August 22, 1994
TO: SALES FORCE MARKETING COMMITTEE NO. 32-94
RE: NASD PROPOSES AMENDMENTS TO CASH/NON-CASH COMPENSATION
RULES
__________________________________________________________
The NASD has proposed for public comment amendments to Article
III, Section 26 of its Rules of Fair Practice, concerning
compensation received by NASD members and their associated persons
in connection with the sale of investment company securities. A
copy of the Special Notice to Members discussing and setting forth
the text of the proposed amendments is attached. The Notice to
Members also includes a section with examples intended to
illustrate the applicability of the provisions as they are proposed
to be amended.
According to the attached Notice, the amended rules would
prohibit members or their associated persons from accepting non-
cash compensation, subject to certain exceptions. "Non-cash
compensation" would be defined as "any non-cash form of
compensation received in connection with the sale and distribution
of investment company securities, including but not limited to
merchandise, gifts and prizes, and payment of travel expenses,
meals and lodging." Thus, as noted in the attached Notice, non-
cash compensation would include payments of cash to reimburse costs
for travel, meals and lodging incurred by a member or an associated
person.
Exceptions from the prohibition on receipt of non-cash
compensation would include: (1) in-house sales incentive programs
for the member's associated persons; (2) sales incentive programs
of mutual funds for the associated persons of a broker-dealer
subsidiary; (3) payment or reimbursement for training and
educational meetings held by a broker-dealer or a mutual fund for
associated persons of broker-dealers; (4) gifts of up to $100 per
associated person annually; and (5) an occasional meal, ticket to
a sporting event or theater, or entertainment for associated
persons and their guests.
As proposed to be amended, the rules would prohibit an
associated person of a member from accepting compensation from any
person other than that member, unless specifically permitted under
other provisions of the rules. The amended rules would continue to
2prohibit members or their associated persons from receiving
compensation in the form of securities. A new provision would be
added requiring members to keep records regarding cash and non-cash
compensation received, with certain exceptions.
Requirements for prospectus disclosure of compensation
arrangements would remain the same as existing requirements, except
that they would refer only to cash compensation because the
amendments would limit non-cash compensation in such a way that its
disclosure would not be required. An exception from the disclosure
requirements is proposed to be added for compensation arrangements
between a non-member company and its sales personnel who are
registered representatives of a member that directly or indirectly
controls, is controlled by, or is under common control with, the
non-member. The recordkeeping requirements referred to above,
however, would apply to such arrangements.
Comments on the proposed amendments must be filed by October
3rd.
Frances M. Stadler
Associate Counsel
Attachment