[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Notices]
[Pages 42200-42202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20152]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36076; File No. SR-NASD-95-12]


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

August 9, 1995.

I. Introduction

    On May 10, 1995, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \2\ and Rule 19b-4 thereunder.\3\ The rule change 
amends Article III, Section 35 of the Rules of Fair Practice and 
Section 8 of the Government Securities Rules.

    \1\ The proposed rule change was initially submitted on April 
10, 1995, and was amended on May 10, 1995, prior to the publication 
in the Federal Register.
    \2\ 15 U.S.C. Sec. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change, together with its terms of 
substance was provided by issuance of a Commission release \4\ and by 
publication in the Federal Register.\5\ Two comments were received in 
response to the Commission release, both raising concerns about the 
proposal. This order approves the proposed rule change.

    \4\ Securities Exchange Act Release No. 35801 (June 2, 1995).
    \5\ 60 FR 30618 (June 9, 1995).
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II. Description

    Under the rules as amended, the definitions of ``advertisement'' 
and ``sales literature'' will include electronic messages. The 
inclusion of the term ``electronic'' with regard to advertisements is 
intended to apply to communications available to all network 
subscribers including items displayed over network bulletin boards. As 
it applies to sales literature, the term ``electronic'' is intended to 
apply to messages sent directly to individuals or targeted groups. The 
term ``sales literature'' also will include telemarketing scripts. 
Generally, these scripts are intended to be read to prospective and 
existing customers or delivered electronically through a telemarketing 
service. They differ from other forms of telephone prospecting and 
customer contact in that these scripts are followed without variation 
by the caller.
    Further, the rules will require that advertising and sales 
literature be approved internally by a registered principal prior to 
filing such materials with the NASD. Currently, the rules only require 
internal approval prior to the use of advertising and sales literature. 
Also, a registered principal will no longer be able to delegate his or 
her responsibility regarding internal approval procedures.
    When material must be filed within a specified time frame, the 
rules will require members to provide the actual or anticipated date of 
first use or publication. For example, a firm that has never filed 
material with the Advertising Regulation Department is required to file 
its first advertisement at least ten days prior to first use and, 
therefore, under the rules as amended, will be required to provide the 
actual or anticipated date of first use.
    The proposed rule change also will amend the scope of the rules 
relating to the use of recommendations by members. The amendment will 
make clear that the price of the security at the time the 
recommendation is made must be provided only when the recommendation is 
for corporate equities.

III. Comments

    As noted above the Commission received two comment letters in 
response to the NASD's proposed rule change. The Investment Company 
Institute (``ICI'') expressed general support for the NASD's 
initiative, but indicated a number of concerns about the proposal.\6\ 
First the ICI believes the requirements that only registered principals 
may approve advertising and sales literature would impose unnecessary 
burdens on members. The ICI believes legal or compliance officers are, 
in most cases, more qualified to handle the review and approval of 
advertising and sales literature than are registered principals. The 
ICI argues that since most legal or compliance officers are not 
registered principals, members will be forced to register such officers 
as principals, transfer review procedures to less qualified principals, 
or allow principals to rely on the opinions of the officers. The ICI 
sees no benefit in achieving such results. The ICI recommends that, 
instead of disrupting an industry practice that appears to be working 
well, the NASD should deal directly with the problem firms.

    \6\ Letter from Craig S. Tyle, Vice President & Senior Counsel, 
Securities and Financial Regulation, Investment Company Institute, 
to Jonathan G. Katz, Secretary, SEC (June 30, 1995).
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    The ICI also recommends that the proposal to require materials to 
be 

[[Page 42201]]
approved internally prior to filing with the NASD should be revised to 
state that the material is submitted on a voluntary basis. The ICI is 
concerned that the use of the term ``accountable'' in the Commission's 
release could be construed as an attempt to impose liability on members 
based on filing materials with the NASD.
    Lastly, the ICI is concerned that the application of the rules to 
electronic communications would be inconsistent with the application of 
the rules with respect to other forms of communications. For example, 
the ICI claims that if a member sponsors an electronic bulletin board, 
the NASD proposal would not distinguish between member advertising and 
other material posted by the public. The ICI recommends that the 
definition of ``advertisement'' be revised to clarify that messages 
posted by the public on member sponsored bulletin boards are not 
included in the definition. Further, the ICI believes that the 
definition of ``sales literature'' is overbroad. The ICI is concerned 
that the definition would include a personalized message to a 
particular individual and, instead, recommends limiting the definition 
to form letters sent to individuals or targeted groups.
    The second commenter strongly endorsed the comments made by the 
ICI.\7\ In particular, this commenter was concerned about the proposed 
requirement relating to registered principal approval of advertising 
and sales literature and the proposed inclusion of the word 
``electronic'' in the definitions of ``advertisement'' and ``sales 
literature.'' \8\

    \7\ Letter from Laura Chasney, T. Rowe Price Associates, Inc., 
to Jonathan G. Katz, Secretary, SEC (July 5, 1995).
    \8\ Id. These concerns already have been summarized in the 
context of the ICI letter above.
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    The NASD responded to these comments in a letter dated July 24, 
1995.\9\ In response to the requirement that only registered principals 
will be able to approve advertising and sales literature, the NASD 
notes that while some unregistered legal or compliance officers perform 
the review function very well, the expertise and skill among the 
reviewers are inconsistent on an industry-wide basis and can result in 
inferior submissions to the NASD. The NASD believes that any burden 
imposed by the rule will be minimal. The NASD states that a significant 
number of firms have legal and compliance personnel that are already 
registered principals. Additionally, the NASD states that under the 
rule as proposed, such personnel do not need to be registered to 
continue to review materials, as long as a registered principal 
approved the material prior to submission. Moreover, the NASD argues 
that the steps necessary to register such personnel, which includes a 
one-time examination, are not overly burdensome. The NASD believes the 
requirement that a registered principal assume final approval 
responsibility will help ensure a satisfactory level of review is 
conducted by all reviewers. The NASD concludes that the improvement of 
the efficiency and quality of the review process, and the resulting 
benefits to the investing public, far outweigh the burdens discussed by 
the commenters.

    \9\ Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Mark P. Barracca, Branch Chief, SEC (July 24, 1995).
    The NASD also responded to the commenters' concern that the 
requirement regarding internal approval by members prior to filing 
submissions with the NASD could be interpreted as an attempt to 
establish a standard of culpability. In its letter, the NASD states 
that the rule is not intended to attach liability to, or establish a 
standard of culpability for, prefiled material. Instead, the rule will 
ensure that member firms' communications are in reasonable compliance 
with relevant SEC and NASD rules prior to submission to the NASD for 
review. The NASD states that this requirement is consistent with SEC 
recommendations made pursuant to the Commission's inspection of the 
NASD's program for reviewing member communications with the public. 
Under the rule, deficient filings will be returned and, if a pattern of 
deficiency is discovered, an internal review of member procedures may 
be appropriate.
    Finally, the NASD responded to the commenters concerns regarding 
the inclusion of the term ``electronic'' in the definitions of 
``advertisement'' and ``sales literature.'' The NASD states that the 
definition of advertisement in the proposed rule is not intended to 
apply to communications posted by members of the public on electronic 
bulletin boards sponsored by NASD members. The NASD claims that the 
definition of advertisement has never applied to communications by 
members of the general public. The NASD argues, therefore, that there 
is no need to amend the definition to clarify that it does not apply 
communications by the general public.
    The NASD also claims that the definition of sales literature in the 
proposed rule is not intended to apply to a personalized message sent 
to a particular individual via electronic mail. The NASD states that 
such messages are not treated as sales literature but generally are 
treated as correspondence under Article III, Section 27(d) of the Rules 
of Fair Practice. The NASD stresses, however, that the definition of 
sales literature does apply to messages sent directly to targeted 
individuals or groups.

IV. Discussion

    The Commission has determined to approve the NASD's proposal. The 
Commission finds that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements of Section 15A(b)(6) 
of the Act.\10\ Section 15A(b)(6) requires, in part, that the rules of 
a national securities association be designed to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; and to protect the public and the public interest.

    \10\ 15 U.S.C. Sec. 78o-3(b)(6).
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    The proposed rule change applies to member communication with the 
public. It will act to clarify issues regarding advertising and sales 
literature, as well as to codify existing rule interpretations 
regarding the scope of rules applicable to member recommendations.
    The changes to the definitions of ``advertisement'' and ``sales 
literature'' will update those terms in an effort to alert members of 
their responsibilities when contacting the public via electronic means 
or by way of telemarketing scripts. The result should be reduced 
confusion among members and a more consistent application of NASD 
rules.
    The proposed changes to the internal approval procedures will 
ensure an adequate degree of expertise and uniformity in the execution 
of such procedures. Further, the requirement that material be approved 
internally prior to filing with the NASD will ensure that members 
satisfy their existing compliance duties. The proposed amendment also 
will require members to include the actual or anticipated date that a 
particular communication will be published which will enable the NASD 
to enforce the existing rules regarding time tables for filing certain 
communications more effectively.
    Lastly, the proposal will reduce member confusion by clarifying an 
existing interpretation with respect to recommendations made by 
members. The rules will be consistent with the existing practice of 
requiring the price at the time a recommendation is made to 

[[Page 42202]]
apply only to recommendations for corporate equity securities.
    All of the changes noted above will promote fairness and protect 
investors and the public. The changes will provide members with a 
greater understanding of their responsibilities when communicating with 
the public. This, in turn, should result in an improved level of 
compliance by members. Additionally, the NASD will be in a better 
position to monitor such compliance.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
the proposed rule change SR-NASD-95-12 be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20152 Filed 8-14-95; 8:45 am]
BILLING CODE 8010-01-M