Most brokers and managers know the rules against churning, unsuitability, unauthorized trading and misrepresentation. But newer regulations involving e-mail and broker compensation can trip up the unwary.
After a series of rule changes, broker e-mail is legal--at least in theory. But the rules are a bit complicated. New NASD rules that went into effect last year and earlier this year allow firms to develop flexible supervisory procedures for the review of correspondence, that is, e-mail. Policies governing e-mail can be tailored to the nature, structure and size of the firm's business. If the policies do not require pre-use review of e-mail, they must provide for the education and training of reps--and the documentation of such training efforts.
E-mail review procedures must be meticulously clear and specific. Among other requirements, review procedures must identify:
* What types of e-mail will be pre-reviewed or post-reviewed;
* The organizational positions responsible for reviewing different types of e-mail; and
* How such reviews will be conducted and documented.
The NASD expects firms to review a sampling of each rep's e-mail, including recommendations to customers. Procedures for reviewing the recommendations must be spelled out. In addition, firms must consider reps' complaint and disciplinary histories, as well as the nature and extent of their training and experience in using electronic communications.
Lastly, in what has been perceived as an unnecessarily broad intrusion, both the NASD and the NYSE have made it clear that firms must prohibit employees from using their home computers or other third-party systems to communicate with clients unless the firms are capable of monitoring such activity.
The rules aim to regulate e-mail according to the nature of the transmission. The content will determine whether the e-mail will be treated as correspondence, advertising or sales literature for compliance purposes.
If the e-mail is being transmitted to either an unknown audience, similar to the target of a newspaper advertisement, or a known audience, similar to the target of a mass mailing, the transmissions clearly have to undergo internal review by a registered principal. In most instances, they must be submitted to the NASD for review and approval as advertising. E-mail that is intended for specific people will usually be classified as sales literature also requiring review by a registered principal and possible NASD approval.
Brokers' communications with chat rooms and electronic bulletin boards are also subject to regulatory oversight. E-mails to electronic bulletin boards have been routinely deemed advertisements, while participation in chat rooms will more often than not be prohibited by the firm.
E-mail hasn't been around that long yet its importance cannot be overstated. As more brokerages stretch to allow such communications, it's best to stay on top of your firm's particular procedures. Make sure you understand them before you press the Send button.
Incentive Programs Starting this year, new NASD rules restrict incentives that might influence a broker to recommend one variable insurance product or mutual fund over another. The rules also aim to limit incentives that tend to compromise the firm's supervisory control of the rep.
In a nutshell, the amended rules generally prohibit member firms and brokers from directly or indirectly offering or accepting noncash compensation (trips and prizes) in connection with the sale of variable insurance or funds. They also prohibit a rep from receiving any cash or noncash compensation in connection with the sale of variable insurance or funds from anyone other than the person's employer. And finally, the rules extend the prohibition against receiving compensation in the form of securities to variable insurance products.
There are two exceptions to the general prohibition on noncash compensation: the de minimis exception, which pertains to gifts of nominal value, and the training and education exception.
The de minimis exception lets reps accept from their employers (not directly from the offerors) gifts that do not exceed an annual amount, currently $100 a person. Another exclusion permits the acceptance of an occasional meal, or theatre or sporting event ticket, but again, only via the firm.
While the acceptance or payment of these noncash items may not be conditioned on reaching a specific sales target, the rule states that these gifts may be given as recognition for past sales or as an incentive for future sales.
Payments by offerors (product issuers) in connection with meetings for the purpose of training or education are also excepted. Brokers are required to obtain their employer's prior approval to attend a meeting, but the approval may not be based on hitting a sales target or some other production-driven incentive. Likewise, an offeror may not use the attainment of a sales target as a precondition for a payment. And a product sponsor's reimbursements may not be used to defray the expenses of a rep's guest.
In the case of this exception, as with real estate, the mantra is "location, location, location." The location of the meeting must be appropriate to its purpose. The NASD states that appropriate locations include the office of the rep or the offeror, or a venue located nearby. A regional location is appropriate if attendees are from several offices. And firms may be able to hold meetings at resort venues in sunny climates without incurring the NASD's wrath provided that the destination passes muster as a regional location.
Conflicts of interest--real or imagined--do nothing to serve your clients. So it's best to ensure that your participation in incentive programs is aboveboard. Check with your firm if you are ever offered something from a vendor that doesn't seem appropriate. Your credibility--and license--are on the line. Be sure to toe it.
E-mail Rules 1) All broker-client e-mail must be: a) pre-reviewed by the firm, b) post-reviewed by the firm, c) spot-checked after being sent, d) either a or b, or e) either a or c.
2) Brokers must take training on the proper use of electronic communications: a) prior to any communications with clients, b) as part of the industry's continuing education requirement, or c) only if e-mails are not pre-reviewed by the firm.
3) Brokers can use their own computers to e-mail clients only if: a) firms are capable of monitoring such activity, b) the communication does not relate to investments, or c) both a and b.
4) Broker-client e-mail is considered: a) correspondence, b) advertising, c) sales literature, or d) either a, b or c, depending on the nature of the transmission.
5) A message posted to an electronic bulletin board is deemed to be: a) an advertisement, b) sales literature, or c) correspondence.
Sales Incentive Rules 1) Brokers can accept the occasional theater ticket or meal: a) from no one, b) via employers only, c) directly from product sponsors with firm approval, or d) from anyone.
2) Brokers can accept gifts: a) never, b) only with a value of $100 or less, c) only with a total value of $100 or less per year, d) via employers only, e) b and d, or f) c and d.
3) Noncash items can be accepted: a) as recognition for past sales, b) as incentives for future sales, c) only when not conditioned on reaching a specific sales target, d) a and b, or e) a, b and c.
4) True or False: Brokers are required to obtain their employer's prior approval to attend a meeting sponsored by an offeror.
5) True or False: A product sponsor's travel and meal reimbursements can be used to defray the expenses of a broker's guest.
E-mail Rules 1) e 2) c 3) a 4) d 5) a
Sales Incentive Rules 1) b 2) f 3) e 4) True 5) False