©2005 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
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June 22, 2005
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 23-05
SEC RULES COMMITTEE No. 40-05
SMALL FUNDS COMMITTEE No. 21-05
UNIT INVESTMENT TRUST COMMITTEE No. 9-05
RE: NASD PROPOSAL ON SALES CONTESTS AND NON-CASH COMPENSATION
NASD has issued a Notice to Members seeking comment on proposed rule changes that
would (1) expand current prohibitions on non-cash compensation to cover the sale and
distribution of any security or type of security and (2) prohibit all product-specific cash and
non-cash “sales contests,” as defined by a proposed new rule.1 The Notice is summarized
below.
Comments on the proposal are due by August 5th. The Institute will hold a conference
call on Thursday, June 30th at 3:30 p.m. Eastern time to discuss the proposal and our comment
letter. Details regarding the call will be forthcoming by email. In the meantime, please
provide any comments to Tami Salmon at 202/326-5825 or tamara@ici.org or to Frances
Stadler at 202/326-5822 or frances@ici.org.
The Notice describes current NASD rules prohibiting non-cash compensation, which
apply only to specified products, including investment company securities. They provide a
series of exceptions. One such exception permits an NASD member to hold an internal non-
cash sales contest with respect to the sale of a single type of security, such as investment
company securities, provided that the contest is based on total production and the credit for
each type of security sold is equally weighted.
Under NASD’s proposal, a new rule (Rule 2311) would replace the existing non-cash
compensation rules. It would apply to the payment or receipt of non-cash compensation and
the sponsoring or participation in any sales contest with respect to the sale of distribution of any
security or type of security. Proposed Rule 2311 would contain several exceptions similar to
those in the current non-cash compensation rules, with some changes intended to improve
clarity and NASD members’ understanding of the rules.
1 NASD Notice to Members 05-40 (June 2005) (“Notice”). The Notice is available on NASD’s website at
http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_014347.pdf.
2
Unlike the current rules, however, proposed Rule 2311 would ban all product-specific
sales contests. The rule would define “sales contest” as “any contest among associated persons
for cash or non-cash prizes that is preconditioned on the achievement of a sales target within a
defined period of time with respect to the sale or distribution of any security or any type of
security.” The Notice expresses NASD’s view that any sales contest that favors one security
(e.g., a proprietary investment company) or type of security (e.g., investment companies or
stocks) has “the potential to create an incentive to engage in sales conduct unrelated to the best
interests of customers.”
According to the Notice, the definition of sales contest would permit broker-dealers to
hold a contest based on total production on the sale of all securities, provided certain records
were kept. In addition, it would allow the payment of cash bonuses to registered
representatives who attained a higher total production across all securities. The Notice seeks
comment on the proposed definition.
The proposal also would eliminate an existing provision that allows non-member
companies or other members to contribute to a non-cash arrangement between and member
and its associated persons, or contributions by a member to a non-cash compensation
arrangement of a non-member, provided that the contribution meets the requirements for such
arrangements. Comment is requested on whether there is any need to retain this provision in
some form.
The Notice states that NASD does not intend the proposed changes to cover different
sales charge structures or differential cash payouts among various products. It notes that the
regulatory treatment of so-called “differential compensation” arrangements is the subject of
SEC rulemaking.
Frances M. Stadler
Deputy Senior Counsel