June 1, 2007
Thank you for the opportunity to comment on the proposed NASD rule interpretation related to business entertainment. I certainly agree that efforts should be made to curtail the unseemly excesses of certain members in the area of business entertainment. I believe however, that the interpretation, as written, will do little to curb abuses, and place undue burdens on those firms that are not presently engaged in abusive behavior.
It appears that the NASD, rather than address the abuses that are occurring, has chosen to impose an additional taxing procedural regime upon member firms that are already struggling to survive under the burden of existing procedural requirements. The very firms that are least likely to commit the offenses that this interpretation was created to address, are the ones that will be most burdened by the interpretation. The large firms that are most likely (by virtue of resources, not necessarily inclination) to engage in excessive business entertainment activities, are also the firms that have the resources dedicated to the procedure creation envisioned by the interpretation. It is quite likely that the vast majority of the firms that have the resources to engage in the type of activities that the new interpretation was designed to curtail already possess procedural tomes dedicated to this very issue. It is not procedures that need to be created or tweaked it is behavior that needs to change.
NASD Rule 2110 requires member firms to observe high standards of commercial honor and just and equitable principles of trade. I fail to see how reasonable persons could not come to the conclusion that the egregious behavior that precipitated the filing of this proposed interpretation would have clearly violated Rule 2110. Some might argue that Rule 2110 is too subjective, but the new rule actually allows a finder of fact to delve into the mind of the alleged offender and divine intent. How else could one determine whether or not entertainment (or anything else, for that matter) was intended or designed to have the likely effect of changing behavior in any fashion? Who will be the reasonable judges as to whether or not certain business entertainment caused a representative to act in a manner inconsistent with the best interests of the client? The NASD points out in the Statement of Purpose that the interpretation codifies a concept implicit in Rule 2110. Why are we taking a regulated activity, the scrutiny of which is criticized for its subjectivity, and making that scrutiny even more subjective? How much consideration has been given to placing a reasonable per client absolute dollar cap on entertainment? Such a measure would curtail the activity that the industry wishes to eliminate, with the added bonus that no additional burden would be placed on the firms that are not engaged in such activity. I realize there would have to be considerable debate as to what constitutes a reasonable cap, but this would seem preferable to creating a subjective standard accompanied by a burdensome procedural regime.
While I disagree with the general requirement that an additional procedural regime is required to prevent entertainment abuses, I find it difficult to argue with the language in the interpretation that requires firms to keep accurate records related to their entertainment activity. Regulators would have an obligation to examine entertainment records particularly if a problem should arise. The interpretation, however, takes this requirement one step further by requiring firms to open up their entertainment records to clients upon request. This requirement would appear reasonable on its face however, implicit in the requirement is that any firm that is not indexing their records by client will be required to do so. The decision as to whether or not a firm indexes entertainment expenses by client should be a business decision. If a client has a concern about one of its employees, and the member firm involved refuses to provide requested information, the client has the continuing option to take their business elsewhere. Every member firm has a regulatory obligation to avoid activities that would influence a clients representative to act in a manner inconsistent with the clients objectives. A requirement that a firm maintain records in a specific manner in order to assist clients in babysitting the clients representatives does not strengthen that obligation. Removing this requirement would ease the reporting burden on firms without compromising the objectives of the interpretation.
I believe that the NASD can craft meaningful regulation to curb entertainment abuses without overburdening those that are not engaged in such abuses. The amendments to the original proposal are indicative of the organizations efforts to address concerns that have already been raised related to the language contained therein. I am hoping that the NASD does not stop there.