Alert June 30, 2009

FINRA Proposes Amendments to Cash Compensation Requirements of Rules Governing Sales of Investment Company Securities

As part of the consolidation of the NASD Rules and incorporated New York Stock Exchange rules into the Consolidated FINRA Rulebook, FINRA issued a Regulatory Notice that proposes to adopt FINRA Rule 2341 (the “Proposed Rule”) regarding the regulation of members’ activities in connection with the sale and distribution of securities (“Securities”) issued by a registered investment company (a “fund”). The Proposed Rule is based largely on current NASD Rule 2830 (the “Current Rule”). It would also (a) codify existing FINRA staff interpretative guidance permitting the trading of Exchange Traded Fund (“ETF”) shares at prices other than the current net asset value of the ETF consistent with applicable SEC rules or exemptive orders; and (b) modify section (c) of the Current Rule to eliminate the requirement that sales of Securities to a retail broker‑dealer by the fund’s underwriter at a price other than the fund’s public offering price comply with NASD Rule 2420 (Dealing with Non-Members). Additionally, the Proposed Rule would modify member recordkeeping requirements with respect to non-cash compensation arrangements by requiring that the value of all non­cash compensation arrangements, which may be based on a good faith estimate in instances where evidence of the actual value is not available, be maintained in the members’ records.

Proposed Changes to Cash Compensation Disclosure Requirements. The Proposed Rule would modify the cash compensation disclosure requirements of the Current Rule. Specifically, the Proposed Rule would revise the current member disclosure requirements with respect to cash compensation received from an offeror of Securities to (1) require that standard “sales charges and service fees” (rather than all cash compensation) be described in a fund’s prospectus, (2) eliminate the term “special cash compensation” and instead requiring prospectus disclosure where a member receives a greater (or special) sales charge or service fee than is ordinarily paid in connection with sales of Securities, and (3) require a member that receives cash payments in addition to the standard sales charges and service fees paid in connection with the sale of Securities (“Special Payments”) (such as sales commissions or service fees, or revenue sharing payments made by offerors to members) to disclose (a) that information about a fund’s fees and expenses may be found in the fund’s prospectus, (b) if applicable, that the firm receives Special Cash Payments, the nature of such Special Cash Payments received in the last 12 months and a list of offerors making such Special Cash Payments listed in descending order of payments received; and (c) provide a reference to an internet page or toll-free number at which updated information regarding Special Cash Payments, which must be updated at least every six months, is available.

The Proposed Rule would also provide supplemental material clarifying that (1) cash compensation includes revenue sharing paid in connection with the sale and distribution of Securities (and therefore members would be required to disclose revenue sharing arrangements pursuant to the rule); and (2) a special sales charge or service fee arrangement includes any arrangement under which a member receives greater sales charges or service fees than other member firms selling the same Securities, even if an offeror would have made the same arrangement available to other members had they requested it.

The comment period on the proposal expires August 3, 2009.