[Federal Register Volume 60, Number 111 (Friday, June 9, 1995)]
[Notices]
[Pages 30618-30622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14191]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35801; File No. SR-NASD-95-12]


Self-Regulatory Organizations; Notice of Filing Proposed Rule 
Change by National Association of Securities Dealers, Inc., Relating to 
Advertising and Sales Literature Filing and Review Requirements Under 
the Rules of Fair Practice and the Government Securities Rules

June 2, 1995.
    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 May 10, 
1995,\1\ 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.

    \1\ The proposed rule change was initially submitted on April 
10, 1995, but was amended on May 10, 1995, in order to make 
technical changes and clarify rule language.
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Self-Regulatory Organization's Statement of the Terms of Substance of 
the Proposed Rule Change

    The NASD is herewith filing a proposed rule change to Article III, 
Section 35 of the Rules of Fair Practice and Section 8 of the 
Government Securities Rules. Proposed new language is italicized and 
proposed deletions are bracketed.
ARTICLE III
Rules of Fair Practice
* * * * *
Communications With the Public
Sec. 35.

(a) Definitions

    (1) Advertisement--For purposes of this section and any 
interpretation thereof, ``advertisement'' means material published, or 
designed for use in, a newspaper, magazine or other periodical, radio, 
television, telephone or tape recording, videotape display, signs or 
billboards, motion pictures, telephone directories (other than 
listings), electronic or other public media.
    (2) Sales literature--For purposes of this section and any 
interpretation thereof, ``sales literature'' means any written or 
electronic communication distributed or made generally available to 
customers or the public, which communication does not meet the 
foregoing definition of ``advertisement.'' Sales literature includes, 
but is not limited to, circulars, research reports, market letters, 
performance reports or summaries, form letters, telemarketing scripts, 
seminar texts, and reprints or excerpts of any other advertisement, 
sales literature or published article.
(b) Approval and Recordkeeping
    (1) Each item of advertising and sales literature shall be approved 
by signature or initial, prior to use or filing with the NASD, by a 
registered principal [(or his designee)] of the member.
* * * * *
(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. 
The member must provide with each filing the actual or anticipated date 
of first use. 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 members 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 Act 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 [[Page 30619]] changed [or expressly disapproved] by 
the Association, shall be withheld from publication or circulation 
until any changes specified by the Association has been made or, [in 
the event of disapproval] if expressly disapproved, until the 
advertisement has been refiled for, and has received, Association 
approval. The member must provide with each filing the actual or 
anticipated date of first use. 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.
    (3) (A) Each member of the Association which has not previously 
filed advertisements with the Association (or with a registered 
securities exchange having standards comparable to those contained in 
this section) shall file its initial advertisement with the 
Association's Advertising Department at least ten days prior to use and 
shall continue to file its advertisements at least ten days prior to 
use for a period of one year. The member must provide with each filing 
the actual or anticipated date of first use.
    [(B) Each member which, on the effective date of this section, had 
been filing advertisements with the Association (or with a registered 
securities exchange having standards comparable to those contained in 
this section) for a period of less than one year shall continue to file 
its advertisements, at least ten days prior to use, until the 
completion of one year from the date the first advertisement was filed 
with the Association or such exchange.]
* * * * *
    (4) Notwithstanding the foregoing provisions, any District Business 
Conduct Committee of the Association, upon review of a member's 
advertising and/or sales literature, and after determining that the 
member has departed and there is a reasonable likelihood that the 
member will again depart from the standards of this section, may 
require that such member file all advertising and/or sales literature, 
or the portion of such member's material which is related to any 
specific types or classes of securities or services, with the 
Association's Advertising Department and/or the District Committee, at 
least ten days prior to use. The member must provide with each filing 
the actual or anticipated date of first use.
    The Committee shall notify the member in writing of the types of 
material to be filed and the length of time such requirement is to be 
in effect. The requirement shall not exceed one year, however, and 
shall not take effect until 30 days after the member receives the 
written notice, during which time the member may request a hearing 
before the District Business Conduct Committee, and any such hearings 
shall be held in reasonable conformity with the hearing and appeal 
procedures of the Code of Procedure.
* * * * *
(d) Standards Applicable to Communications With the Public
* * * * *
(2) Specific Standards
    In addition to the foregoing general standards, the following 
specific standards apply:
* * * * *
    (B) Recommendations: In making a recommendation, whether or not 
labeled as such, a member must have a reasonable basis for the 
recommendation and must disclose [the price at the time the 
recommendation is made, as well as] any of the following situations 
which are applicable:
    (i) That the member usually makes a market in the securities being 
recommended, or in the underlying security if the recommended security 
is an option, and/or that the member or associated persons will sell to 
or buy from customers on a principal basis;
    (ii) That the member and/or its officers or partners own options, 
rights or warrants to purchase any of the securities of the issuer 
whose securities are recommended, unless the extent of such ownership 
is nominal;
    (iii) That the member was manager or co-manager of a public 
offering of any securities of the recommended issuer within the last 3 
years.
    The member shall also provide, or offer to furnish upon request, 
available investment information supporting the recommendation. 
Recommendations on behalf of corporate equities must provide the price 
at the time the recommendation is made.
    A member may use material referring to past recommendations if it 
sets forth all recommendations as to the same type, kind, grade or 
classification of securities made by a member within the last year. 
Longer periods of years may be covered if they are consecutive and 
include the most recent year. Such material must also name each 
security recommended and give the date and nature of each 
recommendation (e.g., whether to buy or sell), the price at the time of 
the recommendation was to be acted upon, and indicate the general 
market conditions during the period covered.
    Also permitted is material which does not make any specific 
recommendation but which offers to furnish a list of all 
recommendations made by a member within the past year or over longer 
periods of consecutive years, including the most recent year, if this 
list contains all the information specified in the previous paragraph. 
Neither the list of recommendations, nor material offering such list, 
shall imply comparable future performance. Reference to the results of 
a previous specific recommendation, including such a reference in a 
follow-up research report or market letter, is prohibited if the intent 
or the effect is to show the success of a past recommendation, unless 
all of the foregoing requirements with respect to past recommendations 
are met.
* * * * *
GOVERNMENT SECURITIES RULES
* * * * *
Communications With the Public
Sec. 8
(a) Definitions
    (1) Advertisement--For purposes of this section and any 
interpretation thereof, ``advertisement'' means material published, or 
designed for use in, a newspaper, magazine or other periodical, radio, 
television, telephone or tape recording, videotape display, signs or 
billboards, motion pictures, telephone directories (other than routine 
listings), electronic or other public media.
    (2) Sales Literature--For purposes of this section and any 
interpretation thereof, ``sales literature'' means any written or 
electronic communication distributed or made generally available to 
customers or the public that does not meet the foregoing definition of 
``advertisement.'' Sales literature includes, but is not limited to, 
circulars, research reports, market letters, performance reports or 
summaries, form letters, standard forms of option worksheets, 
telemarketing scripts, seminar texts, and reprints or excerpts of any 
other advertisement, sales literature, or published article.
(b) Approval and Recordkeeping
    (1) Each item of advertising and sales literature shall be approved 
by signature or initial, prior to use or filing with the NASD, by a 
registered principal [(or designee)] of the member.
* * * * * [[Page 30620]] 
(c) Filing Requirements and Review Procedures
    (1) Members shall file advertisements for review with the 
Association's Advertising Regulation Department as follows:
    (A) Advertisements concerning government securities (as defined in 
Section 3(a)(42) of the Securities Exchange Act of 1934) other than 
collateralized mortgage obligations shall be filed by members with the 
Association's Advertising Department within 10 days of first use or 
publication; and
    (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] if 
expressly disapproved, until the advertisement has been refiled for, 
and has received, Association approval. The member must provide with 
each filing concerning government securities, including collateralized 
mortgage obligations, the actual or anticipated date of first use.
    (2) Each member of the Association that has not previously filed 
advertisements with the Association shall file its initial 
advertisement concerning government securities with the Association's 
Advertising Department at least 10 days prior to use and shall continue 
to file its advertisements concerning government securities at least 10 
days prior to use for a period of one year. The member must provide 
with each filing the actual or anticipated date of first use.
    (3) Notwithstanding the foregoing provisions, any District Business 
Conduct Committee of the Association, upon review of a member's 
government securities advertising and/or sales literature, and after 
determining that the member will again depart from the standards of 
this section, may require that such member file all government 
securities advertising and/or sales literature, or the portion of such 
member's material that is related to any specific types or classes of 
securities or services, with the Association's Advertising Department 
and/or the District Committee, at least 10 days prior to use. The 
member must provide with each filing the actual or anticipated date of 
first use.
    The Committee shall notify the member in writing of the types of 
material to be filed and the length of time such requirement is to be 
in effect. The requirement shall not exceed one year, however, and 
shall not take effect until 30 days after the member receives the 
written notice, during which time the member may request a hearing 
before the District Business Conduct Committee, and any such hearings 
shall be held in reasonable conformity with the hearing and appeal 
procedures of the Code of Procedure.
* * * * *
(d) Standards Applicable to Communications With the Public
* * * * *
(2) Specific Standards
    In addition to the foregoing general standards, the following 
specific standards apply:
* * * * *
    (B) Recommendations: In making a recommendation, whether or not 
labeled as such, a member must have a reasonable basis for the 
recommendation made and must disclose [the price at the time the 
recommendation is made, as well as] any of the following situations 
which are applicable:
* * * * *
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 
test 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

    Article III, Section 35 of the Rules of Fair Practice and Section 8 
of the Government Securities Rules (``Rules'') govern members' 
communications with the public regarding general securities and 
government securities, respectively. The Rules contain definitions, 
internal approval and recordkeeping requirements, filing requirements 
and standards applicable to the content of such communications. The 
NASD is proposing to modify certain sections of the Rules in order to 
revise the definitions of, and the internal approval and timeliness of 
filing requirements for, advertising and sales literature and the scope 
of rules relating to ``Recommendations.'' The revisions will codify 
existing rule interpretations, rectify inconsistencies, and clarify 
issues which have been the source of member misunderstanding. It is not 
anticipated that these proposals will create additional regulatory 
burdens on the membership.
    The NASD is proposing to modify the definitions of 
``Advertisement'' and ``Sales Literature'' in Article III, Subsections 
35(a) (1) and (2) of the Rules of Fair Practice and Subsections 8(a) 
(1) and (2) of the Government Securities Rules to include electronic 
messages. The NASD has consistently applied its standards for 
communications with the public to electronic messages sent via 
computer. The inclusion of the term ``electronic'' in the definition of 
``Advertisement'' is intended to apply to communications available to 
all network subscribers including items displayed over network bulletin 
boards. The inclusion of the term ``electronic'' in the definition of 
``Sales Literature'' is intended to apply to messages sent directly to 
individuals or targeted groups. The NASD believes that the proposed 
rule change will reduce member confusion by clarifying that the 
requirements set forth in these sections are applicable to such 
electronic communications.
    The NASD is proposing to further modify the definition of ``Sales 
Literature'' in Article III, Subsection 35(a)(2) of the Rules of Fair 
Practice and Subsection 8(a)(2) of the Government Securities Rules to 
include telemarketing scripts. Members often file for review with the 
Advertising Regulation Department telemarketing scripts intended to be 
read to prospects and existing customers or delivered electronically 
through a telemarketing service. These scripts differ from other forms 
of telephone prospecting and customer contact in that they are followed 
without variation by the caller or callers. The NASD considers these 
scripts as comparable to a form letter delivered orally. The inclusion 
of telemarketing scripts in the definition will reduce confusion among 
members and promote more consistent application of the rules.
    The NASD is proposing to modify Article III, Subsection 35(b)(1) of 
the Rules of Fair Practice and Subsection 8(b)(1) of the Government 
Securities Rules to require that each item of advertising and sales 
literature be [[Page 30621]] approved internally prior to use only by a 
registered principal. Currently, the Rules allow a registered principal 
to perform the review or to delegate this responsibility to a designee. 
The rules contain no guidelines regarding the level of experience, 
expertise, or qualification that the designee must have in order to 
assume this compliance responsibility. However, Part II of Schedule C 
to the By-Laws sets forth the categories and requirements of registered 
principals and subsection (2)(g)(ii)c.3 thereunder states definitively 
that a Limited Principal-General Securities Sales Supervisor shall not 
be qualified to perform final approval of advertising. Since the 
internal approval rule currently does not address the qualifications 
necessary for the designee, individuals less qualified than principals 
are being designated by registered principals to provide internal 
approval. The proposed amendment eliminates the potential for 
inconsistent internal standards applied by different members regarding 
the review of communications with the public.
    The NASD is also proposing to modify Article III, Subsection 
35(b)(1) of the Rules of Fair Practice and Subsection 8(b)(1) of the 
Government Securities Rules to require that advertising and sales 
literature be approved internally by members prior to being filed with 
the NASD Advertising Regulation Department. The current rules for 
review of advertisements and sales literature require that the material 
be approved internally by the member prior to first use, but do not 
require that material be approved internally by the member before being 
filed with the NASD. Members have verified to the NASD that their 
internal review sometimes occurs after the NASD response is received. 
This practice places the NASD in the role of providing the initial 
compliance review, a role that should, in the NASD's view, be 
maintained within the member firms' compliance departments. The 
proposed amendment will ensure that members are accountable for 
submitting material which is in reasonable conformity to the applicable 
rules. It is anticipated that this amendment will reduce the amount of 
refiling requested by the Advertising Regulation Department due to 
extensive deficiencies in the original filings.
    The NASD is proposing to modify Article III, Subsections 35(c) (1), 
(2), (3)(A) and (4) to the Rules of Fair Practice and Subsections 
8(c)(1)(A) and (B), (c)(2) and (c)(3) of the Government Securities 
Rules to require that, for filing requirements that have timeliness 
requirements, the member provide the actual or expected date of first 
use or publication of the item filed. Currently the rules provide that 
material be filed within ten days of first use or ten days prior to 
use, depending on the status of the firm and the subject matter of the 
communication. For example, the rules require that firms which have 
never filed material with the Advertising Regulation Department shall 
file their advertisement at least ten days prior to first use and 
continue to file their advertisements ten days prior to use for a 
period of one year from the date of first filing. For advertisements 
and sales literature for registered investment companies, direct 
participation programs and government securities, the rules currently 
require that they be filed on an ongoing basis within ten days of first 
use. Advertisements for collateralized mortgage obligations must always 
be filed at least ten days prior to use.
    Under these guidelines, members file communications for review in 
various stages of a document's production. These stages range from 
first drafts to finished products. It is often impossible to determine 
the date of first use unless the information is provided voluntarily by 
the member or requested by the NASD reviewer. Because the NASD 
Advertising Regulation Department reviews approximately 3500 to 4000 
items per month, it is impractical to routinely contact members and 
request they provide the date of use for each piece filed. 
Consequently, the NASD is unable to determine systematically if the 
member firms are meeting their filing obligations. The proposed 
amendment will enable the NASD to enforce the existing rules more 
effectively and consistently.
    The NASD is proposing to delete Article III, Subsection 35(c)(3)(B) 
to the Rules of Fair Practice. This provision was always intended to be 
temporary in that it applied the pre-filing requirements of Subsection 
35(c)(3)(A) for a period of one year to those firms that had been 
filing advertisements for less than one year when the pre-filing 
provisions became effective. The provision ensured that such firms 
continued to pre-file advertisements for a period of at least one year 
from the date their first advertisements were filed. As such, the 
provision became inapplicable exactly one year from its effective date.
    The NASD is proposing to modify Article III, Subsection 35(d)(2)(B) 
to the Rules of Fair Practice and Subsection 8(d)(2)(B) to the 
Government Securities Rules to clarify that the requirement to disclose 
the price of the security applies only to recommendations for corporate 
equities. The literal language of the current rule arguably would 
require price disclosure with respect to all securities products in all 
communications deemed to be recommendations. However, the NASD has a 
longstanding practice of not requiring price disclosure on 
communications for securities products other than corporate equities. 
The proposed amendment specifies that the price requirement applies 
only to communications on behalf of corporate equities and deletes the 
price requirement entirely from the Government Securities Rules. In 
proposing this modification, the NASD has considered that both the 
Rules of Fair Practice and the Government Securities Rules prohibit 
members from omitting material information in communications with the 
public. Therefore, if inclusion of the price of the security is 
necessary to make the material not misleading, then the member is 
required to include the price as applicable.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\2\ which require that 
the Association adopt and amend its rules to promote just and equitable 
principles of trade, and generally provide for the protection of 
customers and the public interest in that the proposed rule change 
codifies existing rule interpretations, rectifies inconsistencies and 
clarifies issues which have been the source of member misunderstanding 
regarding the filing, review and approval of advertising and sales 
literature, and improves the efficiency of the advertising filing, 
review and approval process without creating additional regulatory 
burdens on the membership.

    \2\ 15 U.S.C. Sec. 78o-3(b)(6).
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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 [[Page 30622]] Register or within such longer period (i) as the 
Commission may designate up to 90 days of such date if it finds no 
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 approved 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, N.W., Washington, D.C. 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-95-12 and 
should be submitted by June 30, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\

    \3\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-14191 Filed 6-8-95; 8:45 am]
BILLING CODE 8010-01-M