NASD Wants More Fund Comp Disclosures

August 7, 2003 ( - The NASD has proposed a rule that would require disclosure of more information about compensation paid for the sale of mutual fund shares in an effort to alert investors to potential conflicts of interest.

>According to a press release from the securities regulator, the proposed additional disclosures could serve as a red flag that a brokerage firm or its registered representatives may have financial incentives to recommend particular funds.

>NASD’s Board of Governors approved a proposal for disclosure of two types of compensation. The first type involves so-called revenue-sharing deals, which are arrangements under which mutual-fund companies make cash payments to brokerage firms in return for inclusion in the list of funds that a firm recommends.

>Brokers would be required to provide clients a list of fund companies that made these payments to the brokerage firm. That list would have to be ranked in descending order based on the total amount of compensation the brokerage house received from each fund company. The second proposed disclosure is the payment of a higher compensation rate to registered representatives for selling certain funds.

>The proposal would require firms to disclose the required information in writing when the customer first opens an account or purchases mutual fund shares.   The proposal also would require member firms to update this information twice a year and make it available on their Web sites:

>Specifically, the proposed rules 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
  • 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 announcement is part of a comprehensive review of mutual fund sales practices of securities firms.   NASD’s heightened scrutiny in the area of mutual funds and variable annuities has resulted in over 75 disciplinary actions since the beginning of 2001.   Most recently, the Report of the Joint NASD/Industry Task Force on Breakpoints recommended a number of reforms to ensure that investors purchasing mutual fund shares with front-end loads receive the discounts to which they are entitled (See  Sources: Fund Probe Uncovers Widespread Discount Problems ).