Gifts & Entertainment (2/2)

NASD Rule 3060 (the gift rule) prohibits any member or person associated with a member from giving, or permitting to be given, anything of value in excess of US$100 per individual per year where such payment is in relation to the business of the recipient’s employer. The rule protects against improprieties that may arise when members or their associated
persons give gifts or gratuities to employees of a customer.

NASD recently issued the Report on Examination Findings Regarding Gifts and Gratuities, which details its findings from a review of more than 40 member firms with respect to compliance with Rule 3060 over a two-year period, and the supervision of firm practices in this area. Some of those findings are highlighted below:

Problematic Data Produced

• Firms lacked the centralized record-keeping systems to assess compliance with Rule 3060. They even did not maintain adequate records of gifts, gratuties, travel & entertainment.

Record-Keeping Deficiencies Observed

• Firms failed to maintain records of gifts & entertainment aggregated by individual recipient and require brokers to provide complete attendee information for all ticketed events.

Systems & Procedures to Comply with the Gift Rule

• Firms generally did not have a separate approval process for gifts and the focus is cost control rather compliance with Rule 3060.
• Firms did not have procedures reasonably designed to ascertain whether entertainment was appropriate.
• Firms did not have adequate controls in place to monitor the manner in which tickets (of sporting events, concerts, etc.) purchased were used (note: a ticket provided to a client is deemed a gift (thus subject to the US$100 limit) if the broker does not attend the event with the client).

In HK, the situation is probably quite similar. The focus of controls over gifts and entertainments is more put on cost management and less on conflict of interest. Some compliance officers may have maintained a register of benefits received by the firm's staff, but they seldom monitor the gifts and entertainment offered by the firm to clients. They may think that this is the job of ICAC!