It’s been nine months since the New York Stock Exchange and the National Association of Securities Dealers sought comments on similar recommendations related to how companies treat gifts and entertainment with their clients.
So far, however, the rules have not been adopted officially. “There is still no news,” confirms a spokesman for the oldest and largest U.S. stock exchange, the Big Board, adding it still is reviewing the comment letters.
The uncertainty over what the final rules will look like has put many financial companies that have a broker and/or dealer in a state of limbo. They want to implement the rules, but they don’t want to fully commit without knowing exactly what they must do.
“The situation is leaving firms in a challenging state,” says Dennis Hensley, a partner in the regulatory practice group at the law firm Sidley Austin Brown & Wood, who advises a wide array of financial services firms. “They don’t know exactly where the rules are going to go. It’s tough to know exactly how to deal with this.”
Keep in mind that the NYSE and NASD are not changing their rules for gift-giving. Members still can’t give more than $100 to a person with whom they have a business relationship. Rather, the changes address the hazy part of the rules that permit “ordinary and usual business entertainment,” such as an occasional meal, sports game, theater production, or other entertainment, so long as the entertainment is “neither so frequent nor so extensive as to raise any question of propriety,” according to the NASD.
Principle-Based Approach Leaves Unanswered Questions
Both the Big Board and NASD have taken a principles-based approach toward interpreting allowable entertainment. In other words, there are no clearly defined thresholds for entertainment expenditures, whether for the recipient or the entertainer. Rather, they leave it up to the user and the giver to determine whether they have breached the magical, undefined barrier.
So, in spelling out their gift-and-entertainment policy in their code of ethics, most companies use similar language, stressing that a gift must have “only nominal value” and that entertainment is permissible if it is “reasonable in cost, amount, quantity and frequency, and not excessive.”
Several companies, however, clearly are not comfortable with this principles-based approach. As a result, they go out of their way to set specific standards.
For example, a spokesman for Charles Schwab said the brokerage giant has taken a very strict approach. “We have internal gift rules that are very specific and enforced,” he stressed.
Companies Implement Own, More Specific, Standards
Last year, before the new rules were proposed, Citizens Bank, which has $164 billion in assets, announced that it would implement a number of changes at its affiliate securities broker-dealer, CCO Investment Services Corp., including a blanket prohibition on all gifts and entertainment. “This policy is stricter than NASD Conduct Rules that allow the acceptance of gifts under $100 and entertainment that is ‘neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target,’” it stated in its announcement at the time.
It also said it notified all suppliers of this policy and will maintain strict adherence controls. “This policy removes any appearance of undo influence from an outsider so the customer is confident that they are receiving independent, unvarnished advice,” it added.
POLICIES
Compliance Week has compiled a list of meal, gift, and entertainment policies from a number of corporations. Excerpts from those policies follow.
Baxter: Giving or receiving gifts or entertainment must relate to Baxter's legitimate business. Generally exchanging modest gifts, entertainment, or other business courtesies is permissible if:
The reason for the gift or entertainment is appropriate.
The gift or entertainment helps improve business, political, or community relationships.
Citizens/CCO Investments Services Corp.: CCO is adopting a prohibition on all gifts and entertainment. This policy is stricter than NASD Conduct Rules that allow the acceptance of gifts under $100 and entertainment that is ‘neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.’
Merrill Lynch: Merrill Lynch persons and their family members may not, directly or indirectly, accept or receive bonuses, fees, gifts, frequent or excessive entertainment, or any similar form of consideration that is of more than nominal value from any person or entity with which Merrill Lynch does, or seeks to do, business.
Microsoft: Gift giving and entertainment practices may vary in different cultures; however, any gifts and entertainment given or received must be in compliance with law, must not violate the giver’s and/or receiver’s policies on the matter, and be consistent with local custom and practice.
NYSE Group: You may not accept or solicit any gifts, entertainment or gratuities that could influence, or be perceived to influence, your business judgment. In addition, you may not provide gifts, entertainment or gratuities intended to influence, or that could be perceived as being provided with the intention of influencing, the business judgment of others.
The Capital Group Companies: Associates may not accept (or give) gifts worth more than U.S. $100.00, or accept (or give) excessive business entertainment, loans, or anything else involving personal gain from (or to) those who conduct business with the company. In addition, a business entertainment event exceeding U.S. $250.00 in value should not be accepted (or given) unless the associate receives permission from his/her manager or supervisor and the Gifts and Entertainment Policy Committee.
The Colonial BancGroup, Inc. and affiliate entities: No director, officer or employee should accept a gift or entertainment from any customer, supplier, firm, or individual seeking favors or business from Colonial. In every instance, such a gift or entertainment should be refused with as much poise as possible … If the gift or favor is worth more than $100, the violation is a felony, punishable by up to 30 years in prison and/or a fine of $1,000,000 or three times the value of the gift or favor, whichever is greater. If the gift or favor does not exceed $100, the crime is a misdemeanor, punishable by up to one year in prison and a fine as described above. Under no circumstance will an employee be allowed to accept a gift of cash regardless of the amount.
In banning all gifts and entertainment, The Colonial BancGroup takes it a step further, citing the Crime Control Act of 1984, which states it is a crime for a director, officer, employee, agent, or attorney to corruptly solicit, accept, or agree to receive as a benefit to themselves anything of value from an individual or third party with the intention of being influenced or rewarded in connection with any transaction or business of Colonial. The company stresses that the law imposes criminal liability on the giver, as well as the receiver. “If the gift or favor is worth more than $100, the violation is a felony, punishable by up to 30 years in prison and/or a fine of $1,000,000 or three times the value of the gift or favor, whichever is greater,” it states with chilling emphasis. “If the gift or favor does not exceed $100, the crime is a misdemeanor, punishable by up to one year in prison.”
Hopkins
Many other companies, however, seem comfortable with the principles-based approach, pointing out that prices for things like meals differ drastically, depending upon the city. “They are so many variables,” says Henry Hopkins, chief legal counsel for T. Rowe Price, the Baltimore-based money manager, which is in the process of updating its rules and guidelines in response to the NASD’s proposals.
“You can’t define in St. Paul (Minn.) a reasonable dollar amount for meals and hotels in every part of the world,” concurs Jeffrey Maims, vice president of corporate planning and finance systems and formerly vice president of financial shares services for Ecolab, a cleaning and maintenance firm which has its own elaborate rules for gifts and entertainment but is not bound by the NYSE and NASD proposed rules.
Bank of Astoria is trying to spell out key guidelines under this principles-based approach. In approving “gifts of nominal value,” the company, on its Web site, defines “nominal value” as meaning “that it would be within the employee’s ability to reciprocate on a personal basis or with a legitimate claim to the Bank for reimbursement under similar circumstances.”
Yet, at the same time, companies that have maneuvered comfortably around the principles-based approach express some frustration. They would like the NASD, for example, to serve up some examples as guidelines for acceptable behavior.
Where To Draw The Line
Price’s Hopkins cites, as an example, a full-day seminar featuring an after-session gathering where a tennis or golf pro helps attendees hit balls. Is this suddenly an entertainment event?
Can a company award gifts for sinking a hole in one at one of its seminars? Is it all right to give out gift bags if it has a company’s logo on it?
These kinds of ambiguities have caused some frustrations at a number of companies, reports Madeline Dowling, an associate at Sidley Austin. As a result, she says her firm’s clients have mixed feelings over the principles-based approach. “Some like having criteria and guidance, but some feel there should be actual thresholds,” she adds.
Indeed, earlier this year in a letter to Barbara Sweeney, senior vice president and corporate secretary of NASD, Vincent Altamura, senior vice president and assistant general counsel at Wachovia Corp., generally agreed with the “principles-based” approach to business entertainment, but added “we believe it would be very helpful, and not inconsistent with that approach, for the NASD to give some specific clarifying guidance on certain issues that have been giving members some difficulty and to entertain some modest changes to the gift rules.”
Specifically, he called on the NASD to clarify that transportation and hotel costs are part of the entertainment cost. “It would be useful if it was confirmed that transportation may include reimbursing client’s travel costs to an event even if the client travels unaccompanied by an employee of the member of the firm who is his or her host,” Altamura elaborated. “We believe this is the intent of the language in the Release but would appreciate a confirmation of that.”
Medco Health Solutions, a pharmacy-benefit manager, tries to straddle the line between principles-based and explicit rules. Daniel Walden, Medco’s senior vice president of corporate compliance and chief privacy officer, asserts: “It’s principles based. It lays out a series of concerns, but we do have a dollar figure.” And this is not just for gifts, but for entertainment as well. “Then we go on with a number of principles, which enable us to have exceptions.”
Price’s Hopkins, however, concedes that sometimes a principles-based approach is hard to enforce internally if the chief executive officer questioned why a certain practice is not permitted when “everyone else is doing it.” That’s why he would like to see real-life examples served up by the NASD. This way, when he tells executives that a certain practice is not permitted, he doesn’t just have to say: “This is my interpretation.”
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