ASD and NYSE Propose New Guidance on Gifts and Gratuities and
Business Entertainment
January 24, 2006
As you probably read in this morning's newspaper, NASD and NYSE made proposals on
January 23, 2006 in the areas of gifts and gratuities and business entertainment. NASD issued
Notice to Members 06-06, in which it proposed new interpretive material (IM) to Conduct Rule
3060 (Influencing or Rewarding Employees of Others). If adopted, the IM would more explicitly
outline the policies and procedures NASD member firms must adopt in connection with its
business entertainment practices with employees of a customer. Comments on the proposed
IM are due to NASD by February, 23, 2006. Separately, NYSE issued a news release
announcing that the Exchange would file a proposed rule change with the SEC to clarify its gifts
and gratuities requirements under NYSE Rule 350. NYSE's news release did not provide
specifics, but indications are that NYSE's proposal will be consistent with NASD's.
Please note, however, that despite media reports of these proposals as "new rules," neither
NASD nor NYSE has filed a proposal with the SEC. As such, the proposed guidance is not
effective unless and until approved by the SEC, following publication for public comment in The
Federal Register.
NASD Rule 3060 and NYSE Rule 350 generally prohibit broker-dealers from giving any gift or
gratuity in excess of $100 per year to any person where such payment is in relation to the
business of the recipient's employer. In 1999, the NASD Staff issued a letter stating that Rule
3060 does not prohibit "ordinary and usual business entertainment" (such as an occasional
meal, sporting event, theater production or comparable entertainment event) provided that such
entertainment is "neither so frequent nor so extensive as to raise any question of propriety."
This interpretive position was based in part on NASD's rules governing non-cash compensation
in connection with the offer and sale of mutual funds and variable annuities.
As described in the Notice to Members, NASD's proposed IM would codify broker-dealers'
obligations in connection with business entertainment provided to employees of customers.
More specifically, the IM would recognize a distinction between business entertainment
provided directly to natural person customers (which is not covered by Rule 3060) and business
entertainment provided to employees, agents or representatives of a customer (which is
covered by Rule 3060). In addition, the definition of "business entertainment" under the IM
would codify the longstanding position that the broker-dealer must accompany the customer's
employee or participate in an event for it to be considered business entertainment under Rule
3060.
In addition, the definition of "business entertainment" would expressly include
transportation and lodging expenses provided by a broker-dealer. Of particular note, the
proposed IM expressly states that broker-dealers may not offer anything of value--regardless of
whether it constitutes business entertainment--that comprises conduct that is illegal under any
applicable law or would expose the broker-dealer, customer or recipient to any civil liability to
any governmental authority or agency.
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The proposed IM also provides principles-based guidance concerning the written policies and
procedures that broker-dealers must adopt surrounding their business entertainment practices.
In particular, broker-dealers would be required to determine and define the forms of business
entertainment that are appropriate and inappropriate. The written policies and procedures
would also be required to provide for effective supervision and compliance with the brokerdealer's business entertainment policies. In addition, broker-dealers would be required to
maintain detailed records of business entertainment expenses and make such information
available to a customer in respect of its employees upon written request. Moreover, brokerdealers would be required to establish standards to ensure that persons designated to
supervise, approve and document business entertainment expenses are sufficiently qualified
and that periodic monitoring for compliance with the written policies and procedures is
conducted.
Click here to read the NASD Notice to Members 06-06.
Click here to read the NYSE news release.
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have
any questions concerning these important legal developments, please contact any member of
Morgan Lewis' Broker-Dealer Practice, including:
Theodore R. Lazo
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, D.C. 20004
Phone: 202.739.5250
Fax: 202.739.3001
Email: tlazo@morganlewis.com
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