Sales Activities - Execution of Portfolio Transactions
The FINRA (previously known as NASD) forbids any favoritism involving investment companies and members with regards to portfolio transactions. Specifically, the following actions are not permitted:
- No member shall, directly or indirectly, favor or disfavor the sale or distribution of shares of any particular investment company on the basis of brokerage commissions received or expected by such member from any source, including such investment company.
- 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 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.
- 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.
- 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.
- 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.
However, assuming that none of the prohibited activities above have occurred, nothing in the conduct rules prohibits arrangements where a non-member company pays compensation directly to associated persons of the member, provided that:
- The arrangement is agreed to by the member;
- The member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the Commission or its staff that applies to the specific fact situation of the arrangement;
- The receipt by associated persons of such compensation is treated as compensation received by the member for purposes of the Rules of the Association; and
- That all record keeping requirements are satisfied.
Exam Tips and Tricks
While Rule 2830 covers a wide range of other activities, the following are most likely to be tested on the exam:
- No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales-related expenses and/or service fees exceed .25 of 1% of average net assets per annum
- No member or person associated with a member shall offer or sell the securities of an investment company if the service fees (12b-1 fees) paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets.
FINRA Conduct Rule 2310, 2330 and 2510