Interpretive Letter to Name Not Public
November 18, 1999
This letter responds to your request to Mr. Larry Kosciulek of NASD Regulation, Inc. regarding the application of NASD Rule 2830(1)(5)(D) to sales contests involving sales personnel who perform marketing services on behalf of certain proprietary funds of [Broker/Dealer] a registered broker-dealer and NASD member.
Your letter makes the following representations. Broker/Dealer serves as the principal underwriter for X registered investment companies comprising approximately X investment portfolios (the "Proprietary Funds"). An affiliate serves as investment manager to the Proprietary Funds and receives management fees as compensation. Broker/Dealer is compensated for its services from Rule 12b-1 fees, front-end sales charges and contingent deferred sales charges it receives from the Proprietary Funds. Broker/Dealer employs sales personnel who perform marketing services on behalf of the funds ("Wholesalers"). These Wholesalers promote the Proprietary Funds to retail broker-dealers ("Retail Brokers"). The Wholesalers do not sell Proprietary Fund shares directly to the public.
Broker/Dealer proposes to organize a sales contest pursuant to which it would offer non-cash compensation to its Wholesalers who successfully meet individualized sales targets that are based on seven separate sales targets for sales of investment company and non-investment company products and services. For example, Broker/Dealer would set sales targets in categories such as total sales volume of investment product and managed account assets brought to Broker/Dealer by the Wholesaler. One of the contests’ proposed categories is a target for the total dollar amount of sales of shares of a group of approximately ten Proprietary Funds. The Wholesaler would be required to meet the sales target in each of the seven categories or achieve 110% of the sales targets in four categories and 75% in the other three.
Your letter states that you believe that Rule 2830 should not apply to a non-cash compensation arrangement with Wholesalers, since such employees are not involved in point-of-sale activities. Your letter states that the contest would not create any point-of-sale incentives for the Wholesalers or Retail Brokers. The Wholesalers educate Retail Brokers about the Proprietary Funds, provide information about investment performance and shareholder services, and provide other pertinent information. Your letter states that the contest would not have an effect on the incentives for Retail Brokers who sell to customers because the Retail Brokers would receive no additional compensation as a result of the contest. Your letter also recognizes that the NASD has stated that the non-cash compensation rules do apply to officers and managers of members, but indicated that the policy underlying this position is that such individuals have the ability to influence Retail Brokers’ sales efforts. Your letter states that this concern would not be present in the case of this contest because Wholesalers have no particular influence over a Retail Broker’s sales efforts.
The contest represented in your letter would not be permissible under requirements of Rule 2830(l)(5)(D). As referenced in your letter, the response to Question #10 in Notice to Members 99-55 ("NTM 99-55") states that the non-cash compensation rules apply to any associated person, including officers and managers of members, if they receive, directly or indirectly, such compensation in connection with the sale and distribution of variable contracts or investment company securities. This would include other persons not involved in "point of sale" activities, such as the Wholesalers described in your letter. In addition, the response to Question #12 of NTM 99-55 states that the equal weighting and total production requirements of Rule 2820(l)(5)(D) would apply to insurance wholesalers that are provided stock options for reaching certain production levels. These requirements would apply to non-cash compensation incentive programs as well. Therefore, any non-cash compensation sales contest for Wholesalers must comply with the requirements of Rule 2820(l)(5)(D) and must be based on the entire universe of products that the Wholesalers are authorized to market. It is important to note, however, that the non-cash compensation rules do not restrict a member from conducting an internal sales meeting with its associated persons, where attendance at that meeting is not preconditioned on sales targets or other related sales criteria.
I hope this is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues that you have raised based on the facts you have described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved.
Stephanie M. Dumont
Assistant General Counsel