Regulators are proposing new limits on the expensive trips and other valuable gifts some brokers receive for selling mutual funds or insurance investments from companies other than their own.
The National Association of Securities Dealers, an industry group that polices sales practices at mutual funds, distributed a new rule that would tighten cash and non-cash compensation paid to brokers serving as agents for outside firms.One mutual fund analyst applauded the rule.
"It seems to me they're taking the right step and being pro-active," said John Rekenthaler, editor at Morningstar Mutual Funds, a Chicago-based analysis service.
Rekenthaler criticized the current industry practice of awarding trips to Hawaii and other lucrative perquisites to brokers in return for selling a particular fund.
"It's a disgrace to the professionalism of the industry to have what are in essence kickbacks to people for selling a particular fund," Rekenthaler said.
The proposal, out for public comment until Oct. 3, would amend the NASD's rules concerning mutual fund sales and create new rules on the sale of variable annuities, a popular investment sold by insurance companies.
Brokers would be prohibited, with certain exceptions, from receiving gifts of more than $100 per year from companies other than their own.
The focus is on brokers who sell the funds of outside companies and the compensation those companies pay to encourage brokers to talk up the outside funds, a NASD spokesman said.
The rules would not prohibit sales incentive programs by a broker's employer or sister company, payment for training and education meetings, or "an occasional meal, ticket to a sporting event or theater or entertainment" for brokers and their guests.
The broker couldn't receive cash compensation from the outside company unless it was described in the fund's prospectus.
Suzanne Rothwell, associate general counsel at the NASD, said in-house incentive programs could not award compensation for the sale of a specific mutual fund or annuity, but for a broker's overall sales activity.
Rothwell said the rules, coming on the heels of scandals in the sales of limited partnerships in the 1980s, are not in response to similar problems in mutual fund or annuity sales.
"We have done studies in the 1980s and have not found abuses," she said.
The mutual fund industry's main trade group, the Investment Company Institute, had no immediate comment on the proposed rule. ICI spokesman L. Erick Kanter said the group was studying the rule and seeking comment from its membership.
The rules are being proposed at a time when compensation is being reviewed for the securities industry as a whole.
"I am concerned that some compensation practices may exaggerate conflicts of interest," Securities and Exchange Commissioner Arthur Levitt Jr. said earlier this year. "That is, encourage brokers in some cases to make trades, rather than to do what's in the client's best long-term interests."