FINRA Proposed Rule Would Mandate Disclosure of ‘Shelf Space’ Payments

May 16, 2011Articles Westlaw News & Insight Securities Blog

Member firms have often had arrangements with the mutual fund industry pursuant to which broker-dealers have shared revenue with mutual funds where a member firms' client invested with a particular mutual fund company upon the recommendation of the member firm; this practice is commonly known as "shelf space" payments.

Shelf space payments have long been controversial in the industry because they were generally undisclosed, resulting in litigation against member firms. In an effort to address this perceived problem, the Financial Industry Regulatory Authority recently filed with the Securities and Exchange Commission a proposed rule change that would make the disclosure of such shelf space payments mandatory on the part of member firms.

Although information regarding shelf space payments is currently disclosed in mutual fund prospectuses and related documents and certain member firms similarly disclose this information, the proposed rule makes disclosure a mandatory burden on member firms. The public can comment on this proposed rule up until May 31.

Under the proposed rule, FINRA would require member firms to prominently disclose information detailing that they receive cash compensation in exchange for recommending that their clients invest in certain mutual funds and that this compensation may impact the recommendation. In addition, FINRA would require that broker-dealers provide prominent references to both web pages and toll free telephone numbers that customers can contact for additional information regarding shelf space arrangements.

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