Our 2005 reader survey (see page 26), asked respondents to weigh in on their corporate mandates for regulatory compliance. Sarbanes-Oxley compliance topped the list, with 40 percent of respondents saying that their departments' accounting procedures must follow SOX guidelines. As well, 32 percent of all respondents (including 67 percent who work for financial services firms) are required to meet NASD guidelines for educational meetings, while 30 percent (including 44 percent who work for financial services firms), are required to meet NASD guidelines for incentive meetings. Clearly, regulatory compliance is a growing issue for planners already beleaguered by tight budgets, small staffs, and the pencil-pushing mentality of strategic sourcing. Read on for a summary of the regulatory initiatives that could affect your department in 2006.
NEW NASD RULE THREATENS MEETINGS
NASD (the regulatory body that governs security and annuity companies) has proposed an expanded Conduct Rule 2311 that would replace its current noncash-compensation rules enacted in 1999 — and effectively prohibit all product-specific cash or noncash sales contests, including travel incentives. If adopted as written, the new rules would apply to all securities, eliminating certain exceptions that currently apply, such as variable insurance products or REITS. In addition, the rules would put further limits on education and training events, including limiting all training meetings to the United States.
Susan Krawczyk, partner with the Washington, D.C., law firm Sutherland, Asbill & Brennan, says that the new rules could be NASD's response to how well its member firms have complied with the 1999 rules.
The proposed rule would undoubtedly cause big problems for legitimate incentive and educational meetings. Some industry organizations, such as The Securities Industry Association, a New York — based association that counts 600 securities firms as members, have expressed concerns that the new rule is too broad. In a letter addressed to NASD, SIA worried that the rule could be inadvertently applied “to legitimate business conduct that may not present a risk of conflict or investor harm.”
SIA would also like to see a modification of the provision that limits the location of training and education meetings to the United State. “Given the increasing internationalization of securities markets, many member firms … conduct business in foreign locations,” said John Polanin, chairman of the SIA Self-Regulation and Supervisory Practices Committee. “Consequently, they will often have offices, and indeed may be headquartered, outside of the United States. In such cases we perceive no rational basis for restricting training to domestic venues, particularly since such meetings by definition would be non-incentive based.”
The Financial Services Institute, an association of independent contractor broker-dealers headquartered in Atlanta, Ga., also has concerns, specifically about the elimination of current provisions that permit companies to sponsor product training sessions and other types of educational meetings — such as an insurance company sponsoring a meeting for broker-dealers. According to FSI, these types of meetings are important to independent brokers, who use them to educate themselves about products and to network and exchange ideas. “Everyone is better served when registered representatives have a better understanding of the products they are selling,” says David Bellaire, FSI general counsel.
The commentary period for feedback to Conduct Rule 2311 ended in September, and the ball is in NASD's court as to what the final rule will look like. “NASD staff are currently analyzing the comments,” says NASD spokesman Herb Perrone, who wouldn't put a time frame on when the organization was likely to act.
NASD's reaction to the comments will dictate the next move, says Bellaire. “Sometimes the comments are so far-reaching and voluminous that regulators take the proposal back. Other times they retool and put another proposal out.”
SOX COMPLIANCE GETS EASIER
Nearly four years after the SOX Act was enacted, compliance has become easier. “In the first few years it was kind of like the Wild West,” says David Kaufman, partner, Acquis Consulting Group in New York. “Organizations changed the way they documented policies, processes, and procedures, but not necessarily in a logical manner. What's happening now is that organizations better understand the kinds of documentation procedures that work — there are a lot of successful templates out there.”
Meeting planners, Kaufman says, are becoming more successful at documenting their planning decisions “based on what is best for the company as a whole.” SOX compliance has brought about “more structure to, documentation, and controls,” he says. “It doesn't necessarily change how people work, but it makes meeting planners examine more closely what's happening within their areas of responsibility.”
According to the Controllers' Leadership Roundtable, a forum through which controllers from some of the world's largest companies share research and best practices, companies with less than $5 billion in annual revenue spent an average of $2 million on SOX compliance in 2005, while companies with more than $5 billion in revenue spent an average of $4.7 million. In 2006, with more SOX processes and procedures in place, these costs are expected to drop.
ELIOT SPITZER EASES UP
When New York State Attorney General Eliot Spitzer in 2004 began to examine the behavior of a few large brokers with regard to contingency commissions, there was a concern within the insurance industry that this might turn into a broad-based investigation that could threaten the traditional sales incentive.
But, according to Charles Symington, senior vice president of governmental affairs and federal relations, Independent Insurance Agents & Brokers of America, those concerns have dissipated. “The review has been confined to the larger brokers and has not dug deep into the smaller agencies you find through the United States,” Symington says. “Both regulators and consumers realize there's a big difference between the behavior of a few alleged bad apples and well-established, legal sales incentives programs.”
The Spitzer investigations also led the National Association of Insurance Commissioners to introduce a model compensation-disclosure amendment, and several states to issue new compensation-disclosure regulations in 2005. But the impetus has already begun to fade. “We haven't seen too much compensation-disclosure action at the state level [recently],” Symington says. “It's all died down a bit, and it may have run its course.”
COOL TOOL: Tracking Noncash Compensation Online
FIRE Solutions, a San Francisco — based company that provides training and compliance products for the financial services and insurance industry, has introduced an online program that tracks noncash compensation. PowerComply will track, employee by employee, the form and value of noncash compensation as it is given, or received, and will flag employees who've gone over the regulator's set limits. It will also track sales contests (product sold, how it is promoted, and the reward employees receive) and employee attendance at training meetings and seminars (location, agenda, and associated costs). Its online feature allows auditors and compliance officers to easily access the information online or download it onto spreadsheets. www.firesolutions.com