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Thursday, August 07, 2003

NASD Prescribes More Sunlight

by: Sean Hanna, Editor in Chief

The NASD wants broker-dealers to disclose to investors any cash payments that they take in exchange for shelf space for their funds. It also wants broker-dealers to inform investors when it pays a rep more compensation for selling certain funds.

The recommendations, which were released today by the NASD Board of Governors for comment, are part of the NASD's comprehensive review of mutual fund sales practices of securities firms. That review dates back to the start of 2001 and so far has led to more than 75 disciplinary actions, according to the NASD.

The self-regulatory body said that it believes the new rules will alert investors to the fact that a brokerage firm or its registered representatives may have financial incentives to recommend particular funds.

"When buying mutual funds, investors have the need and right to know about incentive compensation received by a member firm and its registered representatives which often differs from fund to fund," said Robert R. Glauber, chairman and CEO of NASD in a statement. "These important reforms will ensure that investors have this information before they invest."

The proposed amendments would require a securities firm to disclose:

  • that information regarding a fund's fees and expenses may be found in the fund's prospectus;
  • that the fund's policies regarding selection of securities firms (such as soft-dollar and directed brokerage arrangements) are described in the fund's statement of additional information, which an investor may request;
  • if applicable, that the member receives cash payments from mutual funds and their affiliates other than the fees disclosed in a fund's prospectus fee table, and the nature of this compensation;
  • a list of mutual fund firms that made these payments to the firm in descending order based upon the total amount of compensation received from each firm; and
  • if applicable, that registered representatives receive different rates of compensation for different investment company products, the nature of these arrangements, and the names of the investment companies favored by these arrangements.

    The proposal would require firms to disclose the nature of certain compensation arrangements in writing when the customer first opens an account or purchases mutual fund shares. It also would require member firms to update this information twice a year and make it available on their Web Sites. 

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