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NASD Non-Cash Comp Proposal Stirs Opposition

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The insurance industry and regulators are clashing over a proposal of the National Association of Securities Dealers to expand non-cash compensation prohibitions to include the sale of all types of securities.

Rules at the NASD, Washington, now prohibit payment and acceptance of non-cash compensation such as entertainment and travel expenses in connection with the sale of direct participation programs, variable insurance contracts and public offerings of real estate investment trusts. The new rules would expand the prohibitions to include all securities.

William Galvin, Massachusetts secretary of the commonwealth, says the proposal could go even further by more precisely defining those forms of non-cash compensation that would still be allowed.

For example, the NASD could replace the vague current standard on entertainment with a dollar limit, Galvin writes in comments to the NASD.

“Non-cash compensation is often invisible to customers who certainly would want to know if such compensation is being paid to the broker and the amount paid,” Galvin writes.

James Mullery, chief distribution officer at AXA Distributors L.L.C., New York, is opposing the new rules. He says the new rules would inhibit rep education programs.

“By eliminating the ability of member firms to provide temporary incentives to spur registered representatives to spend the time to learn about and become comfortable with a particular category of products, the proposed rule has the potential to significantly harm investors,” Mullery writes.

Mullery also warns that the new rules would discard constraints already developed by the NASD regarding sales contests in the areas of investment company securities and investment products. The current rules “strike the right balance between prohibiting inappropriate single-product promotions and recognizing the inherent impracticality of attempting to regulate out of existence point-of-sale conflicts,” Mullery writes.

The proposed rules now must be approved by the NASD and then by the U.S. Securities and Exchange Commission. An NASD spokesman refused to put a timeline on such actions.