[Federal Register Volume 61, Number 131 (Monday, July 8, 1996)]
[Notices]
[Pages 35822-35844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17250]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37374; File No. SR-NASD-95-61]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Regulation of Cash and Non-Cash Compensation in Connection With the
Sale of Investment Company Securities and Variable Contracts
June 26, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
22, 1995,\1\ the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ On June 14, 1996, the NASD filed Amendment No. 1 with the
Commission. Amendment No. 1 addresses the relationship of the
proposed rule change to industry initiatives concerning compensation
practices, expands the scope of the proposed rule change to govern
all sales targets, whether or not previously specified and replaces
the term ``variable contract securities'' with the term ``variable
contract.'' See Letter from John M. Ramsay, Deputy General Counsel,
NASD to Katherine A. England, Assistant Director, Division of Market
Regulation, SEC (June 14, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD proposes to amend NASD Rules 2820 and 2830 (formerly
Article III, Sections 29 and 26 of the Rules of Fair Practice) to
revise existing rules applicable to the sale of investment company
securities and establish new rules applicable to the sale of variable
contracts.\2\ Below is the text of the proposed rule change. Proposed
new language is italicized; proposed deletions are in brackets.
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\2\ NASD Manual, Rules of the Association, Conduct Rules (CCH),
Rules 2820, 2830.
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Rules of the Association
Conduct Rules
* * * * *
Variable Contracts of an Insurance Company
Rule 2820.
* * * * *
Definitions
(b)
* * *
(3) The terms ``affiliated member'', ``cash compensation'', ``non-
cash compensation'' and ``offeror'' as used in paragraph (h) shall have
the following meanings:
``Affiliated Member'' shall mean a member which, directly or
indirectly, controls, is controlled by, or is under common control with
a non-member company.
``Cash compensation'' shall mean any discount, concession, fee,
service fee, commission, loan or override received in connection with
the sale and distribution of variable contracts. ``Non-cash
compensation'' shall mean any form of compensation received in
[[Page 35823]]
connection with the sale and distribution of variable contracts that is
not cash compensation, including but not limited to merchandise, gifts
and prizes, and payment of travel expenses, meals and lodging.
``Offeror'' shall mean an insurance company, a separate account of
an insurance company, an adviser to a separate account of an insurance
company, a fund administrator, an underwriter and any affiliated person
(as defined in Section 2(a)(3) of the Investment Company Act of 1940)
of such entities.
* * * * *
Member Compensation
(h) In connection with the sale and distribution of variable
contracts:
(1) Except as described below, no associated person of a member
shall accept any compensation, cash or non-cash, from anyone other than
the member with which the person is associated. This requirement will
not prohibit arrangements where a non-member company pays compensation
directly to associated persons of the member, provided that:
(a) the arrangement is agreed to by the member;
(b) the member relies on an appropriate rule, regulation,
interpretive release, interpretive letter, or ``no-action'' letter
issued by the Securities and Exchange Commission that applies to the
specific fact situation of the arrangement;
(c) the receipt by associated persons of such compensation is
treated as compensation received by the member for purposes of NASD
rules; and
(d) the recordkeeping requirement in subparagraph (h)(2) is
satisfied.
(2) Except for items as described in subparagraphs (h)(3)(a) and
(b), a member shall maintain records of all compensation, cash and non-
cash, received by the member or its associated persons from offerors.
The records shall include the names of the offerors, the names of the
associated persons, the amount of cash, the nature and, if known, the
value of non-cash compensation received.
(3) No member or person associated with a member shall directly or
indirectly accept any non-cash compensation offered or provided to such
member or its associated persons, except as provided in this provision.
Notwithstanding the provisions of subparagraph (h)(1), the following
items of non-cash compensation may be accepted:
(a) Gifts to associated persons of members that do not exceed an
annual amount per person fixed periodically by the Board of Governors
\3\ and are not preconditioned on achievement of a sales target.
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\3\ The current annual amount fixed by the Board of Governors is
$100.
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(b) An occasional meal, a ticket to a sporting event or the
theater, or comparable entertainment for persons associated with a
member and, if appropriate, their guests, which is neither so frequent
nor so extensive as to raise any question of impropriety and is not
preconditioned on achievement of a sales target.
(c) Payment or reimbursement by offerors in connection with
meetings held by an offeror or by a member for the purpose of training
or education of associated persons of a member, provided that:
(i) the recordkeeping requirement in subparagraph (h)(2) is
satisfied;
(ii) associated persons obtain the member's prior approval to
attend the meeting and attendance by a member's associated persons is
not preconditioned by the member on the achievement of a sales target
or any other non-cash compensation arrangement permitted by paragraph
(d);
(iii) the location is appropriate to the purpose of the meeting,
which shall mean an office of the offeror or the member, or a facility
located in the vicinity of such office, or a regional location with
respect to regional meetings;
(iv) the payment or reimbursement is not applied to the expenses of
guests of the associated person; and
(v) the payment or reimbursement by the offeror is not
preconditioned by the offeror on the achievement of a sales target or
any other non-cash compensation arrangement permitted by paragraph (d).
(d) Non-cash compensation arrangements between a member and its
associated persons or a non-member company and its sales personnel who
are associated persons of an affiliated member, provided that:
(i) the member's or non-member's non-cash compensation arrangement,
if it includes variable contracts, is based on the total production of
associated persons with respect to all variable contracts distributed
by the member;
(ii) the non-cash compensation arrangement requires that the credit
received for each variable contract security is equally weighted;
(iii) no unaffiliated non-member company or other unaffiliated
member directly or indirectly participates in the member's or non-
member's organization of a permissible non-cash compensation
arrangement; and
(iv) the recordkeeping requirement in subparagraph (h)(2) is
satisfied.
(e) Contributions by a non-member company or other member to a non-
cash compensation arrangement between a member and its associated
persons, provided that the arrangement meets the criteria in paragraph
(d).
(4) No person associated with a member shall accept any cash
compensation offered or provided to such person that is preconditioned
on such person achieving a sales target, except that the following
arrangements are permitted:
(a) Cash compensation arrangements preconditioned on the
achievement of a sales target between a member and its associated
persons or a non-member company and its sales personnel who are
associated persons of an affiliated member, provided that:
(i) the member's or non-member's arrangement, if it includes
variable contracts, is based on the total production of associated
persons with respect to all variable contracts distributed by the
member;
(ii) the arrangement requires that the credit received for each
variable contract security is equally weighted;
(iii) no unaffiliated non-member company or other unaffiliated
member directly or indirectly participates in the member's or non-
member's organization of a permissible arrangement; and
(iv) the recordkeeping requirement in subparagraph (h)(2) is
satisfied.
(b) Contributions by a non-member company or other member to a cash
compensation arrangement preconditioned on the achievement of a sales
target between a member and its associated persons, provided that the
arrangement meets the criteria in paragraph (a).
Investment Companies
Rule 2830
* * * * *
(b)
[(1) ``Associated person of an underwriter,'' as used in paragraph
(l), shall include an issuer for which an underwriter is the sponsor or
a principal underwriter, any investment adviser to such issuer, or any
affiliated person (as defined in Section 2(a)(3) of the Investment
Company Act of 1940) of such underwriter, issuer, or investment
adviser.] The terms ``affiliated member'', ``cash compensation'',
``non-cash compensation'', and ``offeror'' as used in paragraph (l)
shall have the following meanings:
``Affiliated Member'' shall mean a member which, directly or
indirectly, controls, is controlled by, or is under
[[Page 35824]]
common control with a non-member company.
``Cash compensation'' shall mean any discount, concession, fee,
service fee, commission, asset-based sales charge, loan, or override
received in connection with the sale and distribution of investment
company securities.
``Non-cash compensation'' shall mean any form of compensation
received in connection with the sale and distribution of investment
company securities that is not cash compensation, including but not
limited to merchandise, gifts and prizes, and payment of travel
expenses, meals and lodging.
``Offeror'' shall mean an investment company, an adviser to an
investment company, a fund administrator, an underwriter and any
affiliated person (as defined in Section 2(a)(3) of the Investment
Company Act of 1940) of such entities.
* * * * *
[Dealer concessions]
[(l)(1) No underwriter or associated person of an underwriter shall
offer, pay or arrange for the offer or payment to any other member in
connection with retail sales or distribution of investment company
securities, any discount, concession, fee or commission (hereinafter
referred to as ``concession'') which:]
[(A) is in the form of securities of any kind, including stock,
warrants or options;]
[(B) is in a form other than cash (e.g.. merchandise or trips),
unless the member earning the concession may elect to receive cash at
the equivalent of no less than the underwriter's cost of providing the
non-cash concession: or]
[(C) is not disclosed in the prospectus of the investment company.
If the concessions are not uniformly paid to all dealers purchasing the
same dollar amounts of securities from the underwriter, the disclosure
shall include a description of the circumstances of any general
variations from the standard schedule of concessions. If special
compensation arrangements have been made with individual dealers, which
arrangements are not generally available to all dealers, the details of
the arrangements, and the identities of the dealers, shall also be
disclosed.]
[(2) No underwriter or associated person of an underwriter shall
offer or pay any concession to an associated person of another member,
but shall make such payment only to the member.]
[(3)(A) In connection with retail sales or distribution of
investment company shares, no underwriter or associated person of an
underwriter shall offer or pay to any member or associated person,
anything of material value, and no member or associated person shall
solicit or accept anything of material value, in addition to the
concessions disclosed in the prospectus.]
[(B) For purposes of this subparagraph (3), items of material value
shall include but not be limited to:]
[(i) gifts amounting in value to more than $50 per person per
year.]
[(ii) gifts or payments of any kind which are conditioned on the
sale of investment company securities.]
[(iii) loans made or guaranteed to a non-controlled member or
person associated with a member.]
[(iv) wholesale overrides (commissions) granted to a member on its
own retail sales unless the arrangement, as well as the identity of the
member, is set forth in the prospectus of the investment company.]
[(v) payment or reimbursement of travel expenses, including
overnight lodging, in excess of $50 per person per year unless such
payment or reimbursement is in connection with a business meeting,
conference or seminar held by an underwriter for informational purposes
relative to the fund or funds of its sponsorship and is not conditioned
on sales of shares of an investment company. A meeting, conference or
seminar shall not be deemed to be of a business nature unless: the
person to whom payment or reimbursement is made is personally present
at, or is en route to or from, such meeting in each of the days for
which payment or reimbursement is made; the person on whose behalf
payment or reimbursement is made is engaged in the securities business;
and the location and facilities provided are appropriate to the
purpose, which would ordinarily mean the sponsor's office.]
[(C) For purposes of this subparagraph (3), items of material value
shall not include:]
[(i) an occasional dinner, a ticket to a sporting event or the
theater, or comparable entertainment of one or more registered
representatives which is not conditioned on sales of shares of an
investment company and is neither so frequent nor so extensive as to
raise any question of propriety.]
[(ii) a breakfast, luncheon, dinner, reception or cocktail party
given for a group of registered representatives in conjunction with a
bona fide business or sales meeting, whether at the headquarters of a
fund or its underwriter or in some other city.]
[(iii) an unconditional gift of a typical item of reminder
advertising such as a ballpoint pen with the name of the advertiser
inscribed, a calendar pad, or other gifts amounting in value to not
more than $50 per person per year.]
[(4) The provisions of this paragraph (l) shall not apply to:]
[(A) Contracts between principal underwriters of the same
security.]
[(B) Contracts between the principal underwriter of a security and
the sponsor of a unit investment trust which utilizes such security as
its underlying investment.]
[(C) Compensation arrangements of an underwriter or sponsor with
its own sales personnel.]
Member Compensation
(l) In connection with the sale and distribution of investment
company securities:
(1) Except as described below, no associated person of a member
shall accept any compensation, cash or non-cash, from anyone other than
the member with which the person is associated. This requirement will
not prohibit arrangements where a non-member company pays compensation
directly to associated persons of the member, provided that:
(a) the arrangement is agreed to by the member;
(b) the member relies on an appropriate rule, regulation,
interpretive release, interpretive letter, or ``no-action'' letter
issued by the Securities and Exchange Commission or its staff that
applies to the specific fact situation of the arrangement;
(c) the receipt by associated persons of such compensation is
treated as compensation received by the member for purposes of NASD
rules; and
(d) the recordkeeping requirement in subparagraph (l)(3) is
satisfied.
(2) No member or person associated with a member shall accept any
compensation from an offeror which is in the form of securities of any
kind.
(3) Except for items described in subparagraphs (l)(5)(a) and (b),
a member shall maintain records of all compensation, cash and non-cash,
received by the member or its associated persons from offerors. The
records shall include the names of the offerors, the names of the
associated persons, the amount of cash, the nature and, if known, the
value of non-cash compensation received.
(4) No member shall accept any cash compensation from an offeror
unless such compensation is described in a current prospectus of the
investment company. When special cash compensation arrangements are
made available by an offeror to a member, which arrangements are not
made
[[Page 35825]]
available on the same terms to all members who distribute the
investment company securities of the offeror, a member shall not enter
into such arrangements unless the name of the member and the details of
the arrangements are disclosed in the prospectus. Prospectus disclosure
requirements shall not apply to cash compensation arrangements between:
(a) principal underwriters of the same security; and
(b) the principal underwriter of a security and the sponsor of a
unit investment trust which utilizes such security as its underlying
investment.
(5) No member or person associated with a member shall directly or
indirectly accept any non-cash compensation offered or provided to such
member or its associated persons, except as provided in this provision.
Notwithstanding the provisions of subparagraph (l)(1), the following
items of non-cash compensation may be accepted:
(a) Gifts to associated persons of members that do not exceed an
annual amount per person fixed periodically by the Board of Governors
4 and are not preconditioned on achievement of a sales target.
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\4\ The current annual amount fixed by the Board of Governors is
$100.
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(b) An occasional meal, a ticket to a sporting event or the
theater, or comparable entertainment for persons associated with a
member and, if appropriate, their guests, 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.
(c) Payment or reimbursement by offerors in connection with
meetings held by an offeror or by a member for the purpose of training
or education of associated persons of a member, provided that:
(i) the recordkeeping requirement in subparagraph (l)(3) is
satisfied;
(ii) associated persons obtain the member's prior approval to
attend the meeting and attendance by a member's associated persons is
not preconditioned by the member on the achievement of a sales target
or any other non-cash compensation arrangement permitted by paragraph
(d);
(iii) the location is appropriate to the purpose of the meeting,
which shall mean an office of the offeror or the member, or a facility
located in the vicinity of such office, or a regional location with
respect to regional meetings;
(iv) the payment or reimbursement is not applied to the expenses of
guests of the associated person; and
(v) the payment or reimbursement by the offeror is not
preconditioned by the offeror on the achievement of a sales target or
any other non-cash compensation arrangement permitted by paragraph (d).
(d) Non-cash compensation arrangements between a member and its
associated persons or a non-member company and its sales personnel who
are associated persons of an affiliated member, provided that:
(i) the member's or non-member's non-cash compensation arrangement,
if it includes investment company securities, is based on the total
production of associated persons with respect to all investment company
securities distributed by the member;
(ii) the non-cash compensation arrangement requires that the credit
received for each investment company security is equally weighted;
(iii) no unaffiliated non-member company or other unaffiliated
member directly or indirectly participates in the member's or non-
member's organization of a permissible non-cash compensation
arrangement; and
(iv) the recordkeeping requirement in subparagraph (l)(3) is
satisfied.
(e) Contributions by a non-member company or other member to a non-
cash compensation arrangement between a member and its associated
persons, provided that the arrangement meets the criteria in paragraph
(d).
(6) No person associated with a member shall accept any cash
compensation offered or provided to such person that is preconditioned
on such person achieving a sales target, except that the following
arrangements are permitted:
(a) Cash compensation arrangements preconditioned on the
achievement of a sales target between a member and its associated
persons or a non-member company and its sales personnel who are
associated persons of an affiliated member, provided that:
(i) the member's or non-member's arrangement, if it includes
investment company securities, is based on the total production of
associated persons with respect to all investment company securities
distributed by the member;
(ii) the arrangement requires that the credit received for each
investment company security is equally weighted;
(iii) no unaffiliated non-member company or other unaffiliated
member directly or indirectly participates in the member's or non-
member's organization of a permissible arrangement; and
(iv) the recordkeeping requirement in subparagraph (l)(3) is
satisfied.
(b) Contributions by a non-member company or other member to a cash
compensation arrangement preconditioned on the achievement of a sales
target between a member and its associated persons, provided that the
arrangement meets the criteria in paragraph (a).
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Purpose of Proposed Rule Change
Introduction
The NASD is proposing to amend Rule 2820 (``Variable Contracts
Rule'') and Rule 2830 (``Investment Company Rule'') to establish new
rules applicable to the sale of variable contracts and revise existing
rules applicable to the sale of investment company securities.
Generally, the proposed rule change would: (1) Adopt definitions of
the terms ``affiliated member,'' ``cash compensation,'' ``non-cash
compensation'' and ``offeror''; (2) prohibit, except under certain
circumstances, associated persons from receiving any compensation, cash
or non-cash, from anyone other than the member with which the person is
associated; (3) require that members maintain records of compensation
received by the member or its associated persons from offerors; (4)
with respect to the Investment Company Rule, prohibit receipt by a
member of cash compensation from the offeror unless such arrangement is
described in the current prospectus; (5) retain the prohibition, only
with respect to the Investment Company Rule, against a member receiving
compensation in the form of securities; (6) prohibit, with certain
exceptions, members and persons associated with members from accepting,
directly or indirectly, any
[[Page 35826]]
non-cash compensation in connection with the sale of investment company
securities and variable contracts; and (7) prohibit, with certain
exceptions, a person associated with a member from accepting, directly
or indirectly, any cash compensation in connection with the sale of
investment company securities and variable contracts.
The exceptions from the non-cash compensation prohibition would
permit: (1) Gifts of up to $100 per associated person annually; (2) an
occasional meal, ticket to a sporting event or theater, or
entertainment for associated persons and their guests; (3) payment or
reimbursement for training and education meetings held by a broker-
dealer or a mutual fund or insurance company for associated persons of
broker-dealers, as long as certain conditions are met; (4) in-house
sales incentive programs of broker-dealers for their own associated
persons; (5) sales incentive programs of mutual funds and insurance
companies for the associated persons of an affiliated broker-dealer;
and (6) contributions by any non-member company or other member to a
broker-dealer's permissible in-house sales incentive program.
The exceptions from the cash compensation prohibition would permit:
(1) In-house sales incentive programs of broker-dealers for their own
associated persons; (2) sales incentive programs of mutual funds and
insurance companies for the associated persons of an affiliated broker-
dealer; and (3) contributions by any non-member company or other member
to a broker-dealer's permissible in-house sales incentive program.
Background
The proposed rule change is the latest in a series of NASD
determinations designed to control the use of non-cash compensation in
connection with a public offering of securities. Previous rule filings
amending the NASD's rules established restrictions on non-cash
compensation in connection with transactions in direct participation
program securities (``DPPs''), real estate investment trusts
(``REITs''), and corporate debt and equity offerings.
When the DPP rule was first proposed, commenters urged that if non-
cash incentives were inappropriate in connection with the sale of DPPs,
they are also inappropriate in connection with the sale of investment
company securities and variable contracts. However, the NASD recognized
that DPP and investment company securities are treated differently in
many regulatory areas including marketing standards, advertising rules,
net capital requirements, fidelity bonding, corporate finance
requirements, membership in SIPC, qualification examination
requirements and the application of the Investment Company Act of 1940
(``1940 Act''). Similarly, variable contracts are also subject to a
separate scheme of regulation under the NASD's advertising rules and
corporate financing requirements, net capital requirements, fidelity
bonding, membership in SIPC, qualification examination requirements,
and are regulated under the 1940 Act. In 1992, the NASD submitted to
the SEC proposed rule change SR-NASD-92-36 which proposed recordkeeping
and disclosure requirements on the receipt of non-cash compensation in
connection with the sale of investment company securities and variable
contracts. As a result of SEC staff concerns regarding that proposal,
the NASD withdrew SR-NASD-92-36 in April 1994.
In developing the proposed rule change, the Investment Companies
and Insurance Affiliated Member Committees of the NASD (the
``Committees'') have considered the current environment in which
investment company securities and variable contracts are sold. The
Committees did not find that the manner in which non-cash compensation
is offered and paid to members and their associated persons indicates a
level of supervisory problems similar to that present in connection
with the sale of DPPs which led the NASD to adopt a prohibition on non-
cash compensation in connection with such securities in 1988. The
Committees believe, however, that the increased use of non-cash
compensation for the sale of investment company securities and variable
contracts heightens the potential for loss of supervisory control over
sales practices and increases the possibility for perception of
impropriety, which may result in a loss of investor confidence. The
Committees determined, therefore, that the adoption of limitations on
non-cash compensation for the sale of investment company securities and
variable contracts is appropriate at this time.
The NASD is aware of a broad range of cash compensation practices
by which investment company securities and variable contract issuers or
their affiliates provide either incentives or rewards to individual
broker-dealers and their registered representatives for selling the
issuers' products. The NASD believes that the increased use of such
practices, which create an incentive to favor one product over another,
may compromise the ability of securities salespersons to render advice
and services that are in the best interests of customers.
The NASD issued Notice to Members 94-14 (March 1994), reminding
members, among other things, of prospectus disclosure obligations
regarding their acceptance of cash and non-cash compensation for the
sale of investment company products, and Notice to Members 95-80
(September 26, 1995), reminding members, among other things, that
recommendations of investment company securities must be suitable given
the investor's investment objectives and not based on incentives
received by a registered representative.
Given the recent proliferation of such compensation practices and
dramatic increase of public interest in the purchase of investment
company securities and variable contracts, the NASD believes it is
appropriate to adopt limitations on non-cash compensation and certain
types of incentive-based cash compensation for the sale of investment
company securities and variable contracts.
A complete discussion of the background of the proposed rule change
is set forth in NASD Special Notice to Members 94-67 (``NTM 94-67''),
attached to this filing as Exhibit 2, and in an addendum containing
background information (referenced in NTM 94-67), attached to this
filing as Exhibit 3. These documents are available to the public from
the NASD's Office of General Counsel.
Description of the Proposed Rule Change
The current requirements of paragraph (l) of the Investment Company
Rule regulate the disclosure and form of dealer concessions between
principal underwriters and retail dealers of investment company
securities. These provisions prohibit dealer concessions in the form of
securities, require that members be able to elect to receive cash in
lieu of the receipt of non-cash compensation, and prohibit the payment
of concessions directly to associated persons of a member. The
provisions also set forth requirements with respect to the disclosure
of compensation arrangements between underwriters and dealers in the
investment company's prospectus.\5\
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\5\ In Notice to Members 94-14 (March 1994), the NASD clarified
the obligations of members in complying with the compensation
disclosure requirements for investment companies in Subsection
26(l)(1)(C) to Article III of the Rules of Fair Practice. See also
Notice to Members 94-41 (May 1994).
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[[Page 35827]]
With respect to the regulation of variable contracts, the
requirements of Rule 2820 currently do not contain similar provisions
regulating dealer concessions. Thus, the proposed amendments to the
Investment Company Rule would modify current requirements and the
proposed amendments to the Variable Contracts Rule would establish new
requirements that address compensation arrangements between an offeror
and any member participating in the distribution of the company's
securities. The discussion below addresses each proposed provision in
the Investment Company Rule and its counterpart in the Variable
Contracts Rule.
Definitions
Affiliated Member--The NASD is proposing to adopt a definition of
the term ``affiliated member'' for both the Investment Company and
Variable Contracts Rules to include a member which, directly or
indirectly, controls, is controlled by, or is under common control with
a non-member company. The term is used in the sections of the proposed
rule change which address incentive compensation arrangements in order
to identify a common type of relationship existing in the investment
company securities and variable contracts industries whereby a non-
member owns or controls one or more subsidiary broker-dealer member
firms used for underwriting and/or wholesale and retail distribution
services.
Cash Compensation--As proposed to be defined in the Investment
Company Rule, this term would include any discount, concession, fee,
service fee, commission, asset-based sales charge, loan or override
received in connection with the sale and distribution of investment
company securities. This term would encompass compensation arrangements
currently covered under the Investment Company Rule in subparagraph
(l)(1), as well as asset-based sales charges and service fees as
currently defined in subparagraph (b)(9) of the Investment Company
Rule. As a result, the proposed new term would apply to all
compensation arrangements that would be covered under the current
provisions of the Investment Company Rule, with the addition of asset-
based sales charges and service fees. The Variable Contracts Rule's
proposed definition of cash compensation would have a similar scope
with respect to the sale of variable contracts, but does not include
asset-based sales charges in recognition of the different structure of
compensation arrangements with respect to such products.
Non-Cash Compensation--This definition is proposed to be identical
in applicability for both the Investment Company and Variable Contracts
Rules and would encompass any form of compensation received by a member
in connection with the sale and distribution of investment company
securities and variable contracts that is not cash compensation,
including, but not limited to, merchandise, gifts and prizes, and
payment of travel expenses, meals and lodging. Thus, the definition of
``non-cash compensation'' encompasses payments of cash to reimburse
costs incurred by a member or person associated with a member in
connection with travel, meals and lodging. Certain of the proposed rule
language is drawn from the current provisions of subparagraph (l)(3)(B)
of the Investment Company Rule which identifies items of material
value.
Offeror--The NASD is proposing to define the term ``offeror'' in
the Investment Company Rule to include an investment company, an
adviser to an investment company, a fund administrator, an underwriter
and any affiliated person of such entities, and in the Variable
Contract rule to include an insurance company, a separate account of an
insurance company, an adviser to a separate account of an insurance
company, a fund administrator, an underwriter and any affiliated person
of such entities. With the exception of ``fund administrator,'' the
enumerated entities included in the proposed definition of ``offeror''
in the Investment Company Rule are currently included in the definition
of ``associated person of an underwriter,'' which is proposed to be
deleted.6 That definition encompasses the issuer, the underwriter,
the investment advisor to the issuer, and any affiliated person of such
entities.7 The term ``affiliated person'' in the proposed
definition of ``offeror'' is defined in accordance with Section 2(a)(3)
of the 1940 Act. The term ``underwriter'' is defined in Section
2(a)(40) of the 1940 Act and is intended to refer to the principal
underwriter through which the investment and insurance company
distributes securities to participating dealers for sale to the
investor.
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\6\ There are no current similar terms in the Variable Contracts
Rule.
\7\ The term is significantly different from the term ``person
associated with a member'' as used throughout the NASD's rules and
regulations. Any reference to persons associated with an NASD member
firm is defined by the definition of ``person associated with a
member'' or ``associated person of a member'' in Article I, Section
(m) to the NASD By-Laws.
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The NASD does not believe that the inclusion of ``fund
administrator'' in the definition of ``offeror'' in the proposed rule
is overbroad as a result of the fact that affiliates of fund
administrators would now be included in the definition of offeror.
Affiliates of fund administrators are most likely entities already
specified in the definition of ``offeror,'' the definition of which is
further circumscribed by the requirement that payments of cash or non-
cash compensation be made in connection with the sale of investment
company securities or variable contracts.
The adoption of this new definition of offeror would change the
applicability of paragraph (l) of the Investment Company Rule and
paragraph (h) of the Variable Contract rule from focusing on the
distribution relationship of the principal underwriter to the retail
dealers to focusing on the distribution relationship of the offeror to
any participating broker-dealer firm.
Regulation of the Receipt of Cash and Non-Cash Compensation
Introduction--The NASD is proposing to adopt as paragraph (l) of
the Investment Company Rule (replacing the current provisions of that
section) and paragraph (h) of the Variable Contracts Rule new
provisions governing the receipt of cash and non-cash compensation by
members and associated persons of members. The proposed amendments
would apply to both variable annuity and variable life products under
the Variable Contracts Rule. With respect to the Investment Company
Rule, the proposed amendments would apply to sales of securities of an
investment company registered under the 1940 Act. Thus, the proposed
rules would apply to sales of securities by a face-amount certificate
company, a unit investment trust, and open-end and closed-end
management companies.8
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\8\ Closed-end management companies also are regulated under The
Corporate Financing Rule in Rule 2710 and currently are subject to
the prohibition on non-cash compensation contained in subparagraph
(c)(6)(ix) thereof. Rule 2710(b)(8)(C) provides an exemption from
compliance with Section 44 for securities of investment companies
registered under the 1940 Act, except for securities of a closed-end
management company as defined in Section 5(a)(2) of the 1940 Act.
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The preamble to the new rules provides that such compensation must
be received ``in connection with the sale and distribution'' of
investment company securities or variable contracts, as applicable. The
preamble is intended to clarify that the provisions only relate to cash
and non-cash compensation received in connection
[[Page 35828]]
with the sale and distribution of the security covered by the rule, but
not to other forms of payment that are not for sales and distribution
activities.
Subparagraphs 2820(h)(1) and 2830(h)(1): Limitation on Receipt of
Compensation by Associated Persons, and Exception from Limitations--The
NASD is proposing in new subparagraph (l)(1) of the Investment Company
Rule and new subparagraph (h)(1) of the Variable Contract rule to
generally prohibit a person associated with a member from accepting any
compensation from any person other than the member with which the
person is associated. The provision is based on current subparagraph
(l)(2) of the Investment Company Rule.
An exception from this general prohibition is proposed which would
allow the receipt of commissions by an associated person directly from
a non-member if the arrangement is agreed to, and the amount of
commission determined, by the member, the receipt is treated as
compensation received by the member for purposes of NASD rules, the
recordkeeping requirement in the proposed rule change is satisfied, and
the member relies on an appropriate rule, regulation, interpretive
release or applicable ``no-action'' or exemptive letter issued by the
Commission or its staff. It would only be necessary for a member to
obtain from the Commission an interpretation or no-action position in
the event that no current rule, regulation, interpretive release, or
no-action or exemptive letter applied to the member's fact situation.
Also, the proposed rule change clarifies that the member must treat
such direct payments to associated persons as compensation in order to
ensure that the member views such payments in the same manner as
payments made directly to the member for purposes of NASD rules and
posts such payments to the member's books.
The proposed exception is particularly intended to recognize
current practice, commonly referred to as insurance networking, which
relies on certain Commission interpretations or staff no-action letters
that permit, under limited circumstances, associated persons to receive
compensation for the sale of variable annuity products from an
insurance company or licensed insurance agency.9 The exception
reflects the view of the Commission in Securities Exchange Act Release
No. 8389 (August 29, 1968) that, under certain circumstances, such
commission payments to associated persons may be made by an insurance
company or insurance agency acting on behalf of a broker-dealer.10
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\9\ See, e.g., Wiley, Rein & Fielding (Oct. 16, 1991);
Traditional Equinet (Jan. 8, 1992).
\10\ Securities Exchange Act Rel. No. 8389 states that the
Commission would not recommend enforcement action where the
insurance company makes payments directly to its life insurance
agents who are also persons associated with the insurance company's
subsidiary broker/dealer, so long as: (1) Such payments are made as
a purely ministerial service and properly reflected on the books and
records of the broker/dealer; (2) a binding agreement exists between
the insurance company and the broker dealer that all books and
records are maintained by the insurance company as agent on behalf
of the broker/dealer and are preserved in conformity with the
requirements of Rules 17a-3 and 17a-4 under the Act; (3) all such
books and records are subject to inspection by the Commission in
accordance with Section 17(a) of the Act; and (4) the subsidiary
broker/dealer has assumed full responsibility for the securities
activities of all persons engaged directly or indirectly in the
variable annuity operation.
---------------------------------------------------------------------------
Although the need to recognize such direct payments arose in
connection with the sale of variable contract products, the Investment
Company Rule includes the same exception in order to recognize
Commission staff no-action positions that permit direct payments by
certain non-members to associated persons of broker-dealers for the
sale of investment company shares.11
---------------------------------------------------------------------------
\11\ See Chubb Securities Corporation (Nov. 24, 1993) (financial
institutions were permitted to make commission payments to dual
employees of the financial institution and a broker-dealer).
---------------------------------------------------------------------------
Subparagraph 2830(l)(2): Securities as Compensation--The NASD is
proposing to retain as new subparagraph (l)(2) of the Investment
Company Rule the provision currently in subparagraph (l)(1)(A) that
prohibits members and associated persons of members from receiving
compensation in the form of securities of any kind. The Variable
Contracts Rule does not contain this prohibition, as the prohibition is
intended to reflect circumstances that are limited to the sale of
investment company securities.
Subparagraphs 2820(h)(2) and 2830(l)(3): Recordkeeping
Requirement--The NASD is proposing to adopt as new subparagraph (l)(3)
of the Investment Company Rule and subparagraph (h)(2) of the Variable
Contracts Rule the general requirement that members maintain records of
all compensation, cash and non-cash, received from offerors. The
records must include the names of the offerors, the names of the
associated persons, and the amount of cash and the nature and, if
known, the value of non-cash compensation received.
With respect to the requirement that the actual value of non-cash
compensation be recorded, if it is known, the NASD believes that the
value of a non-cash item is usually not known where unaffiliated third
parties contribute to a training and education program sponsored by a
member. In this case, it would be appropriate to only include a
description of the nature of the non-cash item of compensation. In
comparison, the value of non-cash items provided by member firms and/or
their affiliates is generally readily known or determinable.
The recordkeeping requirement is not applicable to two types of de
minimis non-cash compensation allowable under subparagraphs (l)(5)(a)
and (b) of the Investment Company Rule and subparagraphs (h)(3)(a) and
(b) of the Variable Contracts Rule, discussed more fully below under
the exceptions to the prohibition on non-cash compensation.
Subparagraph 2830(l)(4): Prospectus Disclosure of Cash
Compensation--The NASD is proposing to adopt as new subparagraph (l)(4)
in the Investment Company Rule the requirement currently in
subparagraph (l)(1)(C) that prohibits the acceptance of cash
compensation by a member from an offeror unless such compensation is
disclosed in a prospectus. In the case where special cash compensation
arrangements are made available by an offeror to a member, which
arrangements are not made available on the same terms to all members to
distribute the securities, the disclosure shall include the name of the
recipient member and the details of the special arrangements. The
provision has been modified to reference only ``cash compensation''
because non-cash compensation is proposed to be prohibited in a manner
that would not require disclosure of any such non-cash
compensation.\12\
---------------------------------------------------------------------------
\12\ See supra n. 5.
---------------------------------------------------------------------------
The proposed rule change includes two exceptions from the
prospectus disclosure requirement in the Investment Company Rule. The
two exceptions in paragraphs (a) and (b) track the language in current
subparagraphs (l)(4)(A) and (B) of the Investment Company Rule, with
minor language changes for clarification. These two provisions provide
an exception from disclosure for compensation arrangements between: (1)
Principal underwriters of the same security; and (2) the principal
underwriter of a security and the sponsor of a unit investment trust
which utilizes such security as its underlying investment. By their
terms, these provisions describe arrangements that would not trigger
the proposed recordkeeping requirements.
The NASD is not proposing to amend the Variable Contracts Rule to
adopt a similar prospectus disclosure
[[Page 35829]]
requirement. Unlike the Investment Company Rule, there is currently no
provision in the Variable Contracts Rule requiring disclosure of
compensation received by NASD members in connection with the
distribution of variable contracts. Arrangements by insurance companies
for compensating salespersons for variable contract sales are generally
part of a total compensation package based on the sale of non-
securities insurance products as well as variable contracts. Further,
the Securities Act of 1933 and rules adopted thereunder do not require
such disclosure in the prospectus for variable life and annuity
products. As a result, there is no practice for disclosure of any item
of compensation in connection with variable life and annuity products,
such as commissions and expense reallowances. The NASD believes that
insurance companies would be required to make significant modifications
to their automated systems in order to separate in some manner
compensation for sales of securities products from total compensation
for all insurance products. The NASD has determined, therefore, that
before proposing new rules to require the disclosure of all cash
compensation for the sale of variable contracts, more information
should be gathered regarding the different kinds of compensation that
are paid to broker-dealers for the sale of variable contracts and the
form of any required disclosure. The NASD intends to gather such
information in the course of conducting a general study of cash
compensation practices in connection with investment company securities
and variable contracts, as more fully set forth below.
Subparagraphs 2830(l)(5) and 2820(h)(3): Prohibition on Non-Cash
Compensation--The NASD is proposing to adopt as new subparagraph (l)(5)
of the Investment Company Rule and new subparagraph (h)(3) of the
Variable Contracts Rule a general prohibition, with certain exceptions,
on the receipt of non-cash compensation. The new provisions would
prohibit a member or person associated with a member from directly or
indirectly accepting any non-cash compensation offered or provided to
such member or its associated persons unless such non-cash compensation
is permitted under the provisions. Implicit in the prohibition on the
``acceptance'' of non-cash compensation is the requirement that a
member may not make a payment of compensation to another member and its
associated persons that results in a violation of the rule by the
recipients.
The proposed rule change contains several exceptions from the
general prohibition on the receipt of non-cash compensation.
Subparagraphs 2820(h)(3)(a) and (b) and 2830(l)(5)(a) and (b): The
NASD is proposing to adopt exceptions that would permit an associated
person to accept from a person other than its member-employer: (1)
Gifts that do not exceed an annual amount per person fixed periodically
by the Board of Governors, which is currently $100 per person; and (2)
an occasional meal, a ticket to a sporting event or the theater, or
comparable entertainment for persons associated with a member and, if
appropriate, their guests, which is neither so frequent nor so
extensive as to raise any question of propriety. These provisions are
based on the current provisions of subparagraph (l)(3)(B) of the
Investment Company Rule. The latter exception has been revised from the
current language of the Investment Company Rule to reflect that
entertainment for associated persons will usually include a spouse or
guest of the person and that payment for a guest is permissible, but
adds cautionary language that the entertainment should not be ``so
frequent nor so extensive as to raise any question of propriety.''
Since such gifts and entertainment are considered non-cash items, they
are not required to be disclosed in the prospectus. Additionally, these
two forms of non-cash compensation are specifically excepted from the
recordkeeping requirement of the proposed rules.
The proposed provisions would require that the receipt of such non-
cash items not be preconditioned on the achievement by the associated
person of a sales target. This language replaces the current
requirement in subparagraph (l)(3)(B)(v) of the Investment Company Rule
that entertainment ``not be conditioned on sales of shares of
investment companies.'' The revised language is intended to clarify
that such gifts and entertainment are permitted to be provided as
recognition for past sales or as encouragement for future sales, but
shall not be part of an incentive program or plan which requires that
the recipient reach a sales goal as a prior condition to receive the
entertainment or gift.
The proposed exceptions for $100 gifts and entertainment permits
the continuation of long-established, normal business practices, while
preventing an investment or insurance company from providing the gift
or entertainment as part of a non-cash sales incentive program. The
exceptions also recognize that the NASD has not detected or been aware
of any history of abuses in connection with the receipt of such items
of compensation by associated persons of a member firm in connection
with the sale of investment company securities or variable contracts.
Subparagraphs 2820(h)(3)(c) and 2820(l)(5)(c): The NASD is
proposing an exception to the prohibition on non-cash compensation for
training and education meetings in subparagraph (l)(5)(c) of the
Investment Company Rule and subparagraph (h)(3)(c) of the Variable
Contracts Rule. The proposed exception would, under certain conditions,
permit payment or reimbursement by offerors in connection with meetings
held by the offeror or by a member for the purpose of training or
education of associated persons of a member.\13\ It is not unusual for
offerors to pay for such meetings in order to discuss their products
and to reimburse certain expenses related to the member's meeting in
exchange for the opportunity to make a presentation to the associated
persons of the member on a particular training or education topic.
---------------------------------------------------------------------------
\13\ A member holding a training or education meeting for its
associated persons (in comparison to the associated persons of
another member) would not be required to comply with this provision
if the member does not receive a payment or reimbursement from an
offeror for the expenses of the meeting. In this event, the member
would not be prohibited from permitting offerors to make a
presentation at the meeting.
---------------------------------------------------------------------------
This provision is intended to continue to permit members and
offerors to hold training or education meetings for associated persons
of one or more members, where an offeror or a number of offerors pay
for or reimburse the expenses of the meeting. Because investment
company securities and variable contract products are continuously
offered, it is particularly important that associated persons receive
education opportunities with respect to the investment company
securities and variable contract industries generally, updates on any
portfolio changes or structural changes to a current product, and
explanations of new products.
Since the proposed prospectus disclosure provision requires
disclosure of cash compensation only, the proposed exception would not
trigger the disclosure requirements because the payment or
reimbursement of expenses by an offeror for a member's training and
education meeting is considered to be non-cash compensation. The
proposed exception would, however, continue to be subject to the
prohibition on an associated person accepting any compensation from
anyone other than its member-employer.
The NASD anticipates that the agenda of a bona fide training or
education
[[Page 35830]]
meeting will reflect the business purpose of the meeting. In order to
establish circumstances that will encourage such a business purpose,
the NASD is proposing that the exception for training or education
meetings be available only if five conditions are met, which conditions
are intended to ensure that the meeting is for the purpose of training
and education and is not, in fact, a prohibited non-cash sales
incentive trip or entertainment. The first condition is that the
payment or reimbursement by offerors in connection with such meetings
is subject to the proposed recordkeeping requirement in subparagraph
(l)(3) of the Investment Company Rule and subparagraph (h)(2) of the
Variable Contracts Rule in order that information on such payments and
reimbursements is in the records of the member and, therefore, capable
of examination and regulatory oversight by the NASD.
The second condition is that associated persons must obtain the
member's prior approval to attend the meeting. It is anticipated that
members will establish a procedure so that their records reflect that
appropriate approval has been provided to associated persons in
connection with such meetings. This provision assists members in
maintaining supervisory control over their associated persons.
Moreover, the second condition also requires that attendance by the
member's associated persons may not be based by the employer-member on
the achievement of a sales target or any other non-cash compensation
arrangement that is permitted in reliance on paragraph (d) of the
proposed rule. That provision would permit non-cash compensation
arrangements between a member and its associated persons or between a
non-member company and its sales personnel who are associated persons
of an affiliated member, as more fully discussed below. This condition
is intended to ensure that the member does not treat a training or
education meeting as a non-cash incentive item. The provision is not,
however, intended to prevent a member from designating persons to
attend a meeting held by the member or by an offeror to recognize past
performance or encourage future performance, so long as attendance at
the meeting is not earned through a member's in-house sales incentive
program or through the sales incentive program of the member's non-
member affiliate or through the achievement of a sales target.
The third condition is that the location of the meeting must be
appropriate to its purpose. A showing of appropriate purpose is
demonstrated where the location is the office of the offeror or the
member, or a facility located in the vicinity of such office. In order
to address meetings where the attendees are from a number of offices in
a region of the country, the meeting location may be in a regional
location.
The fourth condition is that the payment or reimbursement by an
offeror must not be applied to the expenses of guests of the associated
person.
The fifth and final condition is that the payment or reimbursement
by the offeror must not be conditioned by the offeror on the
achievement of a sales target or any other non-cash arrangement
permitted by proposed subsection (l)(5)(d) of the Investment Company
Rule or proposed subsection (h)(3)(d) of the Variable Contracts Rule.
This requirement is intended to ensure that the offeror making the
payment or reimbursement does not participate in any manner in a
member's decision as to which associated persons will attend a member's
or offeror's meeting.
The fifth condition should be compared to the second provision that
prohibits a member from basing the associated person's attendance at a
training or education meeting on achievement of a sales target or a
permissible in-house non-cash incentive arrangement. Taken together,
the second and fifth conditions are intended to clarify that attendance
at a training or education meeting by an associated person is permitted
to be approved by a member as a recognition for past sales or as an
encouragement for future sales, but shall not be part of a member's or
offeror's incentive program or plan which requires that the recipient
or the member reach a sales goal as a prior condition to attending the
training or education meeting.
Subparagraphs 2820(h)(3) (d) and (e) and 2830(l)(5) (d) and (e):
The NASD is proposing to adopt for the Investment Company Rule and the
Variable Contracts Rule exceptions from the prohibition on non-cash
compensation that will permit: (1) Non-cash compensation arrangements
between a member and its associated persons, (2) non-cash compensation
arrangements between a non-member company and its sales personnel who
are associated persons of an affiliated member, and (3) contributions
by a non-member company or other member to a non-cash compensation
arrangement between a member and its associated persons.
The three permissible arrangements are subject to four conditions.
The conditions that must be met are that: (1) The member's or non-
member's non-cash compensation arrangement, if it includes investment
company or variable product securities, must be based on the total
production of associated persons with respect to all investment company
or variable product securities distributed by that member, (2) the
credit received for each investment company or variable product
security must be equally weighted, (3) no unaffiliated non-member
company or other unaffiliated member may directly or indirectly
participate in the member's or non-member's organization of a
permissible non-cash compensation arrangement; and (4) the member must
maintain records of all compensation, cash and non-cash, received by
the member or its associated persons from offerors. However, the
applicability of the total production and equal weighting requirements
to variable contract securities does not require that variable annuity
and variable life products be combined in the same incentive
arrangement. Because of the substantially different commission
structure of each product, the NASD intends that subparagraph (h)(3)(d)
of the Variable Contracts Rule apply to each variable contract product
type--variable annuity or variable life.
The NASD believes that the proposed rule change distinguishes
between non-cash incentives that act at the point-of-sale to the
investor and those that do not. Point-of-sale non-cash incentive
programs reward associated persons only if they sell a certain number
of shares of a specific investment company securities or variable
contract. Such incentive programs by an offeror or a member will affect
the point-of-sale relationship of associated persons with the investor
because they influence the salesperson to sell a specific investment
company securities or variable contract or the products of only one
offeror. In addition, point-of-sale non-cash incentives offered by
third-parties to the associated persons of a member firm have the
potential to undermine the supervisory control of the member over the
sales practices of its associated persons.
The phrase ``point-of-sale incentives'' is intended to distinguish
between different sales incentive structures on the basis of the
potential impact of the sales incentive on the recommendation of the
associated person at the point of sale to the customer. Where a sales
incentive is structured as a ``point-of-sales incentive,'' the
associated person's recommendation of a specific product is motivated
by the prospect of receiving the sales incentive rather than the desire
to match the investment needs of the customer with the most appropriate
investment product. An example of this is an incentive program that
will
[[Page 35831]]
provide a trip to an exotic location or a cash bonus to an associated
person who sells $X million of ABC mutual fund over a three-month
period. Such an incentive would have the effect of influencing an
associated person to recommend ABC mutual fund over its competitors to
customers. In comparison, an incentive program without a point-of-sale
impact would be a program organized by the employer broker-dealer of an
associated person that would provide for the same trip to the exotic
location or a cash bonus for the sale of $X million of mutual fund
products, with the sale of all mutual fund products being equally-
weighted. In this case, the incentive program should not impact the
point-of-sale recommendation of the associated person, who would focus
on matching the appropriate investment needs of the customer in order
for the associated person's recommendation to result in a sale.
The NASD's proposed rule change, therefore, limits non-cash sales
incentives to situations where such non-cash incentives do not contain
the potential to impact the point-of-sale recommendation by an
associated person to a customer or to undermine the supervisory control
of the member firm with respect to its associated persons.
The NASD is proposing to eliminate the point-of-sale impact of non-
cash sales incentives on the sales practices of an associated person
with respect to the sale of investment company securities and variable
contracts by prohibiting third-party non-cash sales incentive programs
and by requiring that all securities of the product type be included in
the member's (or its affiliate's) in-house incentive program and be
equally weighted. The proposed rule change, therefore, would prohibit a
third-party offeror from conducting a non-cash sales incentive program
for associated persons of member firms, as such programs only provide
incentives that will act at the point-of-sale to influence a
salesperson to sell the proprietary products of the offeror and have
the potential to undermine the supervisory control of the member with
respect to its associated persons, thereby increasing the possibility
for a perception of impropriety which may result in a loss of investor
confidence. The proposed rule change would, however, continue to permit
non-cash incentive programs by a member for its associated persons or
by an insurance or investment company for the associated persons of an
affiliated member, under the four conditions discussed more fully
below. The NASD determined that, in both cases, the non-cash
compensation arrangement is internal to the employer-employee
relationship and, therefore, does not raise the supervisory concerns
that are present in the compensation arrangements between a non-member
and the associated persons of unaffiliated broker-dealers selling its
product.
The exception permitting a non-member affiliate to grant non-cash
incentives to the associated persons of its affiliated broker-dealer
for the sale of investment company securities and variable contracts
recognizes the practice that is particularly present in the life
insurance industry of a non-member insurance company holding a non-cash
sales incentive program for its sales personnel who are also associated
persons of the non-member's affiliated broker-dealer. Such sales
persons are dual-licensed to sell non-securities insurance products and
variable contracts. It is particularly a common practice for a member's
parent life insurance company to award ``points'' for the sale of all
insurance products--including securities--toward attendance at the
insurance company's annual ``leadership conference.'' 14 Moreover,
the exception recognizes that, as a practical matter, an insurance
company or investment company affiliated with a broker-dealer is in a
position through intra-corporate transfers to contribute to and through
its relationship to affect the structure of its affiliated broker-
dealer's in-house incentive program.
---------------------------------------------------------------------------
\14\ As set forth above, arrangements by insurance companies for
compensating salespersons for variable product sales are generally
part of a total compensation package based on the sale of non-
securities insurance products as well as variable contracts.
---------------------------------------------------------------------------
The permissible in-house non-cash arrangements by a member or its
affiliate are subject, moreover, to the first two conditions which are
intended to ensure that a non-cash sales incentive earned by a member's
associated person is on a delayed basis and does not influence the
associated person's point-of-sale relationship with the investor. The
first two conditions require that a member's or its affiliate's non-
cash sales incentive program, if it includes investment company
securities or variable contracts, must be based on the total production
of associated persons with respect to the sale of all investment
company securities or variable contracts distributed by that member and
the credit received for the sale of each investment company security or
variable contract must be equally weighted.
The NASD believes that the intent of first two conditions, by
focusing on total production and equal weighting rather than point-of-
sale incentives, is to align the interests of associated persons,
broker-dealers and investors. Thus, the proposed provisions would allow
for sales incentive programs based on such measures as overall gross
production, new accounts opened or assets under management. Such
measures are not precluded by the proposed rule language and are based
on the same intent to align the interests of associated persons,
broker-dealers and investors. The concept of total production, for
example, is not necessarily restricted to total sales production, but
could include total activity in investment company securities, thus
allowing for incentive contests based on assets gathered or assets
maintained under management.15
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\15\ See Report of the Committee on Compensation Practices,
April 10, 1995 (``Tully Report''), at 13.
---------------------------------------------------------------------------
In proposing the second condition requiring equal weighting, the
NASD recognizes that differential payouts at all levels is common
industry practice and that current methods for determining contest
credits vary, including measurements based on gross production to the
firm or net commissions to the associated person. The NASD believes
that either practice, as well as other arrangements, would be
acceptable so long as the concept of ``equal weighting'' is met and not
skewed by disparate commission, payout or reallowance structures for
individual products. The condition of equal weighting requires a good
faith effort by a member to comply and the test of whether a particular
equal weighting methodology is acceptable is whether the contest is
still skewed toward a particular product or products.
It is believed that these requirements will ensure that members and
their affiliates selling proprietary investment company securities and
variable contracts products do not structure in-house non-cash
arrangements that are biased in favor of their proprietary products or
any one specific product.
A member's or its affiliate's non-cash compensation arrangement is
also subject to the restriction that no unaffiliated non-member entity
(usually an offeror) or another member can participate directly or
indirectly in the member's or its affiliate's organization of a
permissible non-cash sales incentive program. This provision is
intended to ensure that third-party offerors are not involved in and do
not influence the organization of a permissible non-cash sales
incentive program by a member or a member's affiliate. The restriction
on participation is not, however, intended to prevent a
[[Page 35832]]
non-member company from making a presentation on its products at a
member's or its affiliate's in-house sales incentive meeting at the
member's or affiliate's request.
Finally, the non-cash incentive program of a member or its
affiliate for a member's associated persons is also subject to the
recordkeeping requirements of the proposed rule. Thus, in the case
where the member or its associated persons is in receipt of payments or
non-cash sales incentives from its affiliated entity, such payments or
non-cash sales incentives must be recorded on the books and records of
the member firm.
The NASD is also proposing in subparagraph (l)(5)(e) of the
Investment Company Rule and subparagraph (h)(3)(e) of the Variable
Contracts Rule that any non-member entity (usually an offeror) or
another member continue to be permitted to contribute to any member's
in-house non-cash sales incentive program, so long as: (1) The in-house
program is based on total production of the investment company
securities or variable contract products; (2) each sale receives equal
weighting; (3) no entity (other than a member's affiliate) directly or
indirectly participates in the member's organization of its permissible
non-cash incentive compensation program; and (4) the member maintains
records of such contributions. This provision is intended to permit
third-party offerors, and their affiliates, to contribute to the non-
cash incentive program of a member in order to benefit the associated
persons of the member that sell the offeror's securities.16 The
proposed rule change does not similarly permit third party entities to
make contributions to the non-cash incentive program of an affiliate of
a member because such non-member affiliates are not subject to the
recordkeeping requirements of the proposed rule change. Thus,
contributions by third parties for a non-cash incentive program for
associated persons of a member firm may be made only directly to the
member.
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\16\ The provision would also permit a member's affiliate to
contribute to the member's in-house non-cash incentive program.
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Relationship of the In-House Non-Cash Incentive Exceptions for
Members and Their Affiliates to the Training or Education Exception:
The NASD believes that training/education meetings are important to the
investment company/variable contract industries and it is, therefore,
important that the NASD's rules continue to permit such meetings. The
structure of the training or education provision permits members to
recognize high producers by attendance at such meetings, but prohibits
a member from requiring achievement of a specified sales target or any
other in-house non-cash arrangement to attend the meeting. Since the
proposed rule change would permit members and their affiliates to have
an in-house non-cash incentive program for sales of investment company
securities and variable contracts (and offerors may contribute to such
in-house incentive programs), it is important to clarify the difference
between attending a training/education meeting as a permissible
``recognition'' and attending it as an impermissible ``non-cash sales
incentive program.'' The issue arises only where a member is in receipt
of any payment or reimbursement for the costs of a meeting or a third-
party offeror (or any of its affiliates) pays for any of the costs of a
meeting which is attended by associated persons of a member.17 One
clear demarcation is that any meeting held by a member or its affiliate
only for the member's associated persons (where contributions are made
by a third-party offeror) may be covered either by the exception for
in-house non-cash incentives or the exception for a training and
education meeting, whereas any meeting held by a third-party offeror
must comply with the training/education requirements (because a third-
party offeror cannot conduct a non-cash incentive program).
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\17\ See supra note 12.
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Subparagraphs 2820(h)(4) and 2830(l)(6): Prohibition on Certain
Types of Incentive-Based Cash Compensation--The NASD is proposing to
adopt as new subparagraph (l)(6) of the Investment Company Rule and new
subparagraph (h)(4) of the Variable Contracts Rule a prohibition, with
certain exceptions, on the receipt of incentive-based cash
compensation. The new provision would prohibit a person associated with
a member from directly or indirectly accepting any cash compensation
preconditioned on the achievement of a sales target offered or provided
to such person or the member with the person is associated, unless such
compensation is permitted under the provision. Implicit in the
prohibition on the ``acceptance'' of such incentive-based cash
compensation is the requirement that a member may not make a payment of
compensation to another member and its associated persons that results
in a violation of the rule by the recipients.
The inclusion of this provision for the prohibition of incentive-
based cash compensation is intended to ensure that offerors do not
circumvent the non-cash incentive prohibition through the offering of
cash incentives directly to associated persons. This is consistent with
the NASD's intention to prohibit incentives that act as point-of-sale
inducements that could influence the advice of a salesperson. The cash
incentive prohibition is focused only on cash sales incentive contests
that could be used by offerors to reward associated persons of a
broker-dealer for the sale of a particular investment company or
variable contract security and does not encompass payments at the
entity-broker-dealer level that are not passed on to the associated
person. Thus, the focus of the prohibition does not include other cash
revenue-sharing arrangements intended to be covered by the NASD's study
of cash compensation practices, as more fully set forth below. In
particular, the proposed provision would not prohibit the practice of
paying higher sales charges for reaching increasing sales targets.
Also, it is important to note that payments of cash compensation that
would be permitted under this provision would not be subject to the
proposed disclosure provisions above.
The proposed rule change contains exceptions from the prohibition
on the receipt of incentive-based cash compensation.
Subsections 26(l)(6) (a) and (b) and 29(h)(4) (a) and (b): The NASD
is proposing to adopt for the Investment Company Rule and the Variable
Contracts Rule exceptions from the prohibition on incentive-based cash
compensation that, consistent with the non-cash sales incentive
prohibition, will permit: (1) Compensation arrangements between a
member and its associated persons; (2) compensation arrangements
between a non-member company and its sales personnel who are associated
persons of an affiliated member; and (3) contributions by a non-member
company or other member to a cash compensation arrangement between a
member and its associated persons.
The three permissible arrangements are subject to four conditions.
The conditions that must be met are that: (1) The member's or non-
member's compensation arrangement, if it includes investment company or
variable product securities, must be based on the total production of
associated persons with respect to all investment company or variable
product securities distributed by that member; (2) the credit received
for each investment company or variable product security must be
equally weighted; (3)
[[Page 35833]]
no unaffiliated non-member company or other unaffiliated member may
directly or indirectly participate in the member's or non-member's
organization of a permissible compensation arrangement; and (4) the
member must maintain records of all compensation, cash and non-cash,
received by the member or its associated persons from offerors.
Finally, as with proposed provisions for non-cash compensation
arrangements above, the applicability of the total production and equal
weighting requirements to variable contract securities does not require
that variable annuity and variable life products be combined in the
same cash incentive arrangement. Again, because of the substantially
different commission structure of each product, the NASD intends that
subparagraph (h)(4)(a) of the Variable Contracts Rule apply to each
variable contract product type--variable annuity or variable life.
In order to fully understand the applicability of the proposed rule
change with respect to training or education meetings and in-house non-
cash incentive programs, a chart and five narrative examples are
included as Exhibit 5. Copies of these documents are available to the
public from the NASD.
Relationship of the Proposed Rule Change to the Tully Report: The
Tully Report reviewed industry compensation practices in connection
with the sale of all forms of securities for associated persons of
members, identified conflicts of interests inherent in such practices
and identified the ``best practices'' used in the industry to
eliminate, reduce, or mitigate such conflicts of interest. The rule
change proposed herein is limited to addressing certain compensation
issues only in connection with the sale of investment company
securities and variable contracts. The NASD believes that the proposed
rule change is consistent with the characteristics of ``best
practices'' identified in the Tully Report in that the requirements in
the proposed rule for the receipt of non-cash and cash incentives
eliminates the point-of-sale impact of such incentives on the sales
practices of an associated person, thereby helping to align the
interests of associated persons, broker-dealers and investors with
respect to the sale of investment company securities and variable
contracts.
Separate from the proposed rule change, however, the Board of
Directors of NASD Regulation, Inc. (``NASDR'') has agreed that NASDR,
acting through its standing committees, should review the Tully Report
recommendations and determine what initiatives, if any, the
organization should undertake. NASDR will be collecting the views of
the Committees later this year for consideration by the NASD National
Business Conduct Committee (``NBCC'').
Proposed Implementation of New Rules
The NASD is proposing that the amendments to the Investment Company
and Variable Contracts Rules be implemented in the following manner.
The proposed rule change will be effective on the date stated in a
Notice to Members announcing Commission approval, which Notice will be
issued no later than 60 days after Commission approval. The date stated
is the date of the issuance of that Notice. As of that date, members
will be required to comply with the proposed rule change. With respect
to the non-cash and cash sales incentive provisions, no new sales
incentive programs may be commenced after the announced effective date.
Sales incentive programs that are currently on-going on the date of
effectiveness will be permitted to continue for a period not to exceed
six months following the announced effective date. Thus, during the
six-month implementation period, no new incentive programs may commence
and sales may continue to be applied to existing incentive programs.
However, non-cash and cash sales incentives earned by associated
persons will be permitted 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. Thus, during the calendar year 1996, members and their
associated persons would be permitted to receive non-cash sales
incentives earned prior to January 1, 1996.
(b) Statutory Basis for Proposed Rule Change
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) 18 of the Act, which require
that the Association adopt and amend its rules to promote just and
equitable principles of fair trade, and generally provide for the
protection of investors and the public interest in that the proposed
rule change is designed: (1) To adopt new regulations with respect to
the sales of variable contracts in Rule 2820 that will regulate the
direct payment of compensation to associated persons by persons other
than the member with which a person is associated, establish
recordkeeping requirements, and regulate the receipt of non-cash
compensation by members and their associated persons; (2) amend current
regulations with respect to the sale of investment company securities
in Rule 2830 that will clarify the circumstances under which associated
persons may receive direct payments of compensation from persons other
than the member with which a person is associated with, establish
recordkeeping requirements, retain current disclosure requirements and
a prohibition on the receipt of securities as compensation, and
regulate the receipt of non-cash compensation by members and their
associated persons and the receipt of cash incentives by associated
persons. Moreover, the proposed rule change is designed to minimize the
point-of-sale impact of non-cash sales incentives on the
recommendations of associated persons to their customers with respect
to the sale of investment company securities and variable contracts and
eliminate any potential that third party non-cash incentives may
undermine the supervisory control of the member with respect to their
associated persons, which would increase the possibility for the
perception of impropriety which may result in a loss of investor
confidence.
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\18\ 15 U.S.C. Sec. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
Comments received on the proposed rule change in response to NTM
94-67 raised a number of concerns regarding the potential
discriminatory impact of the proposed rule change as published for
comment on issuers of investment company securities and variable
contracts and on members not affiliated with an issuer. Because the
rule change proposed for comment in NTM 94-67 has been significantly
amended to address the arguments of comments with respect to its
discriminatory impact, the NASD's discussion of the proposed rule
change's burden on competition is set forth below in connection with
the comments received on the proposed rule change. On the basis of the
discussion set forth below in connection with the comments received,
the NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in NTM 94-67. 43
comments were received in response thereto. Of the 43 comment letters
[[Page 35834]]
received, 25 were supportive of the overall goal of the proposed rule
change to more closely regulate incentive compensation arrangements, 8
were opposed, and 10 were neither explicitly for nor against the
proposal. The rule change published for comment did not include the
proposed prohibition on the receipt of cash incentives by associated
persons of a member.
Deferral of Cash Compensation Issues
At the time the non-cash compensation proposal was published for
comment company securities and variable contracts, and not with respect
to disclosure of various forms of cash compensation. A number of
commenters raised issues as to whether the requirements of the current
Investment Company Rule and the proposed new Variable Contracts Rule
would require disclosure of various forms of cash compensation
arrangements (e.g., ``revenue sharing'' and ``soft dollar''
arrangements) as ``special compensation'' or as ``cash compensation,''
that are increasingly being provided to members in connection with the
sale of investment company securities and variable contracts. Other
commenters expressed concerns regarding the possibility that members
may provide a disparate cash payout to representatives with respect to
sales of proprietary products.
A connected issue concerning the disclosure of such revenue sharing
arrangements is whether such disclosed compensation is subject to the
sales charge limitations of paragraph (d) of the Investment Company
Rule. In a letter dated November 22, 1994, the Division of Investment
Management of the SEC requested advice from the NASD as to whether the
current disclosure requirements of the Investment Company Rule apply to
such revenue sharing arrangements. Specifically, the SEC asked whether
such cash compensation and revenue sharing arrangements are a
``discount, commission, fee or concession'' for purposes of paragraph
(l) that are subject to disclosure and should be limited as ``sales
charges described in the prospectus'' for purposes of paragraph
2830(d). In connection with the SEC's request, the NASD Board of
Governors approved the proposed rule change to be filed with the SEC
but agreed to defer resolution of the revenue sharing issues until a
later date. The NASD believes that it should not attempt to determine
the applicability of the proposed amendments to the variety of revenue
sharing issues without first gathering information about the scope of
revenue sharing payments and also addressing jurisdictional questions.
Thus, the NASD has deferred issues regarding revenue sharing
arrangements until a study is conducted by NASD staff of members that
engage in the sale of investment company securities and variable
contracts in order to develop a greater understanding of the different
forms of revenue sharing arrangements and to provide information for
policy-making by the Committees. It is anticipated that, as a result of
the study, the NASD will develop rule proposals with respect to the
disclosure of revenue sharing items that will be filed with the SEC and
published for comment prior to adoption. Therefore, the NASD will not
address at this time issues raised by commenters in response to NTM 94-
67 regarding special cash compensation, revenue sharing, soft dollar
payments or certain other forms of cash compensation payments made in
connection with the sale of investment company securities and variable
contracts.
The discussion set forth below of the comments received on the
proposed rule change includes the specific comments received with
respect to revenue sharing and other cash compensation issues that will
be covered by the NASD's study of such arrangements.
Original Proposal
In connection with the sale of investment company securities and
variable contracts, the amendments as originally proposed would have:
(1) Prohibited, with certain exceptions, members and persons associated
with members from accepting any non-cash compensation from an offeror
in connection with the sale of investment company securities and
variable contracts; (2) prohibited associated persons from receiving
any compensation from anyone other than the member with which the
person is associated, unless permitted by the rule; (3) prohibited
receipt by a member of cash compensation from the offeror unless such
arrangement is described in the current prospectus; and (4) required
that members maintain records of compensation received from offerors.
The amendments also would have retained the prohibition, in connection
with the sale of investment company securities, against a member
receiving compensation in the form of securities from an offeror.
The exceptions from the non-cash compensation prohibition would
have permitted: (1) In-house sales incentive programs of broker-dealers
for their own associated persons; (2) sales incentive programs of
investment companies and insurance companies for the associated persons
of a broker-dealer subsidiary; (3) payment or reimbursement for
training and education meetings held by a broker-dealer or an
investment or insurance company 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 a result of member comments, the rule language of the proposed
amendments published in NTM 94-67 was significantly modified by the
Board of Governors. The following is a discussion of member comments in
response to NTM 94-67.
General Comments
Rationale for New Rules. Certain commentators opposed to the
proposed rule change questioned the necessity for the proposed rule
given that both the Insurance Affiliated Members Committee and the
Investment Companies Committee did not find that the manner in which
non-cash compensation is offered and paid to members and their
associated persons indicates a level of supervisory and compliance
problems similar to those experienced by the DPP industry in the late
1980s (Massachusetts Mutual Life Insurance Co. (``MML''), New England
Funds (``New England''), Wood Logan). One commentator (MML) requested
that any final rules be accompanied by a clear and forthright
explanation of the abuses which the proposed rules are attempting to
correct. Another commentator stated that the possibility of the
perception of impropriety is greater in the sale of investment company
securities since such securities, unlike variable products, are not
subject to state insurance regulation, and expressed concern about
broadening the non-cash compensation rules to include variable products
without any evidence of actual or potential abuse (ITT Hartford). The
commentator expressed concern about extending non-cash prohibitions to
variable products solely on the basis of a perception of impropriety.
There were 25 commentators in support of the proposed rule change
that provided specific comments in favor of the proposal (ACLI, A.G.
Edwards & Sons (``AG Edwards''), American Funds Distributors, Inc.,
Bridgeway, Calvert Securities Corp. (``Calvert''), Edwards & Angell,
Equity Services, Inc., FNIC, Fidelity Investments, IAFP, ICI, IM&R, ML
Stern & Co. (``ML Stern''), Mariner, Merrill Lynch, Mutual Service
Corporation (``Mutual Service''),
[[Page 35835]]
Nuveen, PNMR, Prudential, Putnam Investments, Raymond James, State of
New York, T. Rowe Price, Thornburg Securities (``Thornburg''), Titan).
The NASD was urged to adopt a policy regarding the treatment of non-
cash compensation that is applied ``more or less even-handedly'' across
businesses within the securities industry. It was stated that the
potential is present that the abuses identified by the NASD with
respect to DPPs in the 1980s may occur with respect to investment
company securities and variable contracts. It was pointed out that in
many cases the same registered representatives that sell DPPs also sell
investment company securities and variable contracts. It was argued
that the perception of impropriety may lead to a loss of investor
confidence. In this connection, it was pointed out that there had been
recent unfavorable media coverage of non-cash incentives in the sale of
investment company securities (Edwards & Angell).
Another commentator stated that the proposal will contribute to
ethical business practices among registered representatives, instill a
greater disclosure responsibility on sponsors and provide an enhanced
regulatory effort for the protection of the consumer (Raymond James)
and that the proposal on the whole is excellent and will serve to
provide full and fair disclosure of all compensation to the public and
necessary guidance to members as to acceptable forms of compensation
(AG Edwards).
Other commentators stated that prohibiting non-cash compensation
will strengthen the ability of member firms to supervise their
registered representatives (Merrill Lynch) and that the entire
investment community is best served by removing any incentive a
registered representative may have to sell a particular product other
than one for the clients' best interests (Thornburg). It was also
stated that the proposal will provide NASD members with greater control
over compensation offered to their registered representatives (Mutual
Service). Finally, commentators stated that the proposal protects and
enhances investor confidence (IAFP), and decreases the possibility, as
well as the consumer's perception of, representatives' impropriety
(Calvert).
Other General Comments. One commentator thought the proposed rules
were unduly complicated and might unnecessarily penalize members who
have creative compensation approaches (Mutual Service). The commentator
stated that a simpler way to accomplish the objectives of the proposed
rule change would be to require only that all compensation be disclosed
in the prospectus, all cash compensation be paid to the member firm,
and all incentive compensation be based on gross production of all
products. As set forth above, the NASD will review the current forms of
cash compensation received by members in connection with the sale of
investment company securities and variable contracts in order to
develop rules that will address disclosure of compensation in the
prospectus. With respect to the second request that all cash
compensation be paid to the member firm, there is a long history of SEC
interpretive positions and no-action letters permitting third-parties
to make direct payments of cash compensation to associated persons
under certain circumstances. The NASD believes it is appropriate that
the proposed rule change recognizes these SEC positions. With respect
to the third comment, as set forth below, the NASD is revising the
proposal published for comment to require that a member's or its
affiliate's in-house incentive program must be based on total
production of associated persons with respect to sales of investment
company securities and variable contracts and that the credit received
for the sale of each security is equally weighted. These provisions are
discussed more fully below.
Another commentator requested general clarification on the
relationship between Rules 2820 and 2830 (Fidelity). As stated in
paragraph 2820(a), Rule 2820 applies to member's activities in
connection with the sale of variable contracts in lieu of Rule 2830.
Thus, variable contracts are regulated solely by Rule 2820--not Rule
2830.
Relationship to Rules for Direct Participation Program Securities.
One commentator recommended that if the proposed rule with respect to
non-cash sales incentives is adopted that the NASD implement conforming
changes with respect to the NASD's rules for direct participation
program securities in Rule 2810. It was stated that to regulate the DPP
and investment company/variable contracts industries differently would
give a competitive advantage to one over another (Edwards & Angell).
Another commentator stated that Rule 2810(b)(4)(E) does not contain a
similar carve-out for in-house compensation arrangements by affiliates
of a broker-dealer and the proposed rule, if adopted, would therefore
discriminate against broker-dealers which are not subsidiaries of an
investment company or insurance company (Titan II).
The NASD's Direct Participation Programs Committee will review the
proposed rule change in light of the current provisions of the non-cash
incentive rule of Rule 2810.
Specific Comments
Definitions of Cash and Non-Cash Compensation
Cash Compensation Definition. In the explanation of the provisions
of the proposed rule in NTM 94-67, the NASD stated that the proposed
definition of ``cash compensation'' in paragraph (b)(7) of the
Investment Company Rule ``encompasses cash compensation arrangements
covered under the current provisions of the Investment Company Rule.''
One commentator stated that this description appears to be inconsistent
with the proposed new definition of ``cash compensation,'' which
includes, among other things, asset-based sales charges (Fidelity). The
commentator suggested that the NASD either eliminate asset-based sales
charges from the coverage of the definition or explain more clearly the
reasons for its inclusion and the scope of its applicability. The
commentator suggested that the NASD also explain the scope of the
counterpart definition of cash compensation in subparagraph (b)(3) of
the Variable Contracts Rule. The NASD believes that the definition of
``cash compensation'' in the Investment Company Rule should include
coverage of ``asset based sales charges'' and that they are encompassed
in the current Investment Company Rule as a ``fee.'' In comparison to
the proposed definition in NTM 94-67, the term ``asset based sales
charge'' has been deleted from the definition of ``cash compensation''
in the Variable Contracts Rule since there is no provision in the
current Variable Contracts Rule for such charges.
One commentator urged that although the proposal appropriately
places limits on non-cash compensation, the NASD should go further and
only allow, with limited exceptions, the reallowed sales charges in the
prospectus (Nuveen). The NASD believes it is appropriate to permit
different forms of cash compensation, so long as such compensation
arrangements are not contrary to the concepts of fairness and
reasonableness under Article III, Section 1 of the NASD's Rules of Fair
Practice--the NASD's basic ethical rule. In the course of conducting a
study of cash compensation arrangements, the fairness and
reasonableness of such arrangements will be considered.
Non-Cash Compensation. The definition of ``non-cash'' compensation
in Subparagraphs (b)(7) of the Investment Company Rule and (b)(3) of
[[Page 35836]]
the Variable Contracts Rule includes payments of cash to reimburse
members for the costs of travel, meals and lodging. One commentator
stated that if cash payments are to be included within the term ``non-
cash compensation,'' the term ``non-cash compensation'' should be
recharacterized (MML). The NASD believes it is appropriate to treat
cash payments for non-cash items as ``non-cash compensation,'' because
the receipt of non-cash items of compensation should be regulated in
the same manner regardless of whether the item is received or payment
is made for the cost of the item.
However, the NASD believes that there is an issue of whether excess
cash payments for training and education meetings meet the definition
of non-cash compensation and will seek to clarify in its study on cash
compensation whether payments exceeding actual reimbursements fit
within the definition of non-cash compensation, and whether any such
excess is received in connection with sale or distribution practices.
Special Cash Compensation. The proposed change does not contain a
definition of the term ``special cash compensation'' that is used in
the current and proposed disclosure provision of the Investment Company
Rule (subparagraph (l)(4) of the Investment Company Rule) and the
disclosure provision that was originally proposed in subparagraph
(h)(3) of the Variable Contracts Rule. One commentator suggested, for
purposes of the Variable Contracts Rule, defining the phrase as ``any
cash compensation that exceeds the maximum compensation disclosed in
the prospectus,'' which would enable a member to accept less than the
maximum disclosed commission without having to force the disclosure in
the prospectus of all members who were paid no more than the maximum
commission (ITT Hartford).
As set forth above, the NASD has amended the proposed rule change
to the Variable Contracts Rule to delete the disclosure provision. The
NASD intends, nonetheless, to reconsider the definitions in the
proposed rule change with respect to the Investment Company Rule and
Variable Contracts Rule and the text of the disclosure provision being
proposed herein with respect to the Investment Company Rule (including
the requirement for disclosure of ``special compensation
arrangements'') as a part of the study of cash compensation
arrangements, referenced above.
Preamble--``In Connection With''
The preambles to the proposed rule change in the Investment Company
Rule and the Variable Contracts Rule begin with the phrase ``In
connection with the sale and distribution of investment company
securities [variable contracts].'' Commentators stated that there is no
guidance to illustrate the meaning of the phrase and requested NASD
clarification as to the scope of the phrase and whether it applies to
in-house non-cash compensation not intended to serve as a sales
incentive such as, for example, compensation paid as a reward to phone
representatives for a stellar attendance record or exceptional phone
demeanor (MML, Nuveen, T. Rowe Price). Another commentator requested
that the final rules clearly state what compensation arrangements are
acceptable and suggested that language be incorporated in the final
rule clarifying what specific types of compensation are unrelated to
sales and distribution, and therefore not covered by the rules (New
England).
One commentator identified various current investment company
``payment'' practices which are not tied to specified sales levels of
the broker-dealer, but are intended instead to ``solidify the
relationship between the broker-dealer and the mutual fund complex,''
such as when a mutual fund complex: (1) Gives ```unrestricted''' funds
to some of the broker-dealers in its selling group; (2) Gives books to
some of its broker-dealers on ```how to sell mutual funds''' for
distribution to its registered representatives; (3) pays for the cost
of preparing broker-dealer training materials; (4) pays for advertising
in a broker-dealer's internal newsletter (MML). The commentator
emphasized that a literal reading of the phrase could cover all of the
above examples and, absent clarification, the phrase will be
interpreted liberally by some firms and narrowly by others. The
commentator recommended that the phrase be deleted in its entirety or
clarified to ensure its uniform interpretation and implementation.
The NASD is aware that members and their associated persons receive
compensation for the sale of non-securities products from insurance
companies and receive other forms of payments from investment and
insurance companies that are not for sales and distribution activities.
The preamble is not intended to cover compensation and payment
arrangements that are clearly not in connection with the sale and
distribution of investment company securities or variable contracts.
The extent to which any specific cash payments are considered to be
made in connection with the sale of securities will be further
considered and clarified as a result of the NASD's study of cash
compensation arrangements, as set forth above.
Subparagraphs 2820(h)(1) and 2830(l)(1)--The Ministerial Exception
Proposed subparagraph (l)(1) of the Investment Company Rule and
proposed subparagraph (h)(1) of the Variable Contracts Rule would
codify the so-called ``ministerial exception,'' which permits a non-
member, under certain circumstances, to maintain a commission account
as a ministerial service for a member and, on behalf of the member, pay
commission checks directly to associated persons of the member.
One commentator stated that, contrary to the assertion in NTM 94-67
that the ministerial exception only recognizes either the conditions
set forth in Securities Exchange Act Release No. 8389 or no-action
positions on how to comply with conflicting requirements of state
insurance and securities laws, there are additional no-action letters
from the Commission authorizing other direct payment exceptions based
on theories wholly different from either the ministerial exception or
state law conflict (MML). The commentator requested modification of the
proposed rules to explicitly recognize the existence and validity of
such no-action letters. The commentator's recommendation was to add
rule language to the end of subparagraphs (l)(1) of the Investment
Company Rule and (h)(1) of the Variable Contracts Rule published for
comment stating ``or where such payments are authorized by a no-action
letter issued by the staff of the Securities and Exchange Commission.''
One commentator requested that the final rule clarify that an NASD
member firm can rely on any no-action position or opinion of counsel
without having to obtain its own no-action position in order to take
advantage of the ministerial exception (NAVA). Another commentator
stated that the ministerial exception should be allowed to be used in
all states, regardless of whether a state law impediment exists (PNMR).
The NASD agrees that it was not the intention of the ministerial
exception to limit the ability of a member to rely on any applicable
SEC interpretations or no-action letters that would permit direct
payment of commission checks to associated persons. At the same time,
the NASD believes it is necessary to ensure that members rely only on
SEC
[[Page 35837]]
positions that are issued (in comparison to telephone advice) and that
are applicable to the specific fact situation under which such direct
payments will be made. Thus, it should only be necessary for a member
to obtain from the SEC an exemptive, interpretive or no-action letter
in the event that no current rule, regulation, interpretive release, or
no-action position that applies to the member's fact situation.
Additionally, the NASD believes it is necessary to ensure that direct
payments to associated persons are treated as payments directly to the
member for purposes of NASD rules.
Therefore, the rule language set forth in subparagraphs (l)(1) and
(h)(1) of the Investment Companies and Variable Contracts Rules,
respectively, in NTM 94-67 has been revised to clarify that associated
persons may be compensated by certain non-members provided: (1) The
arrangement is agreed to and the amount of commission determined by the
member; (2) the member relies on an appropriate rule, regulation,
interpretation or applicable no-action or exemptive letter issued by
the SEC or its staff; (3) the payments are treated as compensation
received by the member for purposes of the rules of the NASD; and (4)
the payments are subject to the proposed rule's recordkeeping
requirements. The NASD also revised rule language to recognize the SEC
staff's recent no-action letter to Chubb Securities Corporation that
permits commission payments by financial institutions directly to
associated persons of member firms under certain circumstances.19
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\19\ Chubb Securities Corporation (Nov. 24, 1993).
---------------------------------------------------------------------------
The NASD does not believe it is appropriate, as recommended by one
commenter, to amend the rule to recognize an opinion of counsel,
standing alone, as the basis for a member's reliance on the ministerial
exception. This position does not preclude a member from obtaining an
opinion of counsel that the member has based its determination to
permit direct payments by a third-party to its associated persons on an
appropriate rule, regulation, interpretation, or no-action or exemptive
letter of the SEC or its staff and that such rule, regulation,
interpretation, or no-action or exemptive letter applies to the
specific fact situation of the member.
Subparagraphs 2820(h)(2) and 2830(l)(3)--Recordkeeping Requirement
Subparagraph (l)(3) of the Investment Company Rule and subparagraph
(h)(2) of the Variable Contracts Rule, proposed in NTM 94-67 require
member firms to keep records, with certain exceptions, of all cash and
non-cash compensation received from offerors.
One commentator suggested that the NASD should consider requiring
member firms to file a brief report to the NASD on a standard form each
time a program to provide incentives is adopted (Edwards & Angell).
Unless specifically required otherwise by law, the NASD allows members
to devise their own specific methods and procedures for maintaining
various records required to be kept under the rules and regulations of
the Association and the SEC. It is not believed necessary for the NASD
to monitor compliance with the proposed rule change through such a
filing method. The NASD will review member's compliance with the
proposed prohibition on the receipt of non-cash compensation in the
course of its normal examination of the records of member firms.
In order to avoid duplicative recordkeeping, another commentator
suggested including an additional exception to the record keeping
requirement to allow records of compensation to be kept on behalf of a
member by a member's control person, such as, for example, the
investment adviser of a no-load fund complex (T. Rowe Price). The
proposed provision does not address the identity of the entity that
maintains the member's records. The recordkeeping requirement proposed
by the NASD is applicable to the member, regardless of the entity
relied on by the member to maintain its records, and it is the
obligation of the member to ensure that its records comply with all
applicable rules. Any records maintained by a third-party entity for a
member must be maintained in accordance with all applicable law and be
immediately accessible for examination and other regulatory purposes.
Another commentator recommended that the NASD add the phrase ``by
the member or its associated persons'' after the word ``received'' in
the first sentence of the recordkeeping requirement subsections so that
the requirement applies to compensation received by both members and
associated persons (MML). The NASD agrees that the proposed rule should
be clarified to indicate that the recordkeeping requirement applies to
compensation received by members and associated persons and has
modified the rule language in subparagraphs (l)(3) and (h)(2) of the
Investment Company and Variable Contracts Rules, respectively,
accordingly. This amendment is consistent with the proposed amendments
to the ``ministerial'' exception permitting direct payments to
associated persons.
Subparagraph 2830(l)(4)--Disclosure Requirements
The version of the proposed rule change published for comment in
NTM 94-67 contained disclosure obligations in both the Investment
Company Rule and the Variable Contracts Rule which required that all
cash compensation arrangements, including special cash compensation
arrangements, be specifically described in the prospectus, with the
exception of, among other things, arrangements between a non-member
company and its sales personnel who are associated persons of an
affiliated member firm.
The Proposed Disclosure Requirement for Variable Contracts. Two
commentators stated that any commission/compensation disclosure
requirements should be applied equally to both investment company
securities and variable annuities since the products are so similar in
nature and there is no reasonable basis to do otherwise (Raymond James,
New England). Another commentator stated the proposed requirement in
the Variable Contracts Rule to disclose non-standard compensation in a
variable contract prospectus would result in irrelevant and misleading
compensation information and would be financially and functionally
burdensome, especially during a period of rapid growth where the daily
prospectus amendments could be required (PEN). Another commentator
suggested deleting proposed subparagraph (h)(3) of the Variable
Contracts Rule (Lincoln National).
Unlike the Investment Company Rule, there is currently no provision
in the Variable Contracts Rule requiring disclosure of compensation
received by NASD members in connection with the distribution of
variable contracts. Arrangements by insurance companies for
compensating salespersons for variable product sales are generally part
of a total compensation package based on the sale of non-securities
insurance products as well as variable contracts. As discussed above,
the NASD believes that, before requiring disclosure of all cash
compensation for the sale of variable product securities, more
information should be gathered regarding the kinds of compensation that
are included in payment for the sale of variable products and the form
of any required disclosure. Further, regardless of the few comments
received opposed to this provision in the Variable Contracts Rule, the
NASD believes it is
[[Page 35838]]
apparent from the lack of discussion in the comments that the full
potential impact of the proposed disclosure provision in its entirety
on the sale of variable contract products has not been fully understood
by industry commenters. Therefore, the NASD has modified the language
of the Variable Contracts Rule to delete the requirement for disclosure
of cash compensation in subparagraph (h)(3) in the Variable Contracts
Rule published for comment in NTM 94-67, pending the gathering of more
information and industry input, and the Variable Contracts Rule has
been renumbered accordingly.
Discriminatory Impact of Exception for Payments to Sales Personnel.
A number of commentators indicated that the exception proposed in
subparagraph (l)(4)(c) of the Investment Company Rule and subparagraph
(h)(3)(c) of the Variable Contracts Rule in NTM 94-67 to the disclosure
obligation requirement for proprietary issuers with captive sales
forces was unduly burdensome for, and unfairly discriminatory against,
member firms selling only ``non-proprietary'' products, anti-
competitive, and/or misleading to a retail public expecting full
disclosure (IM&R, FNIC, AG Edwards, Stern, Associated, Mariner, Mutual
Service, Cadaret/Grant, Security Life, IAFP, LPL, Putnam, Titan II,
PEN). The commentators emphasized that required disclosures should be
the same whether the products are proprietary or non-proprietary, and
that failure to require uniform disclosure not only frustrates any
attempt to achieve a level playing field but also leads to
recommendations to customers which are not objective or suitable. Other
commentators stated that non-uniform disclosure requirements increases,
rather than decreases, the possibility for the perception of
impropriety (American Growth Fund Sponsors, Titan II, State of New
York, Wood Logan). It was recommended that the exception be deleted.
(IAFP, Titan II).
The NASD believes that the exception to which the commentators
object was intended to clarify that, since any payments of cash
compensation directly to associated persons under the ministerial
exception are required to be disclosed in any event by the member
employing the associated persons, such direct payments need not be
disclosed twice, i.e., as part of the member's receipt of compensation
from its affiliated offeror and separately as direct payments to
associated persons by an affiliated offeror. The purpose of the
exception was to avoid: (1) Duplicate disclosure of compensation
received by members affiliated with an offeror; and (2) disclosure of
the member's reallowance to associated persons when it is paid by an
offeror affiliated with the member.
Because of the considerable confusion caused by the provision,
proposed subparagraph (l)(4) of the Investment Company Rule was revised
to delete the exception provision. At the same time, the ministerial
exception (as set forth above) is proposed to be revised to make it
clear that direct payments to associated persons are treated as
compensation received by a member for purposes of NASD rules. Taken
together, these changes clarify that direct payments to associated
persons must be combined with any other compensation received directly
by the member and are subject to the disclosure requirements of the
proposed rule.
Revenue Sharing Disclosure. A number of commentators stated there
is a growing practice of ``revenue sharing'' between investment company
advisers and retail sellers of investment company shares, whereby the
advisers, in either formal or informal agreements with the retailer,
agree to pay fees to retailer members--over and above Rule 12b-1 fees--
in exchange for, among other things, (1) The placement of the funds
onto the retailer's ``preferred'' list, (2) the retailer agreeing to
sell the fund's shares at all, (3) ``due diligence'' payments for a
member's examination of an offeror's products, (4) inclusion of fund
data in a member's computerized hypothetical system, and (5) access to
a member's E-mail system (Wilmer/Cutler, State of New York, Nuveen).
One of the commentators stated that such practices are required to
be disclosed under the proposed and existing language of paragraph (l)
of the Investment Company Rule, and that the NASD should address this
issue directly and immediately by clarifying and affirming that such
arrangements must be disclosed in a fund's prospectus (Wilmer/Cutler).
The commentator stated that such clarification is essential to fulfill
the purpose of paragraph (l) of the Investment Company Rule and the
larger goal of investor protection.
Another commentator noted that the NASD's definition of ``sales
charges'' in subparagraphs (d)(1) and (2) of the Investment Company
Rule seem sufficiently inclusive to reach and govern revenue sharing
practices as well as non-cash compensation (State of New York). The
same commentator stated that both principles of agency law and
securities anti-fraud statutes and rules provide a basis for requiring
brokers to disclose all financial and economic incentives in connection
with a securities recommendation (State of New York). Finally, one
commentator stated that such ``revenue sharing practices'' should be
prohibited (Nuveen).
As more fully set forth above, the NASD will defer action on issues
regarding revenue sharing and other cash compensation arrangements
until a study conducted by NASD staff of members that engage in the
sale of investment company securities and variable contract products in
order to develop a greater understanding of the different forms of
revenue sharing arrangements and to provide information to the NASD for
policy making.
Disclosure of Special Cash Compensation. One commentator requested
that specific details of special cash compensation arrangements, such
as member names and amounts, should only be required to be disclosed
where the standards for the receipt of such special cash compensation
are not uniformly applicable (American Funds Distributors). Another
commentator stated that the customers are not harmed by special cash
compensation arrangements, since the limit of the customer's costs has
already been disclosed in the prospectus, and suggested deleting
proposed subparagraph (h)(3) of the Variable Contracts Rule (Lincoln
National).
One commentator stated that the prospectus disclosure requirements
would force issuers with non-proprietary sales forces to disclose in
prospectuses the terms of each new selling agreement signed as soon as
the agreement is signed, thus requiring prospectuses to be stickered
sometimes as often as every week (Security Life). The commentator
stated that the benefits of such a burden would be de minimis, and
suggested that the proposed rule be redrafted to only require the
disclosure, for both proprietary and non-proprietary firms, of the
maximum amount of cash compensation.
As set forth above, the NASD will defer action on issues regarding
special compensation arrangements until a study of cash compensation
arrangements is conducted in order to develop a greater understanding
of the different forms of special cash revenue sharing arrangements and
to provide information to the NASD for policy making.
Burden of Compliance. One commentator objected to the proposed
rule's disclosure requirements on the basis that it places the burden
of compliance oversight for ensuring proper disclosure on individual
member firms rather than on the funds and their
[[Page 35839]]
affiliated underwriter (Merrill Lynch). The commentator stated that
this burden places each broker-dealer in the difficult position of
having to independently evaluate the quality of fund disclosure, and
recommended that the NASD either reaffirm the rule's current
prohibition on underwriters and their associated persons from paying
cash compensation that is not disclosed in the prospectus or, in the
alternative, modify the rule language so that both broker-dealers and
underwriters have responsibility for compliance with the proposed rule.
With respect to participating broker-dealers that are not the
principal underwriter for an investment company, the language of the
provision places the burden of ensuring adequate disclosure on each
individual member only with respect to the compensation that the member
is receiving.20 Such a participating member does not have an
obligation to ensure disclosure of compensation received by other
member firms.
---------------------------------------------------------------------------
\20\ The rule language states ``No member shall accept any cash
compensation from an offeror unless such compensation is described
in a current prospectus of the investment company.''
---------------------------------------------------------------------------
However, the principal underwriter is responsible for the
disclosure of compensation with respect to all members with whom they
have entered into dealer agreements. This obligation arises as a result
of the disclosure requirements of SEC Registration Statement Form N-1A.
In Notice to Members 93-12 (February 1993), in Question 35, the NASD
stated that investment companies should provide disclosure in a manner
sufficient for member firms to prove that they can sell the fund's
shares in compliance with NASD rules. Because the principal underwriter
enters into all dealer agreements, the principal underwriter must be
responsible for ensuring adequate disclosure of the compensation
received by all participating dealers.
Treatment of Payments for Training or Education Meetings; Potential
Discriminatory Impact. Offerors from time to time hold and pay for
training and/or educational meetings with different members to
differing degrees, resulting in disparate payment levels to members.
One commentator, assuming that such payments could be regarded as
special cash compensation, stated that the NASD should clarify that
such situations do not require any special prospectus disclosure
(Prudential). Other commentators stated that if a non-proprietary fund
family's contribution toward an unaffiliated broker-dealer's cost of a
public seminar (i.e., training or education meeting) is considered cash
compensation requiring prospectus disclosure, then such unaffiliated
broker-dealers will be placed at a significant competitive disadvantage
when marketing to the public compared to proprietary funds/firms which
would not have to disclose such compensation under the proposed rule
(FNIC, Stern).
Payments made by offerors for training and education meetings which
meet all the requirements for training and education meetings set forth
under subparagraphs (l)(5)(c) or (h)(3)(c) of the Investment Company
and Variable Contracts Rules, respectively, are not required, as non-
cash compensation, to be disclosed in the prospectus. Thus, there is no
discriminatory impact on unaffiliated broker-dealers, as such firms are
not required to disclose payments received as reimbursements for their
costs in conducting a training or education meeting. Such payments
will, however, along with other cash payments be reconsidered in
connection with the NASD's study of the cash compensation arrangements
in connection with the sale of investment company securities and
variable contracts.
Other Comments. The proposed rule does not specifically address the
payment practice of ``overcredits,'' which is a payment made by an
offeror to a member firm over and above the reallowance in a full
dealer reallowance offering. One commentator criticized the proposed
rule for failing to require that the practice of awarding overcredits
be included as a disclosure item (Thornburg). Such payments will,
however, along with other cash payments be reconsidered in connection
with the NASD's study of the cash compensation arrangements in
connection with the sale of investment company securities and variable
contracts.
Two commentators stated that the NASD exceeds its authority in
mandating disclosure requirements which fall within the jurisdiction of
the SEC (Cadaret/Grant, New England Funds). The NASD does not believe
it exceeds its authority by imposing rules on its members with respect
to disclosure of compensation or any other information to investors, so
long as such disclosure requirements are not contrary to the rules and
regulations of the SEC. The proposed disclosure requirements do not
change, and do not attempt to change, in any way the existing
prospectus disclosure requirements under the registration and
disclosure provisions of the Securities Act of 1933 or the Investment
Company Act of 1940.
Subparagraphs 2820(h)(3) and 2830(l)(5)--Prohibition on Non-Cash
Compensation
General Comments on Prohibition. One commentator stated that the
proposed prohibition on non-cash compensation as published for comment
in NTM 94-67 ought not to prohibit an offeror from reimbursing a member
firm for all or a portion of the expenses incurred in conducting a
seminar for the benefit of potential investors, because no public
policy interest is served by prohibiting such arrangements (AG
Edwards). The NASD believes that a ``road show'' or seminar for
investors is not the same as a training or education meeting that is
intended only for associated persons of member firms nor is it a non-
cash sales incentive trip that was intended to be prohibited by the
proposed rule. Thus, it appears appropriate to interpret the proposed
rule to not prohibit reimbursements of the expenses of members for road
shows for the benefit of investors. Such payments will, however, along
with other cash payments be reconsidered in connection with the NASD's
study of the cash compensation arrangements in connection with the sale
of investment company securities and variable contracts.
Another commentator suggested that an additional exemption be added
from the prohibition on non-cash compensation for due diligence
meetings sponsored and paid for by an offeror on behalf of selected
registered representatives of the offeror's selling group broker-dealer
who were invited by the offeror on the basis of the amount of assets
generated or procured the reps for the offeror's funds (Thornburg).
Such meetings, the commentator stated, are specifically for the purpose
of clarifying detailed fund portfolio and investment information so
that registered representatives will be able to answer sophisticated
client queries concerning such matters. Due diligence meetings, as
``due diligence'' is referenced in Section 11 of the Securities Act of
1933, are attended by the due diligence personnel of a broker-dealer
firm for the sole and narrow purpose of ensuring the adequacy and
accuracy of the information in the offering document. Such meetings
would be held at a location appropriate to the conduct of due
diligence, such as the issuer's offices. NASD staff are not aware of
such meetings in the investment company securities or variable contract
context. The commenter's description of ``due diligence'' meetings does
not comport with the narrow purpose of ensuring the adequacy and
accuracy of
[[Page 35840]]
the offering document. Instead, it appears that the meeting being
described is a training and education meeting, which would be required
to comply with the exception for training or education meetings. To the
extent bona fide due diligence meetings are held, as may occur in the
case of a new investment company, the proposed prohibition on non-cash
sales incentives does not prohibit such meetings and the expenses
related to such meetings are considered expenses of the offeror.
De Minimis Exceptions. One commentator stated that the protections
contained in proposed subparagraph (l)(5) of the Investment Company
Rule, which would prohibit members and their associated persons from
accepting any non-cash compensation, are illusory since the proposed
rule does not require any recordkeeping and accountability for the
acceptance of de minimis gifts and entertainment in paragraphs (a) and
(b) (State of New York). Another commentator suggested that these
exceptions retain the current language of the Investment Company Rule
which would require that such gifts and entertainment ``conditioned on
sales of share'' to clarify that, contrary to the explanation in NTM
94-76 (p. 433), such gifts should not even be permitted as rewards,
since rewards in effect invariably become a de facto sales incentive
program (Nuveen).
The NASD agrees with the general premise of the commenters that any
item of value given by an offeror to an associated person has some
influence on that person. The issue is, however, whether the $100 gift
exception and the entertainment exception provide for items of value
that are sufficient to influence the sales practices of the recipient
associated person. The exemptions for gifts and entertainment have long
been in the Investment Company Rule and are particularly appropriate in
the context of a continuously-offered security, when it should be
anticipated that offerors will want to maintain a business relationship
with associated persons of member firms. The NASD is not aware of any
abuse of these exemptions and believes that they represent such a de
minimis activity that they do not have the ability to undermine
investor protection. The NASD has, nonetheless, amended the language of
the first two exceptions to modify the phrase ``not preconditioned on
achievement of a specified sales target'' to clarify that the sales
target cannot be ``previously specified.'' The NASD believes that this
requirement as well as the de minimis nature of the gift or
entertainment proposed in subparagraphs (l)(5)(a) and (b) and (h)(3)(a)
and (b) of the proposed rule change are sufficiently restrictive in
scope and amounts to allay concerns that such gifts and gratuities may
become substantial de facto incentive programs that have the potential
to undermine investor protection.
Another commentator suggested deleting in its entirety the meals
and entertainment exception since such de minimis payments have never
posed serious non-cash compensation problems and the subjective
language of the subsection makes it unenforceable (Titan). The proposed
exception for meals and entertainment is drawn from the current
language of the Investment Company Rule and has not previously
presented an enforcement problem. While the requirement that such meals
and entertainment be ``neither so frequent nor so extensive as to raise
any question of propriety'' is subjective, it is believed that such a
standard is not inconsistent with and is no more subjective than the
Article III, Section 1 standard that members are required to ``observe
high standards of commercial honor and just and equitable principles of
trade'' which allows the NASD to take a broad regulatory approach on a
case-by-case basis if necessary. It is believed that the proposed rule
language provides sufficient specificity to put the membership on
notice of the need to exercise appropriate discretion when relying on
the exception.
One commentator stated that it is unclear whether the exceptions
for $100 gifts and entertainment would be available if a fund sponsor
makes such payments available to a broker-dealer in connection with the
firm's internal sales campaign, which campaign is based on all of the
firm's products during a specific period of time rather than specified
sales targets for particular funds (MML). The NASD believes that this
comment reflects the proposed structure of the rule change published
for comment which would have prohibited third-party offerors from
contributing to a member's in-house incentive program. Regardless of
how the broker-dealer's in-house compensation program is structured,
the exceptions for $100 gifts and entertainment cannot be combined with
the member's in-house incentive program because the third-party offeror
would be participating in the organization of the member's program
which is proposed to be prohibited. As amended, the proposed rule
change would permit, however, third-party offerors to make cash
contributions to the member's in-house incentive program.
Another commentator suggested that the $100 gift exception be
revised to replace the subsection's fixed dollar limitation with the
language ``neither so frequent nor so extensive as to raise any
question of propriety'' found in subparagraph (h)(4)(b) of the Variable
Contracts Rule (ITT Hartford). The commentator reasoned that the
standard of propriety is more appropriate than a fixed dollar
limitation in the context of variable contracts. The $100 exemption is
consistent with Article III, Section 10 of the Rules of Fair Practice
which allows such gifts between a member and the personnel of another
firm and with the Corporate Financing and DPP Rules which permit an
issuer to provide up to $100 of non-cash sales incentives to associated
persons annually in connection with the sale of corporate equities,
real estate investment trusts, closed-end funds, debt, and DPP
offerings.21 The NASD believes it appropriate to provide a fixed
dollar amount as proposed.
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\21\ The SEC approved in Securities Exchange Act Release No.
35862 (June 19, 1995) a change to Rule 2710 that amended its non-
cash incentive provision to change the gift exception from $50 to
$100.
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Exception for Training and Education Meetings. It was pointed out
by commentators that a discrepancy may exist between the text of
proposed subparagraph (l)(5)(c)(v) of the Investment Company Rule
(which specifies that sponsors cannot contribute to the training/
educational meetings if the payment or reimbursement is conditioned on
sales or the promises of sales) and its counterpart in the Variable
Contracts Rule, and the explanation of the subsection on page 434 in
NTM 94-67, which appears to go further than the actual rule language in
saying that members cannot condition attendance at their training
meetings through satisfaction of in-house sales incentive requirements,
regardless of whether they accept offeror contributions (MML, Mutual
Service). Both commentators expect the literal rule language to govern,
and one (MML) requested clarification of this expectation in the final
release. Similarly, commenters stated that, contrary to the NASD's
interpretation, example #4 in NTM 94-67 should not be interpreted as
preventing a product sponsor from contributing to the expenses a member
incurs for awarding a trip based on an in-house, total products sales
contest (Calvert, LPL). Such sponsor contributions, one of the
commenters argued (LPL), are payments for the opportunity to address
and educate registered representatives, not rewards
[[Page 35841]]
for product-specific sales performances. Another commenter stated that
the proposed rule appears to prohibit certain fact-specific situations
that ought not to be prohibited, such as a broker-dealer's incentive
offer of a business development conference/meeting/trip to any of its
associated persons (and guests) as an award for achieving a specific
sales target (measured by either ``commissions earned'' or ``assets
raised'') where the majority of the costs of the conference/meeting/
trip are paid for by invited investment and insurance companies who
also help to conduct some of the training and educational presentations
(Raymond James). The commenter stated further that such incentive
contests and their variants ought to be specifically exempted from the
proposed rule's prohibitions since they satisfy the general intent of
the proposed rules and help to increase the level of education and
training in the fund industry. Finally, other commentators stated that
the proposed non-cash restrictions would be detrimental to the variable
product marketplace (NAVA) and variable product consumers and urged the
NASD to amend its proposal to permit continued product sponsor support
of legitimate educational and training seminars, without limitation on
the methodology used by insurers to invite agent attendees (PEN).
The NASD believes that training/education meetings are important to
the investment company/variable contract industries and it is,
therefore, important that the NASD's rules continue to permit such
meetings without problems of enforcing the non-cash incentive
prohibition. It was anticipated when the training and education meeting
exception was developed that members would recognize high producers by
attendance at such meetings. Because members are permitted to have an
in-house non-cash incentive program for sales of investment company
securities and variable contract products (and offerors may contribute
to such in-house incentive programs), it is important to appropriately
clarify the difference between attending a training/education meeting
as a permissible ``recognition'' and attending it as an impermissible
``non-cash sales incentive program.'' In order to prevent a member from
combining a permitted in-house sales incentive program with a training/
education meeting held by an offeror, the NASD has revised proposed
subparagraphs (l)(5)(c)(ii) of the Investment Company Rule and
(h)(3)(c)(ii) of the Variable Contracts Rule to specify that attendance
of associated persons at bona fide training/education meetings must not
be based by the member on achievement of a sales target or any other
non-cash compensation arrangement permitted under paragraph (d) (which
permits in-house non-cash arrangements by a member or its affiliate).
When this requirement is taken together with the requirement that the
offeror cannot condition its payment or reimbursement on sales or the
promise of sales, these two requirements clarify that attendance at a
training or education meeting by an associated person is permitted to
be approved by a member as a recognition for past sales or as an
encouragement for future sales, but shall not be part of a member's or
offeror's incentive program or plan which requires that the recipient
or the member reach a specific sales goal as a prior condition to
attending the training or education meeting.
Other commentators suggested that the NASD should make explicit in
the proposed rule language for subparagraph (l)(5)(c)(v) of the
Investment Company Rule that attendance at a member's training meeting
cannot be earned through a member's in-house product-specific sales
incentive contest, but only through generic in-house sales criteria
(FNIC, Stern). The NASD has, as set forth above, amended the training
or education exception to clarify that attendance at any training or
education meeting where a member's costs of the meeting are paid for or
reimbursed by a third-party offeror cannot be earned through any in-
house incentive contest--even though such contest is in compliance with
the proposed rule. If a member holds a training or education meeting
for its own associated persons and offerors or other third-parties pay
or reimburse the costs of the meeting, the meeting must comply with the
training or education meeting exception. If no third-party pays or
reimburses the expenses of a member in connection with its internal
training or education meeting, the meeting need not comply with the
training or education exception as the member is not in receipt of non-
cash compensation. Further, in the latter instance, the member is not
prevented from inviting a third-party offeror to be a speaker at the
meeting.
One commentator objected to having any limitations at all imposed
on the ability of fund groups and product sponsors to participate, both
financially and in terms of product content, in national or regional
training, education and compliance meetings, particularly where the
right to attendance at the meetings is earned by product sales (IM&R).
The NASD disagrees with the position of the commentator and believes
that it is appropriate to regulate the manner in which training or
education meetings are held to ensure that such meetings are not
prohibited non-cash incentive meetings.
Another commentator suggested that the NASD clarify that the
limitations imposed for training and education meetings apply to an
offering of new funds as well as existing funds (Prudential). The
requirements for training or education meetings apply to any meeting
considered a training or education meeting with respect to new or
existing funds. As set forth above, however, investor seminars and bona
fide due diligence meetings (which are more likely to occur in the case
of a new fund) are not considered training or education meetings.
A commenter also stated that payment or reimbursement by offerors
to members for the cost of educational meetings should be strictly
limited to expenses actually incurred by the member in connection with
the meeting, and that such payments not exceed the annual amount per
person fixed periodically by the Board of Governors under proposed
subparagraph (l)(5)(a) of the Investment Company Rule (Nuveen). The
NASD is not proposing, at this time, to limit the payments for
educational meetings to the expenses actually incurred by the member in
connection with the meeting. Payments of a member's meeting expenses
that exceed the costs of the meeting will, however, along with other
cash payments be considered in connection with the NASD's study of the
cash compensation arrangements in connection with the sale of
investment company securities and variable contracts.
According to some commenters, the proposed rule's provision
regarding the site for training and education meetings is excessively
harsh and unrealistic, because it restricts site location to a specific
region for non-affiliated broker-dealers while permitting a national
brokerage firm to choose any location (Nike, Capital Analysts). Another
commenter stated that the proposed rule language should be expanded to
state that a national meeting may be held at a national location
(Fidelity). Another commenter stated that since every location in the
United States, or the world for that matter, could be viewed as a
``regional location,'' it is uncertain what regulatory purpose is
served by putting such an ambiguous and virtually limitless requirement
in the proposed rules (MML).
With respect to the first comment, without a restriction with
respect to the
[[Page 35842]]
location of a training/education meeting, it is probable that offerors
will compete for sales of their products on the basis of the location
of the training/education meeting that they are willing to hold for
associated persons of broker-dealers. Members, on the other hand, would
be in a position to negotiate with offerors for reimbursement of
expenses of training/education meetings in exotic locations on the
basis of the sales they have generated. Thus, it appears important that
a restriction be included with respect to the location of the meeting.
While the second commenter is correct that members with an
international business are not subject to any location limitation, it
is important to note that the agenda for such meetings must be
appropriately focused on training and education. As a practical matter,
certain business structures give a natural advantage to some members.
It is believed that if the focus of the meeting is training or
education, that the meeting is most likely to be within the 48
contiguous states.
The NASD determined not to include express limits on the location
of national training and education meetings. The establishment of
objective standards to limit national meetings would require precise
definitions of the terms and phrases ``office of the offeror or
member,'' ``facility located in the vicinity of such office,'' and
``regional location.'' Because members' business lines and distribution
systems are structured in myriad and sometimes substantially dissimilar
ways, especially with respect to physical location, precise definitions
of such terms may deprive some members of the needed flexibility to
structure their meetings. Thus, it would be very difficult to establish
any objective geographical standards without avoiding what might appear
to be discriminatory effects on certain members. The NASD believes that
whether a particular location is appropriate for a training and
education meeting will be dependant, to a significant extent, on the
facts and circumstances of each situation.
Furthermore, the NASD believes that the limitations proposed for
the nature of educational meetings in the proposed rule will discourage
sponsors from holding training and education meetings in exotic places.
Because the burden is now on members to show that a training and
education meeting is bona fide, the NASD anticipates that members will
generally avoid excessively expensive and lavish training and education
settings that would be difficult to justify under the strictures of the
proposed rule.
Another commenter suggested limiting issuer-sponsored trips to the
corporate headquarters of the issuer for educational purposes only, and
to substantiate the purpose of such trips with records of the meeting
agendas (LPL). The NASD agrees with the comment that the purpose of
training or education meetings should be substantiated by the member on
the basis of the meeting agenda, but does not believe it necessary to
limit meetings to the corporate headquarters.
Exception for In-House Sales Incentives. The major comments on the
exceptions in the version of the proposed rule change in NTM 94-67
permitting in-house sales incentive arrangements argued that allowing
direct payments by an affiliated offeror to a member's permissible in-
house program discriminated between members that sell proprietary
products and members that do not, and between investment/insurance
companies with and without an affiliated broker-dealer. In particular,
smaller members were concerned regarding the disparate impact of the
sales incentive prohibition because the largest broker-dealers also
generally sell proprietary products. Commenters also expressed
particular concern regarding the ability of an affiliated investment
company or insurance company (or other non-member affiliate, such as a
bank) to contribute to a member's in-house incentive program, whereas
non-affiliates were prohibited by the proposal from making similar
contributions.
Two commentators stated that the reasons offered for the proposed
rule change, namely, to prevent the increasing potential for loss of
supervisory control and to preempt the possibility of perception of
impropriety and loss in investor confidence, were less than compelling
justifications for regulation that not only discriminates against
certain firms but also encourages the sale of unsuitable products to
the investing public (Security Life, Wood Logan). One commentator
stated that the exception in NTM 94-67 permitting in-house non-cash
compensation eviscerates the goal of aligning the salesperson's
interest with the client's interest (State of New York). Commentators
stated that proposed subparagraph (h)(5) of the Variable Contracts Rule
in NTM 94-67, by allowing non-cash compensation programs for insurance
companies with proprietary products and sales forces, creates an uneven
playing field in favor of ``proprietary providers'' over ``independent
providers'' and is anti-competitive (Skandia, Capital Analysts,
Security Benefit, American Growth Fund Sponsors). Some commentators
suggested either deleting subparagraph (h)(5) of the Variable Contracts
Rule entirely or expanding it to allow independent providers to offer
non-cash compensation programs on the same basis as proprietary
providers (Skandia, PNMR).
The NASD was concerned about the disparate impact of the rule
proposal that would result from a member firm with proprietary products
conducting an in-house contest which includes direct or indirect
economic support and funding through sales of its proprietary products,
and was sympathetic to the comments of those members without
proprietary products who argued that they would be unable to afford in-
house contests without the economic support of outside issuers. In
addition, the NASD was concerned regarding the potential disparate
impact of the rule proposal on affiliated investment or insurance
companies that did not have an affiliated member distributing their
products and would not be permitted to contribute to the in-house
incentive program of unaffiliated members.
The NASD focused on three provisions in subparagraphs (l)(6) and
(h)(5) of the Investment Company and Variable Contracts Rules,
respectively, as proposed in NTM 94-67. These are: (1) The language in
the introduction which permitted a non-member (including offerors) to
provide a sales incentive program for its salespersons that are
associated persons of an affiliated broker-dealer; (2) paragraph (a) of
subparagraphs (l)(6) and (h)(5) which required that the member's in-
house incentive program must be multi-product type oriented or, for
single product type firms, based on the gross production of the
associated person; and (3) paragraph (b) of subparagraphs (l)(6) and
(h)(5) which prohibited an unaffiliated non-member (including offerors)
or other member from participating in and contributing to a member's
in-house incentive program.
In general, the NASD determined that the goal of prohibiting non-
cash incentives for the sale of a particular investment company's
securities would not be compromised if non-member entities and other
members are allowed to contribute to any member's in-house program, so
long as restrictions are imposed on the structure of the in-house
program. The NASD believes that the proposal should distinguish between
incentives that act at the point-of-sale to influence the salesperson's
recommendation to the investor and
[[Page 35843]]
incentives which do not have such effect. Non-cash incentive programs
by an offeror that involve only a single product (regardless of whether
the product is proprietary) affect the point-of-sale relationship with
the investor and are more likely to influence the salesperson to sell a
specific investment company's securities or variable contract. The NASD
believes that contributions by a non-member to a member's in-house
incentive program that includes all variable annuity or variable life
or investment company products does not have the same ``incentive''
effect because the member's in-house incentive is a reward for total
production--not for the sale of a specific variable annuity or variable
life contract product or investment company security.22
---------------------------------------------------------------------------
\22\ See supra discussion explaining the NASD's rationale
underlying the proposed non-cash compensation provisions in
Subsections 26(l)(5) and 29(l)(3) of the Investment Company and
Variable Contract Rules, respectively.
---------------------------------------------------------------------------
The NASD has modified and restructured the provisions proposed in
subparagraphs (l)(6) of the Investment Company Rule and (h)(5) of the
Variable Contracts Rule in NTM 94-67. The subparagraphs have been
renumbered in the proposed rule change as subparagraphs (l)(5)(d) and
(e) and (h)(3)(d) and (e). Subparagraph (d) of the Investment Company
Rule and of the Variable Contracts Rule permits all members and non-
member affiliates of members to hold in-house incentive programs so
long as certain conditions are met which are for the purpose of
avoiding the point-of-sale impact of the incentives, and subparagraph
(e) permits any non-member company and other member to contribute to,
but not to hold or organize, a permissible in-house non-cash sales
incentive program between a member and its associated persons so long
as the same conditions for subparagraph (d) are met. By its limiting
language, permissible contributions under subparagraph (e) may only be
given to an in-house non-cash sales incentive program held by a member
firm; such contributions may not be given to an in-house non-cash sales
incentive program held by a non-member affiliate because the non-member
affiliate is not required by NASD rules to maintain records of the
receipt of such contributions.
With respect to the second condition on the structure of a member's
or affiliate's in-house incentive program proposed in subparagraph
(l)(6)(b) of the Investment Company Rule in NTM 94-67, two commentators
observed that since almost all proprietary firms have investment
company securities and cloned variable products, an incentive program
could be based on just two product types, and recommended either
deleting the exception for in-house sales entirely or changing the
language of the provision to make in-house sales incentive programs
available only if based on gross production of all products (FNIC,
Stern). Another commentator recommended that the ``multi-product type''
condition be revised to make clear that the test is not satisfied by
selecting one security of each product type, for example, a proprietary
investment company and a proprietary variable product (Wood Logan).
The conditions applicable to the member's and its affiliate's
permissible non-cash sales incentive programs in subparagraphs
(l)(5)(d) and (e) of the Investment Company Rule and (h)(3)(d) and (e)
of the Variable Contracts Rule were modified from those proposed in NTM
94-67 in the following manner: (1) The member's in-house non-cash
incentive program, when it includes investment company securities or
variable contracts, must include the total production of associated
persons with respect to all investment company securities and variable
annuity or life contracts distributed by the member, which modifies the
``multi-product type'' rule language in NTM 94-67; (2) the credit
received for each variable contract (i.e., variable annuity or variable
life) must be equally weighted, which is a new provision that was not
included in the language of NTM 94-67; and (3) no non-member company or
other member may directly or indirectly participate in the organization
of a permissible non-cash compensation arrangement, which modified the
corresponding provision in NTM 94-67 by deleting the words ``or
contributes to'' in order to allow contributions to permissible non-
cash programs by outside unaffiliated non-members or other members as
long as their involvement is limited only to such contributions under
new paragraph (e). The fourth requirement, the recordkeeping
requirement, was not modified from the language of NTM 94-67.
The NASD believes that these changes to the non-cash compensation
provisions proposed in subparagraphs (l)(5)(d) and (e) of the
Investment Company Rule and subparagraphs (h)(3)(d) and (e) of the
Variable Contracts Rule eliminate the point-of-sale impact of non-cash
sales incentives on the sales practices of an associated person with
respect to the sale of investment company securities and variable
contracts by prohibiting third-party non-cash sales incentive programs
and by requiring that all securities of the product type be included in
the member's (or its affiliate's) in-house incentive program and be
equally weighted. At the same time, the NASD believes that any
potential discriminatory impact that is not in furtherance of the Act
is addressed by permitting non-members and other members to contribute
to a member's in-house incentive program.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. The Commission requests that, in
addition to any general comments concerning whether the proposed rule
change is consistent with Section 15A(b)(6) of the Act, commentators
specifically address the following issues:
1. The proposed rule change would continue to permit an associated
person to accept gifts from offerors if the total value of gifts from
an offeror to an associated person does not exceed $100 per person per
year and if such gifts are not preconditioned on meeting a sales
target. Associated persons also could continue to accept an occasional
meal, a ticket to a sporting event or the theater, or comparable
entertainment from offerors if the entertainment is neither so frequent
nor so extensive as to raise any question of propriety and is not
preconditioned on meeting a sales target. The NASD states that it is
not aware of any abuse of these exemptions and believes that they
represent such a de minimis activity that they do not have the ability
to undermine investor protection. Should members be required to keep
records of such gifts or entertainment to enable the NASD to surveil
effectively for abuse?
2. The proposed rule change would permit a member or an associated
[[Page 35844]]
person to accept payment or reimbursement from an offeror for expenses
incurred in connection with meetings held by the offeror for the
purpose of training or educating associated persons of a member. Such
meetings can be held at or near an office of the offeror or an office
of the member or a regional location with respect to regional
meetings)--a third-party offeror with a regional business may not
conduct a meeting outside that region unless the member has a more
widespread business. The provision would permit offerors to hold
training meetings in resort locales if that offeror or the member has
an office in that resort locale.
The NASD states that it ``believes that the limitations proposed
for the nature of educational meetings in the proposed rule will
discourage sponsors from holding training and education meetings in
exotic places. Because the burden is now on members to show that a
training and education meeting is bona fide, the NASD anticipates that
members will generally avoid excessively expensive and lavish training
and education settings.'' Are the recordkeeping requirements proposed
by the NASD sufficient to support determinations of whether such
meetings will be bona fide?
3. The NASD states in its filing that a member holding a training
or education meeting for its associated persons would not be required
to comply with the conditions imposed with respect to training and
education meetings held by offerors or unaffiliated members ``if the
member does not receive a payment or reimbursement from an offeror for
the expenses of the meeting. In any event, the member would not be
prohibited from permitting offerors to make a presentation at the
meeting.'' The proposed rule change establishes three separate levels
of regulation of training and education meetings depending upon whether
a member or an offeror holds a training and education meeting and
depending upon whether a member who holds a training and education
meeting accepts reimbursement from an offeror.
a. If an offeror holds a training and education meeting, that
meeting must comply with the training and education exception.
b. If a member holds training and education meeting, and accepts
reimbursement from an offeror for certain expenses, the meeting must
comply with either the training and education exception or the in-house
sales incentive exception (permitting contributions by offerors).
c. If a member holds a training and education meeting for its own
associated persons and accepts no reimbursement from offerors, the
proposed rule change does not regulate that meeting because the meeting
is not in connection with the sale or distribution of investment
company/variable contract securities.
Commenters are asked to address whether a training and education
meeting should constitute non-cash compensation subject to the proposed
rule change if an offeror participates in organizing the meeting even
though an identical meeting would not be subject to the proposed rule
change if organized by the member for its own associated persons.
4. The Tully Committee identified the practice of payment of higher
commissions to registered representatives for proprietary products than
for non-proprietary products as an arrangement that can create
conflicts of interest. The proposed rule change would not prohibit or
regulate this practice. The NASD has stated that ``it has generally not
been the practice for the NASD to regulate the internal compensation
arrangements between a member and its associated persons.'' The
proposed rule change would, however, prohibit contests granting cash
awards if the contest gives greater weight to certain securities than
others. Commenters are invited to address whether the proposed rule
change should be extended to cover ordinary compensation practices in
addition to incentive compensation practices.
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to the file number in the caption above and
should be submitted by July 29, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 96-17250 Filed 7-5-96; 8:45 am]
BILLING CODE 8010-01-P
