Many planners in the financial services industry are facing an uncertain regulatory environment, as the NASD (known formerly as the National Association of Securities Dealers) scrutinizes industry practices and imposes stiff noncompliance penalties. The mutual funds industry in particular has been intensely investigated in recent months about a variety of practices, some of which are incentive programs or “sales contests” that fall under the category of noncash compensation. The NASD guidelines were enacted five years ago, but noncash compliance investigations didn't hit the industry until last year.

Huge fines have been levied on several brokerage firms in particular, and the investigations — not only by NASD but also state regulatory agencies — are continuing. Writing in the spring 2004 issue of The Journal of Investment Compliance, NASD enforcement officials report that “NASD is in the process of examining over 20 broker-dealers” to review their compliance with rules that prohibit brokerage firms from rewarding noncash compensation (including group travel programs) to brokers for selling specific funds or annuities.

As this article went to press in mid-June, the New Hampshire Bureau of Securities Regulation was expected to fine Morgan Stanley DW Inc., headquartered in New York, $500,000 for improperly rewarding brokers with noncash incentives. In April, David Lerner Associates, a Long Island, N.Y., brokerage firm, was fined $100,000 for running sales contests promoting certain proprietary mutual funds and other selected products in violation of NASD rules. In announcing the fine, Mary L. Schapiro, vice chairman and president of regulatory policy and oversight for NASD, said, “The sales contests engaged in by the firm increase the potential for investors to be steered into investments that are in the representatives' financial interests instead of the best interests of the customers.”

The compliance action against David Lerner is the third of its type taken against NASD-member firms since last fall. In September, Morgan Stanley was fined $2 million for holding contests to promote the sale of certain mutual funds and annuities. In October, NASD fined Wells Investment Securities in Norcross, Ga., $150,000 for rewarding brokers with travel and entertainment perquisites for selling Wells' real estate investment trusts.

Determining if your meeting and incentive programs are in compliance isn't easy. Even those financial services firms making efforts to comply are running into complex and sometimes contradictory rules. According to a planner from one large firm, that company rewrote its regulatory policy three times in less than two weeks this past spring because of changing or unclear regulations. “The more improprieties that are uncovered, the more the rules are being tweaked,” she says.

Know the Rules

The first step in making sure your meetings pass muster with the regulatory agencies is to be aware of the rules. Jon Batterman, NASD regional counsel for Long Island and New York, says the violations in the case of David Lerner Associates “occurred because the firm did not have any supervisory system in place to ensure compliance.”

“Our expectation is that any of our members not aware of these rules now should be,” says David Shellenberger, chief counsel for the New York region of NASD.

“It's quite OK [for brokerage firms] to offer incentive programs,” says Bill Boyd, president and CEO of Sunbelt Motivation Inc., Dallas, which counts several NASD-member financial services firms among its clients. But it's important to ensure that the programs are both ethical and legal, he adds.

That may be easier said than done. Regulatory guidelines potentially impact many types of meetings, including those involving education and training (see sidebar). For example, companies can plan and sponsor educational meetings and training sessions, provided attendance is not conditional on meeting sales targets and that the meeting is held in a “reasonable” or “appropriate” location — a rule open to interpretation.

Take Precautions

Experts say that regulatory agencies are trying to come up with clearer guidelines that affect financial services meetings, but that the process may stretch out over a period of 12 to 18 months. In the meantime, planners should be in direct contact with their legal and compliance departments. “In such an uncertain and changing environment, it's a good idea to set up weekly conference calls,” advises a planner who sometimes talks with as many as six legal counselors in her company about compliance issues.

Working closely with in-house compliance and legal departments is crucial in such an unsettled regulatory environment, says Scott Cipinko, who as a LOMA (a financial services sales and marketing association) vice president and the executive director of the Life Insurers Council helps member companies deal with legal and regulatory issues. He advises planners who have any questions about the legality or propriety of a meeting or incentive to immediately ask the company's general counsel for an opinion.

What kinds of questions do financial services planners most often ask compliance professionals? The most common query has to do with meeting location, says Susan Krawczyk, partner with Sutherland, Asbill & Brennan, a Washington, D.C., law firm. Krawczyk, who specializes in federal and state regulation of the sale and marketing of financial products, says, “They'll ask, ‘Gee, our company's headquarters is in a location not really convenient. Can we move the meeting to a more practical location?’” To get an affirmative response and ensure that the meeting passes NASD muster, Krawczyk advises planners to be prepared to answer a range of questions, including those about the “suitability of the content and conduct of the meeting.”

A good place to start for those who need details on NASD guidelines is its Web site at In addition, NASD will provide interpretive guidance regarding the rules.

Boyd says that when it comes to dealing with brokerage firms, incentive houses like his need to understand the law. A third-party planning firm may not, in the end, be legally culpable if a program it helps to manage turns out to be noncompliant, but “we do have an ethical obligation,” he says. Giving the right advice is good business as well, Boyd adds, considering that a noncompliant incentive could end up dealing a huge blow to the financial services company in the way of fines and penalties — not to mention the devastating fallout of negative publicity.

Noncash Compensation

NASD strictly regulates noncash compensation in connection with mutual fund sales. According to Susan Krawczyk, a partner with the Washington law firm Sutherland, Asbill & Brennan, the rules permit noncash compensation in certain circumstances: nonincentive small gifts; meals and entertainment; nonincentive training and education meetings; and incentive noncash compensation programs.

Small gifts and meals and entertainment — These exceptions are allowable depending on frequency and as long as they are not preconditioned on reaching sales targets.

Nonincentive training and education meetings — These exceptions are allowable if a variety of conditions are met, including the appropriateness of the location, content, and conduct of the meeting. Most critically, attendance at these training or education meetings must not depend on achieving sales goals. Whatever the requirement, Krawczyk says, it must not be “just a proxy [disguise] for sales.”

Incentive noncash compensation programs — Incentive noncash compensation is permissible only if the incentive is sponsored by the participant's member firm or affiliate, and is based on total sales production, with equal weight given to each product sold.