With Fidelity Investment brokers being linked with stories of drugs, prostitution and other forms of high-flying partying, the NASD and NYSE are proposing stricter rules to rein in spending on longstanding methods of winning business.
The proposals follow high-profile investigations by the SEC, NASD and the U.S. attorney’s office in Boston into brokers’ excessive spending at Fidelity, the Boston mutual fund giant. For the NASD and the NYSE, through its NYSE Regulation division, the concern is how perks may skew the brokerage selection process and compromise fund managers' fiduciary duty to achieve best execution for shareholders.
The proposed revision to NASD Rule 3060 is aimed at spelling out more explicitly policies and procedures related to rewarding and influencing employees of member firms. Currently, its guidance on business entertainment is vague: The NASD allows meals, sporting events and other events provided that they’re “neither so frequent nor so extensive as to raise any question of propriety.”
Under the amended version, member firms would be required to have a written policy for entertainment, one that identifies which forms of entertainment are appropriate and which aren’t. Further terms require each brokerage firm to keep detailed records of the nature and expense of entertainment to be made available upon written request. In addition, firms must conduct periodic monitoring for compliance and training for its employees. The record-keeping provision requires more sharing of information about expenses between investment companies and brokerage houses and helps bring the customer into the loop.
“It will eliminate potential conflicts of interest and quid pro quo arrangements,” says Donald van Weezel, vice president of regulatory affairs, NYSE Regulation. “It’s in the best interest of the industry.”
The NASD and NYSE Regulation did not provide specific dollar amounts as a threshold for entertainment spending but rather it is leaving it up to each individual firm. UBS, for example, caps third-party spending per financial advisor at $500 for each event and at a total of $1,000 for the year. Smith Barney’s policy calls for a $300 limit for each financial advisor per event, as well as $1,000 for the year.
Another new wrinkle codifies the longstanding NASD view that any form of entertainment paid for by an investment company requires a representative of that company to attend the event, otherwise it will be deemed a gift and subject to the NASD’s $100 cap on gifts. The NASD prohibits any employee of a member firm from giving or receiving a business associate a gift exceeding $100 in value over the course of a year.
As part of standard procedure, the NASD has opened a comment period for its members; all responses are due by Feb. 23. Once the comments have been heard, the NASD and NYSE will submit their final proposals to the SEC.
The blow-up over gift-giving and entertainment follows a year of headlines involving reports of spectacular feats of corporate expense-account spending. One involved charges of employees of Wall Street firms spending lavishly on Fidelity traders, who, according to a SEC and NASD investigation begun in December 2004, allegedly accepted lavish gifts, including high-priced wine, tickets to the Super Bowl and junkets on private jets to Las Vegas. As a result of the probe, Fidelity head trader Scott DeSano, who also faces a civil action, was reassigned to a business-development role after being disciplined for failing to properly supervise the trading desk.
In another high-profile investigation, this one by the U.S. attorney’s office in Boston, there were charges of brokers paying for a chartered private jet to whisk a Fidelity trader off to Florida for his bachelor party in March 2003. Illegal drugs, prostitutes and a so-called party dwarf were, according to the charges, on the plane. Jefferies Group broker Kevin Quinn, who was awarded a $1.5 million expense account to reel in Fidelity clients, was fired last October in connection with the Fidelity probe.
