Interpretive Letter to Robert L. Winston, American Funds Distributors, Inc.
September 9, 1999
Robert L. Winston
Senior Vice President
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071
Dear Mr. Winston:
This letter responds to your letter dated August 10, 1999, in which you requested guidance with respect to NASD Rule 2830(l), which regulates non-cash compensation arrangements for the sale and distribution of investment company securities. Based on your letter and my telephone conversation with you, I understand that American Funds Distributors, Inc. in the course of a year typically invites 800-1000 registered representatives of NASD member firms to a due diligence training meeting generally at your Los Angeles or New York offices. You represent that these meetings are for professional, educational purposes, and that an attendee typically receives six to eight hours of continuing education credit. You also represent that these meetings comply with the requirements for training and education meetings under Rule 2830(l)(5)(C).
You state that your travel department directly handles attendees’ airline, hotel and meal expenses in accordance with your firm’s guidelines. You request further guidance, however, with respect to the payment of personal travel expenses incurred by attendees, which typically include taxi fares, tips and occasionally a meal the night before the meeting. You estimate that, last year, your average reimbursement of personal travel expenses was approximately $85 per attendee.
You note that some of your dealers have interpreted Question #15 of our Questions and Answers Relating to Non-Cash Compensation Rules (Notice to Members 99-55) as precluding your reimbursing their registered representatives directly for their personal out-of-pocket expenses. Question #15 indicates that an offeror, such as a mutual fund or its adviser, may reimburse a registered representative’s "prospecting trip" expenses. However, the payment must be made through the member, must comply with the recordkeeping requirements of Rules 2820(h)(3) and 2830(l)(3), and with respect to investment company securities, must comply with the prospectus disclosure requirements of Rule 2830(l)(4).
Although Question #15 does govern the reimbursement of expenses related to a registered representative’s "prospecting trip," that question does not apply to the reimbursement of expenses incurred while attending a training and education meeting that meets the requirements of Rule 2830(l)(5)(C). Rule 2830(l)(1) provides that, "[e]xcept as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated." Rule 2830(l)(5)(C) allows associated persons to receive from offerors payments or reimbursements of expenses incurred in connection with attending a training and education meeting that satisfies the requirements of that rule provision. The rule allows offerors to make such payments directly to the associated person that incurs these expenses, so long as the member satisfies the recordkeeping requirements of Rule 2830(l)(3). Accordingly, Rule 2830(l)(5)(C) provides an exception to the general prohibition in Rule 2830(l)(1) of associated persons receiving compensation from anyone other than the member with which they are associated.
Question #15 concerns payment of expenses incurred in connection with registered representative "prospecting" or sales trips, which would not qualify as training and education meetings under Rule 2830(l)(5)(C). Accordingly, a mutual fund offeror that wishes to reimburse a registered representative’s prospecting trip expenses must direct the payment through the member, the member must keep appropriate records, and the offeror’s fund prospectus must disclose the details of the arrangement.
I hope this letter 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.
If you have any questions, please do not hesitate to call me at (202) 728-8233.
Joseph P. Savage
Advertising/Investment Companies Regulation