[Federal Register Volume 63, Number 114 (Monday, June 15, 1998)]
[Notices]
[Pages 32690-32691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15781]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40074; File No. SR-NASD-98-32]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Filing Requirements for Independently Prepared Research Reports

June 4, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Deregistration under the Investment 
Company Act of 1940 (the ``Act'').
    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 April 9, 
1998, the National Association of Securities Dealers, Inc. (``NASD'') 
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 NASD Regulation, Inc. 
(``NASD Regulation''). On May 14, 1998, the NASD filed an amendment, 
which has been incorporated in this filing, to clarify the proposed 
change and delete its request for accelerated approval. \1\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ Letter from John Ramsey, Vice President, Deputy General 
Counsel, NASD Regulation, Inc., to Katherine A. England, Assistant 
Director, Division of Market Regulation, SEC, dated May 13, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 2210 of the Conduct 
Rules of the NASD to exclude independently-prepared research reports 
from the filing requirements of Rule 2210. Below is the text of the 
proposed rule change. Proposed new language is in italics.
AMENDMENTS TO NASD CONDUCT RULE 2210
    Paragraph (c)(6) of Conduct Rule 2210 is amended by adding new 
paragraph (G), as follows: (6) The following types of material are 
excluded from the foregoing filing requirements and (except for 
research reports under paragraph (G)) the foregoing spot-check 
procedures:
    * * *
    (G) any research report concerning an investment company registered 
under the Investment Company Act of 1940, provided that:
    (i) the report is prepared by an entity (the ``research firm'') 
that is independent of the investment company, its affiliates, and the 
member using the report;
    (ii) in preparing the report, the services of the research firm 
have not been procured by the investment company, any of its affiliates 
or any member using the report;
    (iii) the research firm prepares and distributes similar types of 
reports with respect to a substantial number of investment companies;
    (iv) the report is distributed and updated with reasonable 
regularity in the normal course of the research firm's business; and
    (v) the report has not been materially altered by the member using 
the report.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. NASD Regulation 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

(a) Purpose
    NASD Conduct Rule 2210 requires that any ``advertisement'' or 
``sales literature'' (as defined by the rule) concerning a registered 
investment company be filed with the Advertising/Investment Companies 
Regulation Department (``Department'') and meet the content standards 
of that rule, as well as all applicable Commission rules. The rule 
defines ``sales literature'' to include a research report. 
Consequently, Rule 2210 requires that NASD members file all investment 
company research reports, including any research report that has been 
prepared by an entity that is independent of the investment company and 
its affiliates and of any NASD member, and whose services are not 
produced by the investment company or any of its affiliates or any NASD 
member to prepare the report (``independent research firms'').
    As the investment company industry has grown in recent years, so 
too has the coverage of this industry by independent research firms. 
Many of these firms publish reports that analyze a wide variety of 
investment companies and provide information, such as each investment 
company's historical performance, the investment company's fees and 
expenses, and a description and narrative analysis of the investment 
company's investment strategies and portfolio management style.
    NASD members use these independently-prepared research reports in a 
number of ways. Some members may make the entire research service 
available to customers at a branch office. Members may also distribute 
an independently-prepared research report concerning a particular 
investment company as part of the selling process.
    The proposed rule change would clarify the meaning, administration 
and enforcement of Rule 2210 insofar as it may appear to apply to 
certain types of independently-prepared research

[[Page 32691]]

reports. The proposed rule change would clarify that these types of 
independently-prepared research reports would not have to be filed with 
the Department. The Department intends to interpret the term 
``independent'' in (G)(i) of the proposed rule change in a manner 
similar to the use of that term in NASD Rule IM-2210-3 regarding 
rankings.
    Under the proposed rule change, these research reports would 
continue to be subject to the Department's spot-check procedures. 
Moreover, the proposed rule change would impose certain conditions 
designed to ensure that the opinions in the research reports are 
objective, that the presentation is balanced, and that investors have 
access to regular updates of the reports. In particular, the proposed 
rule change would impose several requirements derived from an analogous 
SEC rule, Rule 139, which provides a safe harbor from the definition of 
``offer for sale'' and ``offer to sell'' in the Securities Act of 1933.
    Thus, under the proposed rule change, a published article that 
analyzes only a few funds or that is not regularly updated in the 
normal course of business would have to be filed with the Department if 
it is to be distributed or made generally available to customers or the 
public. Moreover, while a member could distribute an independently-
prepared research report concerning a particular fund without filing 
the report with the Department, if the member alters the report in any 
material way, then the member would have to file it with the Department 
if it is to be distributed or made generally available to customers or 
the public.
    NASD Regulation believes that the proposed rule change would not 
raise significant investor protection concerns. In its filing and 
review program, the Department rarely has found significant issues with 
the types of research reports that would be expected by the proposed 
rule change. Moreover, to ensure that investors are adequately 
protected, the proposed rule change would except these types of 
research reports only from the filing requirements, and not the content 
requirements of applicable NASD rules. Under the proposed rule change, 
these research reports would continue to be subject to the content 
requirements of Rule 2210 as well as Conduct Rule 2110 (requiring that 
a member ``observe high standards of commercial honor and just and 
equitable principles of trade''); Rule 2120 (prohibiting use of 
manipulative, deceptive or other fraudulent devices); and IM-2310-2 
(requiring fair dealing with customers, including an avoidance of fraud 
violations). In addition, Conduct Rule 2210 would continue to require 
that these research reports be approved prior to use by a registered 
principal of the member.
    The proposed rule change would apply to independently-prepared 
research reports that are contained in software or that are 
electronically communicated, as well as those on paper.
(b) Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) \2\ of the Act, 
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 investors and the public interest in that the proposed 
rule change allows the dissemination of certain research reports, 
subject to the content requirements of the NASD Conduct Rules.
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    \2\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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, including whether the proposed rule 
change is consistent with the Act. 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 the file number in the caption 
above and should be submitted by July 6, 1998.

    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. 98-15781 Filed 6-12-98; 8:45 am]
BILLING CODE 8010-01-M