NASD Advocates More Disclosure, Less Paper

Broker/dealers and their reps may get a big break on point-of-sale disclosure if the Securities and Exchange Commission heeds recent NASD advice. In a report issued Monday, an NASD task force recommended that b/ds and mutual funds make certain cost and sales practice disclosures on the Web, rather than on paper.

Broker/dealers and their reps may get a big break on point-of-sale disclosure if the Securities and Exchange Commission heeds recent NASD advice. In a report issued Monday, an NASD task force recommended that b/ds and mutual funds make certain cost and sales practice disclosures on the Web, rather than on paper.

It’s something members of both the b/d and fund industries can like. Trade groups for the two industries came out in favor of the Web-based disclosure recommendation, calling it efficient, clear and cost-effective. The Web is certainly a much cheaper option than paper—the medium the SEC is promoting in its current proposed point-of-sale disclosure rule—because it eliminates printing and postage costs. B/ds and reps say they are already struggling under loads of new compliance and disclosure documentation. (Under the NASD proposal, investors would also have the option of requesting paper delivery of the document.)

But some say the NASD’s two-page disclosure document, dubbed the “Profile Plus,” is also simply a better document than those proposed by the SEC. “It discloses information that is more important to investors in a more user-friendly fashion,” said Terry Lister, a longtime lawyer in the b/d industry and general counsel at the Financial Services Institute, an association that represents independent b/ds.

Like the SEC’s proposed disclosure form, the NASD form would include standardized disclosures about sales loads, breakpoints and annual sales costs, as well as any revenue-sharing or differential compensation arrangements a b/d might have with a particular mutual fund. But unlike the SEC form, the NASD form would also include an additional page with information on the fund’s principal investment strategies, risks and long-term performance—“three of the most important things investors need to consider when purchasing a mutual fund,” according to NASD Chairman and CEO Robert Glauber.

B/ds would also be required to link to additional documents, like the fund’s prospectus, and a page that would provide additional details on potential conflicts of interest. This would allow investors to review their investments in as little or as much detail as they wish, and make comparing all funds offered by a particular b/d much easier, Glauber said, in a statement.

Investor advocates aren’t entirely convinced. “It’s a good concept, but it needs work,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “If you look at the piece that’s drawn from the point of sale, it doesn’t give the investor a clear picture of what they pay for the services of the broker versus what they pay for the management of the fund. It doesn’t put cost information in context for the investor,” she said. Roper also said it doesn’t make sense to bury the cost information on the second page, and emphasized that these kinds of disclosure documents would have to apply across all products, not just mutual funds.

How seriously the SEC will take the NASD recommendation is an open question. The SEC reopened the comment period on its disclosure proposal in early March, but the deadline for filing comments was Monday. A final version of the rule is expected to be passed this year. That rule would apply to all sales of mutual funds, 529 plans and variable annuities.

The NASD noted in its report that the document, which consists of two pages, is modeled after the short summary prospectuses, called “profiles,” that the SEC said mutual funds could offer investors in 1998, when it adopted significant changes to disclosure requirements for mutual funds.

Lister says he thinks the SEC is in a hurry to get something passed soon, but that it cannot ignore the work the task force has done. “There are some very influential people on the NASD task force—these are not people that would take their position on the task force, and protecting investors, lightly,” he said. “My belief is that, ultimately, the SEC will lean heavily on the task force report to adopt their proposal.”

In its report, the task force also recommended that the SEC update and modernize the findings that a fund board must make in approving and continuing a 12b-1 plan; list Rule 12b-1 fees in the prospectus fee table solely in a manner that describes their purpose, e.g., as “distribution and shareholder servicing fees,” without reference to a rule number that may be confusing to many investors; mandate better disclosure to investors about the costs of Class B shares and, along with NASD, consider other regulatory issues concerning Class B shares; and reconsider the so-called unified fee proposal previously set forth by SEC staff.

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