[Federal Register Volume 59, Number 31 (Tuesday, February 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3425]
[[Page Unknown]]
[Federal Register: February 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33606; File No. SR-NASD-93-69]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Guidelines Regarding the Use of Rankings in Mutual Fund Advertisements
and Sales Literature
February 9, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November
22, 1993, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to adopt Guidelines Regarding the Use of
Rankings in Mutual Fund Advertisements and Sales Literature. Below is
the text of the proposed rule change. Proposed new language is
italicized.
Guidelines for the Use of Rankings in Mutual Fund Advertisements and
Sales Literature
I. Definition of ``Ranking Entity''
For purposes of these guidelines, the term ``Ranking Entity''
refers to any entity that provides general information about mutual
funds to the public, that is independent of the mutual fund and its
affiliates, and whose services are not procured by the mutual fund or
any of its affiliates to assign the fund a ranking. Examples of
``Ranking Entities'' include services such as Morningstar and Lipper
and financial publications such as Money and Barron's.
II. Required Disclosures
A. Headlines/Prominent Statements.
1. A headline or other prominent statement must not state or imply
that a mutual fund is the best performer in a category unless it is
actually ranked first in the category.
2. Prominent disclosure of the mutual fund's ranking, the total
number of mutual funds in the category, the name of the category, and
the period on which the ranking is based (i.e., the length of the
period and the ending date; or, the first day of the period and the
ending date), must appear in close proximity to any headline or other
prominent statement that refers to a ranking.
B. All advertisements and sales literature containing a mutual fund
ranking must disclose, with respect to the ranking:
1. the name of the category (e.g., growth funds);
2. the number of funds in the category;
3. the name of the Ranking Entity;
4. the length of the period and the ending date, or, the first day
of the period and the ending date;
5. criteria on which the ranking is based;
6. for load funds, whether the ranking takes into account sales
charges;
7. if fees have been waived or expenses advanced during the period
on which the ranking is based, and the waiver or advancement had a
material effect on the ranking, a statement to that effect; and
8. the publisher of the ranking data (e.g., ``ABC Magazine, June
1993'').
The disclosure required by B1, B2 and B3 must be set forth
prominently in the body of the advertisement or sales literature.
C. If the mutual fund ranking consists of a symbol (e.g., a star
system) rather than a number, the advertisement or sales literature
also must disclose the meaning of the symbol (e.g., a four-star ranking
indicates that the fund is in the top 30% of all mutual funds).
D. All advertisements and sales literature containing a mutual fund
ranking must disclose that past performance is no guarantee of future
results.
III. Time Periods
A. Any mutual fund ranking set forth in an advertisement or sales
literature must be, at a minimum, current to the most recent calendar
quarter ended prior to the submission for publication.
B. Except for money market mutual funds;
1. advertisements and sales literature must not use any ranking
based on a period of less than one year.
2. a mutual fund ranking based on total return must be accompanied
by rankings based on total return for the one, five and ten year
periods (or life of the fund) supplied by the same Ranking Entity in
the category and based on the same time period; and,
3. a mutual fund ranking based on the current SEC standardized
yield must be accompanied by rankings based on total return for the
one, five and ten year periods (or life of the fund) supplied by the
same Ranking Entity in the category and based on the same time period.
IV. Categories
A. The choice of category (including a subcategory of a broader
category) on which the mutual fund ranking is based must be one that
provides a sound basis for evaluating the performance of the fund.
B. Subject to the standards below, a mutual fund ranking must be
based only on (1) a published category or subcategory created by a
Ranking Entity or (2) a category or subcategory created by a fund or a
fund affiliate, but based on the performance measurements of a Ranking
Entity.
C. When the mutual fund ranking is based on a subcategory, the
advertisement or sales literature must disclose the name of the full
category and the fund's ranking and the number of funds in the full
category. This requirement does not apply if the subcategory is (1)
based solely on the investment objectives of the funds included and (2)
created by a Ranking Entity. This disclosure could be included in a
footnote.
D. The advertisement or sales literature must not use any category
or subcategory that is based upon the mutual funds' asset size (whether
or not it has been created by a Ranking Entity).
E. If an advertisement uses a category created by the mutual fund
or a fund affiliate, including a ``subcategory'' of a category
established by a Ranking Entity, the advertisement must prominently
disclose:
1. the fact that the fund or its affiliate has created the ranking
category;
2. the number of funds in the category;
3. the basis for selecting the category; and
4. the Ranking Entity that developed the research on which the
ranking is based.
E. An advertisement or sales literature containing a headline or
other prominent statement that proclaims a mutual fund ranking created
by a fund or its affiliate must indicate, in close proximity to the
headline or statement, that the mutual fund ranking is based upon a
category created by the fund or its affiliate.
V. Multiple Class/Two-Tier Funds
Mutual Fund rankings for more than one class or fund with the same
portfolio must be accompanied by prominent disclosure of the fact that
the funds or classes have a common portfolio.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Ranking entities, mutual funds and fund affiliates categorize and
rank mutual funds in various ways such as, for example, according to
fund type, performance over a given period of years, total return, SEC
standardized yield, with and without sales charges and risk/reward.
Article III, Section 35(d)(2)(M) of the NASD Rules of Fair Practice\1\
sets forth the specific standard in communications with the public that
a member who makes investment comparisons, directly or indirectly, must
ensure that the purpose of the communication is clear and that the
comparison is fair and balanced, including any material differences
between the subjects of the comparisons. The use of mutual fund
rankings prepared by ranking entities, mutual funds and fund affiliates
to demonstrate mutual fund performance qualifies as such a comparison.
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\1\NASD Manual, Rules of Fair Practice, Art. III, Sec.
35(d)(2)(M), (CCH) 2195.
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As the number of mutual funds has increased substantially in recent
years, so have the number of mutual fund ranking entities. As the
number of ranking entities has increased, the NASD has observed an
increased reference to mutual fund rankings in fund advertisements and
sales literature. In response to the increasing reference by mutual
fund groups to such mutual fund rankings in mutual fund advertisements
and sales literature, the NASD determined to provide guidance on the
use of fund rankings and is proposing a comprehensive set of guidelines
to be used when mutual fund advertisements and sales literature include
references to mutual fund rankings.
Guidelines for Use of Rankings in Advertising and Sales Literature
Definition of Ranking Entity
The term ``Ranking Entity,'' for purposes of the Guidelines, refers
to an entity that provides general mutual fund information to the
public, is independent of the fund and its affiliates\2\ and whose
services are not used by the fund or its affiliates to assign the fund
a ranking. The definition encompasses entities formed specifically to
provide such information as well as financial publications and
periodicals which include such a service in their publications.
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\2\With respect to any fund, a Ranking Entity will be deemed to
be independent of that fund and its affiliates for the purposes of
these Guidelines only if it is not an ``affiliated person'' of that
fund and its affiliates as such term is defined in Section 2(a)(3)
of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(3) (1988).
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Required Disclosures
The Guidelines contain certain required disclosures. All
advertisements and sales literature containing a ranking must disclose
the name of the mutual fund category, the number of funds in the
category, the name of the Ranking Entity, the period on which the
ranking is based, the criteria on which the fund is ranked, whether,
for load funds, the ranking takes into account sales charges, a
statement as to the material effect, if any, of fees waived or expenses
advanced during the period on which the ranking is based, and the
publisher of the ranking data. Disclosure of the publisher allows the
reader to obtain further information, if desired.
Additionally, because prominent statements often command the same
attention as headlines, the name of the mutual fund category, the total
number of funds in the category, and the period on which the ranking is
based must be disclosed in close proximity to any headline or prominent
statement. Such statement or headline may not state or imply that a
fund is ranked first in a category when it is not.
All advertising or sales literature using a ranking system
consisting of a symbol must disclose the meaning of the symbol.
Finally, all advertising and sales literature containing a ranking must
disclose that past performance is no guarantee of future results.
Time Periods
The NASD believes that the use of rankings which are current
reduces the possibility that such rankings will be deceptive or
misleading. The NASD recognizes that different Ranking Entities provide
rankings with varying frequencies, but believes that the industry
should be provided with a minimum standard of what is current.
Therefore, rankings should be at least current to the most recent
calendar quarter, though use of more current ranking data would be
permissible. The NASD believes that the current standard of the most
recent calendar quarter is reasonable and not misleading.
The NASD is concerned about a member's ability to select a ranking
based on a time period that would show the fund in the best light
without providing balancing information. Thus, the NASD believes that,
for all mutual funds except money market mutual funds, rankings based
on a period of less than one year are not meaningful, could be
misleading and, therefore, should not be used. Additionally, rankings
based on either total return or the SEC standardized yield must be
accompanied by rankings based on the total return for the one, five and
ten year (or mutual fund life) periods supplied by the same Ranking
Entity and must be based on the same time period. This requirement
parallels the SEC requirement that performance information must be
accompanied by one, five and ten year (or mutual fund life) total
return performance figures.
Categories
Recognizing the many ways in which data on mutual fund performance
can be presented, the NASD believes it is important to set standards
for methods of fund categorization which provide a sound basis for
evaluating the performance of a fund. Generally, advertisements and
sales literature must use only categories or subcategories created by
the Ranking Entities. Advertisements or sales literature using rankings
based only on a subcategory must disclose the name of the full
category, the fund's ranking and the number of funds in the full
category, unless the subcategory is based solely on the investment
objectives of the funds and is created by a Ranking Entity.
However, categories or subcategories created by a fund or fund
affiliate may be used as long as performance is measured by the
performance measurements of a Ranking Entity. Additionally, categories
or subcategories created by a fund or its affiliate must also
prominently disclose the fact that the fund or its affiliate has
created the ranking category, the number of funds in the category, the
basis for selecting the category, and the identity of the Ranking
Entity that developed the research on which the ranking is based.
Headlines and prominent statements using a ranking created by a fund or
its affiliate must also disclose in close proximity to the headline or
prominent statement that the ranking is based on a category created by
the fund or its affiliate.
Finally, advertisements or sales literature may not use any ranking
category based on the fund's asset size since such information would
not provide a meaningful basis upon which the fund's performance could
be evaluated.
Multiple Class/Two-Tier Funds
Advertisements or sales literature containing rankings for more
than one class or fund with the same portfolio must disclose the fact
that the funds or classes have a common portfolio.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act\3\ in that the
guidelines will work to protect investors and the public interest by
establishing a baseline of standards to guide the use of mutual fund
rankings in advertising and sales literature in promoting the sale of
mutual funds and by preventing the misleading use of such rankings.
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\3\15 U.S.C. Sec. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The Guidelines, which are not subject to NASD member vote, were
circulated to members in NASD Notice to Members 93-76 (November 1993).
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register, or within such longer period (i) as the Commission
may designate up to 90 days of such date if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, the Commission
will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are field with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File Number SR-NASD-93-69 and
should be submitted by March 8, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3425 Filed 2-14-94; 8:45 am]
BILLING CODE 8010-01-M