In June 2009, as part of the process of developing a new consolidated rulebook, FINRA proposed to replace Rule 2830, which regulates member firms’ activities in the distribution and sale of investment company securities, with proposed FINRA Rule 2341. In its current form, NASD Rule 2830 regulates cash and non-cash compensation arrangements for the sale and distribution of fund shares and prohibits member firms from accepting “cash compensation” from an “offeror” (generally an investment company, its adviser, distributor or their affiliates) unless such compensation is described in the fund’s current prospectus. NASD Rule 2830 requires additional disclosure in the event an offeror makes “special cash compensation” arrangements with a member.
Proposed Rule 2341 would revise the disclosure requirements of NASD Rule 2830 for special cash compensation arrangements in several respects. The proposed rule would require prospectus disclosure relating to standard “sales charges and service fees,” rather than “all cash compensation” as required in NASD Rule 2830. Proposed Rule 2341 also would remove the term “special cash compensation” from the current rule and instead require prospectus disclosure in situations where a member firm receives greater or special sales charges or service fees than are ordinarily paid by the offeror for the sale of the same fund shares. According to the proposed rule, a member firm has entered into a special sales charge or service fee arrangement if it receives from an offeror additional sales charges or service fees above the standard dealer reallowance or commission described in the investment company’s prospectus, unless the prospectus makes clear that the additional compensation is being paid to all who sell the fund’s shares.
The proposed rule also would require a member firm that receives cash payments in addition to the standard sales charges and service fees paid in connection with the sale of fund shares to make certain disclosures to its customers at the time accounts are opened, including: (1) that information about a fund’s fees and expenses may be found in the fund’s prospectus; (2) information relating to cash payments received in the last 12 months from offerors in addition to the standard sales charge and service fees disclosed in the prospectus; and (3) a reference to a web page or toll-free number containing updated information. For existing accounts, the disclosures would be required within 90 days of the effectiveness of the rule, or at the time the customer purchases fund shares after the effective date.
Proposed Rule 2341 also would make a minor change to the recordkeeping requirements for non-cash compensation. Among other things, NASD Rule 2830 requires member firms to keep records of all compensation received by member firms or their associated persons from offerors, other than small gifts and entertainment permitted by the rule. These records must include, “if known,” the value of any non-cash compensation received. The proposed rule would delete the phrase “if known.” Where a receipt or other documentation assigning value is not available, firms would be permitted to estimate in good faith the actual value of non-cash compensation.
Finally, FINRA Rule 2341 would codify earlier FINRA staff interpretive letters that permit the trading of ETF shares at prices other than the current net asset value consistent with applicable SEC rules or exemptive orders.
Comments on the proposed rule are due by August 3, 2009.