Atlanta, Ga. (Aug. 12, 2003) -- The Financial Planning Association lauded a rule proposed by the NASD to expand disclosure of sales incentives by stockbrokers in the sale of mutual fund shares, but said it doesn’t go far enough.


The NASD proposed disclosure to brokerage customers that a broker-dealer is paid by fund companies for “shelf space” to list funds for sale, and that stockbrokers may receive higher commissions in the sale of some of those mutual funds. According to an NASD news release, the proposal would only require brokers to disclose that they may receive ‘different rates of compensation’ on the funds that they sell.


While the FPA said the proposal represents a “first, small step” by the brokerage industry to address conflicts of interest, it said the proposal falls short of meaningful disclosure to the investor. “The disclosure is opaque at best,” said FPA president David Yeske. “As we understand it, the rule would not require disclosure of the dollar amount that a broker makes on the sale of a mutual fund so that the consumer cannot understand the actual financial incentives involved.”


Consumers would have to go to at least two different mutual fund disclosure statements to see fee expenses and brokerage costs, which the FPA contends would be “very confusing to most investors.”


“We don’t think the NASD proposal on its own is meaningful disclosure, nor does it reach other areas of brokerage conflicts,” Yeske said. “The NASD should expand its disclosure requirements to the sale of all stocks to retail investors, not just the 20 percent that are held in mutual funds. Principal trade conflicts should be next in line.”


Typical conflicts of interest in brokerage transactions may include a broker-dealer’s sales incentives for its stockbrokers to push certain equities, including stocks held by the broker-dealer that it wants to move out of inventory, called principal trades.  In contrast, investment advisers must clearly disclose the conflicts in principal trades and must secure permission in advance from the client.


-- WebCPA staff

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