On May 3, 2011, the SEC published for comment a proposal by FINRA to adopt NASD Rule 2830 as FINRA Rule 2341 in the consolidated FINRA rulebook and to make amendments to FINRA Rule 2341. As amended, Rule 2341 would require FINRA members to make new disclosures to investors purchasing fund shares relating to the member’s arrangements to receive “cash compensation” from the fund or its affiliates.
Rule 2341 defines “cash compensation” to include any “discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the distribution of investment company securities.” FINRA’s proposed amendments to Rule 2341 clarify that “cash compensation” includes revenue sharing payments regardless of whether payments are based upon the amount of fund assets that a member’s customers hold, the amount of fund shares the member has sold, or any other amount if the payment is related to the sale and distribution of the fund’s shares. The current rule requires “cash compensation” arrangements to be disclosed in a fund’s prospectus and SAI. Amended Rule 2341 would no longer require prospectus and SAI disclosure.
Under the proposed amendments to Rule 2341, if a FINRA member has received, or entered into an arrangement to receive, cash compensation from an offeror (i.e., a fund, its adviser, a fund administrator, fund underwriter or any of their affiliated persons) other than sales charges and fees disclosed in the prospectus fee table, the member must provide: (1) prominent disclosure that the member has received, or has entered into an arrangement to receive, cash compensation, in addition to the sales charges/service fees disclosed in the prospectus (including fees for services such as sub-transfer agency and sub-administration fees); (2) prominent disclosure that the additional cash compensation may influence the selection of funds that the customer may be offered or recommended; and (3) a prominent reference to a web page or toll-free number where the investor can obtain detailed additional information regarding these arrangements. This additional detailed information regarding cash compensation arrangements must include: (a) a narrative description of the additional cash compensation received from offerors, or to be received pursuant to an arrangement entered into with an offeror, and any services provided, or to be provided, by the member to the offeror or its affiliates for this additional cash compensation; (b) if applicable, a narrative description of any preferred list of funds to be recommended to customers that the member has adopted as a result of the receipt of additional cash compensation, including the names of the funds on this list; and (c) the names of the offerors that have paid, or entered into an arrangement with the member to pay, this additional cash compensation to the member. Each FINRA member would be required to update this information within 90 days of December 31st of each year, or when any of the information becomes materially inaccurate.
The disclosures required under amended Rule 2341 would have to be provided to new customers prior to the time that the customer first purchases shares of a fund through the FINRA member firm. Existing customers would have to receive the information required under amended Rule 2341 by the later of either: (a) 90 days after the effective date of the rule change or (b) prior to the time that the existing customer purchases shares of a fund after the rule’s effective date (other than purchases pursuant to reinvestment of dividends or capital distributions through automatic investment plans).
If approved by the SEC, the proposed amendments to Rule 2341 would become effective on June 23, 2011 or such later date designated by the SEC or consented to by FINRA. Following the effective date, FINRA, within 90 days, will publish a Regulatory Notice setting the compliance date for amended Rule 2341, which will be no later than one year from the effective date.