Broker Non-Cash Compensation Rules Unclear

The NASDs new rules governing non-cash compensation that product sponsors are allowed to give brokers have created some confusion in the industry (see OddLots, November 98, Page 36).Two committees of the Securities Industry Association complained to the NASD in December that the rules need clarification.A letter co-signed by the chairmen of the SIAs investment company committee and self-regulation

The NASDs new rules governing non-cash compensation that product sponsors are allowed to give brokers have created some confusion in the industry (see OddLots, November 98, Page 36).

Two committees of the Securities Industry Association complained to the NASD in December that the rules need clarification.

A letter co-signed by the chairmen of the SIAs investment company committee and self-regulation committee says that portions of the new rules appear to be contradictory.

The rules at one point state that brokers can be reimbursed for attending due diligence meetings as long as their attendance is not preconditioned on the achievement of a sales target or any other incentives, the letter states. On the other hand, the amended rules say it is permissible to send brokers to meetings in order to recognize past performance or encourage future performance.

In their letter, the SIA committee chiefs say they interpret those paragraphs to mean that mutual fund companies can reimburse top fund producers for educational meetings as long as the criteria for inviting the brokers (reaching a publicized, preset sales goal) is not communicated to the brokers in advance.

So long as attendance is not preconditioned on meeting specific sales targets announced in advance, we respectfully submit that a member should be permitted to focus its training on those personnel who are most likely to use the information gained, i.e., top mutual fund or variable product sellers, the letter states.

An NASD spokesperson says the SIA was the only group to send a letter, although other interested groups have called with questions. The NASD is preparing a Q&A document to answer some of the most frequently asked questions about the amendments.

An Investment Company Institute spokesperson says the organization is generally supportive of the non-cash compensation changes, but has not communicated with the NASD since the rule notice was published this past fall.

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