[Federal Register Volume 59, Number 57 (Thursday, March 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6873]


[[Page Unknown]]

[Federal Register: March 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33780; File No. SR-NASD-93-66]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change 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

March 17, 1994.
    On February 7, 1994, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule 
change pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\2\ and rule 19b-4 thereunder.\3\ The proposed rule 
change amends Article III, section 35 of the NASD Rules of Fair 
Practice\4\ and section 8 of the NASD Government Securities Rules\5\ 
to: (1) Require filing of advertisements and sales literature relating 
to investment companies; (2) made 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 
(3) properly reference the ``Advertising Regulation Department'' 
throughout Article III, section 35 of the Rules of Fair Practice and 
the Government Securities Rules.
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    \1\The NASD initially submitted the proposed rule change on 
November 4, 1993. However, on February 7, 1994, the NASD filed 
Amendment No. 1, which amended and superseded the original rule 
filing.
    \2\15 U.S.C. 78s(b)(1) (1988).
    \3\17 CFR 240.19b-4 (1993).
    \4\NASD Manual, Rules of Fair Practice, Article III, Sec. 35 
(CCH) 2195.
    \5\NASD Manual, Government Securities Rules, Sec. 8 (CCH) 2428.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 33603, February 8, 1994) and by 
publication in the Federal Register (59 FR 7282, February 15, 1994). 
One comment letter favoring the proposed rule change was received. This 
order approves 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 Commission believes that it is important that the NASD 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, therefore, has proposed 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 for 
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.\6\
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    \6\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. See Securities Exchange Act 
Release No. 33606 (Feb. 8, 1994), 59 FR 7276 (Feb. 15, 1994) 
(noticing File No. SR-NASD-93-69).
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    Subsection 35(c)(1) will 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.
    The proposed rule change amends subsection 35(c)(2), which 
currently requires certain advertisements to be filed by members 10 
days prior to use, 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.\7\ While the NASD is concerned about 
permitting ranking categories to be created by investment companies or 
their affiliates, rather than by a Ranking Entity, customized ranking 
nonetheless 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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    \7\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 also is amending 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 would make 
the pre-filing requirement for CMO advertisements permanent.
    Finally, the NASD is modifying 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 Commission finds that the proposed rule change is consistent 
with the provisions of section 15A(b)(6) of the Act\8\ because it 
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 Commission 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. Finally, the 
clarifications referring to the phrase ``Advertising Regulation 
Department,'' rather than ``Advertising Department'' will reduce 
unnecessary confusion among NASD members.
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    \8\15 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that File No. SR-NASD-93-66 be, and hereby is approved.

    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. 94-6873 Filed 3-23-94; 8:45 am]
BILLING CODE 8010-01-M