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Firms Pan Proposed NASD Entertainment Limits

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Financial services executives are trying to defend the ability of broker-dealers to take business associates out for meals.

Executives say a rule interpretation proposed by the National Association of Securities Dealers, Washington, could force persons registered with the NASD to stop paying for any form of meal or other business entertainment.

Otherwise, the proposed rule interpretation might place a kind of fiduciary duty on NASD member firms to make sure that any employees of corporate customers being entertained are acting in the best interests of the corporate customers, according to Tamara Barkdoll, assistant general counsel at Transamerica Capital Inc., Denver, a wholesale broker-dealer unit of Aegon N.V., The Hague, Netherlands.

“Would the [NASD] member have a legal duty to report the employee’s conduct to the employer?” Barkdoll asks in a comment letter.

Christopher Shaw, a vice president at another AEGON unit, Transamerica Financial Advisors Inc., argues in his own comment letter that the proposed rule interpretation would force broker-dealers to monitor individual prospects so carefully for signs of connections with corporate customers that the broker-dealers would probably end up violating the privacy provisions of the Gramm-Leach-Bliley Financial Services Modernization Act.

“There,” Shaw writes, “we could not administer these procedures.”

Barkdoll, Shaw and others have written the NASD to comment on proposed NASD Interpretative Material 3060.

The “IM” would add more teeth to NASD Conduct Rule 3060, which prohibits NASD member firms from giving anything worth more than $100 per year to reward employees of corporate prospects for helping give them their employers’ business.

In 1999, the NASD staff said in a letter that the rule did not prohibit ordinary and occasional business entertainment, such as paying for an occasional meal, according to a notice issued by the NASD in January.

The NASD says the proposed IM would simply clarify the 1999 letter ruling, by defining terms and setting recordkeeping standards.

If, for example, an NASD member escorted an employee of Juicy Prospect Inc. to a football game, that would count as business entertainment, the NASD says.

If the member simply gave football game tickets to the Juicy Prospect employee without accompanying the employee to the game, that would count as a gift, the NASD says.

Kimberly Smith, deputy general counsel at ING U.S. Financial Services, West Chester, Pa., a unit of ING Groep N.V., Amsterdam, says the proposed IM is too far broad.

Taken to an extreme, one footnote “would prohibit gifts to family members who happen to be employees of ‘customers,’” Smith writes.

The proposed IM also could interfere with broker-dealer efforts to support training programs, Smith writes.

Links to these comment letters and others are on the Web at Document Link


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