Proposed FINRA Rule 2341, which will replace current NASD Rule 2830 regarding investment company securities, imposes new point-of-sale cash compensation disclosure requirements on broker-dealers, while simultaneously eliminating Rule 2830’s prospectus disclosure requirement for such arrangements. The proposed rule, currently pending before the SEC, will become effective within 365 days after SEC approval.
The disclosure provisions of the proposed rule apply to any broker-dealer that has, within the previous calendar year, received or entered into an arrangement to receive cash compensation from an offeror, other than sales charges and service fees disclosed in the prospectus fee table. Supplementary information accompanying the rule defines cash compensation to include revenue-sharing arrangements, whether based on assets under management, shares sold, or another formula.
A broker-dealer participating in these arrangements must prominently disclose them, and also state that they may influence the selection of investment company securities that the broker-dealer offers or recommends. As to a broker-dealer’s customers at the time Rule 2341 becomes effective, the disclosure must be provided prior to the customer’s next investment company securities purchase from the broker-dealer, except that it need not be provided earlier than 90 days after the effective date. The disclosure must be provided to new customers prior to their first such purchase after the effective date.
The proposed rule also requires that the broker-dealer disclosure include a prominent reference or hyperlink to a webpage or toll-free number providing more information on the arrangements, including: 1) offeror names; 2) a narrative description of the additional cash compensation and any services provided in exchange; and 3) if applicable, a narrative description and names of any preferred investment company sponsors recommended to customers as a result of additional cash compensation. This information must be updated annually, within 90 days after calendar year end, or whenever it becomes materially inaccurate.