In FINRA Regulatory Notice 09-34 (June 17, 2009), FINRA requested comment on a proposed consolidated FINRA rule regarding the distribution and sale of investment company securities. Proposed FINRA Rule 2341 is based on and would replace NASD Rule 2830, which currently regulates member firms' activities in connection with the distribution and sale of investment company securities. The proposed rule would revise the provisions of NASD Rule 2830 by:

  • requiring firms to make new disclosures to investors regarding the receipt of cash compensation;
  • making a minor change to the recordkeeping requirements for non-cash compensation;
  • eliminating a condition regarding discounted sales of investment company securities to dealers; and
  • codifying past FINRA staff interpretations regarding the purchases and sales of exchange-traded funds (ETFs).

The comment period expires August 3, 2009.

Changes to Cash Compensation Provisions

FINRA proposed to modify the disclosure requirements for cash compensation arrangements in several respects. First, the proposed rule would require that all standard "sales charges and service fees" (rather than all cash compensation) be described in the fund prospectus. Second, the proposed rule would eliminate the term "special cash compensation" and instead require prospectus disclosure where a member firm received greater sales charges or service fees than are ordinarily paid in connection with sales of fund shares. In supplementary material, FINRA would clarify that a special sales charge or service fee arrangement includes any arrangement under which a member firm receives greater sales charges or service fees than other member firms selling the same investment company securities, even if an offeror would have made the same arrangement available to other member firms had they requested it. Additionally, a special sales charge would include cash payouts in addition to regular commissions.

Perhaps the most significant change is that the proposed rule would require a member firm that receives cash compensation 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 an account is opened. Such cash compensation includes revenue sharing paid in connection with the sale and distribution of investment company securities, whether based upon the amount of investment company assets that customers hold, the amount of investment company securities the broker-dealer has sold, or any other amount if the payment is related to the sale and distribution of the investment company's securities.

Under the proposed rule, if a member firm receives additional cash compensation from an offeror (including the fund or its affiliates), it would have to:

  • disclose that information about a fund's fees and expenses may be found in the fund's prospectus;
  • disclose, if applicable, that:
    • the member receives cash payments from an offeror, other than sales charges or service fees disclosed in the prospectus fee table;
    • the nature of any such payments received in the last 12 months; and
    • the name of each offeror that made such a cash payment, listed in descending order based upon the amount of compensation received from each offeror; and
  • provide a reference to a Web page or toll-free number containing updated information, which must be updated at least every six months. If the firm elects not to maintain a Web page or toll-free number, it must disclose updated information to customers every six months.

Changes to Non-Cash Compensation Provisions

Under NASD Rule 2830(l)(3), members are currently required to keep records that include, among other things, the nature and, "if known," the value of any non-cash compensation received. FINRA proposed to modify this requirement by deleting the phrase "if known" regarding the value of non-cash compensation. According to the Regulatory Notice, firms would be permitted to estimate in good faith the actual value of non-cash compensation received for which a receipt (or similar documentation) assigning a value is not available.

Changes to Conditions for Discounts to Dealers

NASD Rule 2830(c) currently prohibits investment company underwriters from selling the fund's securities to a retail broker-dealer at a price other than the public offering price unless, among other things, the sale is made in conformance with NASD Rule 2420 (Dealing with Non-Members). FINRA proposed to eliminate this requirement, which FINRA views as no longer necessary given that today virtually all broker-dealers doing business with the public are FINRA members.

Changes Regarding Sales of ETFs

Proposed FINRA 2341 would also address sales of ETFs, which can raise issues under both the Investment Company Act of 1940 and NASD Rule 2830. To address these issues, the proposed rule would add a provision to 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.

The Regulatory Notice is attached here.