Proposed Amendments to Article III, Section 26, of the NASD Rules of Fair Practice Re: Cash and Noncash Concessions in Connection with the Retail Sale of Investment-Company Securities — Last Date for Comments: August 4, 1989
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The NASD requests comments on proposed amendments to subsections (b)(7) — Definitions — and (I) — Dealer Concessions— of Article III, Section 26 of the Rules of Fair Practice. The proposed amendments would revise and simplify the current rule governing dealer concessions paid to members that retail investment-company shares. It would also add a requirement that members keep detailed records of noncash concessions received and paid to their associated persons.
Subsection (1), Article III, Section 26 of the NASD Rules of Fair Practice requires disclosure in the prospectus of an investment company of items of material value, cash and noncash, that members will receive from the underwriters for the retail sale of investment company securities. Descriptions of items that are and are not considered to be of material value are also included in the rule.
The rule also requires that underwriters pay concessions, cash and noncash, to members and not directly to associated persons of members.
When underwriters offer cash and noncash concessions to all members that retail their securities on a uniform basis, a general description of such compensation is permitted in prospectuses. When "special deals" or "special arrangements" are made with individual members that are not made available to all retailing members, the details of the arrangements and the names of the members must be included in the prospectus.
THE PROPOSED AMENDMENTS
The proposed amendments aim to revise and simplify the current rule and to enhance member control over registered representatives by introducing a record-keeping requirement for noncash concessions.
The major requirement of the current rule, prospectus disclosure of compensation, cash and noncash, is retained, as are the disclosure requirements with respect to "special deals."
The requirement that a member must be given the opportunity to take cash in lieu of a noncash concession has been eliminated.
Subsection (b)(7) - Definitions
The current rule is narrowly drawn to apply to relationships between underwriters and other member firms and is headed "dealer concessions." This term was used originally to describe that portion of a front-end sales load reallowed to retail dealers by underwriters.
Currently, with the advent of other methods of financing the cost of sales and sales promotion, utilizing sources other than front-end sales loads, the provisions of the rule need to be broadened to apply to all compensation received by members for retailing investment-company securities.
It is proposed to achieve this by adopting the term "offeror" to broadly define any source of member income and to replace "dealer concessions" with the term "member compensation." The definitional section will also include separate definitions of "cash" and "noncash" compensation.
This subsection is new. It will require members to keep detailed records of the amount and nature of all compensation, cash and noncash, received from offerors for the retail sale of investment-company securities and distribution of such to members' associated persons. This will enhance a member's ability to control and supervise its associated persons.
This subsection is similar in intent to subsection (1)(2) in the current rule. It prohibits an associated person of a member firm from receiving any compensation, cash or noncash, for selling investment-company securities except from the member with which the associated person is affiliated.
This subsection reiterates the prohibition in the current rule against member compensation in the form of securities of any kind.
This subsection reiterates the requirements in the current rule governing disclosure in prospectuses of cash and noncash compensation.
The current rule contains extensive descriptions of items that are and are not of material value. In the Board's opinion, it is not possible to describe all such items in a rule of general application.
The concept of an item of material value has, therefore, been eliminated from the rule. The Board proposes that there will be only two items of compensation that will not require prospectus disclosure provided that they are not conditioned on sales or the promise of sales.
First, the monetary limit on gifts by offerors to associated persons has been increased from $50 to $100 per person per annum. Such gifts must be approved by members but need not be recorded by the member firm.
Second, members may accept compensation from offerors to defray the costs associated with training or educational meetings held at locations appropriate to the purpose of such meetings. Such locations would normally be the offices of offerors or members or facilities located in the vicinity of such offices. No member may realize a profit from the receipt of such compensation.
Subsections 6(a) and 6(b) reiterate exemptive provisions in the current rule. Subsection 6(c) has been rewritten to exclude from the provisions of the rule compensation arrangements between a member firm and its own associated persons.
The NASD encourages all members and other interested parties to comment on the proposed amendments to Article III, Section 26, of the NASD Rules of Fair Practice. Comments should be directed to:
Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006
Questions concerning this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8328.
PROPOSED AMENDMENTS TO ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE
(Note: New text is underlined; deleted text is in brackets.)
(b)(7)["Associated persons of an underwriter," as used in subsection (1) of this section, shall include an issuer for which an underwriter is the sponsor or a principal underwriter, any investment adviser to such issuer, or any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such underwriter, issuer or investment adviser.]
(b)(7)The terms "offeror," "cash compensation" and "non-cash compensation" as used in subsection (1) of this section shall have the following meanings:
"Offeror" shall mean an investment company, an adviser to an investment-company, an underwriter and persons associated with such entities and their affiliates.
"Cash compensation" shall mean compensation received by a member in cash, by check and by electronic means.
"Non-cash compensation" shall mean any form of compensation received by members that is not cash compensation, including but not limited to merchandise, gifts and prizes, and payment of travel expenses, meals and lodging.