasdaq TRF); 54715 (November 6, 2006), 71 FR
66354 (November 14, 2006) [SR–NASD–2006–108]
(establishment of the NASD/NSX TRF); and 54931
(December 13, 2006), 71 FR 76409 (December 20,
2006) [SR–NASD–2006–115] (establishment of the
NASD/BSE TRF).
6 Rule 7, Section 5 is proposed to be renumbered
as part of other changes pending pursuant to File
No. SR–NSCC–2006–04.
7 NASD filed a proposed rule change relating to
the establishment of the NASD/NYSE TRF for
immediate effectiveness, asserting that such
proposed rule change was ‘‘non-controversial’’
because it was substantially similar to the rules
relating to the other TRFs, which were subject to
notice and comment and approved by the
Commission. Securities Exchange Act Release No.
55325 (February 21, 2007), 72 FR 8820 (February
27, 2007) [SR–NASD–2007–011].
E:\FR\FM\22MYN1.SGM
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]]>Agencies
[Federal Register Volume 72, Number 98 (Tuesday, May 22, 2007)]
[Notices]
[Pages 28743-28752]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-9742]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55765; File No. SR-NASD-2006-044]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto Relating to Interpretive Material to NASD Rule
3060 To Require Members To Adopt Policies and Procedures Addressing
Business Entertainment
May 15, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 11, 2006, the National Association of Securities Dealers, Inc.
(``NASD'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by NASD. On April 17,
2007, NASD filed Amendment No. 1 to the proposed rule change.\3\ On May
1, 2007, NASD filed Partial Amendment
[[Page 28744]]
No. 2 to the proposed rule change.\4\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).1
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced and superseded the original rule
filing in its entirety.3
\4\ Partial Amendment No. 2 attached Exhibit 4 of Amendment No.
1, which shows changes of the proposed rule text from the
immediately preceding filing.
\5\ The Commission also is separately publishing a notice by the
New York Stock Exchange LLC (``NYSE'') to propose new NYSE Rule 350A
on business entertainment, which is substantially similar to NASD's
proposed rule text. See Securities Exchange Act Release No. 55766
(May 15, 2007) (SR-NYSE-2006-06). The NYSE proposal and the NASD
proposal primarily differ in that the NYSE proposal contains a
``Notice to Customers'' provision. See discussion infra Part IV,
Solicitation of Comments section.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to adopt Interpretive Material (``IM'') to NASD
Rule 3060 to require members to adopt policies and procedures
addressing business entertainment. Below is the text of the proposed
rule change. Proposed new language is in italics.
* * * * *
IM-3060. Business Entertainment
The NASD Board of Governors is issuing this interpretation
concerning the obligations of a member in connection with any business
entertainment of a customer representative. This interpretation does
not apply to any non-cash compensation that falls within Rule 2820(g)
or Rule 2830(l) (i.e., entertainment provided by offerors to associated
persons of a member in connection with the sale and distribution of
variable contracts or investment company securities). This
interpretation does not apply to any member that does not engage in
business entertainment. For any member that engages in business
entertainment, this interpretation applies only with respect to
business entertainment provided to customer representatives. This
interpretation supersedes any prior interpretive letters or statements
of NASD staff regarding business entertainment under Rule 3060.
(a) General Requirements
No member or person associated with a member shall, directly or
indirectly, provide any business entertainment to a customer
representative pursuant to the establishment of, or during the course
of, a business relationship with any customer that is intended or
designed to cause, or would be reasonably judged to have the likely
effect of causing, such customer representative to act in a manner that
is inconsistent with:
(1) The best interests of the customer; or
(2) The best interests of any person to whom the customer owes a
fiduciary duty.
(b) Definitions
For purposes of this interpretation, the following definitions
shall apply:
(1) The term ``customer'' means:
(A) A person that maintains a business relationship with a member
via the maintenance of an account, through the conduct of investment
banking, or pursuant to other securities-related activity; or
(B) A person whose customer representative receives business
entertainment for the purpose of encouraging such person to establish a
business relationship with the member by opening an account with the
member or by conducting investment banking or other securities-related
activity with the member.
(2) The term ``customer representative'' means a person who is an
employee, officer, director, or agent of a customer, unless such person
is a family member of the customer.
(3) The term ``family member'' means a person's parents, mother-in-
law or father-in-law, spouse, brother or sister, brother-in-law or
sister-in-law, son-in-law or daughter-in-law, and children.
(4) The term ``business entertainment'' means any social event,
hospitality event, sporting event, entertainment event, meal, leisure
activity, or event of like nature or purpose, including business
entertainment offered in connection with a charitable event,
educational event or business conference, as well as any transportation
or lodging related to such activity or event, in which an associated
person of a member accompanies a customer representative.
(A) If a customer representative is not accompanied by an
appropriate associated person of the member, any expenses associated
with the business entertainment will be considered a gift under Rule
3060 unless exigent circumstances make it impractical for an associated
person of the member to attend. All instances where such exigent
circumstances are invoked must be clearly and thoroughly documented and
be subject to the prior written approval of a designated supervisory
person or, in very limited circumstances where such prior approval
cannot reasonably be obtained, to a prompt post-event review to be
conducted and documented by such supervisory person.
(B) Anything of value given or provided to a customer
representative that does not fall within the definition of ``business
entertainment'' is a gift under Rule 3060.
(C) In valuing business entertainment expenses pursuant to this
interpretation, a member's written policies and procedures must specify
the methodology to be used by the member to calculate the value of
business entertainment. In general, business entertainment expenses
should be valued at the higher of face value or cost to the member.
(c) Written Policies and Procedures
(1) Each member must have written policies and supervisory
procedures that:
(A) Define forms of business entertainment that are appropriate and
inappropriate using quantitative and/or qualitative standards that
address the nature and frequency of the entertainment provided, as well
as the type and class of any accommodations or transportation provided
in connection with such business entertainment; and
(B) Make clear that anything of value given or otherwise provided
to a customer representative that does not fall within the definition
of ``business entertainment'' is a gift under Rule 3060; and
(C) Impose either specific dollar limits on business entertainment
or require advance written supervisory approval beyond specified dollar
thresholds; and
(D) Are designed to detect and prevent business entertainment that
is intended as, or could reasonably be perceived to be intended as, an
improper quid pro quo or that could otherwise give rise to a potential
conflict of interest or undermine the performance of a customer
representative's duty to a customer or any person to whom the customer
owes a fiduciary duty; and
(E) Establish standards to ensure that persons designated to
supervise and administer the written policies and procedures are
sufficiently qualified; and
(F) Require appropriate training and education for all personnel
who supervise, administer, or are subject to the written policies and
procedures.
(2) A member's written policies and procedures may distinguish, and
set specifically tailored standards for, business entertainment in
connection with events that are deemed to be primarily educational,
charitable, or philanthropic in nature, provided that such standards
comply with the requirements of this interpretation and
[[Page 28745]]
are explicitly addressed in the written policies and procedures.
(d) Recordkeeping
(1) Each member's written policies and procedures must require the
maintenance of detailed records of business entertainment expenses
provided to any customer representative. The member is not required to
maintain records of:
(A) Business entertainment when the total value of the business
entertainment, including all expenses associated with the business
entertainment, does not exceed $50 per day; or
(B) Additional expenses incurred in connection with otherwise
recorded business entertainment that do not, in the aggregate, exceed
$50 per day.
(2) Each member's written policies and procedures must include
provisions reasonably designed to prevent associated persons of the
member from circumventing the recordkeeping requirements in
contravention of the spirit and purpose of this interpretation (e.g., a
pattern of providing a customer representative with business
entertainment valued at $48).
(3) Each member's written policies and procedures must require
that, upon a customer's written request, the member will promptly make
available to the customer any business entertainment records regarding
business entertainment provided to customer representatives of that
customer.
(e) Exemption for Members With Business Entertainment Expenses Below
$7,500
A member whose business entertainment expenses in the course of its
fiscal year are below $7,500 shall be subject only to paragraphs (a),
(b), and (c)(1)(D) and (E) of this interpretation, and shall be exempt
from paragraphs (c) (other than (c)(1)(D) and (E) as noted above) and
(d). Each member that relies on this exemption must evidence that its
business entertainment expenses are below the $7,500 threshold.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
(A) Background: NASD Rule 3060 prohibits any member or person
associated with a member, directly or indirectly, from giving anything
of value in excess of $100 per year to any person where such payment is
in relation to the business of the recipient's employer. In 1999, NASD
staff issued an interpretive letter stating that Rule 3060 does not
prohibit ``ordinary and usual business entertainment'' (such as an
occasional meal, sporting event, theater production, or comparable
entertainment event) provided that the entertainment ``is neither so
frequent nor so extensive as to raise any question of propriety.'' \6\
The 1999 Letter noted that the interpretation was based, in part, on
NASD's rules governing non-cash compensation in connection with the
offer and sale of investment company shares and variable annuities.
---------------------------------------------------------------------------
\6\ Letter to Henry H. Hopkins and Sarah McCafferty, T. Rowe
Price Investment Services, Inc., from R. Clark Hooper, NASD, dated
June 10, 1999 (``1999 Letter''), available at https://www.nasd.com/
web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_002715.
---------------------------------------------------------------------------
Recently, NASD members have requested more guidance on the rules
concerning gifts and business entertainment in the wake of press
reports of enforcement actions regarding gifts and gratuities.\7\ In
response to these requests, NASD is proposing interpretive material to
NASD Rule 3060 to outline the policies and procedures that a member
must adopt in connection with its business entertainment practices.\8\
The proposed rule change would supersede any prior guidance of NASD
staff regarding business entertainment under Rule 3060, including the
1999 Letter. The proposed rule change would not supersede any guidance
provided under other NASD rules.\9\ NASD has also clarified that any
non-cash compensation falling under Rule 2820(g) or Rule 2830(l) would
be subject to the standards imposed by those rules.\10\
---------------------------------------------------------------------------
\7\ See, e.g., Jenny Anderson, Fidelity Disciplines 16 Traders
Over Gifts From Brokers, N.Y. Times, Dec. 17, 2004, at C5; Andrew
Caffrey & Jeffrey Krasner, Probe of Gifts Said to Focus on Fidelity,
Boston Globe, Dec. 7, 2004, at A1; Probe on Gifts to Fund Officials
Is Said to Include Jefferies, Los Angeles Times, Dec. 3, 2004, at
C4; Jenny Anderson, On Wall Street, A Closer Look At Giving Gifts,
N.Y. Times, Nov. 24, 2004, at C1; Greg Farrell, Brokerages' gifts to
mutual fund managers scrutinized, USA Today, Nov. 24, 2004, at B2.
\8\ In addition, NASD also recently published guidance
concerning gifts and gratuities under Rule 3060. See Notice to
Members 06-69 (December 2006).
\9\ For example, the proposed rule change would not supersede
the guidance given by NASD staff in Notice to Members 99-55 (July
1999) concerning NASD Rules 2820 and 2830.
\10\ NASD published a Notice to Members requesting comment on a
proposed rule change to replace Rules 2820(g) and 2830(l), among
others, with a new Rule 2311. See Notice to Members 05-40 (June
2005). If such a rule change is proposed and approved, NASD will
amend the language of proposed IM-3060 to reflect the change.
---------------------------------------------------------------------------
Rule 3060 is intended to prevent improprieties that may arise when
a member or an associated person of a member gives gifts or gratuities
to employees of a customer. To guard against these improprieties, Rule
3060 imposes a $100 annual limit on gifts and gratuities that a member
or person associated with a member can give to an employee of a
customer in relation to the employer firm's business. However, ordinary
and usual business entertainment is not considered a gift or gratuity
and is permitted ``so long as it is neither so frequent nor so
extensive as to raise any question of propriety.'' \11\ The proposed
rule change is intended to replace this statement regarding business
entertainment with an approach that permits each member to adopt
specific policies and procedures tailored to its business needs. The
proposed rule change also seeks to provide members with general
guidance concerning the types of issues that a firm's policies and
procedures must address and mandates that each member maintain
appropriate records to ensure that persons associated with the member
are complying with the written policies and procedures.
---------------------------------------------------------------------------
\11\ See 1999 Letter.
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In general, NASD, working closely with the New York Stock Exchange
(the ``NYSE''), concluded that, in clarifying a member's obligation
under Rule 3060, a specific standard was unworkable and
impractical.\12\ As NASD noted in the Notice to Members seeking comment
on the proposed rule change, ``the proposed IM does not impose hard
limits, nor does it require that all members adopt the same limits or
even treat all recipients equally.'' \13\ Rather, the proposed rule
change requires that each member assess its use of business
entertainment, determine what limitations are appropriate and meet the
general guidelines set forth in the proposed rule change, and adopt
written
[[Page 28746]]
policies and procedures to ensure that persons associated with the
member are following those limitations. The introductory paragraph in
the proposed interpretation also makes clear that the interpretation
does not apply to any member that does not engage in business
entertainment.
---------------------------------------------------------------------------
\12\ The NYSE also has filed a proposed rule change with the
Commission addressing business entertainment. See supra note 5.
\13\ See Notice to Members 06-06 (January 2006).
---------------------------------------------------------------------------
While, as discussed below, some commenters criticized a general,
principles-based approach as lacking clarity and uniform standards,
NASD and the NYSE both concluded that such an approach was more
appropriate. The proposed rule change expands upon the existing
principles-based approach to business entertainment established in the
1999 Letter but specifically addresses the content of a member's
written policies and procedures.
(B) General Requirements: The observance of ``high standards of
commercial honor and just and equitable principles of trade'' required
of a member in the conduct of its business under NASD Rule 2110
includes the obligation of a member not to act in a manner contrary to
the best interests of a customer in the conduct of business with or for
such customer. Consequently, when a member interacts with an employee--
or any other agent--of a customer, the member should not give that
person anything of value that is intended or designed to cause, or
otherwise would be reasonably judged to have the likely effect of
causing, such person to act in a manner that is inconsistent with the
best interests of the customer or any person to whom the customer owes
a fiduciary duty.\14\ Paragraph (a) of the proposed rule change
codifies this concept by explicitly setting forth the general purpose
behind proposed IM-3060.
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\14\ NASD Rule 2110 precludes the offering of any thing of
value, including but not limited to business entertainment, that
comprises conduct that, to any degree, is either illegal under any
applicable law or would expose the member, customer, or recipient of
the member's business entertainment to any civil liability. For
example, any business entertainment that violated the Foreign
Corrupt Practices Act or any commercial bribery statutes and laws
would, in turn, violate Rule 2110.
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NASD believes that the guiding principle in navigating the concern
of placing a customer representative in conflict with his duty to a
customer is that members should compete for business on the basis of
providing the best professional services. While it is not inappropriate
for business entertainment to foster an environment for the member to
promote or educate the customer representative with respect to such
professional services, it is inconsistent with the terms of proposed
IM-3060 to use business entertainment to provide incentives to customer
representatives to conduct customer business with and/or through the
member without due consideration as to whether the nature and terms of
such professional services meet the objectives and are in the best
interests of the account.
(C) Definitions: There are three defined terms that are integral to
an understanding of the proposed rule change.\15\ First, ``customer''
is defined as (1) ``a person that maintains a business relationship
with a member via the maintenance of an account, through the conduct of
investment banking, or pursuant to other securities-related activity''
or (2) ``a person whose customer representative receives business
entertainment for the purpose of encouraging such person to establish a
business relationship with the member by opening an account with the
member or by conducting investment banking or other securities-related
activity with the member.'' \16\ The definition of ``customer'' has
been amended from the previous rule filing; however, the changes do not
affect those persons considered ``customers'' for the purpose of the
proposed rule change.
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\15\ Terms used in the interpretation have the same meaning as
those defined in NASD's By-Laws and rules unless otherwise
specified.
\16\ NASD Rule 0120(n) defines the term ``person'' to ``include
any natural person, partnership, corporation, association, or other
legal entity.''
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Second, for purposes of the proposed rule change, a ``customer
representative'' means ``a person who is an employee, officer,
director, or agent of a customer, unless such person is a family member
of the customer.'' The term ``customer representative'' replaces the
term ``employee'' in the previous rule filing to clarify that the term
includes persons other than employees. The term also now conforms to
the terminology in the NYSE's proposed rule change. Moreover, the
definition has been amended to exclude certain family members from the
definition of customer representative.\17\ This exclusion has been
added to the definition to address situations where a close family
member has power-of-attorney or similar authority over another family
member's account (e.g., an adult child with authority over his or her
elderly parent's account). NASD believes that these situations are
unlikely to result in the types of conflicts of interest the proposed
rule change seeks to address.
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\17\ The term ``family member'' means a person's parents,
mother-in-law or father-in-law, spouse, brother or sister, brother-
in-law or sister-in-law, son-in-law or daughter-in-law, and
children.
---------------------------------------------------------------------------
This definition, when coupled with the general requirements set
forth in paragraph (a) of the proposed rule change, limit the proposed
rule change to business entertainment provided to a customer
representative. This point is explicitly addressed in the preamble to
the interpretation, which states: ``This interpretation does not apply
to any member that does not engage in business entertainment. For any
member that engages in business entertainment, this interpretation
applies only with respect to business entertainment provided to
customer representatives.'' Thus, the proposed rule change does not
address business entertainment provided to a natural person
customer.\18\ It addresses only business entertainment provided to a
customer representative of the customer (although such customer may be
a natural or non-natural person).
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\18\ As discussed in footnote 5 of Notice to Members 06-06, and
as noted below, natural persons who are both natural person
customers and customer representatives should be treated as customer
representatives. That is, associated persons of a member cannot
avoid the application of the firm's business entertainment policies
by claiming that business entertainment provided to a person who is
both a natural person customer and a customer representative was
provided to that individual solely in his or her ``personal,''
rather than business, capacity.
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Third, ``business entertainment'' is defined as ``any social event,
hospitality event, sporting event, entertainment event, meal, leisure
activity, or event of like nature or purpose, including entertainment
offered in connection with a charitable event, educational event or
business conference, as well as any transportation or lodging related
to such activity or event, in which an associated person of a member
accompanies a customer representative.'' This definition codifies
NASD's long-standing position that an associated person of a member
must accompany or participate in an event for it to be deemed
``business entertainment'' rather than a ``gift.'' In addition, NASD
has deleted the portion of the definition that stated that it is not
necessary for business to be conducted for an event to be ``business
entertainment.'' The definition of business entertainment encompasses
all the events enumerated provided that the customer representative is
accompanied by an associated person of the member; because the clause
did not further define business entertainment, it has been deleted.
As noted above, the definition of ``business entertainment''
generally prescribes that if a customer representative is not
accompanied by an appropriate associated person of a member, any
expenses associated with the business entertainment will be
[[Page 28747]]
considered a gift under Rule 3060. An exception to this requirement is
proposed to address instances when exigent circumstances make it
impractical for an associated person of a member to attend a business
entertainment event. All instances where such exigent circumstances are
invoked must be clearly and thoroughly documented and be subject to the
prior written approval of a designated supervisory person or, in very
limited circumstances where such prior approval cannot reasonably be
obtained, to a prompt post-event review to be conducted and documented
by such supervisory person.
NASD believes that the ``exigent circumstances'' exception provides
necessary flexibility in light of real-world, last minute emergency
situations that could arise that would make it difficult, if not
impossible, for an appropriate associated person of a member to attend
a business entertainment event with a customer representative. Examples
of exigent circumstances would be a sick child, an accident, or some
other sudden, overriding circumstance. NASD does not believe this
provision would lead to circumvention of the spirit or substance of the
proposed rule change since all such occurrences are subject to detailed
documentation such that any patterns of abuse would become quickly
apparent to supervisory personnel.
Paragraph (b)(4)(C) of the proposed rule change provides guidance
to members on the valuation of business entertainment. The proposed
rule change requires that a member's written policies and procedures
specify how the firm will calculate the value of business
entertainment. In general, business entertainment items should be
valued at the greater of face value or cost to the member.
NASD has been asked about the extent to which the proposed rule
change reaches business entertainment conducted outside the United
States, particularly entertainment provided by persons who are employed
in commonly controlled affiliates of a financial services company
operating in the United States and/or foreign jurisdictions. As an
initial matter, proposed IM-3060 reaches all business entertainment of
a member firm and persons associated with a member, even if such
entertainment occurs outside of the United States or is provided to
foreign individuals. However, NASD does not believe that all persons
who are employed in commonly controlled affiliates of a financial
services company operating in the United States and/or foreign
jurisdictions are necessarily associated persons of the member, even if
they report to a person who, in another capacity, is an associated
person of a member.
An associated person of a member may have management and
supervisory responsibilities for non-member affiliates of a financial
services company, located within or outside of the United States,
without the result that the persons being managed and supervised in the
non-member affiliates would necessarily be deemed associated persons of
the member. It is the view of NASD that in such instances the following
factors establish that an employee of a non-member affiliate is not an
associated person of the member: (1) The manager/supervisor of that
employee is recognized in the organization as having a scope of
responsibilities outside of the member firm; (2) the exercise of the
management and supervision over that employee by such manager/
supervisor is not controlled by the member, is reviewable for purposes
of performance and compensation outside of the member, and is not
conducted for the benefit of the member; and (3) the employee of the
non-member affiliates is not otherwise employed or engaged in the
investment banking or securities business of the member and controlled
by the member in respect of such activities.
(D) Written Policies and Procedures: A member's policies and
procedures must be designed to promote conduct consistent with NASD
Rule 2110 and should not undermine the performance of a customer
representative's duty to a customer. The proposed rule change requires
members to adopt written policies and procedures concerning business
entertainment that: (1) Define forms of business entertainment that are
appropriate and inappropriate using quantitative and/or qualitative
standards that address the nature and frequency of the entertainment
provided, as well as the type and class of any accommodation or
transportation provided in connection with such business entertainment;
(2) impose either specific dollar limits on business entertainment or
require advance written supervisory approval beyond specified dollar
thresholds; (3) are designed to detect and prevent business
entertainment that is intended as, or could reasonably be perceived to
be intended as, an improper quid pro quo or that could otherwise give
rise to a potential conflict of interest or undermine the performance
of a customer representative's duty to a customer; (4) establish
standards to ensure that persons designated to supervise and administer
the written policies and procedures are sufficiently qualified; and (5)
require appropriate training and education for all personnel who
supervise, administer, or are subject to the written policies and
procedures.
(i) Define Forms of Appropriate and Inappropriate Business
Entertainment: A member's written policies and procedures concerning
business entertainment must define forms of business entertainment that
are appropriate and inappropriate using quantitative and/or qualitative
standards that address the nature and frequency of the entertainment
provided, as well as the type and class of any accommodations or
transportation provided in connection with such business entertainment.
A member's policies and procedures should include provisions regarding
appropriate venues, nature, frequency, and types and class of
accommodation and transportation.
A member may determine that certain activities, though legal, are
nevertheless inappropriate for business entertainment. NASD believes
that the standards of business entertainment adopted by members must
meet the requirements of Rule 2110 that members and persons associated
with a member adhere to high standards of commercial honor.
Consequently, a member would violate proposed IM-3060 not only if it
failed to adopt procedures, but also if the procedures set standards
that are so unbounded or vague that no reasonable determination of
propriety can be discerned.
The proposed rule change also would allow, but not require, members
to establish different standards for business entertainment in
connection with events that are educational, charitable, or
philanthropic in nature. If a member chooses to distinguish between
forms of business entertainment in its policies and procedures, it
should ensure that these types of business entertainment nonetheless
comply with Rule 2110 and the general requirements set forth in
paragraph (a) of the proposed rule change.
(ii) Impose Either Specific Dollar Limits on Business Entertainment
or Require Advance Written Supervisory Approval Beyond Specified Dollar
Thresholds: A member's written policies and procedures must impose
either specific dollar limits on business entertainment or require
advance written supervisory approval beyond specified dollar
thresholds. The proposed rule change does not impose hard dollar limits
or require that all
[[Page 28748]]
members adopt the same dollar limits or treat all recipients equally.
(iii) Designed to Detect and Prevent Business Entertainment That Is
Intended As, or Could Reasonably Be Perceived To Be Intended As, an
Improper Quid Pro Quo: A member's written policies and procedures must
include procedures designed to detect and prevent business
entertainment that is intended as, or could reasonably be perceived to
be intended as, an improper quid pro quo. For example, members should
develop written policies and procedures reasonably designed to preclude
providing business entertainment that is so lavish or extensive in
nature that a customer representative would likely feel compelled to
place order flow on behalf of the customer without due regard to best
execution or other transaction pricing considerations. NASD does not
intend that this standard would establish a per se violation of the
proposed IM if a customer representative who received business
entertainment from the member is later found to have violated his or
her obligations to his or her employer; however, such actions by a
customer representative may warrant further investigation by the member
firm as to whether the member's policies and procedures are, in fact,
reasonably tailored to prevent these types of violations.\19\ While an
NASD member is not ultimately responsible for the conduct of its
customers' employees or agents, the member is responsible for ensuring
that persons associated with the member do not engage in activities
that are designed to, or reasonably likely to, cause the recipient to
engage in improper conduct. Moreover, a member's compliance with its
policies and procedures would not serve to automatically shield the
member from all liability under the proposed IM for any misconduct by a
customer representative.
---------------------------------------------------------------------------
\19\ NASD Rule 3012(a) requires members to test and verify their
supervisory procedures and ``create additional or amend supervisory
procedures where the need is identified by such testing and
verification.''
---------------------------------------------------------------------------
(iv) Supervision: As is the case with every NASD rule, supervision
is a critical component of business entertainment policies and
procedures. Members are free to define the approach and method of their
written policies and procedures provided they are reasonably designed
to comport with the principles stated in the proposed rule filing.
Irrespective of the manner in which a member crafts its procedures, it
must be clear from the supervisory policies and procedures what factors
determine appropriate levels of business entertainment and how those
determinations are executed, monitored, and enforced. This is
particularly true if members elect to use qualitative, rather than
quantitative, standards. In addition, such supervisory procedures
should provide a method for evidencing both the breadth of supervisory
activities as well as the information upon which such supervision is
conducted. For example, a member's policies and procedures must
evidence the basis upon which a supervisor will determine that business
entertainment does not violate a member's standards as to the nature,
frequency, and dollar amounts of entertainment. A member's policies and
procedures must establish standards to ensure that persons designated
to supervise and administer the member's written policies and
procedures are sufficiently qualified. The requirement that the persons
designated to supervise business entertainment expenses be
``sufficiently qualified'' is not intended to impose a registration
requirement or similar obligation on these individuals; rather, the
requirement is intended to ensure that the member's designation is of
persons who are familiar with the applicable regulatory requirements
and are sufficiently senior and experienced to entrust with the
approval obligations envisioned by the member's policies and
procedures.
(v) Training and Education: A member's business entertainment
policies and procedures must require appropriate training and education
to all applicable personnel. A member also must be able to demonstrate
that it trains persons associated with the member who supervise,
administer, and are subject to such written business entertainment
policies and procedures in all applicable requirements.
(E) Recordkeeping: The only effective way for a member to ensure
that persons associated with the member are following the firm's
policies and procedures is to establish a system to track their
business entertainment expenses. Consequently, a member's policies and
procedures are required to include procedures regarding the maintenance
of detailed records of business entertainment expenses provided to any
customer representative.
NASD recognizes that recordkeeping requirements present compliance
burdens for firms, and NASD has sought to address the potential burden
by providing a recordkeeping carve-out for small expenditures, none of
which would reasonably be expected to influence the behavior of the
recipient. Consequently, the proposed rule change provides that members
are not required to maintain records of (1) Business entertainment when
the total value of the business entertainment, including all expenses
associated with the business entertainment, does not exceed $50 per day
or (2) additional expenses incurred in connection with otherwise
recorded business entertainment that do not, in the aggregate, exceed
$50 per day.\20\
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\20\ Members should be aware, however, that they may need to
track such expenses under other NASD or SEC rules. There is no
express exclusion from Rule 3060 for gifts given during the course
of business entertainment. See Notice to Members 06-69 (December
2006). NASD staff has, however, provided guidance that Rule 3060
does not apply to certain promotional items of nominal value that
display the firm's logo. See id.
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The $50 threshold would apply only to events or activities with a
total cost that did not exceed $50 per day (e.g., an inexpensive lunch)
or to minor expenses related to an otherwise reported business
entertainment event (such as a hot dog at an NBA basketball game, where
the basketball game ticket is reported as a business entertainment
expense). Firms may not allow persons associated with the member to
disaggregate business entertainment expenses relating to an activity or
event in an effort to avoid recordkeeping obligations. Thus, a dinner
expense of $40 followed by a sporting event with a ticket price of $40
would need to be tracked under the member's recordkeeping system.
The proposed rule change also requires that a member's written
policies and procedures include provisions reasonably designed to
prevent persons associated with the member from circumventing the
recordkeeping requirements in contravention of the spirit and purpose
of proposed IM-3060. Thus, for example, members should seek to prevent
associated persons of the member from engaging in patterns of providing
business entertainment that falls below the $50 reporting threshold.
One of the key elements of the proposed rule change is the ability
of a customer to request from the member information regarding the
business entertainment expenses provided to the customer
representatives of the customer. Although members are permitted to
establish reasonable guidelines regarding a customer's ability to
request this information, such guidelines must not impair the ability
of the customer to obtain, on a reasonable and regular basis,
information concerning the member's business entertainment expenses
pertaining to
[[Page 28749]]
the customer representatives of such customer.
(F) Exemption for Members with Business Entertainment Expenses
Below $7,500: The concerns that the proposed interpretation seeks to
address are not presented by those members that, in the aggregate, do
not devote significant resources to business entertainment.
Consequently, the interpretation provides for a partial exemption for
those members with annual business entertainment expenses below $7,500.
The provision provides that the $7,500 ceiling should be measured on a
fiscal year basis. Each member that relies on the exemption must
evidence that its business entertainment expenses were below the
threshold.
Importantly, the exemption is not a total exemption from all
aspects of the proposed interpretation. All members (except those
members that do not engage in any business entertainment) are required
to abide by the interpretation's general requirements as set forth in
paragraph (a) and are required to have written policies and supervisory
procedures that are designed to detect and prevent business
entertainment that is intended as, or could reasonably be perceived to
be intended as, an improper quid pro quo or that could otherwise give
rise to a potential conflict of interest or undermine the performance
of a customer representative's duty to a customer or any person to whom
the customer owes a fiduciary duty, and establish standards to ensure
that persons designated to supervise and administer such policies and
procedures are sufficiently qualified.
The effective date of the proposed rule change will be six months
following Commission approval. NASD will announce the effective date of
the proposed rule change in a Notice to Members to be published no
later than 60 days following Commission approval.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\21\ which requires, among
other things, that NASD rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. NASD believes that the proposed rule change clarifies
existing obligations of members with respect to the provision of
business entertainment and will help prevent conduct by associated
persons of a member that could undermine the performance of an
employee's duty to the member's customer.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in NASD Notice
to Members 06-06 (January 2006). NASD received 28 comments in response
to the Notice.\22\ A copy of the Notice to Members was attached to the
original rule filing as Exhibit 2a. Copies of the comment letters
received in response to the Notice were attached to the original rule
filing as Exhibit 2b. Of the 28 comment letters received, 12 were
generally in favor of the proposed rule change, 13 were opposed, and
three took no clear position.
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\22\ Letter from Pinnacle Taxx Advisors, Inc. (``Pinnacle''),
dated Jan. 26, 2006; Letter from Keefe, Bruyette & Woods (``KBW''),
dated Jan. 26, 2006; Letter from J.P. Morgan, dated Jan. 30, 2006;
Letter from Evolve Securities, Inc. (``Evolve''), dated Jan. 31,
2006; Letter from Seasongood & Mayer, LLC (``Seasongood''), dated
Feb. 2, 2006; Letter from Plexus Consulting (``Plexus'') o/b/o
International Association of Small Broker Dealers and Advisers,
dated Feb. 6, 2006; Letter from Dominion Investor Services, Inc.
(``Dominion''), dated Feb. 13, 2006; Letter from National Regulatory
Services (``NRS''), dated Feb. 6, 2006; Letter from T. Rowe Price
Investment Services, Inc. (``T. Rowe Price''), dated Feb. 17, 2006.
Letter from Maplewood Investment Advisors, Inc. (``Maplewood''),
dated Feb. 22, 2006; Letter from Financial Services Institute, Inc.
(``FSI''), dated Feb. 23, 2006; Letter from Transamerica Financial
Advisors, Inc. (``Transamerica''), dated Feb. 23, 2006; Letter from
H.D. Vest Financial Services (``H.D. Vest''), dated Feb. 23, 2006;
Letter from ING U.S. Financial Services (``ING''), dated Feb. 23,
2006; Letter from The Investment Company Institute (``ICI''), dated
Feb. 23, 2006; Letter from Hines Real Estate Securities, Inc.
(``Hines''), dated Feb. 21, 2006; Letter from The National Society
of Compliance Professionals (``NSCP''), dated Feb. 23, 2006; Letter
from Financial Network, dated Feb. 23, 2006; Letter from Coker
Palmer, dated Feb. 23, 2006; Letter from Griffin, Kubik, Stephens &
Thompson, Inc. (``Griffin''), dated Mar. 2, 2006; Letter from
Debevoise & Plimpton LLP (``Debevoise'') o/b/o The Midtown
Regulatory Group, dated Mar. 3, 2006; Letter from Transamerica
Capital, Inc. (``Transamerica Capital''), dated Mar. 3, 2006; Letter
from The Bond Market Association (``BMA''), dated Mar. 3, 2006;
Letter from Goodwin Browning & Luna Securities, Inc. (``GB&L''),
dated Mar. 3, 2006; Letter from The ABA Securities Association
(``ABASA''), dated Mar. 3, 2006; Letter from Wachovia Capital
Markets, LLC (``Wachovia''), dated Mar. 3, 2006; Letter from Neal E.
Nakagiri (``Nakagiri''), dated Mar. 3, 2006; and Letter from The
Self-Regulation and Supervisory Practices Committee of the
Securities Industry Association (``SIA''), dated Mar. 7, 2006.
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A number of commenters raised concerns with NASD's general,
principles-based approach to the proposed rule change \23\ and
questioned the overall need for the IM.\24\ As indicated above, the
proposed rule change was undertaken in response to requests by NASD
members for clarity concerning appropriate business entertainment. Both
NASD and the NYSE undertook to provide members with additional guidance
following these requests. To the extent some commenters questioned
whether NASD should seek to ``regulate'' the employees of their
members' customers, these commenters fail to recognize that NASD staff
guidance in the 1999 Letter already prohibits business entertainment
for employees of customers that is so frequent or excessive as to raise
questions of propriety. Moreover, as discussed above, NASD is not
seeking to regulate the behavior of the representatives of a member's
customers; \25\ rather, NASD is requiring each member to develop and
enforce some appropriate degree of limitation on the business
entertainment that persons associated with the member provide to its
customers' representatives. In achieving this end, both NASD and the
NYSE believe that a general, principles-based approach is more
appropriate than a restrictive, one-size-fits-all regulatory scheme.
Given the significant variation in broker-dealer business models and
size, and regional differences in what may be considered appropriate
business entertainment, NASD concluded that a fixed-dollar standard or
similar specific mandate would prove unworkable.
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\23\ See, e.g., Letters from Dominion, Financial Network, H.D.
Vest, Hines, Plexus, and NRS.
\24\ See, e.g., Letters from Evolve, Financial Network, FSI,
GB&L, H.D. Vest, ING, Maplewood, Nakagiri, and Transamerica Capital.
Several commenters indicated that the proposed rule change should be
made through notice and comment rulemaking with the Commission. As
the Notice to Members stated, Section 19 of the Securities Exchange
Act of 1934 requires that proposed rule changes such as IM-3060 be
approved by the Commission following publication for public comment
in the Federal Register. See Notice to Members 06-06, at 2 & n.2.
\25\ NASD recognizes that customers whose representatives
receive business entertainment have the responsibility to ensure
that their representatives do not engage in improper conduct.
However, NASD believes that the person providing business
entertainment cannot disclaim any responsibility for improper
conduct that flows directly from business entertainment its employee
provided when the employee either intended for the business
entertainment to have that effect or could reasonably have judged
that the business entertainment would be likely to have that effect.
---------------------------------------------------------------------------
One commenter suggested that NASD exempt certain small broker-
dealers, at
[[Page 28750]]
least in part because they lack the resources to affect decision-making
in the manner the IM seeks to prohibit and that such extravagant and
extensive business entertainment is localized among larger firms and
does not occur in rural or small-market areas.\26\ In response to this
comment, NASD has included a limited exemption for members whose total
business entertainment expenses in the course of their fiscal year are
below $7,500. The exemption provides relief from the recordkeeping
requirements of the rule, as well as many of the specific requirements
regarding written policies and supervisory procedures. NASD believes,
however, that the general requirements of the proposed rule change
should apply to all members that engage in business entertainment. In
addition, members that engage in business entertainment should have
written policies and supervisory procedures that are designed to detect
and prevent improper conduct. As noted above, the proposed rule change
does not apply to any member firm that does not engage in any form of
business entertainment.
---------------------------------------------------------------------------
\26\ Letter from Evolve.
---------------------------------------------------------------------------
Several commenters suggested that NASD identify in the IM the
specific factors to be considered by firms in developing their written
policies and procedures, such as those identified by the NYSE in its
rule filing. NASD staff does not believe it is necessary to identify
specific factors in the IM and that doing so may undermine the
flexibility the proposed rule change is designed to achieve.\27\ NASD
staff will consider whether additional guidance concerning the IM is
necessary when announcing the proposed rule change in a Notice to
Members.
---------------------------------------------------------------------------
\27\ See Letter from BMA.
---------------------------------------------------------------------------
Several commenters expressed concern that the proposed rule change,
including some of the defined terms, was too vague and may, in
application, prove overly broad. Among other things, these commenters
suggested that the proposed rule change could disadvantage firms with
more conservative policies and procedures,\28\ effectively require pre-
approval of all business entertainment,\29\ and introduce disadvantages
among different types of firms and other industry participants.\30\
Other commenters believed that the principles-based approach proposed
by NASD is the appropriate manner to address the needed clarification
of business entertainment.\31\
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\28\ See, e.g., Letters from Hines and ING.
\29\ See Letter from Transamerica Capital.
\30\ See, e.g., Letters from Dominion and Seasongood.
\31\ See Letters from BMA, Griffin, NSCP, and Wachovia.
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While NASD recognizes that there will be distinctions among each
member's written policies and procedures, NASD concluded that member
firms were in the best position to determine appropriate limitations
and restrictions on the business entertainment provided by persons
associated with a member. After considering the various comments
concerning the definitions of ``customer'' and ``business
entertainment'' in the proposed rule change,\32\ NASD has determined
not to amend the definitions substantively.\33\ While several
commenters recommended that the definition of customer track the
definition of ``accredited investor'' as defined in SEC Rule 501 under
the Securities Act of 1933, NASD staff does not believe that the
application of the IM should be dependent on any particular level of
assets. While member firms may choose to treat certain types of
customers or certain types of business entertainment differently for
purposes of their written policies and procedures, NASD believes that,
for purposes of the proposed rule change, a broad definition of each is
appropriate.
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\32\ See, e.g., Letters from BMA, Financial Network, FSI, ING,
and Transamerica Capital.
\33\ As noted in footnote 2 above, although the language in the
definitions has been modified, the substance and breadth has been
retained.
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With respect to one comment, NASD believes that it would be
appropriate for a member's written policies and procedures to allow
case-by-case review and approval for types of entertainment not
specifically set forth in the member's policies and procedures.\34\ One
commenter was concerned that a registered representative may not be
aware whether a recipient of business entertainment is a representative
of a customer of the firm.\35\ If a person is entertained in his
personal capacity as a natural person client, and the firm has
information barriers that would prevent the person providing the
business entertainment from knowing that the person represents another
customer as a representative, and the person providing business
entertainment has no knowledge that such person is a representative of
a customer at the time of the business entertainment, then such
entertainment would fall outside the scope of the IM.
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\34\ See Letter from Debevoise.
\35\ See Letter from FSI.
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Several commenters raised suggestions concerning Rule 3060's
limitation on gifts and gratuities, ranging from comments focused on
increasing the $100 limitation, moving from a hard figure standard to a
principles-based approach, and providing guidance on the types of gifts
and incidental expenses that should be included or excluded from any
limitation.\36\ The proposed rule change is focused on business
entertainment, which is excepted from the limitation on ``gifts,'' and
NASD is not currently considering amending the rule regarding gifts and
gratuities.\37\ NASD has long recognized that gifts--in contrast to
business entertainment--are not incidental to the transaction of
business. NASD requires that any gifts be de minimis and sees no reason
to depart from this long-held view. NASD does not believe that the
proposed rule change is the appropriate forum for providing
interpretive advice on other aspects of Rule 3060; however, NASD staff
recently published additional guidance on Rule 3060 regarding gifts and
gratuities. See Notice to Members 06-69 (December 2006).
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\36\ See, e.g., Letters from ABASA, BMA, Debevoise, Evolve,
Financial Network, and Wachovia.
\37\ The one exception is the one noted above with respect to
exigent circumstances. Numerous commenters requested that NASD adopt
the exigent circumstances exception from the gift rule similar to
the exception that the NYSE has proposed. See, e.g., Letters from
ABASA, BMA, and Wachovia. As discussed above, NASD has determined
that it is appropriate to provide for such an exception.
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Two commenters expressed concern that the IM shifts the burden of
proof required under NASD Rules and suggested that any change to Rule
3060 be done through a separate rule proposal rather than through an
IM.\38\ As discussed in footnote 2 and the accompanying text of Notice
to Members 06-06, the IM, which is the equivalent of a rule provision,
is being proposed in accordance with the procedures for a proposed rule
change under Section 19 of the Act.\39\ Rule 3060 and IM-3060 are two
separate provisions, and the burden of proof under Rule 3060 is not
affected by the proposed IM.
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\38\ See Letters from Financial Network and ING.
\39\ 15 U.S.C. 78s.
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Several commenters appeared concerned that the discussion in
footnote 5 of Notice to Members 06-06 would prohibit entertaining
friends and relatives. This misconstrues the meaning of footnote 5,
which says: ``Members cannot circumvent this proposed interpretive
material by providing business entertainment to a natural person
customer who also is an employee, agent or representative of a customer
by claiming that such business
[[Page 28751]]
entertainment applies only to the `natural person' relationship.'' What
is required by footnote 5 is that an associated person of a member not
avoid the application of the firm's business entertainment policies by
claiming such entertainment is ``personal'' rather than business. Firms
are, however, likely to include policies in their business
entertainment procedures to address personal entertainment of a
customer representative where there is a family or some other personal
relationship, much the way firms do today for gifts and gratuities
under Rule 3060 that are not in relation to the business of the
employer of the recipient.
Many commenters requested clarification on whether an
``independent'' review could be conducted by an independent department
within, or affiliated with, the member.\40\ NASD has removed the
specific review sections of the proposed rule change because it was
redundant of existing obligations. A member firm's responsibility to
supervise business entertainment exists under Rule 3010(a), and a
member firm's responsibility to test and verify that its supervisory
policies and procedures are achieving their intended purpose and
complying with the federal securities laws and regulations and NASD
rules exists under Rule 3012(a)(1).
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\40\ See, e.g., Letters from Debevoise, Evolve, ICI, KBW, NRS,
Transamerica Capital, and Wachovia.
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Many commenters expressed concern with the breadth of the
recordkeeping requirement and requested a lengthy implementation time
for the recordkeeping requirements.\41\ In response to these comments,
NASD provided an exception from the recordkeeping obligations for
expenses under $50. However, as discussed above, NASD believes that a
member's policies and procedures should prevent persons associated with
the member from intentionally avoiding the $50 requirement by breaking
up what are otherwise connected costs or by engaging in frequent,
repeated business entertainment at amounts below the $50 threshold. For
example, a firm's policies and procedures may require associated
persons of the member to submit all business entertainment expenses for
review; however, the firm may decide to record and track only amounts
over $50. NASD also is providing for an effective date of six months
following the Commission's approval of the proposed rule change.
Members should provide the Commission with specific comments as to
whether this is sufficient time to implement recordkeeping systems to
comply with the proposed rule change and, if it is not sufficient,
offer reasons why and suggest an appropriate implementation period.
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\41\ See, e.g., Letters from Evolve, Financial Network, FSI,
H.D. Vest, ICI, ING, Maplewood, and Transamerica Capital.
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One commenter suggested that NASD permit a member's procedures to
include prompt review of business entertainment after the event.\42\
The commenter offered an example of a dinner that unexpectedly exceeds
the firm's threshold. NASD does not believe that a member's policies
and procedures should allow for post-event approval because there does
not appear to be an effective means of rescinding business
entertainment that has already been provided. Rather, persons
associated with a member who are concerned that the cost of an event
may exceed the threshold should request approval in advance to go over
the firm's limit. In such a situation, the member should impose another
dollar limit rather than simply waive the requirement.
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\42\ See Letter from T. Rowe Price.
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Finally, several commenters requested that NASD and the NYSE
harmonize their proposed rule changes or, in the alternative, include a
provision that a dual member that complies with one of the SRO's rule
will be deemed to be in compliance with the other SRO's rule.\43\ In
filing this Amendment No. 1, NASD has sought to address substantive
disparities between its rule and that of the NYSE.
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\43\ See, e.g., Letters from BMA and SIA.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
The Commission notes that the NYSE's proposed Rule 350A(e) provides
that a NYSE member organization must have a system in place to give
notice (e.g., via the member organization's Web site, a disclosure
document, or other appropriate means) to customers that use customer
representatives that upon a customer's written request, the NYSE member
organization will provide detailed information regarding the manner and
expense of any business entertainment provided by the NYSE member
organization to the customer representative,\44\ while the NASD's
proposal does not contain a similar notice provision.\45\ The
Commission is soliciting comment on this difference between the NYSE
and NASD proposed rules an
