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FINRA

FOR RELEASE:
CONTACTS:
Thursday, August 7, 2003
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304

 

NASD Proposes Disclosure of Mutual Fund Compensation Arrangements

Washington, DC — NASD has proposed for comment a rule that would expand the disclosure of two types of compensation paid for the sale of mutual fund shares. Disclosure of these practices would alert investors to the fact that a brokerage firm or its registered representatives may have financial incentives to recommend particular funds.

 

Today's announcement is an important part of a comprehensive review of mutual fund sales practices of securities firms. NASD's heightened scrutiny in the area of mutual funds and variable annuities has resulted in over 75 disciplinary actions since the beginning of 2001. Most recently, the Report of the Joint NASD/Industry Task Force on Breakpoints recommended a number of reforms to ensure that investors purchasing mutual fund shares with front-end loads receive the discounts to which they are entitled. NASD will continue to work with the Securities and Exchange Commission and industry groups to implement these important initiatives and to identify and address other concerns involving mutual fund sales practices.

 

NASD's Board of Governors approved a proposal for disclosure of two types of compensation paid for the sale of mutual fund shares. The first type of compensation consists of cash payments to brokerage firms in return for shelf space. The second is the payment of a higher compensation rate to registered representatives for selling certain funds.

 

The proposal would require firms to disclose the nature of certain compensation arrangements in writing when the customer first opens an account or purchases mutual fund shares. The proposal also would require member firms to update this information twice a year and make it available on their Web Sites.

 

"When buying mutual funds, investors have the need and right to know about incentive compensation received by a member firm and its registered representatives which often differs from fund to fund," said Robert R. Glauber, Chairman and CEO of NASD. "These important reforms will ensure that investors have this information before they invest."

 

The proposed amendments would require a securities firm to disclose:

  • that information regarding a fund's fees and expenses may be found in the fund's prospectus;

  • that the fund's policies regarding selection of securities firms (such as soft dollar and directed brokerage arrangements) are described in the fund's statement of additional information, which an investor may request;

  • if applicable, that the member receives cash payments from mutual funds and their affiliates other than the fees disclosed in a fund's prospectus fee table, and the nature of this compensation;

  • a list of mutual fund firms that made these payments to the firm in descending order based upon the total amount of compensation received from each firm; and

  • if applicable, that registered representatives receive different rates of compensation for different investment company products, the nature of these arrangements, and the names of the investment companies favored by these arrangements.

NASD intends to request public comment on the proposal. Details of the proposal will be made available in a Notice to Members.

 

A part of its ongoing effort to educate investors, NASD has issued a number of alerts outlining the costs involved in purchasing various mutual fund classes and how to determine which share class may be appropriate. Most recently, NASD issued the following alerts:

 

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.