* See Memorandum to Board of Governors No. 58-99, Closed-End Investment Company Committee No. 28-99, SEC Rules
Committee No 63-99, and Unit Investment Trust Committee No. 19-99, dated September 7, 1999.
[11368]
November 1, 1999
TO: BOARD OF GOVERNORS No. 66-99
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 39-99
SEC RULES COMMITTEE No. 88-99
UNIT INVESTMENT TRUST COMMITTEE No. 29-99
RE: ICI COMMENT LETTER ON NASDR PROPOSED SALESPERSON
COMPENSATION RULES
______________________________________________________________________________
As we previously advised you, in September, NASDR requested comment on three proposed
rules relating to salesperson compensation.* These three proposals would: (1) prohibit single security
sales contests; (2) prohibit the payment of higher payout ratios to salespersons for the sale of proprietary
investment company products; and (3) require disclosure of accelerated payout arrangements for
salespersons who change firms. In response to NASDR's request, the Institute filed the attached
comment letter, which addresses the first two of these proposals and is summarized below.
Regulating Single Security Sales Contests
The Institute's letter notes that, while we support the policy objectives behind this proposal,
with respect to investment company securities it seems illogical and confusing to have the regulation of
sales contests depend solely upon the form of compensation to be awarded. To provide for the
uniform regulation of compensation arrangements involving investment company securities, the
Institute's letter recommends that the provisions of Rule 2830(l)(5)(D), which regulate non-cash
compensation paid by a member to its associated persons, be extended to apply to cash compensation
arrangements, but only where (1) the arrangement involves payment of cash compensation to an
associated person who has direct contact with investors and directly effects customer transactions and (2)
the compensation arrangement, if based on production, is based on production over a period of less
than one year. The first condition would tailor the rule so as not to disrupt compensation arrangements
that do not result in the "point-of-sale" incentives that NASDR seeks to address in the proposal; the
second condition would ensure that the revised rule not apply to annual compensation arrangements,
which are not the subject of the concerns articulated by NASDR in its proposal. The Institute's letter
also notes that our recommendation regarding comparable regulation of cash and non-cash
compensation arrangements is consistent with comments filed by the Institute with NASDR on previous
NASDR proposals in this area.
Prohibiting Disparate Payout Ratios
With respect to NASDR's proposed rule that would prohibit the payment of disparate payouts
for proprietary and non-proprietary investment company products, the Institute's letter notes that, while
we support the goals of this proposal, we are concerned that it is unworkable as currently drafted. We
therefore recommend that NASDR defer action on this proposal at this time. We additionally note that
our recommendations with respect to the "single security sales contest" proposal would, by substantively
regulating certain compensation arrangements without regard to the nature of the compensation or
whether the securities are proprietary or non-proprietary products, address many of the concerns that
the differential payout proposal seeks to address.
Regulation of Cash Compensation Paid to Broker-Dealer Firms
Finally, the Institute urges NASDR to improve the disclosure to provided by a broker-dealer to
its customers relating to the compensation the broker-dealer firm (as opposed to the individual
representatives) receives in connection with the sale of investment company securities.
Tamara K. Reed
Associate Counsel
Attachment