NASD Seeks Restrictions on Mutual Fund Sales Incentives

The National Assn. of Securities Dealers asked the Securities and Exchange Commission to restrict brokerage firms from offering incentives to their employees to sell certain mutual funds to customers.

According to the NASD proposal, any cash or other kinds of prizes given to brokers for selling mutual funds must be based on the brokers’ total sales, not just on their sales of certain funds.

The proposal, which is subject to public comment and SEC review, would also require that brokers be paid only by the NASD firms they work for, and that the brokerages record the types and amounts of compensation paid to brokers.

“This is really an attempt to level the playing field,” an NASD staff attorney said. “We didn’t want to eliminate what has been an accepted and standard practice in the securities industry, but at the same time, we didn’t want firms putting cash and contests ahead of their customers.”

The proposal would also prohibit cash compensation to brokers without specifying the types of payments in the fund’s prospectus.

Some investment banks already have policies similar to the rules the NASD proposed. Merrill Lynch & Co., Prudential Securities Inc. and Dean Witter Reynolds Inc. pay brokers the same commissions whether they sell the firm’s funds or a competitor’s products.

Securities firms have an interest in selling their own mutual funds because they collect a percentage of the assets they manage as fees. These fees bolster revenue and can buoy profits, even in periods when financial markets decline.

Offering brokers incentives to sell in-house products has been criticized because other funds may offer better returns to investors.

A panel formed by the SEC and led by Merrill Lynch Chairman Daniel P. Tully issued a report in April calling on all securities firms to halt preferential payments.

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