Christmas is coming, again the season for receiving the festival gifts. Many firms have laid down a formal gift & entertainment policy to manage the conflict of interest. The typical requirements include setting a monetary threshold, compliance review and record keeping. Provision of excessive gifts & entertainment in return for a secret commercial benefit is highly concerned by regulators.
NASD recently fined Jefferies & Company, Inc. US$5.5m for providing more than US$1.6m in improper gifts and entertainment to equity traders employed by FMR Co., Inc., an investment advisor to the Fidelity family of mutual funds, between Sept 2002 and Oct 2004. The improper gifts to those Fidelity traders exceeded US$600,000 and included private chartered air travel, non-promotional sports-related merchandise and expensive bottles of wine. The impermissible entertainment totaled more than US$1m and included lavish trips, private chartered flights, expensive hotel accommodations, weekend golf outings and tickets to the 2004 Super Bowl.
NASD found that in 2002, Jefferies hired Kevin Quinn as an institutional sales trader in its Equity Division and agreed to pay him an annual base salary of US$4m in 2002 and 2003, and US$4.75 in 2004. The firm also provided Quinn with an annual travel and entertainment budget of US$1.5m to be used by Quinn and his team to entertain Fidelity traders to obtain order flow for the Jefferies Equity Division. Jefferies routinely and repeatedly reimbursed Quinn for gifts prohibited by NASD rules, which Quinn provided to Fidelity traders. NASD rules limit the value of gifts that firms and associated persons may give to customers of the firm - such as Fidelity and its traders - to US$100 per individual recipient per year.
NASD also found that Scott W. Jones (Quinn's former supervisor) routinely approved and reimbursed Quinn for entertainment that was inappropriate and excessive. Jefferies failed to establish and maintain an adequate supervisory system, including written procedures, to ensure reasonably that Quinn did not use the budget in violation of NASD rules.
The scale of improper activities in this case was quite massive and alarming. I would suppose there was no compliance monitoring at all.
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