Christopher Myers, former federal prosecutor, is a partner with the national law firm Holland + Knight in McLean, Va., where he is co-chairman of the Global Compliance and Governance National Practice Team. In June, he spoke at a seminar sponsored by meetings management technology provider StarCite Inc., about proposed changes to NASD's (now the Financial Industry Regulatory Authority) gift and entertainment regulations. We followed up with him in early August about the status of the revised rule and how it could affect financial services and insurance meetings.
Financial & Insurance Meetings: What's the status of the revisions to NASD 3060 gift and entertainment regulations waiting for SEC approval?
Myers: It is a little complicated. NASD and NYSE proposed the new Interpretive Material for NASD Rule 3060 and the NYSE counterpart at the beginning of 2006, received comments, incorporated or evaluated the comments, and sent the final proposed guidance to the Securities and Exchange Commission, which also asked for comments. Presently, [As FIM went to press in mid August] no word has come from the SEC or FINRA, the new self-regulatory organization formed by the merger of NASD and the NYSE. I don't know if the recent consolidation has caused a blip in the normal process. Although the SEC has not announced a deadline, it is expected that the new regulations will be approved in the near future.
FIM: How does FINRA's principles-based approach — requiring adherence to regulatory principles rather than specific requirements — apply to the new gift and entertainment rules?
Myers: The gist of this is that companies must come up with reasonable guidelines based on their own methods of doing business. What is reasonable for one company may not be reasonable for another, so one would think they'll be given a little bit of rope to design their own rules. They'll be required to follow a basic concept: that investment decisions should be based on what is in the best interests of the client, and should not appear to have been influenced by entertainment and gifts. It's still a somewhat vague concept, and there will be companies that will test the outer boundaries of this rule.
FIM: Does it follow that FINRA will initiate some enforcement actions in this area?
Myers: I predict there will be regulatory enforcement down the road that will help to more clearly define the limits of the gifts and entertainment rules. This is going to happen when you apply fairly general guidelines across a large and diverse industry.
FIM: Do the revised regs still specify a $100 annual gift limit?
Myers: Yes. There are two different issues here. The gift rule places a strict limit of $100 per year. The entertainment guidance is relevant to the gift rule because expenditures that do not meet the entertainment restrictions will be treated as gifts and be more likely to cause a violation.
FIM: The existing rules apply only to direct employees of a company, and to domestic offices. Do the new rules broaden these parameters?
Myers: Yes, the new rules apply to entertainment of both employees and agents of customers, although not entertainment of customers themselves. They also apply to entertainment that takes place outside the U.S. and entertainment of foreign citizens — but not to affiliates of financial services companies that are not members of FINRA.
FIM: What other effect will the new rules have on events, meetings, and recognition programs?
Myers: There will have to be significant changes in the way companies monitor and track marketing activities and what are viewed by the government as “gift” dollars. Many companies currently track these expenses on a gross level and through individual expense reports. That will have to change. The only way to do this effectively — unless it is a very small company — is by developing a detailed record-keeping system using some pretty sophisticated software. These types of systems aren't currently in place at most broker/dealers, so they'll have to get them by modifying software in-house, or going outside the company to get it. There will be a large market for these kinds of record-keeping solutions, similar to what we saw after the U.S.A. PATRIOT Act changes to the anti-money-laundering laws went into effect.
The merger of NASD and the New York Stock Exchange Member Regulation was approved by the Securities and Exchange Commission on July 30. The new self-regulatory organization is called the Financial Industry Regulatory Authority.
FINRA oversees more than 5,000 securities firms and 666,000 registered representatives and is headed by Mary Schapiro, who served as NASD chairman and chief executive officer.
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