Series 6

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FINRA Conduct Rules - FINRA Conduct Rule 2830: Investment Company Securities

Definitions
Rule 2830 applies exclusively to members in connection with their activities regarding investment company securities. Important definitions under this rule include:

  • Compensation: refers to both cash and non-cash compensation
  • Cash Compensation: refers to any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of investment company securities
  • Non-cash Compensation: refers to any form of compensation received in connection with the sale and distribution of investment company securities that is not cash compensation. It includes but is not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
  • Sales Charges: refer to all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, record keeping or administrative activities and investment management fees.
  • Affiliated Member: refers to any member that, directly or indirectly, controls, is controlled by, or is under common control with a non-member company.
  • Offeror: refers to an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the1940 Act) of such entities.

Dealer Concessions
No member who is an underwriter of the securities of an investment company can sell such a security to any dealer or broker at any price other than a public offering price unless such a sale complies with Rule 2420. This can only occur if a sales agreement is in effect between the parties as of the date of the transaction, which sets forth the concessions to be received by the dealer or broker. Additionally, concessions may only be offered to broker dealers who are FINRA members.

Sales Charges Where No Asset-Based Sales Charges Exist
Members may not sell shares of any investment company if the sales charges described in the prospectus are excessive. Aggregate sales charges are deemed excessive for investment companies without asset-based sales charges if they do not allow breakpoints (discounts on large volume purchases).

  • As a whole, aggregate sales charges may not exceed 8.5% of the fund's public offering price (POP).

A mutual fund that charges 8.5% must offer a breakpoint schedule, rights of accumulation and reinvestment of dividends and capital gains at net asset value (NAV). If a all three of these features are not offered to investors the maximum allowable sales charge 6.5% of the public offering price. Examples of breakpoint schedules would be as follows:

. Total Purchase Maximum Aggregate Sales Charge
a. $10,000+ 7.75%
$25,000+ 6.25%
b. $15,000+ 7.50%
$25,000+ 6.25%

Sales Charges Where Asset-Based Sales Charges Exist
Asset-based sales charges cannot exceed 0.75 of 1% per annum of the average annual net assets, or if the front or deferred sales charges deducted are not credited to the investment company. For investment companies that do have an asset-based sales charge, the maximum aggregate sales charge is 6.25% if a service charge is also imposed. If the mutual fund pays a service fee to broker dealers for providing ongoing services to shareholders the maximum sales charge that may be charged by the fund is 7.25%. FINRA members are prohibited from selling mutual funds that charge a service fee in excess of .25%.

Refund of Sales Charges
If any security issued by an open-end management investment company is repurchased by the issuer, or is tendered for redemption within seven business days after the date of the transaction, (1) the member shall refund to the underwriter the full concession allowed to the dealer or broker on the original sale and (2) the underwriter shall pay to the issuer the underwriter's share of the sales charge on the original sale by the underwriter and shall also pay to the issuer the refund when he receives it.

Selling Dividends
No member shall, in recommending the purchase of investment company securities, state or imply that the purchase of such securities shortly before an ex-dividend date is advantageous to the purchaser, unless there are specific, clearly described tax or other advantages to the purchaser. Also, no member shall represent that distributions of long-term capital gains by an investment company are or should be viewed as part of the income yield from an investment in such a company's securities.

Withhold Orders
No member shall withhold placing customers' orders for any investment company security in order to profit himself as a result of such a withholding.

FINRA Conduct Rule 2830: Member Compensation
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