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Federal Register / Vol. 72, No.

98 / Tuesday, May 22, 2007 / Notices 28743

sunset one year after the Pilot Stocks changes relating to the self-help Commission, and all written
Phase Date, currently scheduled to modifier, the qualified contingent trade communications relating to the
occur on July 9, 2007. NASD has filed modifier, the sub-penny modifier, and proposed rule change between the
the proposed rule change for immediate the modifier used to distinguish Commission and any person, other than
effectiveness.12 The proposed rule inbound and outbound intermarket those that may be withheld from the
change will become operative upon sweep orders. public in accordance with the
filing with the Commission. provisions of 5 U.S.C. 552, will be
III. Date of Effectiveness of the
2. Statutory Basis available for inspection and copying in
Proposed Rule Change and Timing for
the Commission’s Public Reference
NASD believes that the proposed rule Commission Action
Room. Copies of the filing also will be
change is consistent with the provisions The foregoing proposed rule change available for inspection and copying at
of Section 15A(b)(6) of the Act,13 which has become effective pursuant to the principal office of NASD. All
requires, among other things, that NASD Section 19(b)(3)(A)(i) of the Act 15 and comments received will be posted
rules be designed to prevent fraudulent subparagraph (f)(1) of Rule 19b–4 without change; the Commission does
and manipulative acts and practices, to thereunder,16 because it constitutes a not edit personal identifying
promote just and equitable principles of stated policy, practice, or interpretation information from submissions. You
trade, and, in general, to protect with respect to the meaning, should submit only information that
investors and the public interest. NASD administration, or enforcement of an you wish to make available publicly. All
believes that the proposed exemptive existing rule. At any time within 60 submissions should refer to File
authority is appropriate because it will days of the filing of the proposed rule Number SR–NASD–2007–032 and
allow NASD to address certain change, the Commission may summarily should be submitted on or before June
implementation issues as they arise. abrogate such rule change if it appears 12, 2007.
B. Self-Regulatory Organization’s to the Commission that such action is
For the Commission, by the Division of
Statement on Burden on Competition necessary or appropriate in the public
Market Regulation, pursuant to delegated
interest, for the protection of investors, authority.17
NASD does not believe that the or otherwise in furtherance of the
proposed rule change will result in any Jill M. Peterson,
purposes of the Act.
burden on competition that is not Assistant Secretary.
necessary or appropriate in furtherance IV. Solicitation of Comments [FR Doc. E7–9741 Filed 5–21–07; 8:45 am]
of the purposes of the Act. Interested persons are invited to BILLING CODE 8010–01–P

C. Self-Regulatory Organization’s submit written data, views, and


Statement on Comments on the arguments concerning the foregoing,
Proposed Rule Change Received From including whether the proposed rule SECURITIES AND EXCHANGE
Members, Participants or Others change is consistent with the Act. COMMISSION
Comments may be submitted by any of
While NASD did not solicit comments the following methods: [Release No. 34–55765; File No. SR–NASD–
on the proposed rule change, as
2006–044]
discussed above, NASD did receive a Electronic Comments
comment letter in connection with SR– • Use the Commission’s Internet Self-Regulatory Organizations;
NASD–2007–002.14 NASD is filing the comment form (http://www.sec.gov/ National Association of Securities
proposed rule change specifically to rules/sro.shtml); or Dealers, Inc.; Notice of Filing of
address this comment letter and the • Send an e-mail to rule- Proposed Rule Change and
concerns raised by the commenter about comments@sec.gov. Please include File Amendment Nos. 1 and 2 Thereto
the burdens associated with Number SR–NASD–2007–032 on the Relating to Interpretive Material to
implementation of the new Regulation subject line. NASD Rule 3060 To Require Members
NMS-related trade report modifiers. As To Adopt Policies and Procedures
noted above, NASD has determined that Paper Comments
Addressing Business Entertainment
the Regulation NMS-related modifiers • Send paper comments in triplicate
required under the NASD trade to Nancy M. Morris, Secretary, May 15, 2007.
reporting rules are crucial to its Securities and Exchange Commission, Pursuant to Section 19(b)(1) of the
regulatory program and does not agree 100 F Street, NE., Washington, DC Securities Exchange Act of 1934
with the commenter that the self-help 20549–1090. (‘‘Act’’) 1 and Rule 19b–4 thereunder,2
modifier should be optional. NASD All submissions should refer to File notice is hereby given that on April 11,
believes that the proposed exemptive Number SR–NASD–2007–032. This file 2006, the National Association of
authority strikes a fair balance between number should be included on the Securities Dealers, Inc. (‘‘NASD’’) filed
the needs of NASD’s regulatory program subject line if e-mail is used. To help the with the Securities and Exchange
and member concerns regarding the Commission process and review your Commission (‘‘SEC’’ or ‘‘Commission’’)
timing and burdens of the necessary comments more efficiently, please use the proposed rule change as described
systems changes. The proposed rule only one method. The Commission will in Items I, II, and III below, which Items
change should alleviate such burdens by post all comments on the Commission’s have been prepared by NASD. On April
affording members additional time, if Internet Web site (http://www.sec.gov/ 17, 2007, NASD filed Amendment No.
needed, to make the necessary systems rules/sro.shtml). Copies of the 1 to the proposed rule change.3 On May
submission, all subsequent 1, 2007, NASD filed Partial Amendment
12 NASD is filing this proposed rule change for
amendments, all written statements
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immediate effectiveness to allow NASD to address


exemptive requests immediately without regard to
with respect to the proposed rule 17 17 CFR 200.30–3(a)(12).
when the changes to the underlying trade reporting change that are filed with the 1 15 U.S.C. 78s(b)(1).
rules are operational. 2 17 CFR 240.19b–4.
13 15 U.S.C. 78o–3(b)(6). 15 15 U.S.C. 78s(b)(3)(A)(i). 3 Amendment No. 1 replaced and superseded the
14 See FIF Letter, supra note 11. 16 17 CFR 240.19b–4(f)(1). original rule filing in its entirety.

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

No. 2 to the proposed rule change.4 The customer representative to act in a (B) Anything of value given or
Commission is publishing this notice to manner that is inconsistent with: provided to a customer representative
solicit comments on the proposed rule (1) The best interests of the customer; that does not fall within the definition
change, as amended, from interested or of ‘‘business entertainment’’ is a gift
persons.5 (2) The best interests of any person to under Rule 3060.
whom the customer owes a fiduciary (C) In valuing business entertainment
I. Self-Regulatory Organization’s
duty. expenses pursuant to this interpretation,
Statement of the Terms of Substance of
a member’s written policies and
the Proposed Rule Change (b) Definitions procedures must specify the
NASD is proposing to adopt For purposes of this interpretation, methodology to be used by the member
Interpretive Material (‘‘IM’’) to NASD the following definitions shall apply: to calculate the value of business
Rule 3060 to require members to adopt (1) The term ‘‘customer’’ means: entertainment. In general, business
policies and procedures addressing (A) A person that maintains a entertainment expenses should be
business entertainment. Below is the business relationship with a member via valued at the higher of face value or cost
text of the proposed rule change. the maintenance of an account, through to the member.
Proposed new language is in italics. the conduct of investment banking, or
* * * * * (c) Written Policies and Procedures
pursuant to other securities-related
activity; or (1) Each member must have written
IM–3060. Business Entertainment policies and supervisory procedures
(B) A person whose customer
The NASD Board of Governors is representative receives business that:
issuing this interpretation concerning entertainment for the purpose of (A) Define forms of business
the obligations of a member in encouraging such person to establish a entertainment that are appropriate and
connection with any business business relationship with the member inappropriate using quantitative and/or
entertainment of a customer qualitative standards that address the
by opening an account with the member
representative. This interpretation does nature and frequency of the
or by conducting investment banking or
not apply to any non-cash entertainment provided, as well as the
other securities-related activity with the
compensation that falls within Rule type and class of any accommodations
member.
2820(g) or Rule 2830(l) (i.e., or transportation provided in
(2) The term ‘‘customer
entertainment provided by offerors to connection with such business
representative’’ means a person who is
associated persons of a member in entertainment; and
connection with the sale and an employee, officer, director, or agent
(B) Make clear that anything of value
distribution of variable contracts or of a customer, unless such person is a
given or otherwise provided to a
investment company securities). This family member of the customer.
customer representative that does not
interpretation does not apply to any (3) The term ‘‘family member’’ means fall within the definition of ‘‘business
member that does not engage in a person’s parents, mother-in-law or entertainment’’ is a gift under Rule
business entertainment. For any father-in-law, spouse, brother or sister, 3060; and
member that engages in business brother-in-law or sister-in-law, son-in- (C) Impose either specific dollar limits
entertainment, this interpretation law or daughter-in-law, and children. on business entertainment or require
applies only with respect to business (4) The term ‘‘business advance written supervisory approval
entertainment provided to customer entertainment’’ means any social event, beyond specified dollar thresholds; and
representatives. This interpretation hospitality event, sporting event, (D) Are designed to detect and
supersedes any prior interpretive letters entertainment event, meal, leisure prevent business entertainment that is
or statements of NASD staff regarding activity, or event of like nature or intended as, or could reasonably be
business entertainment under Rule purpose, including business perceived to be intended as, an
3060. entertainment offered in connection improper quid pro quo or that could
with a charitable event, educational otherwise give rise to a potential conflict
(a) General Requirements event or business conference, as well as of interest or undermine the
No member or person associated with any transportation or lodging related to performance of a customer
a member shall, directly or indirectly, such activity or event, in which an representative’s duty to a customer or
provide any business entertainment to a associated person of a member any person to whom the customer owes
customer representative pursuant to the accompanies a customer representative. a fiduciary duty; and
establishment of, or during the course (A) If a customer representative is not (E) Establish standards to ensure that
of, a business relationship with any accompanied by an appropriate persons designated to supervise and
customer that is intended or designed to associated person of the member, any administer the written policies and
cause, or would be reasonably judged to expenses associated with the business procedures are sufficiently qualified;
have the likely effect of causing, such entertainment will be considered a gift and
under Rule 3060 unless exigent (F) Require appropriate training and
4 Partial Amendment No. 2 attached Exhibit 4 of
circumstances make it impractical for education for all personnel who
Amendment No. 1, which shows changes of the an associated person of the member to
proposed rule text from the immediately preceding
supervise, administer, or are subject to
filing. attend. All instances where such exigent the written policies and procedures.
5 The Commission also is separately publishing a circumstances are invoked must be (2) A member’s written policies and
notice by the New York Stock Exchange LLC clearly and thoroughly documented and procedures may distinguish, and set
(‘‘NYSE’’) to propose new NYSE Rule 350A on be subject to the prior written approval specifically tailored standards for,
business entertainment, which is substantially
similar to NASD’s proposed rule text. See Securities of a designated supervisory person or, in business entertainment in connection
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Exchange Act Release No. 55766 (May 15, 2007) very limited circumstances where such with events that are deemed to be
(SR–NYSE–2006–06). The NYSE proposal and the prior approval cannot reasonably be primarily educational, charitable, or
NASD proposal primarily differ in that the NYSE
proposal contains a ‘‘Notice to Customers’’
obtained, to a prompt post-event review philanthropic in nature, provided that
provision. See discussion infra Part IV, Solicitation to be conducted and documented by such standards comply with the
of Comments section. such supervisory person. requirements of this interpretation and

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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 28745

are explicitly addressed in the written summaries, set forth in sections A, B, rules.9 NASD has also clarified that any
policies and procedures. and C below, of the most significant non-cash compensation falling under
aspects of such statements. Rule 2820(g) or Rule 2830(l) would be
(d) Recordkeeping
subject to the standards imposed by
(1) Each member’s written policies A. Self-Regulatory Organization’s
those rules.10
and procedures must require the Statement of the Purpose of, and Rule 3060 is intended to prevent
maintenance of detailed records of Statutory Basis for, the Proposed Rule improprieties that may arise when a
business entertainment expenses Change member or an associated person of a
provided to any customer 1. Purpose member gives gifts or gratuities to
representative. The member is not employees of a customer. To guard
required to maintain records of: (A) Background: NASD Rule 3060 against these improprieties, Rule 3060
(A) Business entertainment when the prohibits any member or person imposes a $100 annual limit on gifts and
total value of the business associated with a member, directly or gratuities that a member or person
entertainment, including all expenses indirectly, from giving anything of value associated with a member can give to an
associated with the business in excess of $100 per year to any person employee of a customer in relation to
entertainment, does not exceed $50 per where such payment is in relation to the the employer firm’s business. However,
day; or business of the recipient’s employer. In ordinary and usual business
(B) Additional expenses incurred in 1999, NASD staff issued an interpretive entertainment is not considered a gift or
connection with otherwise recorded letter stating that Rule 3060 does not gratuity and is permitted ‘‘so long as it
business entertainment that do not, in prohibit ‘‘ordinary and usual business is neither so frequent nor so extensive
the aggregate, exceed $50 per day. entertainment’’ (such as an occasional as to raise any question of propriety.’’ 11
(2) Each member’s written policies meal, sporting event, theater The proposed rule change is intended to
and procedures must include provisions production, or comparable replace this statement regarding
reasonably designed to prevent entertainment event) provided that the business entertainment with an
associated persons of the member from entertainment ‘‘is neither so frequent approach that permits each member to
circumventing the recordkeeping nor so extensive as to raise any question adopt specific policies and procedures
requirements in contravention of the of propriety.’’ 6 The 1999 Letter noted tailored to its business needs. The
spirit and purpose of this interpretation that the interpretation was based, in proposed rule change also seeks to
(e.g., a pattern of providing a customer part, on NASD’s rules governing non- provide members with general guidance
representative with business cash compensation in connection with concerning the types of issues that a
entertainment valued at $48). the offer and sale of investment firm’s policies and procedures must
(3) Each member’s written policies company shares and variable annuities. address and mandates that each member
and procedures must require that, upon
Recently, NASD members have maintain appropriate records to ensure
a customer’s written request, the
requested more guidance on the rules that persons associated with the
member will promptly make available to
concerning gifts and business member are complying with the written
the customer any business
entertainment in the wake of press policies and procedures.
entertainment records regarding In general, NASD, working closely
reports of enforcement actions regarding
business entertainment provided to with the New York Stock Exchange (the
gifts and gratuities.7 In response to these
customer representatives of that ‘‘NYSE’’), concluded that, in clarifying a
requests, NASD is proposing
customer. member’s obligation under Rule 3060, a
interpretive material to NASD Rule 3060
(e) Exemption for Members With to outline the policies and procedures specific standard was unworkable and
Business Entertainment Expenses Below that a member must adopt in connection impractical.12 As NASD noted in the
$7,500 with its business entertainment Notice to Members seeking comment on
A member whose business practices.8 The proposed rule change the proposed rule change, ‘‘the
entertainment expenses in the course of would supersede any prior guidance of proposed IM does not impose hard
its fiscal year are below $7,500 shall be NASD staff regarding business limits, nor does it require that all
subject only to paragraphs (a), (b), and entertainment under Rule 3060, members adopt the same limits or even
(c)(1)(D) and (E) of this interpretation, including the 1999 Letter. The proposed treat all recipients equally.’’ 13 Rather,
and shall be exempt from paragraphs (c) rule change would not supersede any the proposed rule change requires that
(other than (c)(1)(D) and (E) as noted guidance provided under other NASD each member assess its use of business
above) and (d). Each member that relies entertainment, determine what
on this exemption must evidence that its 6 Letter to Henry H. Hopkins and Sarah limitations are appropriate and meet the
business entertainment expenses are McCafferty, T. Rowe Price Investment Services, general guidelines set forth in the
Inc., from R. Clark Hooper, NASD, dated June 10, proposed rule change, and adopt written
below the $7,500 threshold. 1999 (‘‘1999 Letter’’), available at http://
* * * * * www.nasd.com/web/idcplg?IdcService=
9 For example, the proposed rule change would
SS_GET_PAGE&ssDocName=NASDW_002715.
II. Self-Regulatory Organization’s 7 See, e.g., Jenny Anderson, Fidelity Disciplines not supersede the guidance given by NASD staff in
16 Traders Over Gifts From Brokers, N.Y. Times, Notice to Members 99–55 (July 1999) concerning
Statement of the Purpose of, and NASD Rules 2820 and 2830.
Dec. 17, 2004, at C5; Andrew Caffrey & Jeffrey
Statutory Basis for, the Proposed Rule Krasner, Probe of Gifts Said to Focus on Fidelity,
10 NASD published a Notice to Members

Change Boston Globe, Dec. 7, 2004, at A1; Probe on Gifts requesting comment on a proposed rule change to
to Fund Officials Is Said to Include Jefferies, Los replace Rules 2820(g) and 2830(l), among others,
In its filing with the Commission, with a new Rule 2311. See Notice to Members 05–
Angeles Times, Dec. 3, 2004, at C4; Jenny
NASD included statements concerning Anderson, On Wall Street, A Closer Look At Giving 40 (June 2005). If such a rule change is proposed
the purpose of and basis for the Gifts, N.Y. Times, Nov. 24, 2004, at C1; Greg Farrell, and approved, NASD will amend the language of
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proposed rule change and discussed any Brokerages’ gifts to mutual fund managers proposed IM–3060 to reflect the change.
11 See 1999 Letter.
comments it received on the proposed scrutinized, USA Today, Nov. 24, 2004, at B2.
8 In addition, NASD also recently published 12 The NYSE also has filed a proposed rule
rule change. The text of these statements guidance concerning gifts and gratuities under Rule change with the Commission addressing business
may be examined at the places specified 3060. See Notice to Members 06–69 (December entertainment. See supra note 5.
in Item IV below. NASD has prepared 2006). 13 See Notice to Members 06–06 (January 2006).

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

policies and procedures to ensure that representatives to conduct customer paragraph (a) of the proposed rule
persons associated with the member are business with and/or through the change, limit the proposed rule change
following those limitations. The member without due consideration as to to business entertainment provided to a
introductory paragraph in the proposed whether the nature and terms of such customer representative. This point is
interpretation also makes clear that the professional services meet the objectives explicitly addressed in the preamble to
interpretation does not apply to any and are in the best interests of the the interpretation, which states: ‘‘This
member that does not engage in account. interpretation does not apply to any
business entertainment. (C) Definitions: There are three member that does not engage in
While, as discussed below, some defined terms that are integral to an business entertainment. For any
commenters criticized a general, understanding of the proposed rule member that engages in business
principles-based approach as lacking change.15 First, ‘‘customer’’ is defined as entertainment, this interpretation
clarity and uniform standards, NASD (1) ‘‘a person that maintains a business applies only with respect to business
and the NYSE both concluded that such relationship with a member via the entertainment provided to customer
an approach was more appropriate. The maintenance of an account, through the representatives.’’ Thus, the proposed
proposed rule change expands upon the conduct of investment banking, or rule change does not address business
existing principles-based approach to pursuant to other securities-related entertainment provided to a natural
business entertainment established in activity’’ or (2) ‘‘a person whose person customer.18 It addresses only
the 1999 Letter but specifically customer representative receives business entertainment provided to a
addresses the content of a member’s business entertainment for the purpose customer representative of the customer
written policies and procedures. of encouraging such person to establish (although such customer may be a
(B) General Requirements: The a business relationship with the member natural or non-natural person).
observance of ‘‘high standards of by opening an account with the member Third, ‘‘business entertainment’’ is
commercial honor and just and or by conducting investment banking or defined as ‘‘any social event, hospitality
equitable principles of trade’’ required other securities-related activity with the event, sporting event, entertainment
of a member in the conduct of its member.’’ 16 The definition of event, meal, leisure activity, or event of
business under NASD Rule 2110 ‘‘customer’’ has been amended from the like nature or purpose, including
includes the obligation of a member not previous rule filing; however, the entertainment offered in connection
to act in a manner contrary to the best changes do not affect those persons with a charitable event, educational
interests of a customer in the conduct of considered ‘‘customers’’ for the purpose event or business conference, as well as
business with or for such customer. of the proposed rule change. any transportation or lodging related to
Consequently, when a member interacts Second, for purposes of the proposed such activity or event, in which an
with an employee—or any other agent— rule change, a ‘‘customer associated person of a member
of a customer, the member should not representative’’ means ‘‘a person who is accompanies a customer
give that person anything of value that an employee, officer, director, or agent representative.’’ This definition codifies
is intended or designed to cause, or of a customer, unless such person is a NASD’s long-standing position that an
otherwise would be reasonably judged family member of the customer.’’ The associated person of a member must
to have the likely effect of causing, such term ‘‘customer representative’’ replaces accompany or participate in an event for
person to act in a manner that is the term ‘‘employee’’ in the previous it to be deemed ‘‘business
inconsistent with the best interests of rule filing to clarify that the term entertainment’’ rather than a ‘‘gift.’’ In
the customer or any person to whom the includes persons other than employees. addition, NASD has deleted the portion
customer owes a fiduciary duty.14 The term also now conforms to the of the definition that stated that it is not
Paragraph (a) of the proposed rule terminology in the NYSE’s proposed necessary for business to be conducted
change codifies this concept by for an event to be ‘‘business
rule change. Moreover, the definition
explicitly setting forth the general entertainment.’’ The definition of
has been amended to exclude certain
purpose behind proposed IM–3060. business entertainment encompasses all
NASD believes that the guiding family members from the definition of
customer representative.17 This the events enumerated provided that the
principle in navigating the concern of customer representative is accompanied
placing a customer representative in exclusion has been added to the
definition to address situations where a by an associated person of the member;
conflict with his duty to a customer is because the clause did not further
that members should compete for close family member has power-of-
attorney or similar authority over define business entertainment, it has
business on the basis of providing the been deleted.
best professional services. While it is another family member’s account (e.g.,
As noted above, the definition of
not inappropriate for business an adult child with authority over his or
‘‘business entertainment’’ generally
entertainment to foster an environment her elderly parent’s account). NASD
prescribes that if a customer
for the member to promote or educate believes that these situations are
representative is not accompanied by an
the customer representative with respect unlikely to result in the types of
appropriate associated person of a
to such professional services, it is conflicts of interest the proposed rule
member, any expenses associated with
inconsistent with the terms of proposed change seeks to address.
This definition, when coupled with the business entertainment will be
IM–3060 to use business entertainment
to provide incentives to customer the general requirements set forth in 18 As discussed in footnote 5 of Notice to

Members 06–06, and as noted below, natural


15 Terms used in the interpretation have the same
14 NASD Rule 2110 precludes the offering of any persons who are both natural person customers and
thing of value, including but not limited to business meaning as those defined in NASD’s By-Laws and customer representatives should be treated as
entertainment, that comprises conduct that, to any rules unless otherwise specified. customer representatives. That is, associated
16 NASD Rule 0120(n) defines the term ‘‘person’’
degree, is either illegal under any applicable law or persons of a member cannot avoid the application
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would expose the member, customer, or recipient to ‘‘include any natural person, partnership, of the firm’s business entertainment policies by
of the member’s business entertainment to any civil corporation, association, or other legal entity.’’ claiming that business entertainment provided to a
liability. For example, any business entertainment 17 The term ‘‘family member’’ means a person’s person who is both a natural person customer and
that violated the Foreign Corrupt Practices Act or parents, mother-in-law or father-in-law, spouse, a customer representative was provided to that
any commercial bribery statutes and laws would, in brother or sister, brother-in-law or sister-in-law, individual solely in his or her ‘‘personal,’’ rather
turn, violate Rule 2110. son-in-law or daughter-in-law, and children. than business, capacity.

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considered a gift under Rule 3060. An associated persons of the member, even policies and procedures are sufficiently
exception to this requirement is if they report to a person who, in qualified; and (5) require appropriate
proposed to address instances when another capacity, is an associated training and education for all personnel
exigent circumstances make it person of a member. who supervise, administer, or are
impractical for an associated person of An associated person of a member subject to the written policies and
a member to attend a business may have management and supervisory procedures.
entertainment event. All instances responsibilities for non-member (i) Define Forms of Appropriate and
where such exigent circumstances are affiliates of a financial services Inappropriate Business Entertainment:
invoked must be clearly and thoroughly company, located within or outside of A member’s written policies and
documented and be subject to the prior the United States, without the result procedures concerning business
written approval of a designated that the persons being managed and entertainment must define forms of
supervisory person or, in very limited supervised in the non-member affiliates business entertainment that are
circumstances where such prior would necessarily be deemed associated appropriate and inappropriate using
approval cannot reasonably be obtained, persons of the member. It is the view of quantitative and/or qualitative
to a prompt post-event review to be NASD that in such instances the standards that address the nature and
conducted and documented by such following factors establish that an frequency of the entertainment
supervisory person. employee of a non-member affiliate is provided, as well as the type and class
NASD believes that the ‘‘exigent not an associated person of the member: of any accommodations or
circumstances’’ exception provides (1) The manager/supervisor of that transportation provided in connection
necessary flexibility in light of real- employee is recognized in the with such business entertainment. A
world, last minute emergency situations organization as having a scope of member’s policies and procedures
that could arise that would make it responsibilities outside of the member should include provisions regarding
difficult, if not impossible, for an firm; (2) the exercise of the management appropriate venues, nature, frequency,
appropriate associated person of a and supervision over that employee by and types and class of accommodation
member to attend a business such manager/supervisor is not and transportation.
entertainment event with a customer controlled by the member, is reviewable A member may determine that certain
representative. Examples of exigent for purposes of performance and activities, though legal, are nevertheless
circumstances would be a sick child, an compensation outside of the member, inappropriate for business
accident, or some other sudden, and is not conducted for the benefit of entertainment. NASD believes that the
overriding circumstance. NASD does the member; and (3) the employee of the
standards of business entertainment
not believe this provision would lead to non-member affiliates is not otherwise
adopted by members must meet the
circumvention of the spirit or substance employed or engaged in the investment
requirements of Rule 2110 that members
of the proposed rule change since all banking or securities business of the
and persons associated with a member
such occurrences are subject to detailed member and controlled by the member
adhere to high standards of commercial
documentation such that any patterns of in respect of such activities.
(D) Written Policies and Procedures: honor. Consequently, a member would
abuse would become quickly apparent
A member’s policies and procedures violate proposed IM–3060 not only if it
to supervisory personnel.
Paragraph (b)(4)(C) of the proposed must be designed to promote conduct failed to adopt procedures, but also if
rule change provides guidance to consistent with NASD Rule 2110 and the procedures set standards that are so
members on the valuation of business should not undermine the performance unbounded or vague that no reasonable
entertainment. The proposed rule of a customer representative’s duty to a determination of propriety can be
change requires that a member’s written customer. The proposed rule change discerned.
policies and procedures specify how the requires members to adopt written The proposed rule change also would
firm will calculate the value of business policies and procedures concerning allow, but not require, members to
entertainment. In general, business business entertainment that: (1) Define establish different standards for
entertainment items should be valued at forms of business entertainment that are business entertainment in connection
the greater of face value or cost to the appropriate and inappropriate using with events that are educational,
member. quantitative and/or qualitative charitable, or philanthropic in nature. If
NASD has been asked about the standards that address the nature and a member chooses to distinguish
extent to which the proposed rule frequency of the entertainment between forms of business
change reaches business entertainment provided, as well as the type and class entertainment in its policies and
conducted outside the United States, of any accommodation or transportation procedures, it should ensure that these
particularly entertainment provided by provided in connection with such types of business entertainment
persons who are employed in business entertainment; (2) impose nonetheless comply with Rule 2110 and
commonly controlled affiliates of a either specific dollar limits on business the general requirements set forth in
financial services company operating in entertainment or require advance paragraph (a) of the proposed rule
the United States and/or foreign written supervisory approval beyond change.
jurisdictions. As an initial matter, specified dollar thresholds; (3) are (ii) Impose Either Specific Dollar
proposed IM–3060 reaches all business designed to detect and prevent business Limits on Business Entertainment or
entertainment of a member firm and entertainment that is intended as, or Require Advance Written Supervisory
persons associated with a member, even could reasonably be perceived to be Approval Beyond Specified Dollar
if such entertainment occurs outside of intended as, an improper quid pro quo Thresholds: A member’s written
the United States or is provided to or that could otherwise give rise to a policies and procedures must impose
foreign individuals. However, NASD potential conflict of interest or either specific dollar limits on business
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does not believe that all persons who undermine the performance of a entertainment or require advance
are employed in commonly controlled customer representative’s duty to a written supervisory approval beyond
affiliates of a financial services company customer; (4) establish standards to specified dollar thresholds. The
operating in the United States and/or ensure that persons designated to proposed rule change does not impose
foreign jurisdictions are necessarily supervise and administer the written hard dollar limits or require that all

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28748 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices

members adopt the same dollar limits or determine appropriate levels of business Consequently, the proposed rule change
treat all recipients equally. entertainment and how those provides that members are not required
(iii) Designed to Detect and Prevent determinations are executed, monitored, to maintain records of (1) Business
Business Entertainment That Is and enforced. This is particularly true if entertainment when the total value of
Intended As, or Could Reasonably Be members elect to use qualitative, rather the business entertainment, including
Perceived To Be Intended As, an than quantitative, standards. In all expenses associated with the
Improper Quid Pro Quo: A member’s addition, such supervisory procedures business entertainment, does not exceed
written policies and procedures must should provide a method for evidencing $50 per day or (2) additional expenses
include procedures designed to detect both the breadth of supervisory incurred in connection with otherwise
and prevent business entertainment that activities as well as the information recorded business entertainment that do
is intended as, or could reasonably be upon which such supervision is not, in the aggregate, exceed $50 per
perceived to be intended as, an conducted. For example, a member’s day.20
improper quid pro quo. For example, policies and procedures must evidence The $50 threshold would apply only
members should develop written the basis upon which a supervisor will to events or activities with a total cost
policies and procedures reasonably determine that business entertainment that did not exceed $50 per day (e.g., an
designed to preclude providing business does not violate a member’s standards inexpensive lunch) or to minor
entertainment that is so lavish or as to the nature, frequency, and dollar expenses related to an otherwise
extensive in nature that a customer amounts of entertainment. A member’s reported business entertainment event
representative would likely feel policies and procedures must establish (such as a hot dog at an NBA basketball
compelled to place order flow on behalf standards to ensure that persons game, where the basketball game ticket
of the customer without due regard to designated to supervise and administer is reported as a business entertainment
best execution or other transaction the member’s written policies and expense). Firms may not allow persons
pricing considerations. NASD does not procedures are sufficiently qualified. associated with the member to
intend that this standard would The requirement that the persons disaggregate business entertainment
establish a per se violation of the designated to supervise business expenses relating to an activity or event
proposed IM if a customer entertainment expenses be ‘‘sufficiently in an effort to avoid recordkeeping
representative who received business qualified’’ is not intended to impose a obligations. Thus, a dinner expense of
entertainment from the member is later registration requirement or similar $40 followed by a sporting event with
found to have violated his or her obligation on these individuals; rather, a ticket price of $40 would need to be
obligations to his or her employer; the requirement is intended to ensure tracked under the member’s
however, such actions by a customer that the member’s designation is of recordkeeping system.
representative may warrant further persons who are familiar with the The proposed rule change also
investigation by the member firm as to applicable regulatory requirements and requires that a member’s written
whether the member’s policies and are sufficiently senior and experienced policies and procedures include
procedures are, in fact, reasonably to entrust with the approval obligations provisions reasonably designed to
tailored to prevent these types of envisioned by the member’s policies prevent persons associated with the
violations.19 While an NASD member is and procedures. member from circumventing the
not ultimately responsible for the (v) Training and Education: A recordkeeping requirements in
conduct of its customers’ employees or member’s business entertainment contravention of the spirit and purpose
agents, the member is responsible for policies and procedures must require of proposed IM–3060. Thus, for
ensuring that persons associated with appropriate training and education to all example, members should seek to
the member do not engage in activities applicable personnel. A member also prevent associated persons of the
that are designed to, or reasonably likely must be able to demonstrate that it member from engaging in patterns of
to, cause the recipient to engage in trains persons associated with the providing business entertainment that
improper conduct. Moreover, a member who supervise, administer, and falls below the $50 reporting threshold.
member’s compliance with its policies are subject to such written business One of the key elements of the
and procedures would not serve to entertainment policies and procedures proposed rule change is the ability of a
automatically shield the member from in all applicable requirements. customer to request from the member
all liability under the proposed IM for (E) Recordkeeping: The only effective
information regarding the business
any misconduct by a customer way for a member to ensure that persons
entertainment expenses provided to the
representative. associated with the member are
customer representatives of the
(iv) Supervision: As is the case with following the firm’s policies and
customer. Although members are
every NASD rule, supervision is a procedures is to establish a system to
permitted to establish reasonable
critical component of business track their business entertainment
guidelines regarding a customer’s ability
entertainment policies and procedures. expenses. Consequently, a member’s
to request this information, such
Members are free to define the approach policies and procedures are required to
guidelines must not impair the ability of
and method of their written policies and include procedures regarding the
procedures provided they are maintenance of detailed records of the customer to obtain, on a reasonable
reasonably designed to comport with business entertainment expenses and regular basis, information
the principles stated in the proposed provided to any customer concerning the member’s business
rule filing. Irrespective of the manner in representative. entertainment expenses pertaining to
which a member crafts its procedures, it NASD recognizes that recordkeeping 20 Members should be aware, however, that they
must be clear from the supervisory requirements present compliance may need to track such expenses under other NASD
policies and procedures what factors burdens for firms, and NASD has sought or SEC rules. There is no express exclusion from
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to address the potential burden by Rule 3060 for gifts given during the course of
19 NASD Rule 3012(a) requires members to test
providing a recordkeeping carve-out for business entertainment. See Notice to Members 06–
and verify their supervisory procedures and ‘‘create 69 (December 2006). NASD staff has, however,
additional or amend supervisory procedures where
small expenditures, none of which provided guidance that Rule 3060 does not apply
the need is identified by such testing and would reasonably be expected to to certain promotional items of nominal value that
verification.’’ influence the behavior of the recipient. display the firm’s logo. See id.

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the customer representatives of such of a member that could undermine the rule change, 13 were opposed, and three
customer. performance of an employee’s duty to took no clear position.
(F) Exemption for Members with the member’s customer. A number of commenters raised
Business Entertainment Expenses Below concerns with NASD’s general,
$7,500: The concerns that the proposed B. Self-Regulatory Organization’s principles-based approach to the
interpretation seeks to address are not Statement on Burden on Competition proposed rule change 23 and questioned
presented by those members that, in the the overall need for the IM.24 As
aggregate, do not devote significant NASD does not believe that the indicated above, the proposed rule
resources to business entertainment. proposed rule change will result in any change was undertaken in response to
Consequently, the interpretation burden on competition that is not requests by NASD members for clarity
provides for a partial exemption for necessary or appropriate in furtherance concerning appropriate business
those members with annual business of the purposes of the Act. entertainment. Both NASD and the
entertainment expenses below $7,500. C. Self-Regulatory Organization’s NYSE undertook to provide members
The provision provides that the $7,500 Statement on Comments on the with additional guidance following
ceiling should be measured on a fiscal Proposed Rule Change Received From these requests. To the extent some
year basis. Each member that relies on commenters questioned whether NASD
Members, Participants, or Others
the exemption must evidence that its should seek to ‘‘regulate’’ the employees
business entertainment expenses were The proposed rule change was of their members’ customers, these
below the threshold. published for comment in NASD Notice commenters fail to recognize that NASD
Importantly, the exemption is not a to Members 06–06 (January 2006). staff guidance in the 1999 Letter already
total exemption from all aspects of the NASD received 28 comments in prohibits business entertainment for
proposed interpretation. All members response to the Notice.22 A copy of the employees of customers that is so
(except those members that do not frequent or excessive as to raise
Notice to Members was attached to the
engage in any business entertainment) questions of propriety. Moreover, as
original rule filing as Exhibit 2a. Copies
are required to abide by the discussed above, NASD is not seeking to
interpretation’s general requirements as of the comment letters received in
regulate the behavior of the
set forth in paragraph (a) and are response to the Notice were attached to
representatives of a member’s
required to have written policies and the original rule filing as Exhibit 2b. Of customers; 25 rather, NASD is requiring
supervisory procedures that are the 28 comment letters received, 12 each member to develop and enforce
designed to detect and prevent business were generally in favor of the proposed some appropriate degree of limitation
entertainment that is intended as, or on the business entertainment that
22 Letter from Pinnacle Taxx Advisors, Inc.
could reasonably be perceived to be persons associated with the member
intended as, an improper quid pro quo (‘‘Pinnacle’’), dated Jan. 26, 2006; Letter from Keefe,
Bruyette & Woods (‘‘KBW’’), dated Jan. 26, 2006;
provide to its customers’
or that could otherwise give rise to a Letter from J.P. Morgan, dated Jan. 30, 2006; Letter representatives. In achieving this end,
potential conflict of interest or from Evolve Securities, Inc. (‘‘Evolve’’), dated Jan. both NASD and the NYSE believe that
undermine the performance of a 31, 2006; Letter from Seasongood & Mayer, LLC a general, principles-based approach is
customer representative’s duty to a (‘‘Seasongood’’), dated Feb. 2, 2006; Letter from
Plexus Consulting (‘‘Plexus’’) o/b/o International
more appropriate than a restrictive, one-
customer or any person to whom the Association of Small Broker Dealers and Advisers, size-fits-all regulatory scheme. Given
customer owes a fiduciary duty, and dated Feb. 6, 2006; Letter from Dominion Investor the significant variation in broker-dealer
establish standards to ensure that Services, Inc. (‘‘Dominion’’), dated Feb. 13, 2006; business models and size, and regional
persons designated to supervise and Letter from National Regulatory Services (‘‘NRS’’), differences in what may be considered
dated Feb. 6, 2006; Letter from T. Rowe Price
administer such policies and procedures Investment Services, Inc. (‘‘T. Rowe Price’’), dated appropriate business entertainment,
are sufficiently qualified. Feb. 17, 2006. Letter from Maplewood Investment NASD concluded that a fixed-dollar
The effective date of the proposed Advisors, Inc. (‘‘Maplewood’’), dated Feb. 22, 2006; standard or similar specific mandate
rule change will be six months Letter from Financial Services Institute, Inc. would prove unworkable.
(‘‘FSI’’), dated Feb. 23, 2006; Letter from
following Commission approval. NASD Transamerica Financial Advisors, Inc.
One commenter suggested that NASD
will announce the effective date of the (‘‘Transamerica’’), dated Feb. 23, 2006; Letter from exempt certain small broker-dealers, at
proposed rule change in a Notice to H.D. Vest Financial Services (‘‘H.D. Vest’’), dated
Members to be published no later than Feb. 23, 2006; Letter from ING U.S. Financial 23 See, e.g., Letters from Dominion, Financial
Services (‘‘ING’’), dated Feb. 23, 2006; Letter from Network, H.D. Vest, Hines, Plexus, and NRS.
60 days following Commission The Investment Company Institute (‘‘ICI’’), dated 24 See, e.g., Letters from Evolve, Financial
approval. Feb. 23, 2006; Letter from Hines Real Estate Network, FSI, GB&L, H.D. Vest, ING, Maplewood,
Securities, Inc. (‘‘Hines’’), dated Feb. 21, 2006; Nakagiri, and Transamerica Capital. Several
2. Statutory Basis Letter from The National Society of Compliance commenters indicated that the proposed rule
NASD believes that the proposed rule Professionals (‘‘NSCP’’), dated Feb. 23, 2006; Letter change should be made through notice and
from Financial Network, dated Feb. 23, 2006; Letter comment rulemaking with the Commission. As the
change is consistent with the provisions from Coker Palmer, dated Feb. 23, 2006; Letter from Notice to Members stated, Section 19 of the
of Section 15A(b)(6) of the Act,21 which Griffin, Kubik, Stephens & Thompson, Inc. Securities Exchange Act of 1934 requires that
requires, among other things, that NASD (‘‘Griffin’’), dated Mar. 2, 2006; Letter from proposed rule changes such as IM–3060 be
rules must be designed to prevent Debevoise & Plimpton LLP (‘‘Debevoise’’) o/b/o The approved by the Commission following publication
Midtown Regulatory Group, dated Mar. 3, 2006; for public comment in the Federal Register. See
fraudulent and manipulative acts and Letter from Transamerica Capital, Inc. Notice to Members 06–06, at 2 & n.2.
practices, to promote just and equitable (‘‘Transamerica Capital’’), dated Mar. 3, 2006; Letter 25 NASD recognizes that customers whose

principles of trade, and, in general, to from The Bond Market Association (‘‘BMA’’), dated representatives receive business entertainment have
protect investors and the public interest. Mar. 3, 2006; Letter from Goodwin Browning & the responsibility to ensure that their
Luna Securities, Inc. (‘‘GB&L’’), dated Mar. 3, 2006; representatives do not engage in improper conduct.
NASD believes that the proposed rule Letter from The ABA Securities Association However, NASD believes that the person providing
change clarifies existing obligations of (‘‘ABASA’’), dated Mar. 3, 2006; Letter from business entertainment cannot disclaim any
jlentini on PROD1PC65 with NOTICES

members with respect to the provision Wachovia Capital Markets, LLC (‘‘Wachovia’’), responsibility for improper conduct that flows
of business entertainment and will help dated Mar. 3, 2006; Letter from Neal E. Nakagiri directly from business entertainment its employee
(‘‘Nakagiri’’), dated Mar. 3, 2006; and Letter from provided when the employee either intended for
prevent conduct by associated persons The Self-Regulation and Supervisory Practices the business entertainment to have that effect or
Committee of the Securities Industry Association could reasonably have judged that the business
21 15 U.S.C. 78o–3(b)(6). (‘‘SIA’’), dated Mar. 7, 2006. entertainment would be likely to have that effect.

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28750 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices

least in part because they lack the address the needed clarification of limitation on gifts and gratuities,
resources to affect decision-making in business entertainment.31 ranging from comments focused on
the manner the IM seeks to prohibit and While NASD recognizes that there increasing the $100 limitation, moving
that such extravagant and extensive will be distinctions among each from a hard figure standard to a
business entertainment is localized member’s written policies and principles-based approach, and
among larger firms and does not occur procedures, NASD concluded that providing guidance on the types of gifts
in rural or small-market areas.26 In member firms were in the best position and incidental expenses that should be
response to this comment, NASD has to determine appropriate limitations included or excluded from any
included a limited exemption for and restrictions on the business limitation.36 The proposed rule change
members whose total business entertainment provided by persons is focused on business entertainment,
entertainment expenses in the course of associated with a member. After which is excepted from the limitation
their fiscal year are below $7,500. The considering the various comments on ‘‘gifts,’’ and NASD is not currently
exemption provides relief from the concerning the definitions of considering amending the rule regarding
recordkeeping requirements of the rule, ‘‘customer’’ and ‘‘business gifts and gratuities.37 NASD has long
as well as many of the specific entertainment’’ in the proposed rule recognized that gifts—in contrast to
requirements regarding written policies change,32 NASD has determined not to business entertainment—are not
and supervisory procedures. NASD amend the definitions substantively.33 incidental to the transaction of business.
believes, however, that the general While several commenters NASD requires that any gifts be de
requirements of the proposed rule recommended that the definition of minimis and sees no reason to depart
change should apply to all members that customer track the definition of from this long-held view. NASD does
engage in business entertainment. In ‘‘accredited investor’’ as defined in SEC not believe that the proposed rule
addition, members that engage in Rule 501 under the Securities Act of change is the appropriate forum for
business entertainment should have 1933, NASD staff does not believe that providing interpretive advice on other
written policies and supervisory the application of the IM should be aspects of Rule 3060; however, NASD
procedures that are designed to detect dependent on any particular level of staff recently published additional
and prevent improper conduct. As assets. While member firms may choose guidance on Rule 3060 regarding gifts
noted above, the proposed rule change to treat certain types of customers or and gratuities. See Notice to Members
does not apply to any member firm that certain types of business entertainment 06–69 (December 2006).
does not engage in any form of business differently for purposes of their written Two commenters expressed concern
entertainment. policies and procedures, NASD believes that the IM shifts the burden of proof
that, for purposes of the proposed rule required under NASD Rules and
Several commenters suggested that change, a broad definition of each is suggested that any change to Rule 3060
NASD identify in the IM the specific appropriate. be done through a separate rule
factors to be considered by firms in With respect to one comment, NASD proposal rather than through an IM.38
developing their written policies and believes that it would be appropriate for As discussed in footnote 2 and the
procedures, such as those identified by a member’s written policies and accompanying text of Notice to
the NYSE in its rule filing. NASD staff procedures to allow case-by-case review Members 06–06, the IM, which is the
does not believe it is necessary to and approval for types of entertainment equivalent of a rule provision, is being
identify specific factors in the IM and not specifically set forth in the proposed in accordance with the
that doing so may undermine the member’s policies and procedures.34 procedures for a proposed rule change
flexibility the proposed rule change is One commenter was concerned that a under Section 19 of the Act.39 Rule 3060
designed to achieve.27 NASD staff will registered representative may not be and IM–3060 are two separate
consider whether additional guidance aware whether a recipient of business provisions, and the burden of proof
concerning the IM is necessary when entertainment is a representative of a under Rule 3060 is not affected by the
announcing the proposed rule change in customer of the firm.35 If a person is proposed IM.
a Notice to Members. entertained in his personal capacity as Several commenters appeared
Several commenters expressed a natural person client, and the firm has concerned that the discussion in
concern that the proposed rule change, information barriers that would prevent footnote 5 of Notice to Members 06–06
including some of the defined terms, the person providing the business would prohibit entertaining friends and
was too vague and may, in application, entertainment from knowing that the relatives. This misconstrues the
prove overly broad. Among other things, person represents another customer as a meaning of footnote 5, which says:
these commenters suggested that the representative, and the person providing ‘‘Members cannot circumvent this
proposed rule change could business entertainment has no proposed interpretive material by
disadvantage firms with more knowledge that such person is a providing business entertainment to a
conservative policies and procedures,28 representative of a customer at the time natural person customer who also is an
effectively require pre-approval of all of the business entertainment, then such employee, agent or representative of a
business entertainment,29 and introduce entertainment would fall outside the customer by claiming that such business
disadvantages among different types of scope of the IM.
36 See, e.g., Letters from ABASA, BMA,
firms and other industry participants.30 Several commenters raised
Debevoise, Evolve, Financial Network, and
Other commenters believed that the suggestions concerning Rule 3060’s Wachovia.
principles-based approach proposed by 37 The one exception is the one noted above with
31 See Letters from BMA, Griffin, NSCP, and
NASD is the appropriate manner to respect to exigent circumstances. Numerous
Wachovia. commenters requested that NASD adopt the exigent
32 See, e.g., Letters from BMA, Financial Network,
circumstances exception from the gift rule similar
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26 Letter from Evolve. FSI, ING, and Transamerica Capital. to the exception that the NYSE has proposed. See,
27 See Letter from BMA. 33 As noted in footnote 2 above, although the e.g., Letters from ABASA, BMA, and Wachovia. As
28 See, e.g., Letters from Hines and ING. language in the definitions has been modified, the discussed above, NASD has determined that it is
29 See Letter from Transamerica Capital. substance and breadth has been retained. appropriate to provide for such an exception.
30 See, e.g., Letters from Dominion and 34 See Letter from Debevoise. 38 See Letters from Financial Network and ING.

Seasongood. 35 See Letter from FSI. 39 15 U.S.C. 78s.

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Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices 28751

entertainment applies only to the as to whether this is sufficient time to have a system in place to give notice
‘natural person’ relationship.’’ What is implement recordkeeping systems to (e.g., via the member organization’s Web
required by footnote 5 is that an comply with the proposed rule change site, a disclosure document, or other
associated person of a member not avoid and, if it is not sufficient, offer reasons appropriate means) to customers that
the application of the firm’s business why and suggest an appropriate use customer representatives that upon
entertainment policies by claiming such implementation period. a customer’s written request, the NYSE
entertainment is ‘‘personal’’ rather than One commenter suggested that NASD member organization will provide
business. Firms are, however, likely to permit a member’s procedures to detailed information regarding the
include policies in their business include prompt review of business manner and expense of any business
entertainment procedures to address entertainment after the event.42 The entertainment provided by the NYSE
personal entertainment of a customer commenter offered an example of a member organization to the customer
representative where there is a family or dinner that unexpectedly exceeds the representative,44 while the NASD’s
some other personal relationship, much firm’s threshold. NASD does not believe proposal does not contain a similar
the way firms do today for gifts and that a member’s policies and procedures notice provision.45 The Commission is
gratuities under Rule 3060 that are not should allow for post-event approval soliciting comment on this difference
in relation to the business of the because there does not appear to be an between the NYSE and NASD proposed
employer of the recipient. effective means of rescinding business rules and specifically whether NASD
Many commenters requested entertainment that has already been should have a similar notification
clarification on whether an provided. Rather, persons associated provision for customers utilizing
‘‘independent’’ review could be with a member who are concerned that customer representatives.
conducted by an independent the cost of an event may exceed the Comments may be submitted by any
department within, or affiliated with, threshold should request approval in of the following methods:
the member.40 NASD has removed the advance to go over the firm’s limit. In Electronic Comments
specific review sections of the proposed such a situation, the member should
impose another dollar limit rather than • Use the Commission’s Internet
rule change because it was redundant of
simply waive the requirement. comment form (http://www.sec.gov/
existing obligations. A member firm’s
Finally, several commenters requested rules/sro.shtml); or
responsibility to supervise business • Send an e-mail to rule-
entertainment exists under Rule 3010(a), that NASD and the NYSE harmonize
their proposed rule changes or, in the comments@sec.gov. Please include File
and a member firm’s responsibility to Number SR–NASD–2006–044 on the
test and verify that its supervisory alternative, include a provision that a
subject line.
policies and procedures are achieving dual member that complies with one of
their intended purpose and complying the SRO’s rule will be deemed to be in Paper Comments
with the federal securities laws and compliance with the other SRO’s rule.43 • Send paper comments in triplicate
regulations and NASD rules exists In filing this Amendment No. 1, NASD to Nancy M. Morris, Secretary,
under Rule 3012(a)(1). has sought to address substantive Securities and Exchange Commission,
Many commenters expressed concern disparities between its rule and that of 100 F Street, NE., Washington, DC
with the breadth of the recordkeeping the NYSE. 20549–1090.
requirement and requested a lengthy III. Date of Effectiveness of the All submissions should refer to File
implementation time for the Proposed Rule Change and Timing for Number SR–NASD–2006–044. This file
recordkeeping requirements.41 In Commission Action number should be included on the
response to these comments, NASD subject line if e-mail is used. To help the
provided an exception from the Within 35 days of the date of
Commission process and review your
recordkeeping obligations for expenses publication of this notice in the Federal
comments more efficiently, please use
under $50. However, as discussed Register or within such longer period (i)
only one method. The Commission will
above, NASD believes that a member’s As the Commission may designate up to
post all comments on the Commission’s
policies and procedures should prevent 90 days of such date if it finds such
Internet Web site (http://www.sec.gov/
persons associated with the member longer period to be appropriate and
rules/sro.shtml). Copies of the
from intentionally avoiding the $50 publishes its reasons for so finding or
submission, all subsequent
requirement by breaking up what are (ii) as to which the self-regulatory
amendments, all written statements
otherwise connected costs or by organization consents, the Commission
with respect to the proposed rule
engaging in frequent, repeated business will:
change that are filed with the
entertainment at amounts below the $50 (A) By order approve such proposed
Commission, and all written
threshold. For example, a firm’s policies rule change, or
(B) Institute proceedings to determine communications relating to the
and procedures may require associated proposed rule change between the
persons of the member to submit all whether the proposed rule change
should be disapproved. Commission and any person, other than
business entertainment expenses for those that may be withheld from the
review; however, the firm may decide to IV. Solicitation of Comments public in accordance with the
record and track only amounts over $50. Interested persons are invited to provisions of 5 U.S.C. 552, will be
NASD also is providing for an effective submit written data, views, and available for inspection and copying in
date of six months following the arguments concerning the foregoing, the Commission’s Public Reference
Commission’s approval of the proposed including whether the proposed rule Room. Copies of the filing also will be
rule change. Members should provide change is consistent with the Act. available for inspection and copying at
the Commission with specific comments The Commission notes that the
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44 NYSE believes that the notice provision would


40 See,
NYSE’s proposed Rule 350A(e) provides
e.g., Letters from Debevoise, Evolve, ICI, encourage the expansion of monitoring and controls
KBW, NRS, Transamerica Capital, and Wachovia. that a NYSE member organization must on business entertainment beyond broker-dealers to
41 See, e.g., Letters from Evolve, Financial the employers of business entertainment recipients.
42 See Letter from T. Rowe Price. See supra note 5.
Network, FSI, H.D. Vest, ICI, ING, Maplewood, and
Transamerica Capital. 43 See, e.g., Letters from BMA and SIA. 45 See supra note 5.

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28752 Federal Register / Vol. 72, No. 98 / Tuesday, May 22, 2007 / Notices

the principal office of the Exchange. All with and operated as a facility of a self- responsibility for each TRF. As such,
comments received will be posted regulatory organization (‘‘Trade the TRFs are facilities ‘‘of NASD and
without change; the Commission does Reporting Facilities’’ or ‘‘TRFs’’). subject to NASD’s registration as a
not edit personal identifying national securities association.’’5
II. Self-Regulatory Organization’s
information from submissions. You At the current time, NASD filed
Statement of the Purpose of, and
should submit only information that proposed rule changes with the
you wish to make available publicly. All Statutory Basis for, the Proposed Rule
Change Commission relating to the
submissions should refer to File establishment of the following TRFs:
Number SR–NASD–2006–044 and In its filing with the Commission, The NASD/Nasdaq TRF; the NASD/
should be submitted on or before June NSCC included statements concerning National Securities Exchange (NSX)
12, 2007. the purpose of and basis for the TRF; the NASD/Boston Stock Exchange
For the Commission, by the Division of proposed rule change and discussed any (BSE) TRF; and the NASD/New York
Market Regulation, pursuant to delegated comments it received on the proposed Stock Exchange (NYSE) TRF. Currently,
authority.46 rule change. The text of these statements all the TRFs are operational. The rules
Jill M. Peterson, may be examined at the places specified governing the operations of these
Assistant Secretary. in Item IV below. NSCC has prepared facilities are contained in NASD Rule
[FR Doc. E7–9742 Filed 5–21–07; 8:45 am] summaries, set forth in sections (A), (B), 4000 and 6100 Series for the NASD/
and (C) below, of the most significant Nasdaq TRF, NASD Rule 4000C and
BILLING CODE 8010–01–P
aspects of these statements.4 6000C Series for the NASD/NSX TRF,
(A) Self-Regulatory Organization’s NASD Rule 4000D and 6000D Series for
SECURITIES AND EXCHANGE Statement of the Purpose of, and the NASD/BSE TRF, and NASD Rule
COMMISSION Statutory Basis for, the Proposed Rule 4000E and 6000E Series for the NASD/
Change NYSE TRF. With the exception of the
[Release No. 34–55770; File No. SR–NSCC–
2007–05] NASD/NYSE TRF, the applicable rules
The purpose of this filing is to clarify permit the TRFs, at the option of their
NSCC’s Rule 7, ‘‘Comparison and Trade NASD member participant, to submit
Self-Regulatory Organizations;
Recording Operation,’’ in order to make the data relating to reported trades to
National Securities Clearing
clear that NSCC may accept transaction NSCC for clearance and settlement.
Corporation; Notice of Filing and
data on behalf of NSCC Members from In order to accommodate the NASD
Immediate Effectiveness of Proposed
Trade Reporting Facilities. and to promote the efficient processing
Rule Change Relating to Its Ability To
Receive Transaction Data From Trade Background of securities transactions, NSCC
Reporting Facilities That Are Facilities NSCC’s Rule 7 permits NSCC in its proposes to clarify its Rule 7, Section 5 6
of a Self-Regulatory Organization discretion to accept transaction data to make clear that it may accept
from self-regulatory organizations transaction data from such TRFs as
May 15, 2007. facilities of the NASD, the applicable
Pursuant to Section 19(b)(1) of the (‘‘SROs’’), as defined in the Securities
Exchange Act of 1934 (and, similarly, SRO. For this purpose, the proposed
Securities Exchange Act of 1934 clarification provides that the TRF be
(‘‘Act’’), 1 notice is hereby given that on from derivatives clearing organizations
registered or deemed registered with the affiliated with and operated as a facility
March 26, 2007, the National Securities of the SRO and that the rules and
Clearing Corporation (‘‘NSCC’’) filed Commodities Futures Trading
Commission). Such data may be operation of the TRF be the subject of
with the Securities and Exchange a rule change of the SRO that has been
Commission (‘‘Commission’’) the provided directly by an SRO or through
subsidiary or affiliated organizations. duly filed with the Commission and is
proposed rule change described in Items effective.7 By allowing NSCC to receive
I, II, and III below, which items have In conjunction with the recent
separation of the National Association transaction data for clearing purposes
been prepared primarily by NSCC. from these facilities with respect to
NSCC filed the proposed rule change of Securities Dealers, Inc. (‘‘NASD’’) and
The Nasdaq Stock Market, Inc. NSCC’s members, broker-dealers will be
pursuant to Section 19(b)(3)(A)(i) of the able to report transactions for both
Act 2 and Rule 19b–4(f)(1) thereunder 3 (‘‘Nasdaq’’), the Commission approved
the establishment by NASD and Nasdaq reporting/regulatory and clearing
so that the proposal was effective upon purposes in a single report to the TRFs.
filing with the Commission. The of the NASD/Nasdaq Trade Reporting
Commission is publishing this notice to Facility, which provides NASD
5 See e.g., Securities Exchange Act Release Nos.
solicit comments on the proposed rule members with an alternative means for
54084 (June 30, 2006), 71 FR 38935 (July 10, 2006)
change from interested parties. reporting transactions in exchange- [SR–NASD–2005–087] (establishment of the NASD/
listed securities effected otherwise than Nasdaq TRF); 54715 (November 6, 2006), 71 FR
I. Self-Regulatory Organization’s on an exchange. Since then, NASD has 66354 (November 14, 2006) [SR–NASD–2006–108]
Statement of the Terms of Substance of established several additional new TRFs (establishment of the NASD/NSX TRF); and 54931
the Proposed Rule Change (December 13, 2006), 71 FR 76409 (December 20,
in conjunction with other registered 2006) [SR–NASD–2006–115] (establishment of the
The purpose of the proposed rule securities exchanges, each of which NASD/BSE TRF).
change is to clarify NSCC’s Rule 7, provides NASD members with alternate 6 Rule 7, Section 5 is proposed to be renumbered

‘‘Comparison and Trade Recording means for reporting transactions in as part of other changes pending pursuant to File
No. SR–NSCC–2006–04.
Operation,’’ in order to make clear that exchange-listed securities effected 7 NASD filed a proposed rule change relating to
NSCC may accept transaction data on otherwise than on an exchange. All of the establishment of the NASD/NYSE TRF for
behalf of NSCC members from trade these TRFs will operate as joint ventures immediate effectiveness, asserting that such
reporting facilities that are affiliated with the relevant exchanges, but NASD, proposed rule change was ‘‘non-controversial’’
jlentini on PROD1PC65 with NOTICES

the ‘‘SRO Member’’ of each such because it was substantially similar to the rules
relating to the other TRFs, which were subject to
46 17 CFR 200.30–3(a)(12). venture, will have sole regulatory notice and comment and approved by the
1 15 U.S.C. 78s(b)(1). Commission. Securities Exchange Act Release No.
2 15 U.S.C. 78s(b)(3)(A)(i). 4 The Commission has modified the text of the 55325 (February 21, 2007), 72 FR 8820 (February
3 17 CFR 240.19b–4(f)(1). summaries prepared by NSCC. 27, 2007) [SR–NASD–2007–011].

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