[Federal Register Volume 69, Number 214 (Friday, November 5, 2004)]
[Notices]
[Pages 64609-64611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3016]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50611; File No. SR-NASD-2004-027]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Investment Company Portfolio Transactions

October 29, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 10, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by NASD. 
NASD amended the proposed rule change on September 17, 2004.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Patrice Gliniecki, Senior Vice President and 
Deputy General Counsel, NASD, to Katherine England, Assistant 
Director, Division of Market Regulation, Commission, dated September 
16, 2004 (``Amendment No. 1''). Amendment No. 1 modified proposed 
Rule 2830(k)(2) to clarify that its prohibition would apply to 
situations in which an investment company directs or is expected to 
direct portfolio transactions in exchange for distribution. 
Amendment No. 1 also modified that proposed prohibition to clarify 
that it would apply not only to the distribution of shares of a fund 
that directs portfolio transaction commissions to the distributing 
broker, but also to the distribution of the shares of any other 
registered investment company. Amendment No. 1 further clarified the 
description of the purpose of the proposed rule change.
    \4\ The Commission recently amended rule 12b-1, 17 CFR 270.12b1-
1, under the Investment Company Act of 1940, 15 U.S.C. 80a, to 
prohibit open-end management investment companies from paying for 
the distribution of their shares with brokerage commissions. See 
Investment Company Act Release No. 26591 (Sept. 2, 2004), 69 FR 
54728 (Sept. 9, 2004). This NASD rule proposal corresponds with the 
Commission's action.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Conduct Rule 2830(k). Below is the 
text of the proposed rule change. Proposed new language is italicized; 
proposed deletions are in [brackets].
* * * * *
Rule 2830. Investment Company Securities
    (a) through (j) No change.
    (k) Execution of Investment Company Portfolio Transactions
    (1) No member shall, directly or indirectly, favor or disfavor the 
sale or distribution of shares of any particular investment company or 
group of investment companies on the basis of brokerage commissions 
received or expected by such member from any source, including such 
investment company, or any covered account.
    (2) No member shall sell shares of, or act as underwriter for, an 
investment company, if the member knows or has reason to know that such 
investment company, or an investment adviser or principal underwriter 
of the company, has a written or oral agreement or understanding under 
which the company directs or is expected to direct portfolio securities 
transactions (or any commission, markup or other remuneration resulting 
from any such transaction) to a broker or a dealer in consideration for 
the promotion or sale of shares issued by the company or any other 
registered investment company.

[[Page 64610]]

    [(2)] (3) No member shall, directly or indirectly, demand or 
require brokerage commissions or solicit a promise of such commissions 
from any source as a condition to the sale or distribution of shares of 
an investment company.
    [(3)] (4) No member shall, directly or indirectly, offer or promise 
to another member, brokerage commissions from any source as a condition 
to the sale or distribution of shares of an investment company and no 
member shall request or arrange for the direction to any member of a 
specific amount or percentage of brokerage commissions conditioned upon 
that member's sales or promise of sales of shares of an investment 
company.
    [(4)] (5) No member shall circulate any information regarding the 
amount or level of brokerage commissions received by the member from 
any investment company or covered account to other than management 
personnel who are required, in the overall management of the member's 
business, to have access to such information.
    [(5)] (6) No member shall, with respect to such member's activities 
as underwriter of investment company shares, suggest, encourage, or 
sponsor any incentive campaign or special sales effort of another 
member with respect to the shares of any investment company which 
incentive or sales effort is, to the knowledge or understanding of such 
underwriter-member, to be based upon, or financed by, brokerage 
commissions directed or arranged by the underwriter-member.
    [(6)] (7) No member shall, with respect to such member's retail 
sales or distribution of investment company shares:
    (A) Provide to salesmen, branch managers or other sales personnel 
any incentive or additional compensation for the sale of shares of 
specific investment companies based on the amount of brokerage 
commissions received or expected from any source, including such 
investment companies or any covered account. Included in this 
prohibition are bonuses, preferred compensation lists, sales incentive 
campaign or contests, or any other method of compensation which 
provides an incentive to sales personnel to favor or disfavor any 
investment company or group of investment companies based on brokerage 
commissions;
    (B) Recommend specific investment companies to sales personnel, or 
establish ``recommended,'' ``selected,'' or ``preferred'' lists of 
investment companies, regardless of the existence of any special 
compensation or incentives to favor or disfavor the shares of such 
company or companies in sales efforts, if such companies are 
recommended or selected on the basis of brokerage commissions received 
or expected from any source;
    (C) Grant to salesmen, branch managers or other sales personnel any 
participation in brokerage commissions received by such member from 
portfolio transactions of an investment company whose shares are sold 
by such member, or from any covered account, if such commissions are 
directed by, or identified with, such investment company or any covered 
account; or
    (D) Use sales of shares of any investment company as a factor in 
negotiating the price of, or the amount of brokerage commissions to be 
paid on, a portfolio transaction of an investment company or of any 
covered account, whether such transaction is executed in the over-the-
counter market or elsewhere.
    [(7)] (8) Provided that the member does not violate any of the 
specific provisions of this paragraph (k), nothing herein shall be 
deemed to prohibit:
    (A) The execution of portfolio transactions of any investment 
company or covered account by members who also sell shares of the 
investment company;
    [(B) A member from selling shares of, or acting as underwriter for, 
an investment company which follows a policy, disclosed in its 
prospectus, of considering sales of shares of the investment company as 
a factor in the selection of broker/dealers to execute portfolio 
transactions, subject to the requirements of best execution;]
    [(C)] (B) A member from compensating its salesmen and managers 
based on total sales of investment company shares attributable to such 
salesmen or managers, whether by use of overrides, accounting credits, 
or other compensation methods, provided that such compensation is not 
designed to favor or disfavor sales of shares of particular investment 
companies on a basis prohibited by this paragraph (k).
    (l) through (n) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule 2830(k) governs members' execution of investment company 
portfolio transactions. The rule generally prohibits members from 
favoring the sale of shares of any investment company on the basis of 
brokerage commissions received or expected by the member from any 
source, including the fund. The rule is designed to prevent quid pro 
quo arrangements in which brokerage commissions, which represent an 
asset of the fund, are used to compensate members for selling fund 
shares. Rule 2830(k)(7)(B) permits a member to sell the shares of, or 
act as an underwriter for, an investment company that follows a policy, 
disclosed in its prospectus, of considering sales of shares of the 
investment company as a factor in the selection of broker-dealers to 
execute fund portfolio transactions, subject to the requirements of 
best execution. NASD proposes to eliminate this provision, due to 
concerns that members have misconstrued the limited nature of the 
provision and the fact that the provision does not change the general 
prohibitions of the rule.
    The proposed rule change also would include language, in new Rule 
2830(k)(2), that would clarify that no member may sell the shares of, 
or act as underwriter for, an investment company if the member knows, 
or has reason to know, that such investment company, or an investment 
adviser or principal underwriter of the company, has a written or oral 
agreement or understanding under which the company directs or is 
expected to direct portfolio securities transactions (or any 
commission, markup or other remuneration resulting from the 
transaction) to a broker or a dealer in consideration for the promotion 
or sale of shares issued by the company or any other registered 
investment company.\5\ Under the proposed rule change, a member would 
not violate Rule 2830(k) solely because the member promotes or sells 
the shares of an investment

[[Page 64611]]

company that directs fund portfolio transactions to the member. 
However, a member would violate Rule 2830(k) if the member engages in 
the type of conduct prohibited under paragraphs (1) through (7).
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    \5\ Proposed new paragraph (k)(2) would add an objective 
proscription, in that the broker-dealer's intent to favor or 
disfavor a particular fund would not be relevant to that 
prohibition. The existing proscription of paragraph (k)(1), in 
contrast, turns upon the question of whether a broker-dealer favors 
or disfavors a fund based on receipt or expected receipt of 
brokerage commissions.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that NASD rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. One important purpose of Rule 2830(k) is to help 
eliminate conflicts of interest in the sale of investment company 
securities, and the proposed rule change will improve NASD's ability to 
achieve this objective.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change as amended is consistent with the Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-027. The 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549.
    Copies of such filing will also be available for inspection and 
copying at the principal office of NASD. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASD-2004-027 and should be submitted by 
November 26, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3016 Filed 11-4-04; 8:45 am]
BILLING CODE 8010-01-P