[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: 94-3485]
[[Page Unknown]]
[Federal Register: February 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33603; File No. SR-NASD-93-66]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Filing Requirements for Use of Mutual Fund Rankings and Elimination of
Sunset Provisions in Pre-Filing Requirements of Advertising and
Government Securities Rules
February 8, 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
4, 1993, the National Association of Securities Dealers, Inc. (``NASD''
or ``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), and amended on February 7, 1994,\1\ 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.
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\1\Amendment No. 1 superseded the original rule filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Article III, Section 35 of the NASD
Rules of Fair Practice to require filing of advertisements and sales
literature relating to investment companies, to make the pre-filing
requirement of Article III, Subsection 35(c)(2) of the Rules of Fair
Practice and in Subsection 8(c)(1)(B) of the Government Securities
Rules permanent, and to properly reference the ``Advertising Regulation
Department'' throughout Article III, Section 35 of the Rules of Fair
Practice and the Government Securities Rules. Below is the text of the
proposed rule change. Proposed new language is italicized; proposed
deletions are in brackets.
Rules of Fair Practice
* * * * *
Communications With the Public
Sec. 35
* * * * *
(c) Filing Requirements and Review Procedures
(1) Advertisements and sales literature concerning registered
investment companies (including mutual funds, variable contracts and
unit investment trusts) not included within the requirements of
Subsection (c)(2) of this Section, and public direct participation
programs (as defined in Article III, Section 34 of the Rules of Fair
Practice) shall be filed with the Association's Advertising Regulation
Department within 10 days of first use or publication by any member.
Filing in advance of use is recommended. Members are not required to
file advertising and sales literature which have previously been filed
and which are used without change. Any member filing any investment
company advertisement or sales literature pursuant to this Subsection
that includes or incorporates rankings or comparisons of the investment
company with other investment companies shall include a copy of the
ranking or comparison used in the advertisement or sales literature.
(2) Advertisements concerning collateralized mortgage obligations
registered under the Securities At of 1933, and advertisements and
sales literature concerning registered investment companies (including
mutual funds, variable contracts and unit investment trusts) that
include or incorporate rankings or comparisons of the investment
company with other investment companies where the ranking or comparison
category is not generally published or is the creation, either directly
or indirectly, of the investment company, its underwriter or an
affiliate, shall be filed with the Association's Advertising Regulation
Department for review at least 10 days prior to use (or such shorter
period as the Department may allow in particular circumstances) for
approval and, if changed or expressly disapproved by the Association,
shall be withheld from publication or circulation until any changes
specified by the Association have been made or, in the event of
disapproval, until the advertisement has been refiled for, and has
received, Association approval. Any member filing any investment
company advertisement or sales literature pursuant to this Subsection
shall include a copy of the data, ranking or comparison on which the
ranking or comparison is based. [This subsection (c)(2) shall remain in
effect for one year from November 16, 1993 unless modified or extended
prior thereto by the Board of Governors.]
* * * * *
Government Securities Rules
* * * * *
Communications With the Public
Sec. 8
* * * * *
(c) Filing Requirements and Review Procedures
(1) Members shall file advertisements for review with the
Association's Advertising Regulation Department as follows:
* * * * *
(B) advertisements concerning collateralized mortgage obligations
shall be filed with the Association's Advertising Regulation Department
for review at least 10 days prior to use (or such shorter period as the
Department may allow in particular circumstances) for approval and, if
changed or expressly disapproved by the Association, shall be withheld
from publication or circulation until any changes specified by the
Association have been made or, in the event of disapproval, until the
advertisement has been refiled for, and has received, Association
approval. [This subsection (c)(1)(B) shall remain in effect for one
year from November 16, 1993 unless modified or extended prior thereto
by the Board of Governors.]
* * * * *
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
As the number of mutual funds has increased substantially in recent
years, so has the number of mutual fund ranking entities (``Ranking
Entities''). Ranking Entities, as well as mutual funds and fund
affiliates, categorize and rank mutual funds by, for example, fund
type, performance over a given period of years, total return,
standardized yield calculated pursuant to Commission rules, the
variations in sales charges, and risk/reward. References to such
rankings in mutual fund advertisements and sales literature have also
increased substantially in recent years as members have attempted to
boost the sale of fund shares by touting the performance of various
mutual funds.
The NASD Board of Governors believes that it is important for the
Association to be able to review and regulate the use of ranking
materials and the development of customized rankings in order to
prevent the misleading use of such rankings. The NASD is, therefore,
proposing to amend Article III, Section 35(c) of the NASD Rules of Fair
Practice to require that copies of mutual fund rankings and the data on
which the rankings are based be submitted to the Association's
Advertising Regulation Department review. The proposed rule change
requires members filing advertisements or sales literature for review
which use or incorporate mutual fund rankings to include in the filing
a copy of the ranking or comparison. The NASD also has proposed
Guidelines for the Use of Rankings in Mutual Fund Advertisements and
Sales Literature (``Guidelines'') on which the NASD review will be
based.\2\
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\2\On November 4, 1993, the NASD submitted a proposed rule
change with the Commission File No. SR-NASD-93-69) for Commission
approval. The Commission intends to publish notice of the Guidelines
in the Federal Register concurrently with notice of the instant
proposed rule change.
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Subsection 35(c)(1) is proposed to be amended to require that any
member that files any investment company advertisements or items of
sales literature pursuant to Subsection 35(c)(1) which include or
incorporate rankings or comparisons of the investment company with
other investment companies, shall include a copy of the ranking or
comparison used in the advertising or sales literature. The
requirements of this provision will permit the staff to immediately
determine whether the use of the ranking complies with the Guidelines,
and avoid the need for the NASD staff to research the ranking or
attempt to obtain a copy of the source information in order to verify
the accuracy of the material.
Subsection 35(c)(2), which currently requires certain
advertisements to be filed by members 10 days prior to use, is proposed
to be amended to require such pre-use filing for all investment company
advertisements or items of sales literature which incorporates rankings
or comparisons of the investment company with other investment
companies where the ranking or comparison is not generally published or
is the creation, directly or indirectly, of the investment company, its
underwriter or an affiliate.\3\ While the NASD is concerned about
permitting ranking categories to be created by investment companies or
their affiliates, rather than by a Ranking Entity, it recognizes that
customized ranking may provide meaningful information to the investor.
Such filing also must include a copy of the data, ranking or comparison
on which the ranking or comparison is based.
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\3\The proposed Guidelines permit the use of a ranking based on
a category or subcategory created by a fund or a fund affiliate
rather than by a Ranking Entity, so long as the ranking is based on
the performance measurements of a Ranking Entity.
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The NASD is also proposing to amend Article III, Subsection
35(c)(2) of the Rules of Fair Practice and Subsection 8(c)(1)(B) of the
Government Securities Rules to eliminate sunset provisions relating to
collateralized mortgage obligations (``CMOs''). This change will make
the pre-filing requirement for CMO advertisements permanent.\4\
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\4\The NASD simultaneously filed, with the original filing of
this proposed rule change, proposed rule change SR-NASD-93-64
requesting a grant of temporary accelerated approval to extend the
sunset provisions for one year to provide an opportunity for SEC
review and publication for comment of this proposed rule change. The
SEC granted accelerated approval to that proposed rule change. See
Securities Exchange Act Release No. 33174 (Nov. 9, 1993), 58 FR
60712 (Nov. 17, 1993) (approving File No. SR-NASD-93-64).
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Finally, the NASD is proposing to modify references to the
Advertising Department to reference the Advertising Regulation
Department in Article III, Section 35 of the Rules of Fair Practice and
the Government Securities Rules.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act\5\ in that the rule
ensures that the use of rankings of investment companies in advertising
and sales literature is accurate and presents investors with fair and
meaningful data upon which to make an informed investment decision.
With respect to the proposed elimination of the sunset provisions for
the prefiling of CMO advertisements, the Board believes that the
positive regulatory benefits seen since implementation of the
provision, i.e., the reduction in misleading advertising, warrants
making the prefiling requirement provision permanent.
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\5\15 U.S.C. 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
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 filed 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-93-66 and
should be submitted by [insert date 21 days from the date of
publication].
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. 94-3485 Filed 2-14-94; 8:45 am]
BILLING CODE 8010-01-M