1 See Memorandum to Closed-End Investment Company Members No. 22-98, SEC Rules Members No. 58-98 and Unit
Investment Trust Members No. 15-98, dated July 29, 1998.
2 NASD Notice to Members 98-75 (September 1998).
3 See Memorandum to Closed-End Investment Company Members No. 26-97, SEC Rules Members No. 66-97 and Unit
Investment Trust Members No. 35-97, dated September 10, 1997. The only difference is that, as the Institute had suggested,
the NASD revised the proposal to clarify that an NASD member may contribute to a non-cash compensation arrangement of
a non-member, if that arrangement complies with the conditions of the rules.
[10349]
October 1, 1998
TO: SALES FORCE MARKETING COMMITTEE No. 19-98
RE: NASD NOTICE TO MEMBERS DESCRIBING NEW NON-CASH COMPENSATION
RULES
______________________________________________________________________________
We recently informed you that the Securities and Exchange Commission had approved the NASD’s
proposed amendments to its rules governing non-cash compensation.1 As was anticipated, the NASD
has issued a Notice to Members that describes the amended rules and how they will be implemented,
and sets forth the text of the rules.2 A copy of the Notice is attached.
The amended rules are nearly identical to the proposed version the SEC published for comment
last year.3 As previously indicated, the rules prohibit, with certain exceptions, NASD members and
persons associated with members from directly or indirectly paying or receiving any non-cash
compensation in connection with the sale of investment company securities. The exceptions are: (1)
gifts of up to $100 per associated person annually; (2) an occasional meal, ticket to a sporting event or
theater, or comparable entertainment; (3) payment or reimbursement for training and educational
meetings held by a broker-dealer or mutual fund for the associated persons of broker-dealers, if certain
conditions are met; (4) in-house sales incentive programs of broker-dealers for their own associated
persons and sales incentive programs of mutual funds for the associated persons of an affiliated broker-
dealer, subject to certain conditions; and (5) contributions by a non-member or other member to a
broker-dealer’s permissible in-house sales incentive program, or by a member to a non-member’s
permissible in-house sales incentive program.
Under the amended rules, both cash and non-cash compensation arrangements (with certain
exceptions) are subject to recordkeeping requirements. The records must include the names of the
offerors, the names of the associated persons, the amount of cash, the nature and, if known, the value of
non-cash compensation received. The attached Notice states that records regarding the “nature” of
non-cash compensation should indicate whether the compensation was received in connection with a
sales incentive program or a training and education meeting. According to the Notice, records for a
training and education meeting, for example, should demonstrate that the meeting complied with the
requirements of the rules (i.e., they should include date and location, the fact that attendance is not
conditioned on the achievement of a previously specified sales target, etc.). Only cash compensation
arrangements are subject to prospectus disclosure requirements.
The amended rules will become effective on January 1, 1999. As of that date, any new sales
incentive programs must comply with the new requirements. Existing sales incentive programs that are
ongoing as of January 1, 1999 may continue under the old rules for no more than six months from that
date. Non-cash sales incentives or awards earned by registered representatives under existing programs
may be received by the registered representative for a period of up to 12 months following the six-
month implementation period.
Frances M. Stadler
Deputy Senior Counsel