Thursday, June 30, 2005

NASD and NYSE Try to Come Up with Rules Regulating Entertainment for Mutual Fund Executives

A Wall Street Journal article (here) discusses recent efforts by the NASD and the New York Stock Exchange to come up with rules governing the amount and types of entertainment that brokerage firms can provide to executives at mutual funds.  As discussed in an earlier post (here), the SEC is investigating Fidelity Investments, among other firms, for the receipt of lavish entertainment from brokerage firms seeking a slice of the approximately $1 billion the firm spends annually on commissions for its massive mutual and pension funds.  The Journal article notes that the U.S. Attorney Office in Boston is conducting a grand jury investigation into whether fund executives received not only the usual perks -- free golf, tickets to sporting events, and elaborate dinners at fine restaurants -- but also drugs and trysts with prostitutes.  That's a tough one to expense, and the brokerage firms may have a bit of books-and-records problem if it turns out company funds were used for the latter purposes.

Although the NASD has a $100 limit on gifts, there is no regulation in place on entertainment except that it can be "neither so frequent nor so extensive as to raise any question of propriety."  That's about as helpful as writing an admonition "Don't do anything stupid."  Many firms have their own internal policies, but those can often be avoided or waived.  Among the possible limitations being kicked around at this point is to limit the value of any entertainment to $350 per person without prior approval, an amount sure to cause some New York restaurants to view as unworthy of their appetizer menu.  Gift and entertainment policies are often like tax provisions, viewed as something to be gotten around rather than a guideline to proper conduct.  We'll see if anything concrete comes from the current effort, although a criminal indictment would get everyone's attention in a hurry. (ph)

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