Request for Comments on a Proposed Amendment to the Corporate Financing Interpretation Concerning Sales Incentives for Real Estate Investment Trusts and Corporate Debt and Equity Offerings
TO: All NASD Members and Other Interested Persons
Attn: Corporate Financing Department
LAST DATE FOR COMMENT: June 6, 1986
The Board of Governors of the National Association of Securities Dealers, Inc. has approved a proposed amendment to the Interpretation of the Board of Governors—Review of Corporate Financing, Article III, Section 1 of the NASD Rules of Fair Practice (the Corporate Financing Interpretation) that would prohibit the payment of non-cash sales incentives in connection with the distribution of public offerings.
The purpose of this notice is to solicit public comments on the proposed amendment. The text of the proposed amendment is attached.
BACKGROUND
On March 15, 1985, the NASD published for comment in Notice to Members 85-17 a proposed amendment to Appendix F to Article III, Section 34 of the NASD Rules of Fair Practice that would prohibit a sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member) or a direct participation program (DPP) from directly or indirectly offering or providing non-cash compensation to a member or its associated persons including, but not limited to, travel bonuses, prizes and awards in excess of $50 per person per sponsor.
Non-cash sales incentives are generally organized by direct participation program sponsors and are usually offered to the account executives of member firms. The NASD Direct Participation Programs and Real Estate Committees expressed concern that the emphasis given to non-cash sales incentives undermines the firm's ability to supervise its account executives. The committees recommended that the Board of Governors approve an amendment to Appendix F to prohibit non-cash sales incentives in connection with the distribution of public direct participation programs. The committees also determined that the amendment should not affect a member's ability to establish its own in-house incentive program.
The Board of Governors approved the recommendations of the committees relating to the adoption of the prohibition on non-cash sales incentives. Adoption of the proposed amendment now awaits the final approval of the Securities and Exchange Commission. If approved by the SEC, the amendment would become effective on January 1, 1987.
SALES INCENTIVES IN NON-DPP OFFERINGS
The Board of Governors referred to the Corporate Financing Committee the question of whether the prohibition on non-cash sales incentives should apply to the distribution of real estate investment trusts (REITs) and corporate public offerings. Recent tax proposals and other factors in the real estate market have resulted in a marked increase in the number of REITs filed with the NASD Corporate Financing Department for review. In many cases, REITs are sponsored by members or affiliates of members that previously confined their activities to direct participation programs. As a result, some REITs now offer sales incentive programs that are substantially similar to programs usually offered in connection with DPPs.
While non-cash sales incentives have been utilized with respect to the distribution of REITs, sales incentives have not traditionally been employed in connection with the distribution of corporate debt and equity offerings.
PROPOSED AMENDMENT
The NASD is publishing for comment a proposed amendment to the "Arrangement Factors" section of the Corporate Financing Interpretation that would prohibit an issuer or an affiliate of an issuer (other than a member dealing with persons associated with that member) from directly or indirectly offering or providing a member or person associated with a member non-cash sales compensation or sales-incentive items including, but not limited to, travel bonuses, prizes and awards valued in excess of $50 per person per issuer. In addition, members and their associated persons would be prohibited from accepting non-cash sales compensation. The amendment is proposed to become effective on January 1, 1987, concurrent with the proposed amendment to Appendix F approved by the Board of Governors in connection with public direct participation programs.
REQUEST FOR COMMENTS
The NASD is requesting comments on the proposed amendment prior to final consideration by the NASD Board of Governors, with a specific request for comments as to whether the proposed prohibition should apply to both corporate and REIT offerings, or only to REIT offerings since non-cash sales incentives are not currently utilized with respect to corporate offerings.
All comments received during this comment period will be reviewed by the Corporate Financing Committee, and changes to the proposed amendment will be recommended as deemed appropriate. The Board of Governors will then reconsider the amendment. If the Board approves the amendment or an amended version, it must be filed with and approved by the Securities and Exchange Commission before it becomes effective.
All written comments should be addressed to:
Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
All comments must be received by June 6, 1986. All comments received will be made available for public inspection.
Any questions regarding this notice should be directed to Richard J. Fortwengler, Coordinating Analyst, NASD Corporate Financing Department, at (202) 728-8258.
Sincerely,
Frank J. Wilson
Executive Vice President
Legal and Compliance
Attachment
PROPOSED AMENDMENT TO INTERPRETATION OF THE BOARD OF GOVERNORS
REVIEW OF CORPORATE FINANCING
Article III, Section 1 of the NASD Rules of Fair Practice
* * * *
Arrangement Factors
* * * *
Sales Incentives*
When proposed in connection with the distribution of a public offering of securities, it shall be presumed to be an unfair and unreasonable arrangement for an issuer or an affiliate of an issuer (other than a member dealing with persons associated with that member) to directly or indirectly offer or provide to a member or person associated with a member non-cash sales compensation or sales incentive items including, but not limited to, travel bonuses, prizes and awards in excess of $50 per person per issuer. In addition, it shall be presumed to be an unfair and unreasonable arrangement for a member or associated person to accept such non-cash compensation or sales incentive items.
* The provision on sales incentives is proposed to be included at page 2031 of the NASD manual.