1 SEC Release No. 34-38993 (August 29, 1997), 62 Fed. Reg. 47080 (September 5, 1997).
2 See Memorandum to Closed-End Fund Committee No. 18-96, SEC Rules Committee No. 72-96 and Unit Investment
Trust Committee No. 27-96, dated July 10, 1996.
3 A reference in the July 1996 proposal to "persons associated with a member and, if appropriate, their guests" was
dropped from this subsection of the rule. It still appears, however, in the text of the release describing the rule
provision.
[9226]
September 8, 1997
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 32-97
SEC RULES COMMITTEE No. 87-97
UNIT INVESTMENT TRUST COMMITTEE No. 55-97
RE: REVISED NASD NON-CASH COMPENSATION PROPOSAL
______________________________________________________________________________
The Securities and Exchange Commission has published for comment a revised version
of the NASDs proposed amendments to its rules governing non-cash compensation. A copy of
the SEC release is attached.1 The new version is very similar to the NASD proposal the SEC
issued for comment in July 1996.2 The principal differences between the two proposals are
highlighted in the summary description of the revised proposal below. Comments on the
attached proposed amendments must be filed by September 26th. If there are issues you
would like the Institute to consider addressing in its comment letter, please contact me at
(202) 326-5822 or by e-mail to frances@ici.org by September 15th.
Like the July 1996 proposal, the attached proposal would prohibit most non-cash
compensation, subject to specified exceptions. The proposal has been revised, however, to
prohibit an NASD member or person associated with a member not only from accepting any
non-cash compensation (subject to the specified exceptions), but also from making payments or
offers of payments of such compensation.
The types of non-cash compensation proposed to be permitted would remain the same
and include: (1) gifts of up to $100 that are not preconditioned on achievement of a sales target;
(2) an occasional meal, ticket to a sporting event or the theater, or comparable entertainment
which is neither so frequent nor so extensive as to raise any question of propriety and is not
preconditioned on achievement of a sales target;3 (3) payment or reimbursement in connection
with training or educational meetings, subject to several conditions; (4) in-house incentive
programs, subject to various conditions, including that the
4 The continued reference to the "cash sales incentive provisions" appears to be an error, as those provisions were
deleted from the proposal.
2
program must give equal credit for each sale of an investment company security. In addition,
as under the July 1996 proposal, there is 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.
In response to comments received on the July 1996 proposal, the NASD has deleted
provisions that would have prohibited the receipt by associated persons of cash compensation
preconditioned on the achievement of a sales target unless the program satisfied conditions
similar to those that apply to in-house non-cash incentive programs. (The stated purpose of
this provision was to prevent circumvention of the non-cash incentive prohibition.)
Like the July 1996 proposal, the attached proposal would not change the existing
prospectus disclosure requirements with respect to cash compensation, and non-cash
compensation would not be subject to prospectus disclosure requirements. The SEC release
discusses in detail the NASDs intention to solicit comments separately on regulation of cash
compensation arrangements. It states that "[t]he NASD will reconsider the appropriateness of
prospectus disclosure in light of the Commissions recent initiatives for simplified prospectus
disclosure as well as the responses to NASDs publication of a Request for Comment on cash
compensation issues." (Footnote omitted.)
The attached proposal includes the same recordkeeping requirements for cash and non-
cash compensation that were included in the July 1996 proposal. The SEC release provides
additional guidance, however, on the records required with respect to non-cash compensation.
It states that the proposed requirement to disclose the "nature" of non-cash compensation
means that records should include, among other things, disclosure of whether the
compensation is paid in connection with a sales incentive program or a training and education
meeting. The records should "retain all information necessary to determine that the rule is
being complied with." In the case of compensation paid in connection with a training or
education meeting, this would include, for example, the date and location of the meeting, the
fact that attendance at the meeting is not conditioned on the achievement of a sales target, the
fact that payment is not applied to the expenses of guests of associated persons of the member,
"and any other information required to enable NASD Regulation to determine compliance with
the rule."
If the SEC approves the proposed amendments, they will be effective on the date
announced in an NASD Notice to Members, which will be no more than 60 days after SEC
approval. As in the case of the 1996 proposal, the release states that, "[w]ith respect to the non-
cash and cash sales incentive provisions,4 no new sales incentive programs may be
commenced" after the effective date. (As we indicated last year, presumably new programs
that satisfy the rules conditions could be commenced after the effective date.) Ongoing
programs on the effective date could continue for no more than six months after the effective
date (i.e., sales could continue to be applied to those programs). In addition, "non-cash and
3cash sales incentives" earned by associated persons could be received for up to twelve months
following the expiration of the six-month implementation period.
Frances M. Stadler
Associate Counsel
Attachment (in .pdf format)