Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 28743 

12NASD is filing this proposed rule change for 

immediate effectiveness to allow NASD to address 

exemptive requests immediately without regard to 

when the changes to the underlying trade reporting 

rules are operational. 

13 15 U.S.C. 78o–3(b)(6). 

14See FIF Letter, supra note 11. 

15 15 U.S.C. 78s(b)(3)(A)(i). 

16 17 CFR 240.19b–4(f)(1). 

17 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Amendment No. 1 replaced and superseded the 

original rule filing in its entirety. 

sunset one year after the Pilot Stocks 

Phase Date, currently scheduled to 

occur on July 9, 2007. NASD has filed 

the proposed rule change for immediate 

effectiveness.12 The proposed rule 

change will become operative upon 

filing with the Commission. 

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,13 which 

requires, among other things, that NASD 

rules be designed to prevent fraudulent 

and manipulative acts and practices, to 

promote just and equitable principles of 

trade, and, in general, to protect 

investors and the public interest. NASD 

believes that the proposed exemptive 

authority is appropriate because it will 

allow NASD to address certain 

implementation issues as they arise. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASD does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

While NASD did not solicit comments 

on the proposed rule change, as 

discussed above, NASD did receive a 

comment letter in connection with SR–

NASD–2007–002.14 NASD is filing the 

proposed rule change specifically to 

address this comment letter and the 

concerns raised by the commenter about 

the burdens associated with 

implementation of the new Regulation 

NMS-related trade report modifiers. As 

noted above, NASD has determined that 

the Regulation NMS-related modifiers 

required under the NASD trade 

reporting rules are crucial to its 

regulatory program and does not agree 

with the commenter that the self-help 

modifier should be optional. NASD 

believes that the proposed exemptive 

authority strikes a fair balance between 

the needs of NASD’s regulatory program 

and member concerns regarding the 

timing and burdens of the necessary 

systems changes. The proposed rule 

change should alleviate such burdens by 

affording members additional time, if 

needed, to make the necessary systems 

changes relating to the self-help 

modifier, the qualified contingent trade 

modifier, the sub-penny modifier, and 

the modifier used to distinguish 

inbound and outbound intermarket 

sweep orders. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing proposed rule change 

has become effective pursuant to 

Section 19(b)(3)(A)(i) of the Act 15 and 

subparagraph (f)(1) of Rule 19b–4 

thereunder,16 because it constitutes a 

stated policy, practice, or interpretation 

with respect to the meaning, 

administration, or enforcement of an 

existing rule. At any time within 60 

days of the filing of the proposed rule 

change, the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2007–032 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2007–032. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of the filing also will be 

available for inspection and copying at 

the principal office of NASD. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASD–2007–032 and 

should be submitted on or before June 

12, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.17

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. E7–9741 Filed 5–21–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55765; File No. SR–NASD–

2006–044] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto 

Relating to Interpretive Material to 

NASD Rule 3060 To Require Members 

To Adopt Policies and Procedures 

Addressing Business Entertainment 

May 15, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on April 11, 

2006, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’) filed 

with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by NASD. On April 

17, 2007, NASD filed Amendment No. 

1 to the proposed rule change.3 On May 

1, 2007, NASD filed Partial Amendment 


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28744 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 

4Partial Amendment No. 2 attached Exhibit 4 of 

Amendment No. 1, which shows changes of the 

proposed rule text from the immediately preceding 

filing. 5The Commission also is separately publishing a 

notice by the New York Stock Exchange LLC 

(‘‘NYSE’’) to propose new NYSE Rule 350A on 

business entertainment, which is substantially 

similar to NASD’s proposed rule text. See Securities 

Exchange Act Release No. 55766 (May 15, 2007) 

(SR–NYSE–2006–06). The NYSE proposal and the 

NASD proposal primarily differ in that the NYSE 

proposal contains a ‘‘Notice to Customers’’

provision. See discussion infra Part IV, Solicitation 

of Comments section. 

No. 2 to the proposed rule change.4 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as amended, from interested 

persons.5

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASD is proposing to adopt 

Interpretive Material (‘‘IM’’) to NASD 

Rule 3060 to require members to adopt 

policies and procedures addressing 

business entertainment. Below is the 

text of the proposed rule change. 

Proposed new language is in italics. 

* * * * * 

IM–3060. Business Entertainment 

The NASD Board of Governors is 

issuing this interpretation concerning 

the obligations of a member in 

connection with any business 

entertainment of a customer 

representative. This interpretation does 

not apply to any non-cash 

compensation that falls within Rule 

2820(g) or Rule 2830(l) (i.e., 

entertainment provided by offerors to 

associated persons of a member in 

connection with the sale and 

distribution of variable contracts or 

investment company securities). This 

interpretation does not apply to any 

member that does not engage in 

business entertainment. For any 

member that engages in business 

entertainment, this interpretation 

applies only with respect to business 

entertainment provided to customer 

representatives. This interpretation 

supersedes any prior interpretive letters 

or statements of NASD staff regarding 

business entertainment under Rule 

3060. 

(a) General Requirements 

No member or person associated with 

a member shall, directly or indirectly, 

provide any business entertainment to a 

customer representative pursuant to the 

establishment of, or during the course 

of, a business relationship with any 

customer that is intended or designed to 

cause, or would be reasonably judged to 

have the likely effect of causing, such 

customer representative to act in a 

manner that is inconsistent with: 

(1) The best interests of the customer; 

or 

(2) The best interests of any person to 

whom the customer owes a fiduciary 

duty. 

(b) Definitions 

For purposes of this interpretation, 

the following definitions shall apply: 

(1) The term ‘‘customer’’ means: 

(A) A person that maintains a 

business relationship with a member via 

the maintenance of an account, through 

the conduct of investment banking, or 

pursuant to other securities-related 

activity; or 

(B) A person whose customer 

representative receives business 

entertainment for the purpose of 

encouraging such person to establish a 

business relationship with the member 

by opening an account with the member 

or by conducting investment banking or 

other securities-related activity with the 

member. 

(2) The term ‘‘customer 

representative’’ means a person who is 

an employee, officer, director, or agent 

of a customer, unless such person is a 

family member of the customer. 

(3) The term ‘‘family member’’ means 

a person’s parents, mother-in-law or 

father-in-law, spouse, brother or sister, 

brother-in-law or sister-in-law, son-inlaw or daughter-in-law, and children. 

(4) The term ‘‘business 

entertainment’’ means any social event, 

hospitality event, sporting event, 

entertainment event, meal, leisure 

activity, or event of like nature or 

purpose, including business 

entertainment offered in connection 

with a charitable event, educational 

event or business conference, as well as 

any transportation or lodging related to 

such activity or event, in which an 

associated person of a member 

accompanies a customer representative. 

(A) If a customer representative is not 

accompanied by an appropriate 

associated person of the member, any 

expenses associated with the business 

entertainment will be considered a gift 

under Rule 3060 unless exigent 

circumstances make it impractical for 

an associated person of the member to 

attend. All instances where such exigent 

circumstances are invoked must be 

clearly and thoroughly documented and 

be subject to the prior written approval 

of a designated supervisory person or, in 

very limited circumstances where such 

prior approval cannot reasonably be 

obtained, to a prompt post-event review 

to be conducted and documented by 

such supervisory person. 

(B) Anything of value given or 

provided to a customer representative 

that does not fall within the definition 

of ‘‘business entertainment’’ is a gift 

under Rule 3060. 

(C) In valuing business entertainment 

expenses pursuant to this interpretation, 

a member’s written policies and 

procedures must specify the 

methodology to be used by the member 

to calculate the value of business 

entertainment. In general, business 

entertainment expenses should be 

valued at the higher of face value or cost 

to the member. 

(c) Written Policies and Procedures 

(1) Each member must have written 

policies and supervisory procedures 

that: 

(A) Define forms of business 

entertainment that are appropriate and 

inappropriate using quantitative and/or 

qualitative standards that address the 

nature and frequency of the 

entertainment provided, as well as the 

type and class of any accommodations 

or transportation provided in 

connection with such business 

entertainment; and 

(B) Make clear that anything of value 

given or otherwise provided to a 

customer representative that does not 

fall within the definition of ‘‘business 

entertainment’’ is a gift under Rule 

3060; and 

(C) Impose either specific dollar limits 

on business entertainment or require 

advance written supervisory approval 

beyond specified dollar thresholds; and 

(D) Are designed to detect and 

prevent business entertainment that is 

intended as, or could reasonably be 

perceived to be intended as, an 

improper quid pro quo or that could 

otherwise give rise to a potential conflict 

of interest or undermine the 

performance of a customer 

representative’s duty to a customer or 

any person to whom the customer owes 

a fiduciary duty; and 

(E) Establish standards to ensure that 

persons designated to supervise and 

administer the written policies and 

procedures are sufficiently qualified; 

and 

(F) Require appropriate training and 

education for all personnel who 

supervise, administer, or are subject to 

the written policies and procedures. 

(2) A member’s written policies and 

procedures may distinguish, and set 

specifically tailored standards for, 

business entertainment in connection 

with events that are deemed to be 

primarily educational, charitable, or 

philanthropic in nature, provided that 

such standards comply with the 

requirements of this interpretation and 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 28745 

6Letter to Henry H. Hopkins and Sarah 

McCafferty, T. Rowe Price Investment Services, 

Inc., from R. Clark Hooper, NASD, dated June 10, 

1999 (‘‘1999 Letter’’), available at http:// 

www.nasd.com/web/idcplg?IdcService= 

SS_GET_PAGE&ssDocName=NASDW_002715. 

7See, e.g., Jenny Anderson, Fidelity Disciplines 

16 Traders Over Gifts From Brokers, N.Y. Times, 

Dec. 17, 2004, at C5; Andrew Caffrey & Jeffrey 

Krasner, Probe of Gifts Said to Focus on Fidelity, 

Boston Globe, Dec. 7, 2004, at A1; Probe on Gifts 

to Fund Officials Is Said to Include Jefferies, Los 

Angeles Times, Dec. 3, 2004, at C4; Jenny 

Anderson, On Wall Street, A Closer Look At Giving 

Gifts, N.Y. Times, Nov. 24, 2004, at C1; Greg Farrell, 

Brokerages’ gifts to mutual fund managers 

scrutinized, USA Today, Nov. 24, 2004, at B2. 

8 In addition, NASD also recently published 

guidance concerning gifts and gratuities under Rule 

3060. See Notice to Members 06–69 (December 

2006). 

9For example, the proposed rule change would 

not supersede the guidance given by NASD staff in 

Notice to Members 99–55 (July 1999) concerning 

NASD Rules 2820 and 2830. 

10NASD published a Notice to Members 

requesting comment on a proposed rule change to 

replace Rules 2820(g) and 2830(l), among others, 

with a new Rule 2311. See Notice to Members 05–

40 (June 2005). If such a rule change is proposed 

and approved, NASD will amend the language of 

proposed IM–3060 to reflect the change. 

11See 1999 Letter. 

12The NYSE also has filed a proposed rule 

change with the Commission addressing business 

entertainment. See supra note 5. 

13See Notice to Members 06–06 (January 2006). 

are explicitly addressed in the written 

policies and procedures. 

(d) Recordkeeping 

(1) Each member’s written policies 

and procedures must require the 

maintenance of detailed records of 

business entertainment expenses 

provided to any customer 

representative. The member is not 

required to maintain records of: 

(A) Business entertainment when the 

total value of the business 

entertainment, including all expenses 

associated with the business 

entertainment, does not exceed $50 per 

day; or 

(B) Additional expenses incurred in 

connection with otherwise recorded 

business entertainment that do not, in 

the aggregate, exceed $50 per day. 

(2) Each member’s written policies 

and procedures must include provisions 

reasonably designed to prevent 

associated persons of the member from 

circumventing the recordkeeping 

requirements in contravention of the 

spirit and purpose of this interpretation 

(e.g., a pattern of providing a customer 

representative with business 

entertainment valued at $48). 

(3) Each member’s written policies 

and procedures must require that, upon 

a customer’s written request, the 

member will promptly make available to 

the customer any business 

entertainment records regarding 

business entertainment provided to 

customer representatives of that 

customer. 

(e) Exemption for Members With 

Business Entertainment Expenses Below 

$7,500 

A member whose business 

entertainment expenses in the course of 

its fiscal year are below $7,500 shall be 

subject only to paragraphs (a), (b), and 

(c)(1)(D) and (E) of this interpretation, 

and shall be exempt from paragraphs (c) 

(other than (c)(1)(D) and (E) as noted 

above) and (d). Each member that relies 

on this exemption must evidence that its 

business entertainment expenses are 

below the $7,500 threshold. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NASD has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

(A) Background: NASD Rule 3060 

prohibits any member or person 

associated with a member, directly or 

indirectly, from giving anything of value 

in excess of $100 per year to any person 

where such payment is in relation to the 

business of the recipient’s employer. In 

1999, NASD staff issued an interpretive 

letter stating that Rule 3060 does not 

prohibit ‘‘ordinary and usual business 

entertainment’’ (such as an occasional 

meal, sporting event, theater 

production, or comparable 

entertainment event) provided that the 

entertainment ‘‘is neither so frequent 

nor so extensive as to raise any question 

of propriety.’’ 6 The 1999 Letter noted 

that the interpretation was based, in 

part, on NASD’s rules governing noncash compensation in connection with 

the offer and sale of investment 

company shares and variable annuities. 

Recently, NASD members have 

requested more guidance on the rules 

concerning gifts and business 

entertainment in the wake of press 

reports of enforcement actions regarding 

gifts and gratuities.7 In response to these 

requests, NASD is proposing 

interpretive material to NASD Rule 3060 

to outline the policies and procedures 

that a member must adopt in connection 

with its business entertainment 

practices.8 The proposed rule change 

would supersede any prior guidance of 

NASD staff regarding business 

entertainment under Rule 3060, 

including the 1999 Letter. The proposed 

rule change would not supersede any 

guidance provided under other NASD 

rules.9 NASD has also clarified that any 

non-cash compensation falling under 

Rule 2820(g) or Rule 2830(l) would be 

subject to the standards imposed by 

those rules.10

Rule 3060 is intended to prevent 

improprieties that may arise when a 

member or an associated person of a 

member gives gifts or gratuities to 

employees of a customer. To guard 

against these improprieties, Rule 3060 

imposes a $100 annual limit on gifts and 

gratuities that a member or person 

associated with a member can give to an 

employee of a customer in relation to 

the employer firm’s business. However, 

ordinary and usual business 

entertainment is not considered a gift or 

gratuity and is permitted ‘‘so long as it 

is neither so frequent nor so extensive 

as to raise any question of propriety.’’ 11

The proposed rule change is intended to 

replace this statement regarding 

business entertainment with an 

approach that permits each member to 

adopt specific policies and procedures 

tailored to its business needs. The 

proposed rule change also seeks to 

provide members with general guidance 

concerning the types of issues that a 

firm’s policies and procedures must 

address and mandates that each member 

maintain appropriate records to ensure 

that persons associated with the 

member are complying with the written 

policies and procedures. 

In general, NASD, working closely 

with the New York Stock Exchange (the 

‘‘NYSE’’), concluded that, in clarifying a 

member’s obligation under Rule 3060, a 

specific standard was unworkable and 

impractical.12 As NASD noted in the 

Notice to Members seeking comment on 

the proposed rule change, ‘‘the 

proposed IM does not impose hard 

limits, nor does it require that all 

members adopt the same limits or even 

treat all recipients equally.’’ 13 Rather, 

the proposed rule change requires that 

each member assess its use of business 

entertainment, determine what 

limitations are appropriate and meet the 

general guidelines set forth in the 

proposed rule change, and adopt written 


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28746 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 

14NASD Rule 2110 precludes the offering of any 

thing of value, including but not limited to business 

entertainment, that comprises conduct that, to any 

degree, is either illegal under any applicable law or 

would expose the member, customer, or recipient 

of the member’s business entertainment to any civil 

liability. For example, any business entertainment 

that violated the Foreign Corrupt Practices Act or 

any commercial bribery statutes and laws would, in 

turn, violate Rule 2110. 

15Terms used in the interpretation have the same 

meaning as those defined in NASD’s By-Laws and 

rules unless otherwise specified. 

16NASD Rule 0120(n) defines the term ‘‘person’’

to ‘‘include any natural person, partnership, 

corporation, association, or other legal entity.’’

17The term ‘‘family member’’ means a person’s 

parents, mother-in-law or father-in-law, spouse, 

brother or sister, brother-in-law or sister-in-law, 

son-in-law or daughter-in-law, and children. 

18As discussed in footnote 5 of Notice to 

Members 06–06, and as noted below, natural 

persons who are both natural person customers and 

customer representatives should be treated as 

customer representatives. That is, associated 

persons of a member cannot avoid the application 

of the firm’s business entertainment policies by 

claiming that business entertainment provided to a 

person who is both a natural person customer and 

a customer representative was provided to that 

individual solely in his or her ‘‘personal,’’ rather 

than business, capacity. 

policies and procedures to ensure that 

persons associated with the member are 

following those limitations. The 

introductory paragraph in the proposed 

interpretation also makes clear that the 

interpretation does not apply to any 

member that does not engage in 

business entertainment. 

While, as discussed below, some 

commenters criticized a general, 

principles-based approach as lacking 

clarity and uniform standards, NASD 

and the NYSE both concluded that such 

an approach was more appropriate. The 

proposed rule change expands upon the 

existing principles-based approach to 

business entertainment established in 

the 1999 Letter but specifically 

addresses the content of a member’s 

written policies and procedures. 

(B) General Requirements: The 

observance of ‘‘high standards of 

commercial honor and just and 

equitable principles of trade’’ required 

of a member in the conduct of its 

business under NASD Rule 2110 

includes the obligation of a member not 

to act in a manner contrary to the best 

interests of a customer in the conduct of 

business with or for such customer. 

Consequently, when a member interacts 

with an employee—or any other agent—

of a customer, the member should not 

give that person anything of value that 

is intended or designed to cause, or 

otherwise would be reasonably judged 

to have the likely effect of causing, such 

person to act in a manner that is 

inconsistent with the best interests of 

the customer or any person to whom the 

customer owes a fiduciary duty.14

Paragraph (a) of the proposed rule 

change codifies this concept by 

explicitly setting forth the general 

purpose behind proposed IM–3060. 

NASD believes that the guiding 

principle in navigating the concern of 

placing a customer representative in 

conflict with his duty to a customer is 

that members should compete for 

business on the basis of providing the 

best professional services. While it is 

not inappropriate for business 

entertainment to foster an environment 

for the member to promote or educate 

the customer representative with respect 

to such professional services, it is 

inconsistent with the terms of proposed 

IM–3060 to use business entertainment 

to provide incentives to customer 

representatives to conduct customer 

business with and/or through the 

member without due consideration as to 

whether the nature and terms of such 

professional services meet the objectives 

and are in the best interests of the 

account. 

(C) Definitions: There are three 

defined terms that are integral to an 

understanding of the proposed rule 

change.15 First, ‘‘customer’’ is defined as 

(1) ‘‘a person that maintains a business 

relationship with a member via the 

maintenance of an account, through the 

conduct of investment banking, or 

pursuant to other securities-related 

activity’’ or (2) ‘‘a person whose 

customer representative receives 

business entertainment for the purpose 

of encouraging such person to establish 

a business relationship with the member 

by opening an account with the member 

or by conducting investment banking or 

other securities-related activity with the 

member.’’ 16 The definition of 

‘‘customer’’ has been amended from the 

previous rule filing; however, the 

changes do not affect those persons 

considered ‘‘customers’’ for the purpose 

of the proposed rule change. 

Second, for purposes of the proposed 

rule change, a ‘‘customer 

representative’’ means ‘‘a person who is 

an employee, officer, director, or agent 

of a customer, unless such person is a 

family member of the customer.’’ The 

term ‘‘customer representative’’ replaces 

the term ‘‘employee’’ in the previous 

rule filing to clarify that the term 

includes persons other than employees. 

The term also now conforms to the 

terminology in the NYSE’s proposed 

rule change. Moreover, the definition 

has been amended to exclude certain 

family members from the definition of 

customer representative.17 This 

exclusion has been added to the 

definition to address situations where a 

close family member has power-ofattorney or similar authority over 

another family member’s account (e.g., 

an adult child with authority over his or 

her elderly parent’s account). NASD 

believes that these situations are 

unlikely to result in the types of 

conflicts of interest the proposed rule 

change seeks to address. 

This definition, when coupled with 

the general requirements set forth in 

paragraph (a) of the proposed rule 

change, limit the proposed rule change 

to business entertainment provided to a 

customer representative. This point is 

explicitly addressed in the preamble to 

the interpretation, which states: ‘‘This 

interpretation does not apply to any 

member that does not engage in 

business entertainment. For any 

member that engages in business 

entertainment, this interpretation 

applies only with respect to business 

entertainment provided to customer 

representatives.’’ Thus, the proposed 

rule change does not address business 

entertainment provided to a natural 

person customer.18 It addresses only 

business entertainment provided to a 

customer representative of the customer 

(although such customer may be a 

natural or non-natural person). 

Third, ‘‘business entertainment’’ is 

defined as ‘‘any social event, hospitality 

event, sporting event, entertainment 

event, meal, leisure activity, or event of 

like nature or purpose, including 

entertainment offered in connection 

with a charitable event, educational 

event or business conference, as well as 

any transportation or lodging related to 

such activity or event, in which an 

associated person of a member 

accompanies a customer 

representative.’’ This definition codifies 

NASD’s long-standing position that an 

associated person of a member must 

accompany or participate in an event for 

it to be deemed ‘‘business 

entertainment’’ rather than a ‘‘gift.’’ In 

addition, NASD has deleted the portion 

of the definition that stated that it is not 

necessary for business to be conducted 

for an event to be ‘‘business 

entertainment.’’ The definition of 

business entertainment encompasses all 

the events enumerated provided that the 

customer representative is accompanied 

by an associated person of the member; 

because the clause did not further 

define business entertainment, it has 

been deleted. 

As noted above, the definition of 

‘‘business entertainment’’ generally 

prescribes that if a customer 

representative is not accompanied by an 

appropriate associated person of a 

member, any expenses associated with 

the business entertainment will be 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 28747 

considered a gift under Rule 3060. An 

exception to this requirement is 

proposed to address instances when 

exigent circumstances make it 

impractical for an associated person of 

a member to attend a business 

entertainment event. All instances 

where such exigent circumstances are 

invoked must be clearly and thoroughly 

documented and be subject to the prior 

written approval of a designated 

supervisory person or, in very limited 

circumstances where such prior 

approval cannot reasonably be obtained, 

to a prompt post-event review to be 

conducted and documented by such 

supervisory person. 

NASD believes that the ‘‘exigent 

circumstances’’ exception provides 

necessary flexibility in light of realworld, last minute emergency situations 

that could arise that would make it 

difficult, if not impossible, for an 

appropriate associated person of a 

member to attend a business 

entertainment event with a customer 

representative. Examples of exigent 

circumstances would be a sick child, an 

accident, or some other sudden, 

overriding circumstance. NASD does 

not believe this provision would lead to 

circumvention of the spirit or substance 

of the proposed rule change since all 

such occurrences are subject to detailed 

documentation such that any patterns of 

abuse would become quickly apparent 

to supervisory personnel. 

Paragraph (b)(4)(C) of the proposed 

rule change provides guidance to 

members on the valuation of business 

entertainment. The proposed rule 

change requires that a member’s written 

policies and procedures specify how the 

firm will calculate the value of business 

entertainment. In general, business 

entertainment items should be valued at 

the greater of face value or cost to the 

member. 

NASD has been asked about the 

extent to which the proposed rule 

change reaches business entertainment 

conducted outside the United States, 

particularly entertainment provided by 

persons who are employed in 

commonly controlled affiliates of a 

financial services company operating in 

the United States and/or foreign 

jurisdictions. As an initial matter, 

proposed IM–3060 reaches all business 

entertainment of a member firm and 

persons associated with a member, even 

if such entertainment occurs outside of 

the United States or is provided to 

foreign individuals. However, NASD 

does not believe that all persons who 

are employed in commonly controlled 

affiliates of a financial services company 

operating in the United States and/or 

foreign jurisdictions are necessarily 

associated persons of the member, even 

if they report to a person who, in 

another capacity, is an associated 

person of a member. 

An associated person of a member 

may have management and supervisory 

responsibilities for non-member 

affiliates of a financial services 

company, located within or outside of 

the United States, without the result 

that the persons being managed and 

supervised in the non-member affiliates 

would necessarily be deemed associated 

persons of the member. It is the view of 

NASD that in such instances the 

following factors establish that an 

employee of a non-member affiliate is 

not an associated person of the member: 

(1) The manager/supervisor of that 

employee is recognized in the 

organization as having a scope of 

responsibilities outside of the member 

firm; (2) the exercise of the management 

and supervision over that employee by 

such manager/supervisor is not 

controlled by the member, is reviewable 

for purposes of performance and 

compensation outside of the member, 

and is not conducted for the benefit of 

the member; and (3) the employee of the 

non-member affiliates is not otherwise 

employed or engaged in the investment 

banking or securities business of the 

member and controlled by the member 

in respect of such activities. 

(D) Written Policies and Procedures: 

A member’s policies and procedures 

must be designed to promote conduct 

consistent with NASD Rule 2110 and 

should not undermine the performance 

of a customer representative’s duty to a 

customer. The proposed rule change 

requires members to adopt written 

policies and procedures concerning 

business entertainment that: (1) Define 

forms of business entertainment that are 

appropriate and inappropriate using 

quantitative and/or qualitative 

standards that address the nature and 

frequency of the entertainment 

provided, as well as the type and class 

of any accommodation or transportation 

provided in connection with such 

business entertainment; (2) impose 

either specific dollar limits on business 

entertainment or require advance 

written supervisory approval beyond 

specified dollar thresholds; (3) are 

designed to detect and prevent business 

entertainment that is intended as, or 

could reasonably be perceived to be 

intended as, an improper quid pro quo 

or that could otherwise give rise to a 

potential conflict of interest or 

undermine the performance of a 

customer representative’s duty to a 

customer; (4) establish standards to 

ensure that persons designated to 

supervise and administer the written 

policies and procedures are sufficiently 

qualified; and (5) require appropriate 

training and education for all personnel 

who supervise, administer, or are 

subject to the written policies and 

procedures. 

(i) Define Forms of Appropriate and 

Inappropriate Business Entertainment: 

A member’s written policies and 

procedures concerning business 

entertainment must define forms of 

business entertainment that are 

appropriate and inappropriate using 

quantitative and/or qualitative 

standards that address the nature and 

frequency of the entertainment 

provided, as well as the type and class 

of any accommodations or 

transportation provided in connection 

with such business entertainment. A 

member’s policies and procedures 

should include provisions regarding 

appropriate venues, nature, frequency, 

and types and class of accommodation 

and transportation. 

A member may determine that certain 

activities, though legal, are nevertheless 

inappropriate for business 

entertainment. NASD believes that the 

standards of business entertainment 

adopted by members must meet the 

requirements of Rule 2110 that members 

and persons associated with a member 

adhere to high standards of commercial 

honor. Consequently, a member would 

violate proposed IM–3060 not only if it 

failed to adopt procedures, but also if 

the procedures set standards that are so 

unbounded or vague that no reasonable 

determination of propriety can be 

discerned. 

The proposed rule change also would 

allow, but not require, members to 

establish different standards for 

business entertainment in connection 

with events that are educational, 

charitable, or philanthropic in nature. If 

a member chooses to distinguish 

between forms of business 

entertainment in its policies and 

procedures, it should ensure that these 

types of business entertainment 

nonetheless comply with Rule 2110 and 

the general requirements set forth in 

paragraph (a) of the proposed rule 

change. 

(ii) Impose Either Specific Dollar 

Limits on Business Entertainment or 

Require Advance Written Supervisory 

Approval Beyond Specified Dollar 

Thresholds: A member’s written 

policies and procedures must impose 

either specific dollar limits on business 

entertainment or require advance 

written supervisory approval beyond 

specified dollar thresholds. The 

proposed rule change does not impose 

hard dollar limits or require that all 


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19NASD Rule 3012(a) requires members to test 

and verify their supervisory procedures and ‘‘create 

additional or amend supervisory procedures where 

the need is identified by such testing and 

verification.’’

20Members should be aware, however, that they 

may need to track such expenses under other NASD 

or SEC rules. There is no express exclusion from 

Rule 3060 for gifts given during the course of 

business entertainment. See Notice to Members 06–

69 (December 2006). NASD staff has, however, 

provided guidance that Rule 3060 does not apply 

to certain promotional items of nominal value that 

display the firm’s logo. See id. 

members adopt the same dollar limits or 

treat all recipients equally. 

(iii) Designed to Detect and Prevent 

Business Entertainment That Is 

Intended As, or Could Reasonably Be 

Perceived To Be Intended As, an 

Improper Quid Pro Quo: A member’s 

written policies and procedures must 

include procedures designed to detect 

and prevent business entertainment that 

is intended as, or could reasonably be 

perceived to be intended as, an 

improper quid pro quo. For example, 

members should develop written 

policies and procedures reasonably 

designed to preclude providing business 

entertainment that is so lavish or 

extensive in nature that a customer 

representative would likely feel 

compelled to place order flow on behalf 

of the customer without due regard to 

best execution or other transaction 

pricing considerations. NASD does not 

intend that this standard would 

establish a per se violation of the 

proposed IM if a customer 

representative who received business 

entertainment from the member is later 

found to have violated his or her 

obligations to his or her employer; 

however, such actions by a customer 

representative may warrant further 

investigation by the member firm as to 

whether the member’s policies and 

procedures are, in fact, reasonably 

tailored to prevent these types of 

violations.19 While an NASD member is 

not ultimately responsible for the 

conduct of its customers’ employees or 

agents, the member is responsible for 

ensuring that persons associated with 

the member do not engage in activities 

that are designed to, or reasonably likely 

to, cause the recipient to engage in 

improper conduct. Moreover, a 

member’s compliance with its policies 

and procedures would not serve to 

automatically shield the member from 

all liability under the proposed IM for 

any misconduct by a customer 

representative. 

(iv) Supervision: As is the case with 

every NASD rule, supervision is a 

critical component of business 

entertainment policies and procedures. 

Members are free to define the approach 

and method of their written policies and 

procedures provided they are 

reasonably designed to comport with 

the principles stated in the proposed 

rule filing. Irrespective of the manner in 

which a member crafts its procedures, it 

must be clear from the supervisory 

policies and procedures what factors 

determine appropriate levels of business 

entertainment and how those 

determinations are executed, monitored, 

and enforced. This is particularly true if 

members elect to use qualitative, rather 

than quantitative, standards. In 

addition, such supervisory procedures 

should provide a method for evidencing 

both the breadth of supervisory 

activities as well as the information 

upon which such supervision is 

conducted. For example, a member’s 

policies and procedures must evidence 

the basis upon which a supervisor will 

determine that business entertainment 

does not violate a member’s standards 

as to the nature, frequency, and dollar 

amounts of entertainment. A member’s 

policies and procedures must establish 

standards to ensure that persons 

designated to supervise and administer 

the member’s written policies and 

procedures are sufficiently qualified. 

The requirement that the persons 

designated to supervise business 

entertainment expenses be ‘‘sufficiently 

qualified’’ is not intended to impose a 

registration requirement or similar 

obligation on these individuals; rather, 

the requirement is intended to ensure 

that the member’s designation is of 

persons who are familiar with the 

applicable regulatory requirements and 

are sufficiently senior and experienced 

to entrust with the approval obligations 

envisioned by the member’s policies 

and procedures. 

(v) Training and Education: A 

member’s business entertainment 

policies and procedures must require 

appropriate training and education to all 

applicable personnel. A member also 

must be able to demonstrate that it 

trains persons associated with the 

member who supervise, administer, and 

are subject to such written business 

entertainment policies and procedures 

in all applicable requirements. 

(E) Recordkeeping: The only effective 

way for a member to ensure that persons 

associated with the member are 

following the firm’s policies and 

procedures is to establish a system to 

track their business entertainment 

expenses. Consequently, a member’s 

policies and procedures are required to 

include procedures regarding the 

maintenance of detailed records of 

business entertainment expenses 

provided to any customer 

representative. 

NASD recognizes that recordkeeping 

requirements present compliance 

burdens for firms, and NASD has sought 

to address the potential burden by 

providing a recordkeeping carve-out for 

small expenditures, none of which 

would reasonably be expected to 

influence the behavior of the recipient. 

Consequently, the proposed rule change 

provides that members are not required 

to maintain records of (1) Business 

entertainment when the total value of 

the business entertainment, including 

all expenses associated with the 

business entertainment, does not exceed 

$50 per day or (2) additional expenses 

incurred in connection with otherwise 

recorded business entertainment that do 

not, in the aggregate, exceed $50 per 

day.20

The $50 threshold would apply only 

to events or activities with a total cost 

that did not exceed $50 per day (e.g., an 

inexpensive lunch) or to minor 

expenses related to an otherwise 

reported business entertainment event 

(such as a hot dog at an NBA basketball 

game, where the basketball game ticket 

is reported as a business entertainment 

expense). Firms may not allow persons 

associated with the member to 

disaggregate business entertainment 

expenses relating to an activity or event 

in an effort to avoid recordkeeping 

obligations. Thus, a dinner expense of 

$40 followed by a sporting event with 

a ticket price of $40 would need to be 

tracked under the member’s 

recordkeeping system. 

The proposed rule change also 

requires that a member’s written 

policies and procedures include 

provisions reasonably designed to 

prevent persons associated with the 

member from circumventing the 

recordkeeping requirements in 

contravention of the spirit and purpose 

of proposed IM–3060. Thus, for 

example, members should seek to 

prevent associated persons of the 

member from engaging in patterns of 

providing business entertainment that 

falls below the $50 reporting threshold. 

One of the key elements of the 

proposed rule change is the ability of a 

customer to request from the member 

information regarding the business 

entertainment expenses provided to the 

customer representatives of the 

customer. Although members are 

permitted to establish reasonable 

guidelines regarding a customer’s ability 

to request this information, such 

guidelines must not impair the ability of 

the customer to obtain, on a reasonable 

and regular basis, information 

concerning the member’s business 

entertainment expenses pertaining to 


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21 15 U.S.C. 78o–3(b)(6). 

22Letter from Pinnacle Taxx Advisors, Inc. 

(‘‘Pinnacle’’), dated Jan. 26, 2006; Letter from Keefe, 

Bruyette & Woods (‘‘KBW’’), dated Jan. 26, 2006; 

Letter from J.P. Morgan, dated Jan. 30, 2006; Letter 

from Evolve Securities, Inc. (‘‘Evolve’’), dated Jan. 

31, 2006; Letter from Seasongood & Mayer, LLC 

(‘‘Seasongood’’), dated Feb. 2, 2006; Letter from 

Plexus Consulting (‘‘Plexus’’) o/b/o International 

Association of Small Broker Dealers and Advisers, 

dated Feb. 6, 2006; Letter from Dominion Investor 

Services, Inc. (‘‘Dominion’’), dated Feb. 13, 2006; 

Letter from National Regulatory Services (‘‘NRS’’), 

dated Feb. 6, 2006; Letter from T. Rowe Price 

Investment Services, Inc. (‘‘T. Rowe Price’’), dated 

Feb. 17, 2006. Letter from Maplewood Investment 

Advisors, Inc. (‘‘Maplewood’’), dated Feb. 22, 2006; 

Letter from Financial Services Institute, Inc. 

(‘‘FSI’’), dated Feb. 23, 2006; Letter from 

Transamerica Financial Advisors, Inc. 

(‘‘Transamerica’’), dated Feb. 23, 2006; Letter from 

H.D. Vest Financial Services (‘‘H.D. Vest’’), dated 

Feb. 23, 2006; Letter from ING U.S. Financial 

Services (‘‘ING’’), dated Feb. 23, 2006; Letter from 

The Investment Company Institute (‘‘ICI’’), dated 

Feb. 23, 2006; Letter from Hines Real Estate 

Securities, Inc. (‘‘Hines’’), dated Feb. 21, 2006; 

Letter from The National Society of Compliance 

Professionals (‘‘NSCP’’), dated Feb. 23, 2006; Letter 

from Financial Network, dated Feb. 23, 2006; Letter 

from Coker Palmer, dated Feb. 23, 2006; Letter from 

Griffin, Kubik, Stephens & Thompson, Inc. 

(‘‘Griffin’’), dated Mar. 2, 2006; Letter from 

Debevoise & Plimpton LLP (‘‘Debevoise’’) o/b/o The 

Midtown Regulatory Group, dated Mar. 3, 2006; 

Letter from Transamerica Capital, Inc. 

(‘‘Transamerica Capital’’), dated Mar. 3, 2006; Letter 

from The Bond Market Association (‘‘BMA’’), dated 

Mar. 3, 2006; Letter from Goodwin Browning & 

Luna Securities, Inc. (‘‘GB&L’’), dated Mar. 3, 2006; 

Letter from The ABA Securities Association 

(‘‘ABASA’’), dated Mar. 3, 2006; Letter from 

Wachovia Capital Markets, LLC (‘‘Wachovia’’), 

dated Mar. 3, 2006; Letter from Neal E. Nakagiri 

(‘‘Nakagiri’’), dated Mar. 3, 2006; and Letter from 

The Self-Regulation and Supervisory Practices 

Committee of the Securities Industry Association 

(‘‘SIA’’), dated Mar. 7, 2006. 

23 See, e.g., Letters from Dominion, Financial 

Network, H.D. Vest, Hines, Plexus, and NRS. 24See, e.g., Letters from Evolve, Financial 

Network, FSI, GB&L, H.D. Vest, ING, Maplewood, 

Nakagiri, and Transamerica Capital. Several 

commenters indicated that the proposed rule 

change should be made through notice and 

comment rulemaking with the Commission. As the 

Notice to Members stated, Section 19 of the 

Securities Exchange Act of 1934 requires that 

proposed rule changes such as IM–3060 be 

approved by the Commission following publication 

for public comment in the Federal Register. See 

Notice to Members 06–06, at 2 & n.2. 

25NASD recognizes that customers whose 

representatives receive business entertainment have 

the responsibility to ensure that their 

representatives do not engage in improper conduct. 

However, NASD believes that the person providing 

business entertainment cannot disclaim any 

responsibility for improper conduct that flows 

directly from business entertainment its employee 

provided when the employee either intended for 

the business entertainment to have that effect or 

could reasonably have judged that the business 

entertainment would be likely to have that effect. 

the customer representatives of such 

customer. 

(F) Exemption for Members with 

Business Entertainment Expenses Below 

$7,500: The concerns that the proposed 

interpretation seeks to address are not 

presented by those members that, in the 

aggregate, do not devote significant 

resources to business entertainment. 

Consequently, the interpretation 

provides for a partial exemption for 

those members with annual business 

entertainment expenses below $7,500. 

The provision provides that the $7,500 

ceiling should be measured on a fiscal 

year basis. Each member that relies on 

the exemption must evidence that its 

business entertainment expenses were 

below the threshold. 

Importantly, the exemption is not a 

total exemption from all aspects of the 

proposed interpretation. All members 

(except those members that do not 

engage in any business entertainment) 

are required to abide by the 

interpretation’s general requirements as 

set forth in paragraph (a) and are 

required to have written policies and 

supervisory procedures that are 

designed to detect and prevent business 

entertainment that is intended as, or 

could reasonably be perceived to be 

intended as, an improper quid pro quo 

or that could otherwise give rise to a 

potential conflict of interest or 

undermine the performance of a 

customer representative’s duty to a 

customer or any person to whom the 

customer owes a fiduciary duty, and 

establish standards to ensure that 

persons designated to supervise and 

administer such policies and procedures 

are sufficiently qualified. 

The effective date of the proposed 

rule change will be six months 

following Commission approval. NASD 

will announce the effective date of the 

proposed rule change in a Notice to 

Members to be published no later than 

60 days following Commission 

approval. 

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,21 which 

requires, among other things, that NASD 

rules must be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

NASD believes that the proposed rule 

change clarifies existing obligations of 

members with respect to the provision 

of business entertainment and will help 

prevent conduct by associated persons 

of a member that could undermine the 

performance of an employee’s duty to 

the member’s customer. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASD does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The proposed rule change was 

published for comment in NASD Notice 

to Members 06–06 (January 2006). 

NASD received 28 comments in 

response to the Notice.22 A copy of the 

Notice to Members was attached to the 

original rule filing as Exhibit 2a. Copies 

of the comment letters received in 

response to the Notice were attached to 

the original rule filing as Exhibit 2b. Of 

the 28 comment letters received, 12 

were generally in favor of the proposed 

rule change, 13 were opposed, and three 

took no clear position. 

A number of commenters raised 

concerns with NASD’s general, 

principles-based approach to the 

proposed rule change 23 and questioned 

the overall need for the IM.24 As 

indicated above, the proposed rule 

change was undertaken in response to 

requests by NASD members for clarity 

concerning appropriate business 

entertainment. Both NASD and the 

NYSE undertook to provide members 

with additional guidance following 

these requests. To the extent some 

commenters questioned whether NASD 

should seek to ‘‘regulate’’ the employees 

of their members’ customers, these 

commenters fail to recognize that NASD 

staff guidance in the 1999 Letter already 

prohibits business entertainment for 

employees of customers that is so 

frequent or excessive as to raise 

questions of propriety. Moreover, as 

discussed above, NASD is not seeking to 

regulate the behavior of the 

representatives of a member’s 

customers; 25 rather, NASD is requiring 

each member to develop and enforce 

some appropriate degree of limitation 

on the business entertainment that 

persons associated with the member 

provide to its customers’

representatives. In achieving this end, 

both NASD and the NYSE believe that 

a general, principles-based approach is 

more appropriate than a restrictive, onesize-fits-all regulatory scheme. Given 

the significant variation in broker-dealer 

business models and size, and regional 

differences in what may be considered 

appropriate business entertainment, 

NASD concluded that a fixed-dollar 

standard or similar specific mandate 

would prove unworkable. 

One commenter suggested that NASD 

exempt certain small broker-dealers, at 


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26Letter from Evolve. 

27See Letter from BMA. 

28See, e.g., Letters from Hines and ING. 

29See Letter from Transamerica Capital. 

30See, e.g., Letters from Dominion and 

Seasongood. 

31See Letters from BMA, Griffin, NSCP, and 

Wachovia. 

32See, e.g., Letters from BMA, Financial Network, 

FSI, ING, and Transamerica Capital. 

33As noted in footnote 2 above, although the 

language in the definitions has been modified, the 

substance and breadth has been retained. 

34See Letter from Debevoise. 

35See Letter from FSI. 

36See, e.g., Letters from ABASA, BMA, 

Debevoise, Evolve, Financial Network, and 

Wachovia. 

37The one exception is the one noted above with 

respect to exigent circumstances. Numerous 

commenters requested that NASD adopt the exigent 

circumstances exception from the gift rule similar 

to the exception that the NYSE has proposed. See, 

e.g., Letters from ABASA, BMA, and Wachovia. As 

discussed above, NASD has determined that it is 

appropriate to provide for such an exception. 

38See Letters from Financial Network and ING. 

39 15 U.S.C. 78s. 

least in part because they lack the 

resources to affect decision-making in 

the manner the IM seeks to prohibit and 

that such extravagant and extensive 

business entertainment is localized 

among larger firms and does not occur 

in rural or small-market areas.26 In 

response to this comment, NASD has 

included a limited exemption for 

members whose total business 

entertainment expenses in the course of 

their fiscal year are below $7,500. The 

exemption provides relief from the 

recordkeeping requirements of the rule, 

as well as many of the specific 

requirements regarding written policies 

and supervisory procedures. NASD 

believes, however, that the general 

requirements of the proposed rule 

change should apply to all members that 

engage in business entertainment. In 

addition, members that engage in 

business entertainment should have 

written policies and supervisory 

procedures that are designed to detect 

and prevent improper conduct. As 

noted above, the proposed rule change 

does not apply to any member firm that 

does not engage in any form of business 

entertainment. 

Several commenters suggested that 

NASD identify in the IM the specific 

factors to be considered by firms in 

developing their written policies and 

procedures, such as those identified by 

the NYSE in its rule filing. NASD staff 

does not believe it is necessary to 

identify specific factors in the IM and 

that doing so may undermine the 

flexibility the proposed rule change is 

designed to achieve.27 NASD staff will 

consider whether additional guidance 

concerning the IM is necessary when 

announcing the proposed rule change in 

a Notice to Members. 

Several commenters expressed 

concern that the proposed rule change, 

including some of the defined terms, 

was too vague and may, in application, 

prove overly broad. Among other things, 

these commenters suggested that the 

proposed rule change could 

disadvantage firms with more 

conservative policies and procedures,28

effectively require pre-approval of all 

business entertainment,29 and introduce 

disadvantages among different types of 

firms and other industry participants.30

Other commenters believed that the 

principles-based approach proposed by 

NASD is the appropriate manner to 

address the needed clarification of 

business entertainment.31

While NASD recognizes that there 

will be distinctions among each 

member’s written policies and 

procedures, NASD concluded that 

member firms were in the best position 

to determine appropriate limitations 

and restrictions on the business 

entertainment provided by persons 

associated with a member. After 

considering the various comments 

concerning the definitions of 

‘‘customer’’ and ‘‘business 

entertainment’’ in the proposed rule 

change,32 NASD has determined not to 

amend the definitions substantively.33

While several commenters 

recommended that the definition of 

customer track the definition of 

‘‘accredited investor’’ as defined in SEC 

Rule 501 under the Securities Act of 

1933, NASD staff does not believe that 

the application of the IM should be 

dependent on any particular level of 

assets. While member firms may choose 

to treat certain types of customers or 

certain types of business entertainment 

differently for purposes of their written 

policies and procedures, NASD believes 

that, for purposes of the proposed rule 

change, a broad definition of each is 

appropriate. 

With respect to one comment, NASD 

believes that it would be appropriate for 

a member’s written policies and 

procedures to allow case-by-case review 

and approval for types of entertainment 

not specifically set forth in the 

member’s policies and procedures.34

One commenter was concerned that a 

registered representative may not be 

aware whether a recipient of business 

entertainment is a representative of a 

customer of the firm.35 If a person is 

entertained in his personal capacity as 

a natural person client, and the firm has 

information barriers that would prevent 

the person providing the business 

entertainment from knowing that the 

person represents another customer as a 

representative, and the person providing 

business entertainment has no 

knowledge that such person is a 

representative of a customer at the time 

of the business entertainment, then such 

entertainment would fall outside the 

scope of the IM. 

Several commenters raised 

suggestions concerning Rule 3060’s 

limitation on gifts and gratuities, 

ranging from comments focused on 

increasing the $100 limitation, moving 

from a hard figure standard to a 

principles-based approach, and 

providing guidance on the types of gifts 

and incidental expenses that should be 

included or excluded from any 

limitation.36 The proposed rule change 

is focused on business entertainment, 

which is excepted from the limitation 

on ‘‘gifts,’’ and NASD is not currently 

considering amending the rule regarding 

gifts and gratuities.37 NASD has long 

recognized that gifts—in contrast to 

business entertainment—are not 

incidental to the transaction of business. 

NASD requires that any gifts be de 

minimis and sees no reason to depart 

from this long-held view. NASD does 

not believe that the proposed rule 

change is the appropriate forum for 

providing interpretive advice on other 

aspects of Rule 3060; however, NASD 

staff recently published additional 

guidance on Rule 3060 regarding gifts 

and gratuities. See Notice to Members 

06–69 (December 2006). 

Two commenters expressed concern 

that the IM shifts the burden of proof 

required under NASD Rules and 

suggested that any change to Rule 3060 

be done through a separate rule 

proposal rather than through an IM.38

As discussed in footnote 2 and the 

accompanying text of Notice to 

Members 06–06, the IM, which is the 

equivalent of a rule provision, is being 

proposed in accordance with the 

procedures for a proposed rule change 

under Section 19 of the Act.39 Rule 3060 

and IM–3060 are two separate 

provisions, and the burden of proof 

under Rule 3060 is not affected by the 

proposed IM. 

Several commenters appeared 

concerned that the discussion in 

footnote 5 of Notice to Members 06–06 

would prohibit entertaining friends and 

relatives. This misconstrues the 

meaning of footnote 5, which says: 

‘‘Members cannot circumvent this 

proposed interpretive material by 

providing business entertainment to a 

natural person customer who also is an 

employee, agent or representative of a 

customer by claiming that such business 


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40See, e.g., Letters from Debevoise, Evolve, ICI, 

KBW, NRS, Transamerica Capital, and Wachovia. 

41See, e.g., Letters from Evolve, Financial 

Network, FSI, H.D. Vest, ICI, ING, Maplewood, and 

Transamerica Capital. 

42See Letter from T. Rowe Price. 

43See, e.g., Letters from BMA and SIA. 

44NYSE believes that the notice provision would 

encourage the expansion of monitoring and controls 

on business entertainment beyond broker-dealers to 

the employers of business entertainment recipients. 

See supra note 5. 

45See supra note 5. 

entertainment applies only to the 

‘natural person’ relationship.’’ What is 

required by footnote 5 is that an 

associated person of a member not avoid 

the application of the firm’s business 

entertainment policies by claiming such 

entertainment is ‘‘personal’’ rather than 

business. Firms are, however, likely to 

include policies in their business 

entertainment procedures to address 

personal entertainment of a customer 

representative where there is a family or 

some other personal relationship, much 

the way firms do today for gifts and 

gratuities under Rule 3060 that are not 

in relation to the business of the 

employer of the recipient. 

Many commenters requested 

clarification on whether an 

‘‘independent’’ review could be 

conducted by an independent 

department within, or affiliated with, 

the member.40 NASD has removed the 

specific review sections of the proposed 

rule change because it was redundant of 

existing obligations. A member firm’s 

responsibility to supervise business 

entertainment exists under Rule 3010(a), 

and a member firm’s responsibility to 

test and verify that its supervisory 

policies and procedures are achieving 

their intended purpose and complying 

with the federal securities laws and 

regulations and NASD rules exists 

under Rule 3012(a)(1). 

Many commenters expressed concern 

with the breadth of the recordkeeping 

requirement and requested a lengthy 

implementation time for the 

recordkeeping requirements.41 In 

response to these comments, NASD 

provided an exception from the 

recordkeeping obligations for expenses 

under $50. However, as discussed 

above, NASD believes that a member’s 

policies and procedures should prevent 

persons associated with the member 

from intentionally avoiding the $50 

requirement by breaking up what are 

otherwise connected costs or by 

engaging in frequent, repeated business 

entertainment at amounts below the $50 

threshold. For example, a firm’s policies 

and procedures may require associated 

persons of the member to submit all 

business entertainment expenses for 

review; however, the firm may decide to 

record and track only amounts over $50. 

NASD also is providing for an effective 

date of six months following the 

Commission’s approval of the proposed 

rule change. Members should provide 

the Commission with specific comments 

as to whether this is sufficient time to 

implement recordkeeping systems to 

comply with the proposed rule change 

and, if it is not sufficient, offer reasons 

why and suggest an appropriate 

implementation period. 

One commenter suggested that NASD 

permit a member’s procedures to 

include prompt review of business 

entertainment after the event.42 The 

commenter offered an example of a 

dinner that unexpectedly exceeds the 

firm’s threshold. NASD does not believe 

that a member’s policies and procedures 

should allow for post-event approval 

because there does not appear to be an 

effective means of rescinding business 

entertainment that has already been 

provided. Rather, persons associated 

with a member who are concerned that 

the cost of an event may exceed the 

threshold should request approval in 

advance to go over the firm’s limit. In 

such a situation, the member should 

impose another dollar limit rather than 

simply waive the requirement. 

Finally, several commenters requested 

that NASD and the NYSE harmonize 

their proposed rule changes or, in the 

alternative, include a provision that a 

dual member that complies with one of 

the SRO’s rule will be deemed to be in 

compliance with the other SRO’s rule.43

In filing this Amendment No. 1, NASD 

has sought to address substantive 

disparities between its rule and that of 

the NYSE. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

As the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

The Commission notes that the 

NYSE’s proposed Rule 350A(e) provides 

that a NYSE member organization must 

have a system in place to give notice 

(e.g., via the member organization’s Web 

site, a disclosure document, or other 

appropriate means) to customers that 

use customer representatives that upon 

a customer’s written request, the NYSE 

member organization will provide 

detailed information regarding the 

manner and expense of any business 

entertainment provided by the NYSE 

member organization to the customer 

representative,44 while the NASD’s 

proposal does not contain a similar 

notice provision.45 The Commission is 

soliciting comment on this difference 

between the NYSE and NASD proposed 

rules and specifically whether NASD 

should have a similar notification 

provision for customers utilizing 

customer representatives. 

Comments may be submitted by any 

of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2006–044 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2006–044. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of the filing also will be 

available for inspection and copying at 


jlentini on PROD1PC65 with NOTICES
28752 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 

46 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 15 U.S.C. 78s(b)(3)(A)(i). 

3 17 CFR 240.19b–4(f)(1). 

4The Commission has modified the text of the 

summaries prepared by NSCC. 

5See e.g., Securities Exchange Act Release Nos. 

54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) 

[SR–NASD–2005–087] (establishment of the NASD/ 

Nasdaq TRF); 54715 (November 6, 2006), 71 FR 

66354 (November 14, 2006) [SR–NASD–2006–108] 

(establishment of the NASD/NSX TRF); and 54931 

(December 13, 2006), 71 FR 76409 (December 20, 

2006) [SR–NASD–2006–115] (establishment of the 

NASD/BSE TRF). 

6Rule 7, Section 5 is proposed to be renumbered 

as part of other changes pending pursuant to File 

No. SR–NSCC–2006–04. 

7NASD filed a proposed rule change relating to 

the establishment of the NASD/NYSE TRF for 

immediate effectiveness, asserting that such 

proposed rule change was ‘‘non-controversial’’

because it was substantially similar to the rules 

relating to the other TRFs, which were subject to 

notice and comment and approved by the 

Commission. Securities Exchange Act Release No. 

55325 (February 21, 2007), 72 FR 8820 (February 

27, 2007) [SR–NASD–2007–011]. 

the principal office of the Exchange. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASD–2006–044 and 

should be submitted on or before June 

12, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.46

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. E7–9742 Filed 5–21–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55770; File No. SR–NSCC–

2007–05] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Relating to Its Ability To 

Receive Transaction Data From Trade 

Reporting Facilities That Are Facilities 

of a Self-Regulatory Organization 

May 15, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’), 1 notice is hereby given that on 

March 26, 2007, the National Securities 

Clearing Corporation (‘‘NSCC’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change described in Items 

I, II, and III below, which items have 

been prepared primarily by NSCC. 

NSCC filed the proposed rule change 

pursuant to Section 19(b)(3)(A)(i) of the 

Act 2 and Rule 19b–4(f)(1) thereunder 3

so that the proposal was effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested parties. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The purpose of the proposed rule 

change is to clarify NSCC’s Rule 7, 

‘‘Comparison and Trade Recording 

Operation,’’ in order to make clear that 

NSCC may accept transaction data on 

behalf of NSCC members from trade 

reporting facilities that are affiliated 

with and operated as a facility of a selfregulatory organization (‘‘Trade 

Reporting Facilities’’ or ‘‘TRFs’’). 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NSCC included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. NSCC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements.4

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

The purpose of this filing is to clarify 

NSCC’s Rule 7, ‘‘Comparison and Trade 

Recording Operation,’’ in order to make 

clear that NSCC may accept transaction 

data on behalf of NSCC Members from 

Trade Reporting Facilities. 

Background 

NSCC’s Rule 7 permits NSCC in its 

discretion to accept transaction data 

from self-regulatory organizations 

(‘‘SROs’’), as defined in the Securities 

Exchange Act of 1934 (and, similarly, 

from derivatives clearing organizations 

registered or deemed registered with the 

Commodities Futures Trading 

Commission). Such data may be 

provided directly by an SRO or through 

subsidiary or affiliated organizations. 

In conjunction with the recent 

separation of the National Association 

of Securities Dealers, Inc. (‘‘NASD’’) and 

The Nasdaq Stock Market, Inc. 

(‘‘Nasdaq’’), the Commission approved 

the establishment by NASD and Nasdaq 

of the NASD/Nasdaq Trade Reporting 

Facility, which provides NASD 

members with an alternative means for 

reporting transactions in exchangelisted securities effected otherwise than 

on an exchange. Since then, NASD has 

established several additional new TRFs 

in conjunction with other registered 

securities exchanges, each of which 

provides NASD members with alternate 

means for reporting transactions in 

exchange-listed securities effected 

otherwise than on an exchange. All of 

these TRFs will operate as joint ventures 

with the relevant exchanges, but NASD, 

the ‘‘SRO Member’’ of each such 

venture, will have sole regulatory 

responsibility for each TRF. As such, 

the TRFs are facilities ‘‘of NASD and 

subject to NASD’s registration as a 

national securities association.’’5

At the current time, NASD filed 

proposed rule changes with the 

Commission relating to the 

establishment of the following TRFs: 

The NASD/Nasdaq TRF; the NASD/ 

National Securities Exchange (NSX) 

TRF; the NASD/Boston Stock Exchange 

(BSE) TRF; and the NASD/New York 

Stock Exchange (NYSE) TRF. Currently, 

all the TRFs are operational. The rules 

governing the operations of these 

facilities are contained in NASD Rule 

4000 and 6100 Series for the NASD/ 

Nasdaq TRF, NASD Rule 4000C and 

6000C Series for the NASD/NSX TRF, 

NASD Rule 4000D and 6000D Series for 

the NASD/BSE TRF, and NASD Rule 

4000E and 6000E Series for the NASD/ 

NYSE TRF. With the exception of the 

NASD/NYSE TRF, the applicable rules 

permit the TRFs, at the option of their 

NASD member participant, to submit 

the data relating to reported trades to 

NSCC for clearance and settlement. 

In order to accommodate the NASD 

and to promote the efficient processing 

of securities transactions, NSCC 

proposes to clarify its Rule 7, Section 5 6

to make clear that it may accept 

transaction data from such TRFs as 

facilities of the NASD, the applicable 

SRO. For this purpose, the proposed 

clarification provides that the TRF be 

affiliated with and operated as a facility 

of the SRO and that the rules and 

operation of the TRF be the subject of 

a rule change of the SRO that has been 

duly filed with the Commission and is 

effective.7 By allowing NSCC to receive 

transaction data for clearing purposes 

from these facilities with respect to 

NSCC’s members, broker-dealers will be 

able to report transactions for both 

reporting/regulatory and clearing 

purposes in a single report to the TRFs. 


jlentini on PROD1PC65 with NOTICES