September 8, 1999
 
 
 

                   NASD Regulatory Arm Proposes Rules
                   Aimed at Disclosure of Broker Incentives

                   By RANDALL SMITH
                   Staff Reporter of THE WALL STREET JOURNAL

                   A top U.S. securities regulator proposed three new rules aimed at curbing
                   or forcing disclosure of conflicts of interest when brokers have an extra
                   incentive to sell securities or mutual funds.

                   One of the rules proposed by NASD Regulation Inc., the regulatory arm
                   of the National Association of Securities Dealers, would require securities
                   firms to tell customers of any higher payout formulas being received by
                   brokers who jump from one firm to another.

                   Such higher payouts "could act as an incentive for the [broker] to trade
                   customer accounts inappropriately by, for example, 'churning' or trading
                   the accounts excessively, in order to generate as much revenue as possible
                   during the time that higher commission payouts are being paid," NASDR
                   said in seeking comment from NASD members Tuesday.

                   The other proposed rules would bar higher payouts for brokers who sell
                   their securities firm's own proprietary mutual funds and would bar contests
                   promoting the sale of a single security. While higher payouts for in-house
                   mutual-fund sales have long been a source of controversy on Wall Street,
                   many firms have curtailed the practice.

                   "Although firms use differential compensation arrangements for a variety of
                   products, the importance of mutual funds to retail investors may make
                   differential payouts involving [mutual funds] of particular concern," the
                   NASD unit said. It added that one alternative to an outright ban could be
                   disclosure to customers.

                   The proposal for disclosure of higher payouts to brokers who switch firms
                   could spark even more heat, according to industry experts. Many brokers
                   are receiving higher percentages of the commissions they generate
                   temporarily as part of lucrative incentive packages being offered in the
                   current bull market in order to recruit them from one securities firm to
                   another. Such higher payouts are known as "accelerated payouts."

                   Arthur Levitt, chairman of the Securities and Exchange Commission, has
                   been pressing to reform broker pay for years. In 1995, an industry group
                   convened by Mr. Levitt and led by former Merrill Lynch & Co. chairman
                   Daniel Tully criticized the use of sales contests and upfront bonuses as
                   potentially hazardous to investors' health.

                   In a speech last April, Mr. Levitt said single-product sales contests were
                   "virtually extinct" and said a rule banning them "would ensure their demise."
                   As for paying brokers higher commissions to sell in-house mutual funds, he
                   said, "customers ought to be told when the only difference between the
                   products is that the rep gets paid more for selling it."

                   The same is true for packages paid to brokers who switch firms, Mr.
                   Levitt said. "I understand that the competition for representatives can get
                   very intense, and I have no intention of interfering with that competition," he
                   added. "But reps who are paid to switch firms may feel pressure to trade
                   more after the switch. So it is imperative that customers know the
                   incentives that were offered to their brokers."

                   In 1998, the NASD adopted a rule limiting the use of prizes, cash or trips
                   to promote proprietary mutual funds or annuities -- another area singled
                   out for criticism by the Tully report -- because such incentives could tempt
                   a broker to sell an unsuitable product to clients.