FINRA recently issued a revised proposed rule governing the disclosure of cash compensation paid to broker-dealers in connection with the distribution and sale of investment company securities. Proposed FINRA Rule 2341 would replace NASD Rule 2830, on which it is based, and would require point-of-sale disclosure by broker-dealers regarding such cash compensation if adopted.
Rule 2830(l) currently prohibits broker-dealers from accepting any cash compensation from an “offeror” of investment company securities, including the investment company and its investment adviser, administrator, underwriter or any other affiliated person, unless the cash compensation is disclosed in the investment company’s current prospectus or statement of additional information (“SAI”). Under the proposed rules, broker-dealers could no longer rely on the disclosure of cash compensation arrangements in an investment company’s prospectus or SAI.1 Instead, a broker-dealer that has received, or has entered into an arrangement to receive, within the previous calendar year any cash compensation from an offeror, other than the sales charges and service fees disclosed in the prospectus fee tables of investment companies sold by such broker-dealer, would be required to: (i) prominently disclose that it has received, or has entered into an arrangement to receive, cash compensation (including revenue sharing, sub-administrative and/or sub-transfer agency fees, if applicable) from investment companies and their affiliates; (ii) prominently disclose that this additional cash compensation may influence the selection of investment company securities that the broker-dealer and its associated persons offer or recommend to investors; and (iii) provide a prominent reference (or hyperlink in the case of electronically delivered documents) to a webpage or toll-free number where the investor could obtain additional information regarding the broker-dealer’s cash compensation arrangements. This additional information would include a narrative description of additional cash compensation received (or to be received) from offerors and a description of any services provided (or to be provided) by the broker-dealer in return, a narrative description of any preferred list of investment companies (including the names of the investment companies) that the broker-dealer has adopted as a result of the receipt of additional cash compensation, and the names of offerors that have paid, or entered into an arrangement with the broker-dealer to pay, additional cash compensation. Broker-dealers would not be required to disclose the dollar amount of additional cash compensation received during the applicable period.
If the rule is adopted, broker-dealers would be required to provide the requisite disclosures to each customer prior to the time that the customer first purchases shares of an investment company through the broker-dealer. The proposed rule would require that broker-dealers provide existing customers with the requisite disclosures by the later of 90 days after the effective date of the proposed rule change or prior to the time the customer first purchases shares of an investment company through the broker-dealer after the effective date (other than purchases through reinvestment of dividends or capital distributions or through automatic investment plans).
Proposed FINRA Rule 2341 would also revise NASD Rule 2830 by making a minor change to the recordkeeping requirements for non-cash compensation, eliminating a condition regarding discounted sales of investment company securities to dealers, codifying past FINRA staff interpretations regarding the purchases and sales of exchange-traded funds, and making certain minor technical revisions.
The SEC is expected to take action on the proposal this summer.