NASD Rule 2830 - Investment Company Securities

Offices of sub-adviser holding training and education meeting is permissible location under Rule 2830(l).

 



September 28, 2006

Via First-Class Mail
Steven K. McGinnis
Loring Ward Securities, Inc.
3055 Olin Avenue
Suite 2000
San Jose, CA 95128

Re: Guidance Regarding Rule 2830(l) - International Due Diligence Trip

Dear Mr. McGinnis:

I am responding to your letter dated March 15, 2006 in which you request interpretive advice regarding the application of Rule 2710(d) with respect to an international due diligence trip being sponsored by LWI Financial, Inc., doing business as Loring Ward Advisor Services, a registered investment adviser, and Loring Ward Securities, Inc., an NASD member firm ("Loring Ward"). Specifically, you seek limited guidance on whether the proposed location of a meeting in connection with that trip is appropriate.

Background and Question

Based on your letter and our subsequent conversations, I understand the facts to be as follows: In 1999, Loring Ward created two of its six affiliated mutual funds - SA International High Book to Market, and SA International Small Company Funds, each consisting wholly of internationally-based investments. You note that these two funds have approximately $542,882,353 and $191,436,460, respectively, and each is sub-advised by Dimensional Fund Advisors ("Dimensional"). In addition, you note that Loring Ward utilizes a third mutual fund, LWAS/DFA International High Book to Market Portfolio, which is directly advised by Dimensional.

Per your letter, Loring Ward has determined to invite a limited number of their investment advisory representatives ("IARs") and a limited number of unaffiliated advisers ("RIAs") to conduct a two-day due diligence trip to the offices of Loring Ward's sub-adviser's international trading offices in London, United Kingdom. You note that three of your firm's representatives and nine unaffiliated investment advisers who will be included among the invitees are also licensed as representatives of other NASD members. In addition, you note that Loring Ward will be paying for or reimbursing the cost of transportation and attendance of invited representatives to the meeting.

Per your letter, you state that Dimensional is one of the leading practitioners of advanced Modern Portfolio Theory, on which Loring Ward's investment philosophy is based. Further you note that Dimensional's London office is its center for all foreign securities research and trading other than the Far East investments which are managed by the firm's Sydney offices. At the London location, you believe that the primary purpose of the education trip will be for attendees to observe first-hand the process that Dimensional uses to determine investments ranging from the London Stock Exchange to the Ljubljana Exchange, and to be taken through the series of steps followed by Dimensional, from modeling the exchange, identifying appropriate investments for model and achieving best price and execution globally. Dimensional will be holding the training and education meeting by having its staff actively participate in presenting agenda items that relate to its market research, asset class investing, and international equity strategies.

In your conclusion, you note that you believe the trip is not considered non-cash compensation because it meets the exceptions set forth in NASD Rule 2710(d)(2)(C)(i) through (iv)1:

 

(i) The attendance on the trip is not conditioned on the achievement of a sales target or any other incentive. The attendees are pre-selected for attributes relating to the amount and mix of their existing portfolios' assets;
(ii) The meeting will be held in the offices where the determination and execution of off-shore investments actually occur and the meetings will be led by the individuals who conduct such transactions;
(iii) The payment and reimbursement will only be for transportation to and attendance at the meeting. Guests and/or additional days that may be taken by attendees will not be paid or reimbursed; and
(iv) No past or future sales targets are applied to the trip. The attendees remain free to use, or not use, any of the products of either Loring Ward or Dimensional.

 

For these reasons, you state that you believe that the meeting and the associated trip are not considered non-cash compensation as defined by Rule 2710.

 

Response

During conversations, we discussed that the non-cash compensation issues raised by the proposed trip were more appropriately subject to NASD Rule 2830(l) (Investment Company Securities, Member Compensation).

While NASD Rule 2710 (Corporate Financing Rule - Underwriting Terms and Arrangements) does contain provisions governing the payment of non-cash compensation in paragraph (i), these provisions generally relate to payments or offers of payment of non-cash compensation in connection with the sale and distribution of a public offering of securities.

Rule 2830(l)(5) (Investment Company Securities, Member Compensation) provides that no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in that subsection. Certain non-cash compensation arrangements are permitted, subject to certain conditions being satisfied. One such permitted arrangement is detailed in Rule 2830(l)(5)(C), which permits the payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education (italics added) of associated persons of a member, provided that: 

 

(i) the record keeping requirements outlined are satisfied;
(ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by Rule 2830(l)(5)(D);
(iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
(iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
(v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by Rule 2830(l)(5)(D).

 

Based on our discussions and your letter, you represent that the non-cash compensation to be paid by Loring Ward will satisfy all the conditions outlined above. However, you seek limited guidance on whether the location of the proposed meeting, the international trading offices in London, United Kingdom, of Dimensional, is appropriate.

Rule 2830(b)(1)(E) defines the term "offeror" to mean an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities.

You note in your letter that Dimensional is a sub-adviser to certain affiliated mutual funds created by Loring Ward. Therefore, we believe that Dimensional, as a sub-adviser, can be considered an "offeror," under Rule 2830. Further, we note that the exception in Rule 2830(l)(5)(C)(iii) applies to the location of a particular offeror's offices, specifically the offices of the offeror that is holding the meeting. Based on the facts you have presented, Dimensional is holding the meeting by having its staff actively participate in the agenda items to be presented at such training and education meeting. Therefore, Dimensional's London offices would be an appropriate location under Rule 2830(l)(5)(C)(iii) for the proposed training and education meeting.

Please note that the views expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Governors of NASD. This letter responds only to the limited question of whether the proposed location would be appropriate under Rule 2830(l)(5)(C) based on the facts as you have described them, and does not address any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved. We note in particular that this letter does not address whether the proposed meeting otherwise complies with the requirements of Rule 2830(l)(5)(C). In addition, you should be aware that any changes in the facts as you have described them will require further consideration and may cause us to reach a different conclusion.

Sincerely,

Kosha K. Dalal
Associate General Counsel

cc: Debra J. Pohlson, Acting District Director, District 1

 

1 The non-cash compensation provisions referenced in your letter are found in Rule 2710(i)(2)(C)(i) through (iv).