Groups Oppose Rule on Proprietary Sales
November 8, 1999
A NASD Regulation proposal to prohibit broker/dealers from paying their registered representatives more for selling the broker/dealer's own mutual funds than for selling outside funds has run into opposition from trade groups representing the securities and mutual fund industries.
NASD Regulation at a minimum should defer action on the rule proposal, according to the Securities Industry Association and the Investment Company Institute. Of the two groups, the SIA is the most critical of the proposal and says the purported need for the proposed rule is unsupported by evidence of abusive sales practices of proprietary funds. Even a requirement that companies disclose details about extra pay for proprietary sales should be adopted only if NASD Regulation can point to problems based on NASD Regulation exams, said Marc E. Lackritz, president of the SIA, in a letter to NASD Regulation Oct. 28.
The SIA "does not believe that a flat prohibition on payment of differential compensation for proprietary mutual fund products is warranted by any demonstrated abuses, and it is inconsistent with NASD Regulation's regulatory practice," Lackritz said.
The ICI expressed support for the goals of the proposed rule - which is designed to minimize conflicts of interest between securities salespeople and their customers - but said ambiguity in the language of the proposal made the rule unworkable. NASD Regulation should defer action on the proposal and make other changes in NASD Regulation sales practice rules as an alternative, said Tamara K. Reed, ICI associate counsel, in a letter to NASD Regulation Oct. 28.
NASD Regulation, on Sept. 2, proposed three rules that would change the way broker/dealers sell securities and compensate their salespeople. The proposals would prohibit firms from paying their reps more for selling proprietary funds than for selling outside funds, ban sales contests for a single security - including mutual funds and variable annuities - and require broker/dealers to provide more disclosure to customers when broker/dealers temporarily pay higher commissions to representatives who move from one firm to another.
The idea of banning higher commissions for proprietary sales has been around for at least four years. In 1995, a special panel formed at the direction of SEC Chairman Arthur Levitt examined the issue of conflicts of interest between securities salespeople and customers. The group, known as the Tully Commission after its chairman Arthur Tully, recommended that firms pay identical commissions for proprietary and non-proprietary products.
NASD regulation already has power to monitor conflicts of interest between customers and reps, Lackritz said. NASD Regulation rules that require securities sales to be suitable for investors, provide a basis for taking action against sales abuses, he said.
In addition, NASD Regulation runs the risk of limiting investor choice and reducing competition if it adopts a rule against paying more for proprietary sales, Lackritz said. Such a prohibition might cause firms to stop selling non-proprietary funds, he said.