NASD and NYSE Issue Joint Guidance on Accomodating Client Requests for Charitable Contributions

On May 5, 2006, the NASD and NYSE published joint guidance recommending that broker-dealers consider establishing policies and procedures to address potential conflicts of interest that may arise when employees or agents of an organizational customer solicit substantial charitable contributions from broker-dealers. At the heart of the issue is a concern that employees or agents of customers who act in a fiduciary capacity (i.e., employees who are in a position to award business to the broker-dealer) may solicit charitable contributions to seek an improper benefit for themselves individually, rather than the customer organization with which they are affiliated. This could occur, for example, when the solicited charitable contribution satisfies a personal pledge or obligation of the employee soliciting the contribution or otherwise results in some pecuniary benefit to that employee. In this way, the concerns here mirror the conflicts concerns that prompted SRO rules limiting gifts and entertainment to employees of customers.

Consistent with the approach taken by the NASD and NYSE in their recent guidance on gifts and gratuities, the NASD and NYSE’s recommendations in this area are more conceptual and process-based than specific. In particular, the NASD and NYSE suggest that broker-dealers consider establishing procedures that include, depending on the broker-dealer’s structure and manner of charitable giving:

• A requirement for prior approval by the broker-dealer for customer-solicited charitable contributions exceeding a specified amount or frequency;
• An exception process requiring prior approval by an appropriate representative of the customer for requests that exceed a specified amount or frequency;
• A prohibition from linking the amount of charitable contributions given to the actual or anticipated level of business done by the customer soliciting the charitable contribution; and
• Reviews by the broker-dealer of the nature and amount of business received from customers whose employees have solicited charitable contributions.

When developing policies and procedures in this area, broker-dealers may also wish to consider the following limits:

• The contribution should be made in the name of the broker-dealer and be payable directly to the charity;
• The broker-dealer should have no reason to believe that the person requesting the contribution at the customer organization will derive an improper economic or pecuniary benefit as a result of the proposed contribution; and
• The broker-dealer should confirm that the charity does not appear on the Office of Foreign Assets Control’s Specially Designated Nationals List.

View the joint guidance

Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any member of Morgan Lewis’s broker-Dealer Practice, including:

Washington, D.C.
Steven W. Stone
202.739.5453
sstone@morganlewis.com

Beth Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com