The National Association of Securities Dealers and NYSE Regulation are seeking public comment on proposed standards that deal with the obligations of securities firms and individual brokers in providing business entertainment.

Currently, NASD and NYSE rules prohibit giving anything of value in excess of US$100. The NASD notes that its existing interpretive material states that the rules do not prohibit “ordinary and usual business entertainment” provided that that entertainment is “neither so frequent nor so extensive as to raise any question of propriety.”

In reviewing the issue in recent months, the staffs of NASD and the NYSE have worked together to develop a consistent approach that will provide greater clarity concerning the types of business entertainment that are appropriate. The approach is focused on the procedures that broker-dealers must adopt to guard against providing inappropriate business entertainment.

“The foundational principle of this rule is that conduct cannot undermine the performance of an employee
s duty to a customer,” said NASD chairman and CEO Robert Glauber. “Firms must design standards for entertainment that are consistent with high standards of commercial honor, and they must develop robust policies and procedures to ensure compliance.”

“The purpose of the rule is to prohibit the employees of a broker-dealer from providing business entertainment to a client, particularly one who is acting in a fiduciary capacity, that is intended to cause the client to act in a manner inconsistent with the best interests of his or her employer or customer,” said Grace Vogel, executive vice president of NYSE Regulation’s division of member firm regulation.

The NYSE rules will require each firm to develop written policies and procedures, tailored to that organization’s business model, designed to define forms of entertainment that are appropriate and inappropriate and to detect and prevent entertainment that is intended as an inducement for obtaining customer business, or could give rise to a conflict of interest. Each firm is expected to develop specific dollar limits or require supervisory approval at certain dollar thresholds.

The rule will require firms to effectively supervise compliance with these policies and to provide for periodic verification and testing. Firms will be expected to train all applicable personnel. They will also be required to maintain detailed records of these expenses, and to inform clients that detailed information on the entertainment of their employees is available upon request.

The deadline for submitting comments on the NASD rule is February 23.