1 See Memorandum to Closed-End Fund Members No. 25-95, SEC Rules Members No. 46-95 and Unit Investment Trust Members No. 36-95, dated
July 20, 1995.
July 10, 1996
TO: CLOSED-END FUND COMMITTEE No. 18-96
SEC RULES COMMITTEE No. 72-96
UNIT INVESTMENT TRUST COMMITTEE No. 27-96
RE: NASD NON-CASH COMPENSATION PROPOSAL
______________________________________________________________________________
The SEC has issued for public comment proposed amendments to the rules of the NASD
governing non-cash compensation. In most respects, the proposed amendments are similar to
those set forth in NASD Notice to Members 95-56 (July 1995).1 A copy of the SECs notice is
attached. Comments on the proposed amendments are due Monday, July 29. Please call
Frances Stadler at 202/326-5822 with any comments you have on the proposal by no later than
Friday, July 19.
The proposed amendments would permit NASD members and their associated persons
to receive non-cash compensation only in specified circumstances. All other forms of non-cash
compensation would be prohibited. "Non-cash compensation" would be defined to include
compensation received in connection with the sale of investment company shares, other than
cash compensation, including but not limited to merchandise, gifts and prizes, and payment of
travel expenses, meals and lodging.
The following types of non-cash compensation would be permitted: (1) gifts to
associated persons of up to $100 annually that are not preconditioned on achieving a sales
target; (2) an occasional meal, ticket to a sporting event or theater, or comparable entertainment
for associated persons and their guests that is not so frequent or extensive to raise any question
of propriety and is not preconditioned on achieving a sales target; (3) payment or
reimbursement in connection with training or educational meetings, subject to several
conditions, including that the location of the meeting is appropriate for its purpose and that
such payment or reimbursement is not preconditioned on achieving a sales target; and (4) in-
house incentive programs, subject to various conditions, including that the program give equal
credit for each sale of an investment company security (and, thus, does not treat sales of
proprietary funds more favorably). Non-member firms would be permitted to contribute to
such in-house incentive programs, but could not otherwise participate in the organization of
such a program.
The proposed amendments also would prohibit the receipt by associated persons of
cash compensation preconditioned on the achievement of a sales target unless the program
satisfied conditions similar to those required for in-house non-cash incentive programs. Non-
member firms could contribute to such programs. The SECs release states that these
arrangements were included in order "to ensure that offerors do not circumvent the non-cash
incentive prohibition through the offering of cash incentives directly to associated persons."
The release further states that "the focus of the prohibition does not include other cash revenue-
sharing arrangements." Such arrangements are the subject of a study being conducted by the
NASD staff. The study is anticipated to result in further rule proposals governing the
disclosure of revenue sharing arrangements. The current proposed amendments would not
change the existing prospectus disclosure requirements with respect to cash compensation
arrangements. Because of the limits that would be placed on them under the proposed
amendments, non-cash compensation arrangements would no longer be subject to the
prospectus disclosure requirements.
The current prohibition on compensation in the form of securities would be retained.
The proposed amendments also would establish a general exception for arrangements that are
permitted by an SEC rule, regulation, interpretive release, or interpretive or no-action letter and
that meet certain other conditions. The SECs release cites Chubb Securities Corporation (Nov.
24, 1993), which permitted financial institutions to make commission payments to dual
employees of the financial institution and a broker-dealer, as an example of such a letter.
The proposed amendments would establish a new recordkeeping requirement. NASD
members would be required to maintain records of all cash and non-cash compensation
received by the member or its associated persons from investment companies and affiliates.
The records would include, among other things, the amount of any cash and the nature and, if
known, the value of any non-cash compensation received. Non-cash compensation awarded
pursuant to the exceptions for gifts of no more than $100 and for occasional tickets, meals, etc.
would not be subject to the recordkeeping requirements.
If the proposed amendments are approved by the SEC, the NASD will issue a Notice to
Members within 60 days, and the amendments will be effective on the date of that Notice. The
SECs release states that "no new sales incentive programs may be commenced" after the
effective date, but presumably new programs that satisfy the amended rules conditions could
be commenced after that date. In the case of programs in existence on the effective date, sales
may continue to be applied to such programs for six months after the effective date and cash
and non-cash incentives earned by associated persons could continue to be received "for a
period not to exceed twelve months following the expiration of the six-month implementation
period in the next calendar year after approval of the amendments by the SEC."
In addition to seeking general comments on the NASDs proposal, the SECs release
seeks comment on several specific matters, including (1) whether non-cash compensation in the
form of gifts of no more than $100 and occasional meals, tickets, etc. should be subject to the
recordkeeping requirements, (2) whether the recordkeeping requirements will be sufficient to
enable the NASD to determine that training and educational meetings are held at appropriate
locations, (3) whether, as under the proposed amendments, training and educational meetings
should be treated differently, depending on whether they are sponsored by a member firm for
its associated persons or by an investment company or affiliate and on whether an investment
company or affiliate contributes to the meeting, and (4) whether the proposal should be
extended to address other instances of differential compensation for proprietary products, as
opposed to non-proprietary products.
Craig S. Tyle
Vice President and Senior Counsel
Attachment