NASD and NYSE have filed substantially similar proposals with the Securities and Exchange Commission regarding their members’ provision of “business entertainment,” defined to include various social events and leisure activities and any related transportation or lodging. Under the proposed rules, members are prohibited from directly or indirectly providing business entertainment to a customer representative that is either intended or designed to, or would be reasonably judged to have the likely effect of causing, such representative to act inconsistently with the customer’s best interests or the best interests of any person to whom the customer owes a fiduciary duty. This prohibition would apply to entertaining customer representatives (such as an employee or officer of the customer), but not to entertainment provided directly to individual (natural person) customers. Members that do not engage in business entertainment would not be subject to the proposed rules, and a partial exemption is proposed for firms with annual business entertainment expenses of less than $7,500.
The proposals provide that anything of value given to a customer representative that does not qualify as business entertainment will be treated as a gift and subject to the limitations applicable to gifts. Both proposals also make clear that generally an associated person of the member firm must accompany the customer representative for an event to qualify as business entertainment rather than a gift.
The proposed rules would require members to adopt written policies and procedures that, among other things, define appropriate and inappropriate forms of business entertainment and set certain thresholds for entertainment expenditures. Such policies and procedures must be reasonably designed to detect abuses or circumvention of the business entertainment rules and must specify the methodology for valuing business entertainment expenses (generally, the higher of face value or cost). Members also would be required to keep detailed records of the business entertainment provided to any customer representative, subject to limited exceptions, and must make such records available to the customer upon request.
Both proposals request an effective date for the rule changes of six months following SEC approval. The comment period for the NYSE proposal closes June 11, and the comment period for the NASD proposal closes June 12.