The NASD held its "Face-to-Face with NASD Conference" in New York on October 25, 2006. The conference provided practical compliance advice for independent broker-dealers in a number of areas including: retirement income planning; gifts and entertainment; and the 3013 certification. This Alert summarizes some substantive highlights from the conference.

Compliance Considerations in Retirement Income Planning

John Komoroske, NASD Vice President moderated this panel and was joined by Andrew Favret, Associate Vice President and Counsel, NASD Enforcement; Phillip Gillespie, Senior Vice President and Deputy General Counsel, OppenheimerFunds, Inc.; and Stephen Mitchell, Director, Merrill Lynch.

The discussion focused on the changes in investor behavior as people live longer. Panelists noted that "tomorrow’s retirees" will be in an accumulation mode through their 60s and into their 70s, and also will be seeking out innovative income vehicles.

The panel noted these changes will present unique compliance considerations and suggested that over time the industry will need to consider the following:

  • Development of dynamic monitoring tools to help firms monitor investments and holdings throughout retirement;
  • Creation of various methods to effectively educate registered representatives regarding the new generation of products that will be developed for the retirement marketplace; and
  • Development of a suitability review process that takes into account an investor’s comprehensive retirement plan as opposed to looking at purchase and sales transactions in isolation.

The panel noted that NASD enforcement in the retirement market will be an important dynamic that will shape compliance efforts in this area. Mr. Favret reviewed the September 14, 2006 enforcement action against Securities America which involved a broker who lured long-term employees of Exxon Corporation into retiring prematurely and liquidating their 401(k) and pension plan assets. The broker used sales material that illustrated high returns from investments that would be made with the liquidated 401(k) and pension plan assets, and also set forth suggested withdrawal amounts. Over time, investors were unable to maintain the recommended withdrawal amounts without depleting their retirement accounts, causing the broker to resort to discretionary trading in a failed effort to keep the retirement assets in tact.

Mr. Favret noted that there are at least two other ongoing investigations which have the same type of abuses as was found in Securities America and suggested that early retirement pitches will be a top enforcement priority.

Gifts and Entertainment

Marc Menchel, Executive Vice President and General Counsel, NASD moderated this panel and the speakers were Gary Goldsholle, Vice President and Associate General Counsel, NASD; Gloria Greco, First Vice President, Merrill Lynch; and David Levine, Chief Counsel, Deutsche Bank.

The panel first covered Rule 3060’s $100 limit on gifts and gratuities and noted that the prohibition applies only to payments or gratuities given "in relation to the business of the employer of the recipient." The panel noted that a gift by a registered representative to a trader at a fund complex is an example of a type of payment covered by the rule. In contrast, the rule does not apply to gifts or gratuities given to a representative’s clients where such payments are unrelated to the business of the client’s employer. For example, in a March 2001 letter the NASD permitted a representative to reimburse a client’s airfare, hotel, food, and travel expenses incurred by the client to attend a business meeting with the registered representative -- the purpose of which was to discuss issues related to the client’s financial planning needs.

NASD panelists clarified that the cost of delivery does not need to be included in determining the cost of a gift. Another clarification involved shared gifts. The NASD panelists stated that a shared gift that costs, for example, $220 and which is given to four people would be within the limit as long as the gift can be reasonably shared (e.g., a fruit basket). Panelists also clarified that in determining whether the $100 limit would be exceeded, a firm must aggregate gifts it makes with those gifts made by its associated persons. The panel also reviewed NASD interpretative positions setting forth that promotional items of nominal value and personal items are not subject to the $100 limit. The panelists cautioned firms to avoid the temptation of reading these interpretations broadly. The panel noted that there needs to be some limits to gifts given by an associated person to an individual to which he or she has a personal relationship. Likewise, firms shouldn’t "put a logo on everything" and call it a promotional item.

The panel then reviewed a 1999 NASD interpretative letter stating that ordinary and usual business entertainment is not considered a gift or gratuity and is not subject to the $100 limit. Panelists noted that an associated person of the member must attend the event or activity with the recipient for an event or activity to be considered "business entertainment." Also, the business entertainment can not be so frequent or extensive as to raise any questions of propriety.

The discussion then turned to Proposed IM-3060, which clarifies members’ obligations with respect to business entertainment. The proposed IM would expand on the guidance proposed in the 1999 interpretative letter. Importantly, the IM would not impose dollar limits or other specific requirements. Rather, it takes a principles-based approach.

Panelists indicated that the SEC is likely to advance consideration of the Proposed IM very shortly.

CEO Certification

The CEO certification panel was moderated by Phil Shaikun, Associate Vice President and Associate General Counsel, NASD. Mr. Shaikun was joined by Mary Dunbar, Of Counsel, Morgan Lewis & Bockius; Donald Lopezi, Deputy Director, NASD Member Regulation; and James Rabenstine, Vice President, Nationwide Insurance.

The panel reviewed the operation of Rule 3013 and noted that the 3013 Report must be prepared prior to the execution of the CEO certification and also must be reviewed by the CEO, CCO, and any officers that the firm deems necessary to make the certification.

Panelists noted that the report must document a firm’s processes, including the manner and frequency in which the firm’s procedures are administered and the officers and supervisors who administer such procedures. The NASD panelists noted that the 3013 Report does not need to set forth any conclusions or findings.

The NASD panelists also noted that the 3013 Report could be combined with the 3012 Report, but that each part of the Report should be clearly identified. One panelist noted that a firm combining the 3012 and 3013 Reports should break up the report into two parts and include an opening paragraph in each part of the report stating which requirement the section of the report satisfies (e.g. "This section of the report is designed to fulfill the requirement of Rule 3012…").

The panel clarified that the firm’s board does not need to hold a meeting to receive the report. Further, the report is not required to be given to the Board prior to the CEO certification. Where the broker-dealer is a subsidiary of a parent company, the parent company’s Board does not need to receive the report. In such cases, the Report should go to the broker-dealer’s board or an equivalent body.

The NASD staff stressed that firms should use the certification in IM-Rule 3013 and should not alter the form. The staff stated they are concerned that even slight alterations or clarification can lead to widespread changes throughout the industry over the course of time.

The NASD panelists then turned to the NASD’s examination program as it relates to 3013 and stressed that it is not using the 3013 Report (or the 3012 Report) as a roadmap to finding deficiencies. Rather, the NASD’s exam protocol calls for the review of the 3013 certificate to make sure that it was executed in a timely manner and not altered, and for the review of the 3013 Report for completeness. In contrast, the examination staff will generally look at the 3012 Report in connection with the staff’s findings of widespread or serious deficiencies. In such cases, the staff will review the 3012 Report to see whether and how it addresses the deficiencies.

The NASD panelists further noted that examination findings to date have not indicated widespread problems. Common exam findings have included:

  • Failure to designate a CCO on Schedule A of Form BD;
  • Failure to complete the annual certification in a timely manner; and
  • Failure to comply with the books and records requirements (e.g., failure to maintain a copy of the report).

The panel concluded with considerations of best practices in this area. It was suggested that firms create an SOP detailing how it stays abreast of regulatory changes and internal business developments (e.g., new lines of businesses). Similarly, the panel suggested that a firm should establish a mechanism to review its written compliance and supervisory procedures on a regular basis and should also put in place various methods to test its polices and procedures.

Originally published November 3, 2006

© 2007 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.