[Federal Register Volume 66, Number 167 (Tuesday, August 28, 2001)]
[Notices]
[Pages 45350-45351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21669]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44737; File No. SR-NASD-2001-49]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
National Association of Securities Dealers, Inc. To Extend the 
Expiration Date of Rules Concerning Bond Mutual Fund Volatility Ratings

August 22, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 10, 2001, 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 16, 2001, NASD 
Regulation amended the proposal.\3\ NASD Regulation filed the proposal 
pursuant to Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(6) 
thereunder,\5\ which renders the proposal effective upon with the 
Commission. 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 16, 2001 letter from Patrice M. Gliniecki, Vice 
President and Deputy General Counsel, NASD Regulation, to Katherine 
A. England, Assistant Director, Division of Market Regulation, SEC 
(``Amendment No. 1''). In Amendment No. 1, NASD Regulation (a) 
clarified that the trial period will be extended through August 31, 
2003; (b) clarified that the trial period applies to Rule 2210(c)(3) 
as well as IM-2210-5; and (c) made technical, non-substantive 
changes to the proposal.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6). NASD Regulation provided written 
notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, on August 1, 
2001.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend Interpretive Material (``IM'') 
2210-5 to extend the expiration date of IM-2210-5 and NASD Rule 
2210(c)(3) from August 31, 2001 through August 31, 2003.\6\ The text of 
the proposed rule change is below. Proposed new language is in italics. 
Proposed deletions are in brackets. IM-2210-5. Requirements for the Use 
of Bond Mutual Fund Volatility Ratings (This rule and Rule 2210(c)(3) 
will expire on August 31, [2001] 2003, unless extended or permanently 
approved by the Association at or before such date.)
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    \6\ In Securities Exchange Act Release No. 42476 (February 29, 
2000), 65 FR 12305 (March 8, 2000), the SEC approved IM-2210-5 and 
NASD Rule 2210(c)(3) on a trial basis. This proposal clarifies in 
the language of IM-2210-5 that the trial period applies to Rule 
2210(c)(3) as well as IM-2210-5.
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    (a) No change.
    (b) No change.
    (c) No change.
* * * * *

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 its proposal and 
discussed any comment it received regarding the proposal. 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

Background and Description of the NASD's Rules on Bond Mutual Fund 
Volatility Ratings

    On February 29, 2000, the SEC approved the adoption of NASD IM-
2210-5, which permits members and their associated persons to include 
bond fund volatility ratings in supplemental sale literature (mutual 
fund sales material that is accompanied or preceded by a fund 
prospectus).\7\ The SEC also approved at that time, new NASD Rule 
2210(c)(3), which sets forth the filing requirements and review 
procedures applicable to sales literature containing bond mutual fund 
volatility ratings. Previously, the NASD Regulation staff interpreted 
NASD rules to prohibit the use of bond fund volatility ratings in sales 
material.
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    \7\ See Securities Exchange Act Release No. 42476 (February 29, 
2000), 65 FR 12305 (March 8, 2000) at 12306.
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    IM-2210-5 permits the use of bond fund volatility ratings only in 
supplemental sales literature and only if certain conditions are met:
     The word ``risk'' may not be used to describe the rating.
     The rating must be the most recent available and be 
current to the most recent calendar quarter ended prior to use.
     The rating must be based exclusively on objective, 
quantifiable factors.
     The entity issuing the rating must provide detailed 
disclosure on its rating methodology to investors through a toll-free 
telephone number, a web site, or both.
     A disclosure statement containing all of the information 
required by the rule must accompany the rating. The statement must 
include such information as the name of the entity issuing the rating, 
the most current rating and the date it was issued, and a description 
of the rating in narrative form containing certain specified 
disclosures.
    Rule 2210(c)(3) requires members to file bond mutual fund sales 
literature that includes or incorporates volatility ratings with the 
Advertising Regulation Department of NASD Regulation (``Department'') 
at least 10 days prior to use for Department approval. If the 
Department requests changes to the material, the material must be 
withheld from publication or circulation until the requested changes 
have been made or the material has been refiled and approved.
    IM-2210-5 and the new Rule 2210(c)(3) were approved on an 18-month 
trial basis, which trial period expires on August 31, 2001, unless 
extended or permanently approved by NASD Regulation at or before that 
date.

Proposed Rule Change to Extend the Expiration Date of IM-2210-5 and to 
Clarify the Related Expiration Date of NASD Rule 2210(c)(3)

    As indicated in the SEC's order approving IM-2210-5 and Rule 
2210(c)(3), NASD Regulation requested the 18-month trial period to 
provide an opportunity to assess whether the rule change had 
facilitated the dissemination of useful, understandable information to 
investors, and whether it had prevented the dissemination of 
inappropriate and misleading information.
    As of July 2001, the Department had received only six filings 
pursuant to

[[Page 45351]]

these provisions. In general, these filings met the requirements of IM-
2210-5. However, the staff does not believe that it has received a 
sufficient number of filings to adequately evaluate the provisions' 
effectiveness. While there may be a number of reasons for the low 
number of filings, the staff believes that low investor demand for bond 
funds coupled with the strong promotion of equity mutual funds during 
much of the trial period may have contributed to the low level of 
filings. The staff believes that additional experience with these 
provisions is necessary to evaluate the effect on the delivery of 
accurate and useful information to investors concerning bond mutual 
fund volatility.
    Accordingly, NASD Regulation is proposing to extend the expiration 
date of IM-2210-5 and Rule 2210(c)(3) for an additional two years, 
until August 31, 2003, to allow more filings to be made. Before this 
period expires, the staff will evaluate IM-2210-5 and Rule 2210(c)(3) 
and determine whether to recommend that they be eliminated, modified, 
or permanently approved as is. Further, NASD Regulation is proposing to 
amend IM-2210-5 to clarify that upon its expiration, Rule 2210(c)(3) 
will also expire.
2. Statutory Basis
    Nasdaq believes that the proposed extension is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that the Association's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general to protect investors and 
the public interest. NASD Regulation believes that extending the 
expiration date of IM-2210-5 and Rule 2210(c)(3) will provide the 
additional experience necessary to filly analyze and evaluate the 
provisions.
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    \8\ 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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \9\ and 
Rule 19b-4(f)(6)\10\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    NASD Regulation has asked that the Commission accelerate the 
operative date. The Commission finds good cause to waive the 30-day 
operative waiting period, because such designation is consistent with 
the protection of investors and the public interest. Acceleration of 
the operative date will ensure that the operation of the Rule will be 
uninterrupted by the expiration provision currently contained in IM-
2210-5. For these reasons, the Commission finds good cause to waive the 
30-day operative waiting period.\11\
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    \11\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f). The NASD will announce the proposed rule change in a Notice 
To Members, to be published no later than 30 days after August 10, 
2001, the date that NASD Regulation filed the proposed rule change.
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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 proposal 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 20549-0609. 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 Association. All 
submissions should refer to file number SR-NASD-2001-49 and should be 
submitted by September 18, 2001.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21669 Filed 8-27-01; 8:45 am]
BILLING CODE 8010-10-M