[Federal Register Volume 61, Number 233 (Tuesday, December 3, 1996)]
[Notices]
[Pages 64185-64186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30676]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37987; File No. SR-NASD-96-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Incorporated 
Amending the Requirements for the Use in Advertisements and Sales 
Literature of Investment Company Rankings

November 25, 1996.
    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 October 
17, 1996,\1\ the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ On November 21, 1996, the NASD filed Amendment No. 1 with 
the Commission. The amendment clarified that rankings based on yield 
may be based on periods of less than one year. The amendment also 
made technical amendments to the text of the rule. See Letter from 
John Ramsay, Deputy General Counsel, NASD Regulation, Inc. to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, Commission, dated November 20, 1996.
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I. 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 Rule IM-2210-
3 of the NASD's Conduct Rules to allow for the use in advertisements 
and sales literature of investment company rankings that represent 
short, medium and long term performance. Below is the text of the 
proposed rule change. Proposed new language is italicized; proposed 
deletions are in brackets.

IM-2210-3.  Use of Rankings in Investment Companies Advertisements and 
Sales Literature

    (d) Time Periods
    (1) Any investment company ranking set forth in an advertisement 
or sales literature must be, at a minimum, current to the most 
recent calendar quarter ended, in the case of advertising, prior to 
the submission for publication, or, in the case of sales literature, 
prior to use.
    (2) Except for money market mutual funds:
    (A) advertisements and sales literature must not use any 
rankings, other than rankings based on yield, based on a period of 
less than one year.
    (B) any investment company ranking based on total return must be 
accompanied by rankings based on total return for [the] a one year 
period for investment companies in existence for one year; [the] one 
and five year periods for investment companies in existence for at 
least five years; and [the] one, five and ten year periods for 
investment companies in existence for at least ten years supplied by 
the same Ranking Entity [in the category], relating to the same 
investment category, and based on the same time period; provided 
that, if rankings for such one, five and ten year time periods are 
not published by the Ranking Entity, then rankings representing 
short, medium and long term performance must be provided in place of 
rankings for the required time periods.
    (C) an investment company ranking based on yield may be based 
only on the current SEC standardized yield. An investment company 
ranking based on the current SEC standardized yield must be 
accompanied by rankings based on total return for [the] a one year 
period for investment companies in existence for one year; [the] one 
and five year periods for investment companies in existence for at 
least five years; and [the] one, five and ten year periods for 
investment companies in existence for at least ten years supplied by 
the same Ranking entity [in the category], relating to the same 
investment category, and based on the same time period; provided 
that, if rankings for such, one, five and ten year time periods are 
not published by the Ranking Entity, then rankings representing 
short, medium and long term performance must be provided in place of 
rankings for the required time periods.

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 self-regulatory organization 
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 self-regulatory organization 
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

1. Purpose
    In 1994, the Commission approved what is now IM-2210-3 of the NASD 
Conduct Rules, which provides guidelines for the use of rankings in 
investment companies' advertisements and sales literature 
(``Guidelines'').\2\ Among other things, the Guidelines require that 
all rankings used in advertising and sales literature by member firms 
to promote non-money market mutual fund performance include rankings 
over one, and, if available, five and ten year periods. Prior to the 
Guidelines, there were no specific standards for the use of rankings. 
Members generally had selected rankings for whatever time period that 
produced the most favorable rankings for an investment company.
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    \2\ Securities Exchange Act Release No. 34354 (July 12, 1994), 
59 FR 36461 (July 18, 1994).
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    Since the approval of the Rankings Guidelines, staff of NASD 
Regulation, Inc. (``NASDR'') have considered the issue of whether to 
allow for greater flexibility in the use of time periods other than 
those prescribed by the Guidelines. The staff notes that some rankings, 
which are based on adjusted total return to reflect criteria and 
methodologies established and imposed by the ranking entities, use time 
periods that do not meet the three specifically prescribed time periods 
contained within the Guidelines. For example, one ranking entity has 
developed a ranking system that summarizes an investment company's 
risk/reward profile for 3, 5 and 10 year periods. This system provides 
a composite ranking that seeks to measure how well an investment 
company has balanced return and risk in the past. This ranking entity 
does not intend that its risk adjusted rankings measure one year time 
periods and considers such measurements to be statistically meaningless 
and potentially misleading.
    NASDR believes that performance-adjusted rankings which use 
different time periods than those prescribed by the Guidelines can help 
investment company investors make informed investment decisions if 
presented in a way that is not misleading. NASDR staff determined that 
the Guidelines, as originally approved, should be revised consistent 
with the original goal that would prevent selectivity of time periods.
    The proposed rule change revises subparagraphs (2) (B) and (C) to

[[Page 64186]]

paragraph (d) of IM-2210-3. The proposed rule change clarifies that the 
use of one, five and ten year time periods is required if such time 
periods are published by the ranking entity.\3\ If rankings for the 
required time periods are not published by the ranking entity, the 
proposed rule change provides that rankings representing short, medium 
and long term performance must be provided in place of rankings for the 
required time periods. In its discussions of how the terms ``short,'' 
``medium'' and ``long term'' might be interpreted, NASDR staff 
considered time frames of 1-4 years, 5-5 years and 10 years or more, 
respectively, as an acceptable interpretation. The proposed rule change 
also replaces the phrase ``in the category,'' in subparagraphs (2) (B) 
and (C) with the phrase ``relating to the same investment category.'' 
to clarify that when members provide rankings for advertisements and 
sales literature, rankings for the prescribed time periods must be for 
the same investment category of subcategory as the total return ranking 
that is being accompanied by the prescribed ranking.
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    \3\ The Guidelines define ``Ranking Entity'' as ``* * * any 
entity that provides general information about investment companies 
to the public, that is independent of the investment company and its 
affiliates, and whose services are not procured by the investment 
company or any of its affiliates to assign the investment company a 
ranking.''
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    The proposed rule change makes clear that the Guidelines apply to 
rankings that use time periods other than the one, five, and ten year 
periods prescribed in the Guidelines if rankings for the required time 
periods are not published by the ranking entity. On the one hand, the 
proposed rule change provides an option that relaxes the requirement to 
use standardized time periods. At the same time, this option still 
assures that rankings will continue to be reflected over an extended 
period and therefore provide more than just a ``snapshot'' view. NASDR 
believes that the proposed rule change provides a flexible framework 
within which ranking entities using different methodologies can provide 
useful information to investors in a way that is not harmful or 
misleading.
2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Sections 15A(b)(6) of the Act, \4\ 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 continues to prohibit 
the use in advertising and sales literature of rankings containing 
arbitrarily selected time periods while allowing time periods other 
than those originally prescribed by the rule in a way that is not 
misleading.
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    \4\ 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 impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received by the NASD.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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 the 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 at the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-96-39 and should 
be submitted by December 24, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30676 Filed 12-2-96; 8:45 am]
BILLING CODE 8010-01-M