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ALI-ABA Course of Study
FINRA/SEC Compliance and Enforcement The Changing Broker-Dealer
and Adviser Regulatory Landscape--Staying Ahead of the Curve
Sponsored with the cooperation of the Philip D. Reed Chair and the Corporate
Law Center of Fordham University School of Law
September 18 - 19, 2008
New York, New York
Establishing an Effective Gifts and Entertainment Policy
By
Stephen A. Kasprzak
Michael G. Rufino
FINRA
New York, New York
Neal E. Sullivan
Bingham McCutchen LLP
Washington, DC
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ALI-ABA Course of Study
FINRA / SEC Compliance and Enforcement:
The Changing Broker-Dealer and Adviser Regulatory
Landscape – Staying Ahead of the Curve
Establishing an Effective Gifts and
Entertainment Policy
Stephen Kasprzak
FINRA
Michael Rufino
FINRA
Neal Sullivan
Bingham McCutchen
Overview of Existing FINRA Landscape:
General Requirements of Rule 3060
Imposes a $100 annual limit on gifts and gratuities to “any
person, principal, proprietor, employee, agent or
representative of another person.”
The annual limit is based on a combined total of gifts and
gratuities given by the member and all associated persons of
the member.
Only payments or gratuities given “in relation to the
business of the employer of the recipient” are included.
Members must keep a “separate record” of all payments or
gratuities in any amount known to the member.
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Overview of Existing FINRA Landscape:
Rule 3060 and Supervision / Recordkeeping
Rule 3010 requires that each member have a supervisory
system to achieve compliance with Rule 3060.
FINRA members must have systems and procedures in
place to ensure that gifts given by the member and its
associated persons that are in relation to the business of
the employer of the recipient are reported, reviewed for
compliance under Rule 3060 and maintained in the
member’s records.
New Developments in the FINRA Landscape:
Proposed IM-3060
FINRA is considering additional guidance governing gifts and
gratuities and business entertainment through the proposal
of IM-3060.
» Considers a general prohibition on giving gifts or items of value
that are intended to cause, or could be reasonably judged to
have the likely effect of causing, a conflict of interest, as
opposed to a strict dollar limit.
» Creates a safe-harbor provision stating that gifts of $250 or less
per year per se would not violate Rule 3060.
» Eliminates the $50 de minimis exclusion from the
recordkeeping requirements and permits each member to
establish its own thresholds, provided the member’s
recordkeeping system captures the necessary information for
the member to monitor for compliance.
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New Developments in the FINRA Landscape:
Proposed IM-3060’s Key Definitions
“Institutional customers”
» A customer that meets the definition of “institutional account” in
NASD Rule 3110(c)(4).
“Family member”
» Broadened to include a person’s parents, grandparents,
mother-in-law or father-in-law, spouse, brother, sister, brotherin-law or sister-in-law, son-in-law or daughter-in-law, children,
grandchildren, cousin, aunt or uncle, and niece or nephew.
“Business entertainment”
» Social events, hospitality events, charitable events, sporting
events -- and meals, transportation, and/or lodging related to
those events -- that are “regarding an existing or prospective
customer relationship.”
New Developments in the FINRA Landscape:
Proposed IM-3060’s Key Definitions (cont.)
“Customer”
» A person that maintains a business relationship with a
member via the maintenance of an account, through the
conduct of investment banking, or pursuant to other
securities-related activity; or
» A person whose customer representative receives business
entertainment for the purpose of encouraging such person to
establish a business relationship with the member by opening
an account with the member or by conducting investment
banking or other securities-related activity with the member.
“Customer representative”
» A person who is an employee, officer, director, or agent of a
customer, unless such person is a family member of the
customer.
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Enforcement of Rule 3060:
Lessons Learned and
Implications of Proposed IM-3060
Jefferies & Company, Inc., (December 2006)
Fidelity (December 2006)
Wells Investment Securities, Inc (August 2003)
Drafting Policies and Procedures:
Implications of Proposed IM-3060
The proposed IM requires all members that provide business
entertainment to customer representatives to have written policies
and supervisory procedures covering business entertainment.
As amended, FINRA members must have written policies and
supervisory procedures with respect to business entertainment
that:
» Are designed to detect and prevent business entertainment that
is an improper quid pro quo or may otherwise give rise to a
potential conflict or undermine the performance of a customer
representative’s duty to a customer or any person to whom the
customer owes a fiduciary duty;
» Clearly delineate what is -- and is not -- a gift; and
» Require appropriate training and education for all personnel
who supervise, administer, or are subject to the written policies
and procedures.
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Drafting Policies and Procedures:
Implications for Proposed IM-3060 (cont.)
FINRA members who provide business entertainment to
customer representatives of institutional customers must
have special written policies and supervisory procedures that:
» Define forms of appropriate and inappropriate business
entertainment;
» Impose specific limits or thresholds requiring advance written
supervisory approval.
» Provide for the maintenance of detailed records of business
entertainment expenses provided to any customer
representative of an institutional customer. The detailed
records must include provisions reasonably designed to prevent
associated persons from circumventing the requirements.
Hypothetical 1A
ABC brokerage is a institutional and retail broker-dealer. In April,
two ABC sales people took six business acquaintances and their
spouses to Augusta, GA for the Masters Golf tournament. Earlier
in the year, four of the six acquaintances had been guests of
ABC at a golf outing in Florida. The acquaintances included an
equity trader from an institutional market maker and the son-inlaw of a high net worth client.
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Hypothetical 1A
The total cost of the ABC event was $100,000
ABC paid for the following:
» Transportation to/from Augusta and Augusta National
» Hotels (Deluxe King rooms)
» Entertainment, including
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VIP passes to the 18th green tent and brunch for the Finals ($2000 each)
Picture opportunities with Tiger Woods ($500)
Admission to Masters practice rounds ($200)
Full access to the Executive Club, located on Azalea Drive ($200 per day)
» Each attendee received a Masters souvenir golf towel ($45), a green
golf polo with the Masters logo ($100) and a Masters program ($20)
Hypothetical 1A
Questions:
1. What policies and procedures should ABC brokerage put in
place to address this type of event?
2. How should these procedures differ for the institutional client?
For the spouses and son-in-law of the client?
3. Is the overall nature and cost of the event reasonable?
4. How should the tickets, gifts and meals be valued?
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Hypothetical 1B
Two of the spouses on the trip decided not to attend the Masters
and in their place were offered a spa day in Augusta paid for by
ABC at a cost of $300 per person. No ABC employee attended the
spa day with the spouses.
The day before the trip to Augusta, one of the attendees -- guilt
ridden after seeing the extravagant trip itinerary -- cancelled his
trip to the Masters and asked that the money that would have
been spent for his travel and entertainment instead be donated to
his favorite local charity.
Hypothetical 1B
Questions:
1. Should ABC pay for the spa day for the spouses? Does it matter
that an ABC employee did not attend the spa day?
2. Can ABC make a substitute charitable donation to the attendee’s
favorite charity in lieu of the trip to the Masters?
3. What should ABC’s policies and procedures reflect regarding
each of these scenarios?
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Hypothetical 2
Regina the registered representative has joined ABC firm, a
broker-dealer serving both institutional and retail customers, and
intends to focus on the development of a high net worth client
base for investments in ABC’s managed account program. She is
recent a graduate of the Wharton School of Business and has
remained close with many of her classmates who have landed
lucrative jobs since graduation. Several of her classmates are
already customers of ABC brokerage firm.
Regina develops her own marketing plan, which involves
reaching out to her former classmates to schedule meetings over
meals and various sporting and cultural events.
Hypothetical 2
In connection with her marketing plan, Regina paid for the following
meals and events with her former classmates:
» Dinner and a Broadway show with a former classmate who is now the
CFO of a public company ($200 dinner and $300 for the show)
» Golf at the Westchester Country Club with a former classmate who now
manages a hedge fund (2 rounds at $275 per person)
» Six lunches at Smith and Wollensky Steakhouse with various former
classmates who work on Wall street ($50 to 100 per lunch)
For those who open an account with ABC brokerage or move their
existing ABC account to her, Regina sends an engraved Tiffany pen
(valued at approximately $175) as a thank you gift.
Regina submits the expense reports for the meals and
entertainment, but pays for the pens herself. She sends the pens in
boxes displaying the ABC brokerage firm logo.
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Hypothetical 2
Questions
1. Where are the "gifts" in this hypo? Are the meals and events
“business entertainment”?
2. Does it matter that Regina paid for the pens herself?
3. What kind of business records should Regina have created to
comply with Rule 3060’s requirements and ABC firm’s policies?
4. What should ABC have done to prevent Regina from running
afoul of Rule 3060? Should ABC reprimand Regina?
5. Should the gifts be treated differently when bestowed on the
CFO of the public company versus the hedge fund manager or
Wall Street workers?
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