In the wake of high-profile
accounting scandals such as what took place with Enron and
WorldCom, corporate governance has become the credo that much of
American business now is forced to follow. And for meeting planners
in the financial and insurance industries, the concept is
particularly critical.
Not only must planners ensure they are
in compliance with the financial controls their companies
implemented following the federal Sarbanes-Oxley Act of 2002 (see
“Making Sense of SOX”), they also must adhere
to rules and regulations laid down by the Washington, D.C.-based
National Association of Securities Dealers, which is now
considering two measures that could have far-reaching implications
for business entertainment and training/educational meetings.
The long arm of
NASD
With an annual budget of $500 million
and 2,000 employees, NASD is the biggest private-sector provider of
regulatory services in the world. Working at the behest of the
Securities and Exchange Commission, it oversees thousands of
brokerage firms and registered securities dealers nationwide and
writes the rules that govern their activities. In the past several
years, it has stepped up its scrutiny and imposed a slew of
noncompliance disciplinary actions -- generally in the form of
steep fines.
This past April, to cite a recent
example, Houston-based American General Securities Inc., a member
company of American International Group, was fined $1.1 million.
Among NASD’s charges was that AGS allowed certain mutual fund
companies to participate in its “top producer or training
meetings.” For all of 2004, NASD collected $102 million in
fines.
MAKING SENSE OF SOX
“Meeting planners shouldn’t feel threatened by SOX,” says Peggy Hemphill (right), founder of West Hartford, Conn.-based management consulting company Your Corporate Source, “but they should be prepared for it.” What follows is some of Hemphill’s best advice for coping with the ruling.
Document requests for proposal. Create backup for an audit. If a company does not use an official RFP form, document the process with e-mails. Planners need to show they have a competitive bid process in place and should get at least three RFPs into the pipeline. And be prepared to answer, “Why did you choose that provider over the others?”
Know the financials. Who asked for the meeting to be planned? Who assigned the budget and approved it? Planners have to be able to show where the authorization came from to proceed with the spend.
Involve legal. Find out what the company’s standard terms and conditions are and what the internal process is on contract review and execution. Third parties should sign contracts on the company’s behalf only if it has been agreed upon by legal counsel and there is a statement that binds them to the company’s rules.
Be ethical. Who is paying for the site visit? Who is getting the gift or points for booking with a certain supplier? These are things that raise red flags. In lieu of a formal company policy, the planner should advise suppliers that they will not accept perks. -- C.A.S.
Updating the rules
Passing muster with NASD means knowing
the rules, and planners would do well to study the two new proposed
measures before either becomes mandatory. (The rules have to be
approved by the SEC and officially voted on. That process,
according to a NASD spokesperson, could last well into 2007.)
Proposed change to Rule
3060. On Jan. 23, 2006, NASD issued a proposed change to
reform the gift and entertainment rule and gave its member firms
one month to comment. On April 11, the association filed its
official rule change proposal with the SEC, where it remains
awaiting passage. If the change to Rule 3060 becomes law, firms
will have to adopt written policies and procedures, including what
forms of business entertainment are and are not appropriate;
maintain detailed records; establish internal company standards for
approval and documentation of business entertainment expenses;
establish standards for supervision of the policy, and periodically
monitor themselves for compliance.
The proposed change defines business
entertainment as “entertainment provided to an employee in the form
of any social event, hospitality event, charitable event, sporting
event, entertainment event, meal, leisure activity, as well as any
transportation or lodging accompanying or related to the event.” It
also states that anything of value given to an employee that is
“not defined as business entertainment is a gift.” As such, it is
subject to the existing $100 annual gift limit per recipient.
However, the proposed rule also notes
there will be no change to the July 1999 Notice to Members No.
99-55, which
states that “promotional items of nominal value that display the
offerer’s logo, such as golf balls, shirts, towels and pens, do not
count toward the $100 gift limit.”
Washington, D.C.-based Brant Brown,
assistant general counsel for NASD, says the proposal aims to put
the onus on firms. “Rule 3060 had previously said that business
entertainment would not be considered a gift or gratuity under
certain circumstances,” he notes. “Well, a few years ago there were
all sorts of things in the press about the abuses of business
entertainment, and our members were coming to us asking for
guidance, and that’s what this proposal is about.”
The new rule does not include any list
of dos and don’ts; neither does it set any activity-specific dollar
limits with regard to entertainment.
It is anyone’s guess, says Brown, when
the SEC will issue its ruling. However, once it is received, firms
will have one year from the date of the commission’s approval to
implement record-keeping systems to comply with the proposed
change. Highlights of note:
* The ruling includes an exception from
record keeping for expenses of $50 or less, but says companies need
to establish policies that will prevent employees from
intentionally avoiding the $50 requirement by breaking up connected
costs. For example: A $45 dinner plus a $45 limo ride to get to the
restaurant should be considered part of the same expense and
reported as such.
* To alleviate concern that an event
might exceed the set dollar limit outlined in a company’s policy,
the policy should specify the process by which an employee should
seek approval to go over the limit, prior to the event. But in such
a situation, the company “should impose another dollar limit,
rather than simply waive the requirement,” according to the rule
change.
Proposed expansion of Conduct
Rule 2311. On June 9, 2005, NASD filed an amendment to
expand the 1999 ruling, which prohibits contests that award
non-cash incentives, such as cruises, sporting events and concert
tickets, by firms that encourage the sale of one mutual fund,
variable insurance, annuity or securities over another. But there
were loopholes. If adopted as written, the new rule would eliminate
all previous exceptions and extend to all securities. It would also
put limitations on educational and training meetings, including
requiring them to take place in the United States.
NASD then gave its member firms until
Aug. 5, 2005, to comment. Many voiced their concerns, including
John Polanin Jr., chairman of the New York City-based Securities
Industry Association and chairman of the self-regulation and
supervisory practices committee. In a letter to Barbara Sweeney,
senior vice president and corporate secretary of NASD, Polanin
asked that NASD reconsider and clarify its position, because if
adopted as written, Rule 2311 could cause unintended consequences
by eliminating legitimate employee benefits that are not
incentive-based.
“Many firms may offer their employees
an opportunity to participate in traditional team-building
activities, such as trips or holiday gatherings,” Polanin noted.
“It is unclear, however, whether this type of activity would be
permissible under the new rules. Since [such activities] present
little risk of conflict or investor harm, we respectfully request
that NASD clarify that firms could continue to engage in this type
of practice.”
With the commentary period for the new
Rule 2311 having expired last year, the ball is squarely back in
NASD’s court. Insiders say it’s hard to predict how the association
will respond. According to a spokesperson, NASD currently is
reviewing the feedback it has received. When it does issue a
decision, one of three things can happen: NASD can take back its
proposal to expand Rule 2311 altogether, it can incorporate
suggestions made by its members or it can put out an entirely new
proposal -- and the cycle will begin all over again.