Some brokers might be crying "Scrooge" at regulators this holiday season.
Starting Jan. 1, brokerages, mutual fund companies, and variable annuity companies will not be allowed to offer trips, dinners, and other perks as rewards for selling a particular product or brand. Instead, noncash rewards may be offered only for overall sales of an investment company's products.
In addition, one product may not be favored over another, according to new rules by the National Association of Securities Dealers.
"Things got out of hand, and frankly I'm glad to see the crackdown," said Keith Hartstein, the senior vice president of national sales for John Hancock Funds Inc. of Boston.
Sales contests based on specific funds or product lines were popular several years ago, particularly when new funds or variable annuities were introduced. Regulators permitted the practice as long as it was disclosed in a prospectus, but they became increasingly concerned about customer suitability.
As a result, some bank-owned and other brokerages stopped letting brokers participate in the contests. Large mutual fund companies also shied away from offering them.
Nonetheless, come January, some investment companies will have to change the way they promote their proprietary products. For example, Bank One Corp.'s mutual fund unit, the One Group, has offered brokers trips, credit for seminars, and tapes with sales techniques, a spokeswoman the Chicago- based banking company said.
Some variable annuity companies also will have to change their ways. American Skandia of Shelton, Conn., and Pacific Life Insurance Co. of Newport Beach, Calif., are running contests based on specific product sales.
The new NASD rule is designed to ensure "that the needs of investors are the primary consideration, not whether one fund is sold over another," a spokeswoman for the group said. We "want to be clear that when there is a contest, you have to include everything to be fair."
The ban on contests for specific products is one of several new NASD rules on noncash compensation. The rules also prohibit business meetings that are preconditioned on sales, and they raise to $100 from $50 the annual limit on gifts that brokerage companies dispense.
The changes, which do not affect cash compensation, were approved by the Securities and Exchange Commission in July.
Several bank brokerage chiefs said they disallowed product-specific contests years ago. But, they said, that has not stopped variable annuity companies from trying their luck.
Randy Reynolds, chief executive of Compass Brokerage Inc. in Birmingham, Ala., said he has been approached three times in the last five months by variable annuity companies offering trips as rewards for sales.
"There's more variable annuity supply than there is demand for it. And there is extreme competition among the variable annuity companies to raise assets," said Mr. Reynolds, whose company is the brokerage arm of Compass Bancshares.
American Skandia offers trips to Hawaii, Grand Cayman Island, Aruba, Scotland, and Mexico. The trips are scheduled for specific dates and include meetings with money managers.
"Clearly people like to go to nice places, and clearly it's an incentive for them to sell American Skandia products," said Bayard Tracy, national sales manager for the company's financial institutions division. Nonetheless, there are restrictions, and representatives gain value from the meetings, he said.
In any case, American Skandia will stop offering the trips after the contest ends in May, Mr. Tracy said.
Pacific Life runs a similar contest. A broker who sells $1.2 million of product can go to San Diego. For $2.2 million of sales a trip to Hawaii is offered, and for $3 million there is a trip to Ireland.
The contest runs until March, and the trips will take place next summer. "This will be the last one that we'll be doing," a spokeswoman said.
The NASD rule will allow existing programs to continue for six months and permits awards until June 30, 2000.
The rule for sales meetings will let fund companies pay travel expenses for brokers only. Attendance cannot depend on sales, and the site must be "appropriate to the purpose of the meeting."
A spokesman for Massachusetts Financial Services of Boston said the company's lawyers are reviewing a program that offers special incentives to brokers who sell $2.5 million of its funds per year. They get access to special conference calls and newsletters as well as a trip to Boston to meet with portfolio managers.
"We're trying to decide what we can and cannot do in 1999," the spokesman said.
Some fund companies said they already comply with the new rules.
OppenheimerFunds Inc. stop-ped running a top-producer trip in 1994, said James H. Ruff, president of the New York company's distribution unit. It still sponsors about 15 due diligence trips a year, but they are not tied to production, Mr. Ruff said. Spouses may go along, but the company no longer pays travel-related costs.
"There was always a question of whether those types of trips were walking that fine line," Mr. Ruff said.
"Most big banks that we work with ask to see a copy of the agenda," said Michael C. Vessels, senior vice president and national sales manger for AIM Management Group of Houston. "The last thing a bank wants is to have their producers out of the office for a day or two playing golf."