Beginning next year, there won't be many more "due diligence" meetings being held in exotic resort locales.
A decade after they were first drafted, the NASD's recommended changes in noncash compensation rules were approved by the SEC in July and go into effect Jan. 1, 1999. The new rules cover product-specific incentives and other perks offered by mutual funds and insurance companies (see OddLots, May '95 and November '94 RR).
The changes, amendments to NASD Rules 2820 and 2830, are intended to restrict noncash incentives that might compromise a broker's requirement to "match the investment needs of the customer with the most appropriate investment product," the NASD says in a notice to members. Noncash compensation is defined as merchandise: gifts and prizes, travel expenses, or meals and lodging offered to brokers as an incentive to sell certain products. The revisions require due diligence trips to be held in a location "appropriate to its purpose," a city in which the mutual fund company has offices, for example.
More specifically, the revisions also: 1) prohibit brokers from receiving securities as compensation; 2) require detailed records of all compensation, both cash and noncash; and 3) limit gifts to brokers to a maximum value of $100 annually, such as an occasional meal, ticket to a sporting event or theater. Gifts from product sponsors should not be "so frequent nor so extensive as to raise any question of impropriety," the NASD says. Brokers cannot be required to meet preset sales targets to receive these perks, but can receive them as rewards after the sale has been made.
The rules don't directly apply to proprietary products. Firms have more leeway in incenting their employees, versus outside sponsors, although incentives for selling a specific fund or annuity are banned. But a firm could continue to offer incentives for overall sales of a proprietary fund family, for example.
The NASD continues to develop rules regarding cash compensation arrangements, such as the undisclosed revenue-sharing deals between fund companies and dealers.
For more details on the noncash compensation rule, check the NASDR Web site (www.nasdr.com) and click on "members check here," then "notices to members" and 98-75.
