The NASD has proposed rules that would require a broker to tell clients about special payouts the rep may be receiving, as well as prohibit single-product sales contests.
The NASD is taking comments on the rules until Oct. 29. (See Notice to Members 99-81 at www.nasdr.com.)
The three proposals would:
1) Prohibit higher payouts for proprietary mutual funds. One option being considered would simply require verbal or written disclosure of the special payout to customers at or before the point of sale.
2) Prohibit single-product sales contests for any security. Current rules restrict only contests and noncash incentives for variable annuities and funds.
3) Require disclosure of accelerated payouts given to broker recruits. The rule proposal states that the "perceived problem with this practice is that it could act as an incentive for [churning] during the time that higher commission payouts are being paid."
The rules were developed at the insistence of SEC Chairman Arthur Levitt Jr. (see box).
But the proposals are bound to be controversial. The NASD struggled for a decade to develop the noncash compensation rules.
What's more, the proposed package doesn't address the most common form of recruitment bonus--upfront loans based on past production--which could conceivably cause a bad broker to churn prior to a move.
Most firms use accelerated payouts in conjunction with upfront bonuses.
Every spring for the past two years, SEC Chairman Arthur Levitt Jr. has made a point to publicly criticize what he believes to be an unseemly practice--paying brokers to change firms.
In April 1998, Levitt directed that the NASD develop disclosure rules for recruitment deals--and even threatened to ban recruitment money. This year, at an April compliance conference in Florida, Levitt again urged disclosure of recruiting incentives and noted that it was his understanding that the NASD was working on a disclosure rule.
Brokers don't necessarily disagree with Levitt's concerns. In today's environment, producers are changing firms more frequently for bigger checks, many reps note. "So the issue of upfront bonuses is even more important now," says one broker.
Another broker says every rep should have the freedom to move from firm to firm without having to disclose incentives. "It's free-enterprise, a free-market."
At the same time, this rep has no problem disclosing recruiting incentives to clients. "I'm not afraid of telling my clients about upfront bonuses or incentives, and I'm not afraid of what they'll think. I actually think they'll understand and say, 'Go for it.'"
