ICI Comments on NASD Compensation Proposal, August 2005

Washington, DC, August 8, 2005 - The Institute supports a proposed NASD rule that would address concerns about potential securities industry conflicts of interest by prohibiting brokers from accepting non-cash compensation in connection with the sale of any security and by prohibiting brokerage firms from sponsoring product-specific sales contests.

Background
NASD currently restricts registered securities dealers from accepting any non-cash compensation (gifts of over $100, tickets to theater or sporting events, etc.) in connection with the sale of certain products, including: direct participation programs, variable insurance contracts, investment company securities, public offerings of real estate investment trusts, and other securities. NASD also prohibits brokerage firms from sponsoring internal non-cash sales contests in connection with the sale of variable insurance contracts or investment company securities unless they meet certain criteria.

In June, NASD proposed to expand the prohibitions of non-cash compensation to the sale and distribution of any security or type of security, rather than just those enumerated above. NASD also proposed to prohibit all product-specific cash and non-cash "sales contests."

ICI Position
In a recent comment letter, ICI states that prohibiting sales contests for specific products and extending restrictions on non-cash compensation to all products will promote the interests of investors. ICI also states that consistent regulatory treatment of similar arrangements across all products makes sense because concerns about potential conflicts exist regardless of the type of product. It also addresses concerns about the current requirements, which singles out some securities for more stringent regulatory treatment, putting them at a competitive disadvantage.

The Institute supports NASD's proposal but recommends that the NASD revise the rule to:

avoid unintentionally prohibiting certain non-cash compensation arrangements that are currently permitted under NASD rules;
replace a subjective standard that would be used to determine the permissibility of certain non-cash compensation arrangements with an objective standard; and
continue to permit outside contributions to a non-cash compensation arrangement.

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