[Federal Register Volume 65, Number 217 (Wednesday, November 8, 2000)]
[Notices]
[Pages 67025-67028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28653]
[[Page 67025]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43507; File No. SR-NASD-98-11]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2, and 3 by the National Association of
Securities Dealers, Inc. Concerning Related Performance Information
November 2, 2000.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ Rule 19b-4 thereunder,\2\ notice is hereby given that on
February 12, 1998, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), through its wholly owned subsidiary,
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities
and Exchange Commission (``Commission'' or ``SEC'' ) the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by NASD Regulation. On August 10, 1998, NASD Regulation
filed an amendment that completely replaced and superseded the original
proposed rule change.\3\ On October 17, 2000, NASD Regulation again
amended the proposal.\4\ On October 30, 2000, NASD Regulation filed an
amendment that made minor, technical changes to the proposed rule
language.\5\ The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See August 7, 1998 letter from Joan C. Conley, Secretary,
NASD Regulation, and attachments to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), SEC
(``Amendment No. 1'' )
\4\ See October 16, 2000 letter (``October 16 Letter'' and
attachments from Alden S. Adkins, General Counsel and Senior Vice
President, NASD Regulation, and attachments, to Katherine A.
England, Assistant Director, Division, SEC (``Amendment No. 2'' ).
In Amendment No. 2, NASD Regulation proposes that (i) members
presenting clone performance present total return information for
all related clone funds; (ii) the predecessor and the advertised
mutual fund share sub-investment advisers as well as investment
advisers, and substantially all of the predecessor portfolio's
assets must have been transferred to the advertised mutual fund,
upon conversion the predecessor portfolio would have to cease to
exist as a separate entity, to present predecessor performance;
(iii) comparison portfolio performance reflect the total return of
other investment companies as wellas other portfolios managed by the
investment adviser or sub-investment adviser; (iv) several changes
be made to the general standards set forth in paragraph (d) of
proposed IM-2210-5; (v) no material difference may exist between the
portfolio to which the related performance information refers and
the advertised mutual fund, except that the portfolio may not have
been registered under the Investment Company Act of 1940, and
material difference may exist between the fees and expenses of a
clone fund and the advertised mutual fund; and (vi) any member
filing sales material that presents related performance information
to maintain books and records that demonstrate the basis for and
calculation of the related performance information.
The draft notice in Amendment No. 2 includes all of the changes
implemented in Amendment Nos. 1 and 2. See October 19, 2000
telephone conversation between Sarah Williams, Assistant General
Counsel, NASD Regulation and Joseph P. Morra, Special Counsel,
Division of Market Regulation, SEC.
\5\ See October 30, 2000 letter from Alden S. Adkins, Senior
Vice President and General Counsel, NASD Regulation to Katherine A.
England, Assistant Director, Division, SEC (``Amendment No. 3'' ).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing a new Interpretive Material 2210-5 and
conforming amendments to existing Rule 2210 and IM-2210-2 of the NASD.
Below is the text of the proposed rule change, as amended. Proposed new
language is in italics. Proposed deletions are in brackets.
2200. Communications with Customers and the Public
2210. Communications With the Public
(a) and (b) No change.
(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
paragraph (c)(2), and public direct participation programs (as defined
in Rule 2810), and advertisements concerning governments securities (as
defined in Section 3(a)(42) of the Act) shall be filed with the
Association's Advertising/Investment Companies Regulation Department
(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 member filing any
investment company advertisement or sales literature pursuant to this
paragraph (c) 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. Any member filing a mutual fund or variable contract
advertisement or sales literature that presents Comparison Portfolio
Performance (as defined by IM 2210-5) shall include a copy of the proof
of independent verification required by IM 2210-5(c)(1)(B).
(c)(2) through (f) No change.
IM 2210-2. Communications With the Public About Variable Life
Insurance and Variable Annuities
(a) No change.
(b) Specific Considerations
(1) Fund Performance Predating Inclusion in the Variable Product
In order to show how an existing fund would have performed had it
been an investment option within a variable life insurance policy or
variable annuity, communications may contain the fund's historical
performance that predates its including in the policy or annuity. Such
performance may only be used provided that no significant changes
occurred to the fund at the time or after it became part of the
variable product. However, communications may not include the
performance of an existing fund for the proposes of promoting
investment in a similar, but new Investment option (i.e., clone fund or
model fund) available in a variable contract. The presentation of
historical performance must conform to applicable Association and SEC
standards. Particular attention must be given to including all elements
of return and deducting applicable charges and expenses.
(b)(2) through (5) No change.
IM-2210-5 Presentation of Mutual Fund Related Performance Information
Any advertisement or sales literature concerning an open-end
management investment company (the ``Advertised Mutual Fund'' ) may
present the following types of performance information (collectively,
``Related Performance Information'' ).
(a) ``Clone'' Performance
The total return of all registered open-end management investment
companies, calculated in accordance with Item 21 of SEC Form N-1A, that
have the same investment policies, investment objectives, investment
strategies, investment adviser and sub-investment adviser as an
Advertised Mutual Fund, provided that the presentation of this Related
Performance Information complies with the general standards in
paragraph (d).
(b) ``Predecessor'' Performance
The total return of an Advertised Mutual Fund, calculated in
accordance with Item 21 of SEC Form N-1A, that includes the performance
of an insurance company separate account,
[[Page 67026]]
common trust fund or private investment company that had been converted
into, and had the same investment adviser and sub-investment adviser
as, the Advertised Mutual Fund; that had investment policies,
investment objectives and investment strategies that were in all
material respects equivalent to those of the Advertised Mutual Fund;
and that was not created in order to establish a performance record,
provided that:
(1) in the conversion, substantially all of the assets of the
predecessor portfolio were transferred to the Advertised Mutual Fund
and upon conversion the predecessor portfolio ceased to exist as a
separate entity;
(2) the performance of the predecessor portfolio is adjusted as of
the conversion date only, to reflect all current fees and expenses of
the Advertised Mutual Fund, as disclosed in the fee table in the
Advertised Mutual Fund's current prospectus, but not reflecting any fee
waiver or expense reimbursement for the Advertised Mutual Fund; and
(3) the presentation of this Related Performance Information
complies with the general standards in paragraph (d).
(c) ``Comparison Portfolio'' Performance
(1) The total return of a composite of other portfolios, including
other investment companies, managed by the investment adviser (or, as
appropriate, the sub-investment adviser) of an Advertised Mutual Fund,
provided that:
(A) The composite:
(i) Consists of all actual fee-paying, discretionary portfolios
managed by the investment adviser (or sub-investment adviser) with
substantially similar investment policies, investment objectives, and
investment strategies to the Advertised Mutual fund, including the
Advertised Mutual Fund itself;
(ii) Excludes terminated portfolios after the last full performance
measurement period the portfolios were under management, but includes
terminated portfolios or all periods prior termination;
(iii) Does not reflect any portfolio that has been switched into
the composite or exclude any portfolio that had been switched into the
composite or exclude any portfolio that had been switched from the
composite, unless documented changes in guidelines communicated by the
client made the switching appropriate; and
(iv) Adjusts the gross performance information of any portfolio to
reflect all current fees and expenses of the Advertised Mutual Fund, as
disclosed in the fee table in the Advertised Mutual Fund's current
prospectus;
(B) The investment adviser (or sub-investment adviser) has obtained
verification from an independent third party that the creation and
maintenance of the composite complies with paragraph (1)(A) and proof
of this independent verification, current as of the investment
adviser's (or sub-investment adviser's) most recently ended fiscal
year, has been field with the Advertising/Investment Companies
Regulation Department; and
(C) The presentation of this Related Performance Information
complies with the general standards in paragraph (d).
(2) No member may imply that the Association or any of its
affiliates endorses or approves of any composite or the manner in which
it was created or maintained.
(d) General Standards
(1) No material difference may exist between the portfolio to which
the Related Performance Information refers and the Advertised Mutual
Fund, except;
(A) The portfolio may not have been registered under the Investment
Company Act of 1940 and therefore may not be subject to the
restrictions that the Investment Company Act and the Internal Revenue
Code impose; and
(B) Material differences may exist between the fees and expenses of
an investment company reflected in Clone Performance and the Advertised
Mutual Fund.
(2) Any Related Performance Information presented in an
advertisement or sales literature:
(A) Must be, at a minimum, current to the most recent calendar
quarter ended prior to submission for publication (in the case of an
advertisement) or prior to use (in the case of sales literature); and
(B) Must be accompanied by Related Performance Information for one,
five and ten years periods, provided that if the Related Performance
Information is available for less than one, five or ten years, the time
period during which the Related Performance Information is available
must be substituted for the period otherwise prescribed.
(3) Any advertisement or sales literature that presents Related
Performance Information:
(A) Must identify the length of, and the date of the last day in,
the period used to compute the Related Performance Information:
(B) Must present, in a more prominent manner than the Related
Performance Information, the total return of the Advertised Mutual
Fund(excluding the performance of any predecessor portfolio) calculated
and presented in accordance with the applicable SEC rules, provided
that the registration statement for the Advertised Mutual Fund has been
effective for at least one year;
(C) When applicable, mut prominently disclose that the Advertised
Mutual Fund has been in operation for less than one year;
(D) Must disclose;
(i) Any material difference between the fees and expenses of an
investment company reflected in Clone Performance and the Advertised
Mutual Fund;
(ii) In the case of all Related Performance Information:
a. That the Related Performance Information is not the
performance of the Advertised Mutual Fund and should not be
considered indicative of or a substitute for that performance and;
b. When applicable, that some or all of the portfolios reflected
in the Related Performance Information (including any predecessor
portfolios) are not registered under the Investment Company Act of
1940 and therefore were not subject to certain investment
restrictions that the Investment Company Act and the Internal
Revenue Code impose, and that the performance of those portfolios
may have been adversely affected had they been registered under the
Investment Company Act; and
(iii) Any other information that may be necessary to ensure that
the Related Performance Information is not presented in a misleading
manner;
(E) May not refer to the Related Performance Information in any
headline or other prominent statement;
(F) May not contain any ranking based on the Related Performance
Information; and
(G) Must accompany any graph or illustration concerning Related
Performance Information with a more prominent graph or illustration
concerning the total return of the Advertised Mutual Fund,
calculated and presented in accordance with applicable SEC rules,
provided that the registration statement for the Advertised Fund has
been effective for at least one year.
(4) No advertisement or sales literature for a money market fund
may present Related Performance Information.
(5) Any member filing an advertisement or sales literature
presenting Related Performance with the Department must maintain
books and records that demonstrate the basis for and calculation of
the Related Performance Information. Retention by the member of
copies of all such records maintained by any investment advisers
under Rule 204-2(16) of the Investment Advisers Act of 1940 would
satisfy this requirement. Such records must be maintained for three
years following the last distribution or publication of the
advertisement or sales literature.
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
[[Page 67027]]
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
1. Purpose
Rule 2210 requires the filing of various forms of advertisement and
sales literature with the Advertising/Investment Companies Regulation
Department of NASD Regulation. NASD Regulation staff reviews these
filings to determine whether they meet applicable standards in the NASD
Conduct Rules, which are generally designed to ensure that sales
material is fair, balanced and not misleading.
The SEC's Division of Investment Management recently issued a
series of ``no-action letters'' that essentially permit mutual funds to
present a range of performance information in their sales material and
prospectuses, subject to specific factual circumstances and regulatory
conditions. These letters generally permit the presentation of the
performance of (i) a mutual fund from which the offered fund has been
``cloned''; (ii) a non-investment company account that had been
converted into the advertised mutual fund; (iii) private, investment
company or institutional accounts that are managed by the mutual fund's
adviser; and (iv) a mutual fund that was previously managed by the
offered fund's portfolio manager (``manager performance''). (Together,
these types of performance information will be referred to as ``Related
Performance Information.'')
The SEC's no-action letters note that the NASD Conduct Rules impose
standards on mutual fund and variable product sales material separate
from the Commission rules, and the Commission staff reached no
conclusion concerning whether the presentation of Related Performance
Information under the conditions imposed by the no-action letters would
comply with the NASD Conduct Rules.
Historically, the NASD has prohibited the presentation of any
Related Performance Information, except predecessor performance, in
mutual fund and variable product sales material. In light of the
Commission staff's recent no-action letters and apparent public
interest in the potential benefits and concerns with the presentation
of Related Performance Information in mutual fund and variable product
sales material, NASD Regulation requested comment in August 1997 on
whether the NASD should permit Related Performance Information to be
included in advertisements or sale literature (Notice to Members 97-
47).
NASD Regulation received 55 comment letters from investors,
Chartered Financial Analysts, mutual funds, money managers, and trade
associations. Forty-four commenters supported the presentation of some
type of Related Performance Information, while 11 opposed the
presentation of any Related Performance Information. Commenters
disagreed about the types of Related Performance Information that NASD
Regulation should permit. The highest level of opposition was raised to
the presentation of manager performance information. Indeed, even some
of those who otherwise supported the presentation of Related
Performance Information opposed the presentation of portfolio manager
performance. Of the 44 commenters who generally supported the
presentation of Related Performance Information, 11 specifically
discussed the presentation of manager performance. Of these 11, six
opposed any presentation of manager performance information.
The proposed rule change would permit the presentation of Related
Performance Information (other than manager performance information) in
mutual fund and variable product sales material, subject to certain
conditions designed to make the presentation fair, balanced and not
misleading. The proposed rule change would generally permit, subject to
certain conditions, the presentation of the performance of (i) a mutual
fund from which the offered fund had been ``cloned''; (ii) a non-
investment company account that had been converted into the advertised
mutual fund; and (iii) private, investment company or institutional
accounts that are managed by the mutual fund's adviser. The proposed
rule change thus represents a significant liberalization of the types
of performance information that members may present in mutual fund and
variable product sales material, subject to conditions designed to
protect investors.
At the same time, the NASD Board of Directors reaffirmed the NASD's
longstanding policy of prohibiting the presentation of manager
performance in mutual fund advertisements and sales literature. The
NASD believes that the presentation of manager performance could
mislead or confuse investors about the contributions of other personnel
of the investment adviser to the mutual fund's performance, such as
research analysts who recommend securities to the portfolio manager and
traders who obtain best execution. The efforts of these personnel and
the resources of the investment adviser are, in most cases, critical to
the mutual fund's performance. Moreover, a relatively long time period
may elapse between the departure of a portfolio manager from the
previous mutual fund and the advertisement of the new mutual fund's
performance, thus rendering the manager performance information
stale.\6\
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\6\ The position of the Commission's staff continues to be that
manager performance information in a mutual fund's prospectus,
advertisements or sales literature is not per se misleading under
the federal securities laws, provided that the performance is not
presented in a misleading manner and is not presented as a
substitute for the advertised mutual fund's performance. See
Bramwell Growth Fund (pub. avail. August 7, 1996); ITT Hartford
Mutual Funds (pub. avail. February 7, 1997). The Commission's staff
believes that whether manager performance information is misleading
depends on the totality of the circumstances, including the manner
in which it is presented. Id.
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2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\7\ in
that the proposed rule change is designed to prevent fraudulent acts
and practices, and to promote just and equitable principles of trade.
In particular, NASD Regulation believes the proposal would establish
conditions designed to ensure that the presentation of Related
Performance Information is fair, balanced, and not misleading.
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\7\ 15 U.S.C. 78o-3(b)(6).
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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
See discussion of comment letters in Item II(A)(1) above.
[[Page 67028]]
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 NASD Regulation 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.
NASD Regulation has requested that the Commission provide the
public with at least 45 days in which to comment on the proposed rule
change.\8\ The Commission agrees to allow a 45-day comment period on
the proposed rule change.
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\8\ See October 16, 2000 Letter at page 1. NASD Regulation also
consents to an extension of the time period for Commission action to
30 days after the expiration of the 45-day comment period. The
Commission notes that a further extension of the time period for
Commission action may be needed to allow for Commission analysis of
comment letters, and to allow NASD Regulation to provide a response
to comment letters.
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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. Additionally, as previously noted,
the Commission's staff disagrees with the NASD's decision to per se
exclude manager performance information from the rule. Interested
persons are specifically invited to comment on this issue.
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, DC 20549-0609. 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-98-11 and should be
submitted by December 26, 2000.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28653 Filed 11-7-00; 8:45 am]
BILLING CODE 8010-01-M