March 18, 1994
TO: BOARD OF GOVERNORS NO. 27-94
SEC RULES MEMBERS NO. 16-94
RE: NASD CLARIFIES DISCLOSURE REQUIREMENTS FOR CASH/NON-CASH
COMPENSATION
__________________________________________________________
Article III, Section 26 of the NASD's Rules of Fair Practice prohibits
members from accepting compensation from a mutual fund underwriter unless the
compensation is disclosed in the fund's prospectus. To the extent adequate
disclosure is not currently being included in a fund prospectus, the NASD
recently issued the attached Notice to clarify the disclosure necessary to comply
with the NASD's rules.
For disclosure of cash and non-cash compensation that does not involve
special compensation arrangements, the Notice provides that the disclosure must
set forth the maximum cash compensation and the type of non-cash compensation to
be provided to all participating members. Any variations from the standard
schedule of concessions must be disclosed if the concessions are not uniformly
paid to all members purchasing the same dollar amounts of fund shares.
The Notice states that establishment of a non-cash compensation program
must be unequivocal (e.g., the disclosure should use the words "will" or "shall"
not "may be"). The disclosure should also indicate the type of non-cash
compensation offered, e.g., merchandise, trip, attendance at a sales seminar.
According to the Notice, this disclosure "can be sufficiently generic, without
specifying the name of the resort or the item of merchandise" so as to avoid the
use of stickers or amendments if different resorts or different merchandise is
offered over a lengthy period of time.
With respect to special cash or non-cash compensation arrangements, the
Notice states that mutual fund underwriters must include an amendment or sticker
to the offering document that identifies the member(s) to receive the special
arrangements and the exact details of the arrangement.
The Notice states that in order to be consistent with SEC disclosure rules,
the disclosure for cash and non-cash compensation arrangements should be in the
prospectus and not the Statement of Additional Information. As noted above,
special cash and non-cash compensation arrangements may be disclosed in a sticker
to the prospectus.
The Notice also reminds members that they are prohibited from accepting any
item of material value from an underwriter in connection with retail sales of
mutual funds that is in addition to the concessions disclosed in the prospectus.
Items of material value include any payment in excess of $50 per person per year
for the reimbursement of travel expenses in connection with a meeting held by the
underwriter and payment by the underwriter for entertainment events if receipt
of such is conditioned on sales of fund shares.
Paul Schott Stevens
General Counsel
Attachment