THE CRACKDOWN on financial services sales practices over the past several years by NASD (formerly known as the National Association of Securities Dealers) not only led to enforcement actions and fines, but also serves as a cautionary tale for firms wondering whether or not some of their meetings pass regulatory muster.
Anecdotal evidence suggests that NASD is stepping up enforcement. On April 20, The Wall Street Journal reported that NASD recently took disciplinary measures against 10 companies in seven states, and against an additional 48 individual brokers, for violations of its rules and securities laws. Last year, NASD collected $102 million in disciplinary fines.
Companies that fall under NASD guidelines may be re-thinking their site selection. One financial services planner who has typically held incentive programs in Europe, responded recently to an inquiry from a European Tourist Board, saying that meeting far from where the planner's company has an office might run afoul of NASD regulations.
Some companies have shifted their meetings away from an incentive model in order to comply with NASD Conduct Rule 2830(l), which involves training and education meetings. This provision allows a mutual fund company, for example, to hold an educational meeting, but attendance cannot be based on hitting a sales target or some other production-driven qualification. And the location of the meeting must be “appropriate to its purpose,” in NASD lingo.
This provision is open to interpretation, however. Concerns and confusion about what it requires and how NASD will police it, are aspects of NASD's noncash-compensation rules that bedevil planners.
Ban on Sales Contests Broadens
In the meantime, NASD is now proposing to broaden its ban on sales contests. Late in April, NASD announced it wants to ban contests that award brokers cash for selling a particular security or type of security in preference to another. NASD already prohibits contests that award noncash incentives, such as cruises or concert tickets, to encourage the sale of one kind of mutual fund, variable annuity, or certain other securities in preference to others.
“A broker's first responsibility is to recommend securities that are right for the investor. Sales contests, whether they pay off in cash or cruises, that favor particular securities can interfere with that responsibility,” said Robert Glauber, chairman and CEO of NASD, in announcing the proposed rule change. “This rule would eliminate, in a clear and complete way, a potential conflict of interest.”
State regulatory agencies have been getting into the enforcement act as well. In another April development, the New Hampshire Bureau of Securities Regulation fined Morgan Stanley DW Inc. $435,000 for improper sales and business practices. Among other problems, the bureau focused on the company's “improper use of sales incentives.”
In the consent agreement reached with Morgan Stanley, the bureau cited the company for holding sales campaigns that focused on certain proprietary funds, “while offering compensation schemes that are not permissible under state and federal securities guidelines.” One sales campaign was a “Steak-a-thon,” where agents were awarded steaks for sales of certain Morgan Stanley proprietary funds.
The same New Hampshire office is also seeking $17.5 million in penalties from American Express Co., alleging that it illegally steered clients towards under performing proprietary funds. Some of the sales contests cited include a free one-year lease of a Mercedes-Benz automobile for advisors who sold the most American Express funds.