[Federal Register Volume 68, Number 96 (Monday, May 19, 2003)]
[Notices]
[Pages 27116-27126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12451]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47820; File No. SR-NASD-00-12]


Self-Regulatory Organization; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 3 and 4 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Concerning Amendments to Rules 
Governing Member Communications With the Public

May 9, 2003.

I. Introduction

    On June 9, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'') and through its subsidiary, NASD Regulation, Inc. 
(``NASD Regulation''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed 
a proposed rule change to amend NASD Rule 2210 and the Interpretive 
Materials thereunder, promulgate new NASD Rule 2211, and renumber 
existing NASD Rule 2211.\3\ On August 8, 2001, NASD Regulation filed 
Amendment No. 1 to the proposed rule change. On December 12, 2001, NASD 
Regulation filed Amendment No. 2 to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on December 31, 2001.\4\ The Commission received ten 
comment letters on the proposed rule change.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The NASD originally submitted the proposed rule change to 
the Commission on March 21, 2000, however, because the submission 
did not comply with the requirements of Exchange Act Rule 19b-4, the 
Commission does not consider the proposed rule change filed on the 
date. Rather, the Commission considers the proposed rule change to 
be filed on June 9, 2000, the date on which the deficiencies were 
corrected.
    \4\ See Securities Exchange Act Release No. 45181 (December 20, 
2001), 66 FR 67586.
    \5\ See letters from Amy B.R. Lancellota, Senior Counsel, 
Investment Company Institute, to Jonathan G. Katz, Secretary, 
Commission, dated February 13, 2002 (``ICI Letter''); Christopher R. 
Franke, Chairman, Self-Regulatory and Supervisory Practices 
Committee, Securities Industry Association, to Jonathan G. Katz, 
Secretary, Commission, dated February 14, 2002 (``SIA Letter''); 
James R. Anderson, Vice President and Chief Compliance Officer, AIM 
Distributors, Inc. to Jonathan G. Katz, Secretary, Commission, dated 
February 13, 2002 (``AIM Letter''); James Anderson, Vice President 
and Chief Compliance Officer, Fund Management Company, to Jonathan 
G. Katz, Secretary, Commission, dated February 13, 2002 (``FMC 
Letter''); Michel de Konkoly Thege, Vice President and Associate 
General Counsel, The Bond Market Association, to Jonathan G. Katz, 
Secretary, Commission, dated February 15, 2002 (``BMA Letter''); 
Brandon Becker, Wilmer, Cutler & Pickering, to Jonathan G. Katz, 
Secretary, Commission, dated February 25, 2002 (``Wilmer-Becker 
Letter''); Forrest Fost, Associate Legal Counsel and Danielle 
Nicholson Smith, Senior Legal Analyst, T. Rowe Price Associates, 
Inc., to Jonathan G. Katz, Secretary, Commission, dated February 14, 
2002 (``T. Rowe Letter''); Yoon-Young Lee, Wilmer, Cutler & 
Pickering, to Jonathan G. Katz, Secretary, Commission, dated 
February 13, 2002 (``Wilmer-Lee Letter''); Alexander C. Gavis, 
Associate General Counsel, Fidelity Investments, to Jonathan G. 
Katz, Secretary, Commission, dated February 15, 2002 (``Fidelity 
Letter''); Sullivan & Cromwell, to Jonathan G. Katz, Secretary, 
Commission, dated February 22, 2002 (``Sullivan Letter'').

---------------------------------------------------------------------------

[[Page 27117]]

    On November 6, 2002, NASD Regulation filed Amendment No. 3 to the 
proposed rule change.\6\ On March 6, 2003, NASD Regulation filed 
Amendment No. 4 to the proposed rule change.\7\ This notice and order 
approves the proposed rule change, as amended, and solicits comments 
from interested persons on Amendment Nos. 3 and 4.
---------------------------------------------------------------------------

    \6\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated November 4, 2002 (``Amendment 
No. 3'').
    \7\ See letter from Philip Shaikun, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division, 
Commission, dated March 6, 2003 (``Amendment No. 4'').
---------------------------------------------------------------------------

II. Description of Proposed Rule Change

A. Summary

    The NASD submitted the proposed rule change to modernize and 
clarify the rules governing member communications with the public. 
Among other things, the proposed rule change would exclude all 
communications to institutional investors from member pre-use approval 
and NASD filing requirements and from many of the content standards. 
Form letters and group e-mail to existing retail customers and fewer 
than 25 prospective retail customers also would be eligible for these 
exclusions, provided that a member developed appropriate policies and 
procedures to supervise and review such communications. In addition, 
the proposed rule change would exclude independently prepared reprints, 
and excerpts there from, from the filing and many of the content 
standards, and would exclude certain press releases from the filing 
requirements. The proposed rule change generally would simplify the 
content standards applicable to member communications.\8\
---------------------------------------------------------------------------

    \8\ NASD member broker/dealers that are dually registered as 
investment advisers will remain subject to the advertising standards 
of the Investment Advisers Act of 1940 and Commission rules 
thereunder, to the extent that their sales material promotes 
advisory products or services.
---------------------------------------------------------------------------

B. Description of Proposed Rule Change

1. Reorganization of Rule 2210
    The proposed rule change would create new NASD Rule 2211, which 
would apply to institutional sales material and correspondence. The 
proposed rule change also would provide cross-references between NASD 
Rule 2210 and NASD Rule 2211 in appropriate places. Existing NASD Rule 
2211, concerning telemarketing, would be renumbered as NASD Rule 2212.
2. Definition of ``Public Appearance''
    Existing NASD Rule 2210(d)(1)(C) provides that NASD members who 
engage in public appearances or speaking activities must follow the 
content standards of NASD Rules 2210(d) and (f). Consequently, public 
appearances already are subject to strict content requirements. The 
proposed rule change would clarify the application of NASD Rule 2210 to 
public appearances by defining ``public appearance'' as a type of 
communication with the public. Public appearances would include 
participation in a seminar, forum (including an interactive electronic 
forum), radio or television interview, or other public appearance or 
public speaking activity.
3. Institutional Sales Material
    The proposed rule change would eliminate the pre-use approval and 
filing requirements applicable to communications that are distributed 
or made available only to institutional investors contained in NASD 
Rule 2210. Institutional sales material would be subject to new 
supervision and review requirements that are modeled on those in NASD 
Rule 3010, which apply to correspondence. Moreover, institutional sales 
material would continue to be subject to the record-keeping 
requirements and some, but not all, of the content standards in NASD 
Rule 2210.\9\
---------------------------------------------------------------------------

    \9\ The proposed rule change would revise the content standards 
to specifically indicate which type of communication is subject to 
each standard. Therefore, standards that apply only to 
``advertisements'' or ``sales literature'' would not apply to 
institutional sales material. For example, the ranking guidelines in 
proposed IM-2210-3 would apply only to advertisements and sales 
literature and therefore would not apply to institutional sales 
material.
---------------------------------------------------------------------------

    Under the proposed rule change, no member could treat a 
communication as having been distributed to an institutional investor 
if the member had reason to believe that the communication or any 
excerpt thereof would be forwarded or made available to any person 
other than an institutional investor. For example, if a member had 
reason to believe that such a communication would be forwarded or made 
available to 401(k) plan participants or other beneficiaries of 
institutional accounts, it would be treated as retail sales material. 
NASD Regulation believes that plan participants and other beneficiaries 
of institutional accounts should receive the same protections under the 
advertising rules as other retail investors. Similarly, an 
advertisement in a publication designed for broker/dealers or other 
institutional investors may not be treated as institutional sales 
material if the member has reason to believe that the publication will 
be made available to any person other than an institutional investor.
    The proposed rule change amended the definition of ``institutional 
investor,'' first, to include governmental entities and their 
subdivisions. Second, the definition was amended to include employee 
benefit plans that meet the requirements of section 403(b) or section 
457 of the Internal Revenue Code and have at least 100 
participants.\10\ Third, the definition was amended to apply to 
qualified plans with at least 100 participants.\11\ Fourth, the 
proposed rule change would define ``institutional investor'' to include 
any person acting solely on behalf of any institutional investor. 
Fifth, NASD Regulation clarified that the term ``institutional 
investor'' includes only associated persons who are registered with an 
NASD member.\12\ Sixth, the definition would clarify that no member may 
treat a communication as having been distributed to an institutional 
investor if the member has reason to believe that the communication or 
any excerpt thereof will be forwarded or made available to any person 
other than an institutional investor. Thus, for example, if a member 
has reason to believe the employer sponsor of a retirement plan will 
make sales material available for inspection by the plan participants, 
then the member may not treat the sales material as having been 
distributed only to an institutional investor.
---------------------------------------------------------------------------

    \10\ This category of institutional investor does not include 
participants of such plans.
    \11\ Again, this category of institutional investor does not 
include participants of such plans.
    \12\ The ``broker/dealer-only'' exception, which would become a 
part of the institutional investor definition, recognizes the 
special expertise that NASD members have with respect to brokerage 
products and services. While registered persons should have this 
expertise, as demonstrated by their completion of the qualifications 
process, there can be no assurance that other associated persons 
would.

---------------------------------------------------------------------------

[[Page 27118]]

    The definition of ``institutional investor'' would include persons 
described in NASD Rule 3110(c)(4), which defines ``institutional 
account'' to include any entity with total assets of at least $50 
million.
4. Form Letters and Group Electronic Mail
    NASD Rule 2210 currently treats any letter or e-mail sent to more 
than one person as ``sales literature'' subject to the content 
standards applicable to all other sales literature, and to the member 
pre-use approval and NASD filing requirements. The proposed rule change 
would define ``correspondence'' to include form letters and group e-
mail sent to existing retail customers and to fewer than 25 prospective 
retail customers within any 30 calendar-day period (``Group 
Correspondence''), as well as written and electronic communications 
prepared for delivery to a single retail customer. The proposed rule 
change would subject Group Correspondence to the strict supervisory 
procedures in NASD Rule 3010(d), which governs the approval and review 
of correspondence, and to those content standards that apply to 
correspondence.\13\ Form letters and group e-mail sent to 25 or more 
prospective retail customers within any 30 calendar-day period would be 
subject to the pre-use approval, filing, and record-keeping 
requirements of NASD Rule 2210, and to all of the content standards 
applicable to sales literature.\14\
---------------------------------------------------------------------------

    \13\ Notice to Members 98-11 provides guidance to members 
concerning NASD Rule 3010(d). The Notice makes clear that, at a 
minimum, a member must develop procedures for the review of some of 
each registered representative's correspondence with the public 
relating to the member's investment banking or securities business, 
tailored to its structure and the nature and size of its business 
and customers.
    The Notice provides that members must:
    [sbull] Specify in writing the firm's policies and procedures 
for reviewing different types of correspondence;
    [sbull] Identify what types of correspondence will be pre-or 
post-reviewed by a registered principal; and
    [sbull] Periodically re-evaluate the effectiveness of the firm's 
procedures for reviewing public correspondence and consider any 
necessary revisions.
    \14\ The proposed rule change would permit members to treat form 
letters or group e-mail sent to a combination of existing customers 
and fewer than 25 prospective retail customers within any 30 
calendar-day period as correspondence.
    Of course, members could not ``sanitize'' sales literature by 
enclosing it with Group Correspondence. For example, an item that a 
member has distributed as sales literature would remain sales 
literature for purposes of Rule 2210 when the member encloses it in 
Group Correspondence.
---------------------------------------------------------------------------

    In order to ensure that its review of Group Correspondence meets 
these standards, a member would be expected to review its procedures to 
ensure that they adequately address potential concerns with the 
distribution of Group Correspondence. The NASD encourages members to 
consider whether to adopt stricter procedures that require registered 
principal pre-use approval of Group Correspondence that presents a 
higher risk to investors, based on factors such as its content, 
purposes or targeted audience.
    ``Existing retail customer'' would be defined as any person, other 
than an institutional investor, for whom the member or a clearing 
broker or dealer on behalf of the member carries an account, or who has 
an account with any registered investment company for which a member 
serves as principal underwriter. The new language would make clear that 
a person who has opened an account with an investment company or with a 
transfer agent for such an investment company could qualify as an 
existing retail customer. NASD also has amended the language to make it 
more consistent with existing NASD Rule 2211(d).
5. Article Reprints
    NASD Rule 2210 currently defines ``sales literature'' to include 
``reprints or excerpts of any * * * published article.'' Article 
reprints may have to be filed with the Department, depending upon their 
content, such as whether they pertain to registered investment 
companies. The proposed rule change would define a new type of 
communication with the public, an ``independently prepared reprint,'' 
and exclude independently prepared reprints from the filing and most of 
the content standards. An independently prepared reprint would consist 
of any article reprint that meets certain standards that are designed 
to ensure that the reprint was issued by an independent publisher and 
was not materially altered by the member. The proposed rule change 
would provide that a member may alter the contents of an independently 
prepared reprint in a manner necessary to make it consistent with 
applicable regulatory standards or to correct factual errors.
    An article reprint would qualify as an ``independently prepared 
reprint'' under Rule 2210(a)(6)(A) only if, among other things, its 
publisher is not an affiliate of the member using the reprint or any 
underwriter or issuer of the security mentioned in the reprint or 
excerpt that the member is promoting. For purposes of this provision, 
``affiliate'' has the same meaning as that term is defined in NASD Rule 
2720(b)(1)(A) and (B). The term ``affiliate'' as used in NASD Rule 
2210(a)(6)(B) (regarding investment company research reports) also has 
this meaning.
    Some, but not all, content standards would apply to independently 
prepared reprints. For example, NASD Rule 2210(d)(1) would impose 
various content standards on all communications with the public, 
including independently prepared reprints. However, paragraph (d)(1)(D) 
(concerning predictions and projections of performance) would not apply 
to a statement in an independently prepared reprint that represents the 
author's opinion about the prospects for a member's business, products 
or services.\15\
---------------------------------------------------------------------------

    \15\ Nevertheless, a projection made in the reprint by a person 
other than the author, such as a mutual fund's portfolio manager or 
an associated person of a member, would be subject to paragraph 
(d)(1)(D).
---------------------------------------------------------------------------

    The proposed rule change also would include certain investment 
company research reports within the definition of independently 
prepared reprints. NASD Rule 2210 was amended to exclude these research 
reports from the filing requirements.\16\ Because these research 
reports present essentially the same issues as independently prepared 
reprints, the proposed rule change would subject these research reports 
to the same content and other requirements that apply to independently 
prepared reprints.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 42340 (January 13, 
2000), 65 FR 3510 (January 21, 2000).
---------------------------------------------------------------------------

    Independently prepared reprints would continue to be subject to the 
pre-use approval and record-keeping requirements of NASD Rule 2210. 
Moreover, article reprints and research reports that do not meet the 
definition of ``independently prepared reprint'' would continue to 
constitute sales literature that would have to meet all of the 
requirements applicable to sales literature.
6. Press Releases
    NASD Rule 2210 defines ``sales literature'' to include ``any 
written or electronic communication distributed or made generally 
available to customers or the public,'' which the Department has 
interpreted to include press releases. The proposed rule change would 
codify this interpretation by amending the definition of ``sales 
literature'' to include press releases concerning a member's product or 
service. The proposed rule change would exclude from the filing 
requirements press releases that are made available only to members of 
the media.\17\
---------------------------------------------------------------------------

    \17\ The proposed rule change would exclude all press releases 
made available only to members of the media, without limiting the 
exclusion to press releases concerning investment companies.

---------------------------------------------------------------------------

[[Page 27119]]

7. Television and Video Advertisements
    The proposed rule change would require members that have filed a 
draft version or ``story board'' of a television or video advertisement 
pursuant to a filing requirement also to file the final filmed version 
within ten business days of first use or broadcast. This rule change 
would codify an existing Department policy regarding television and 
video sales material. NASD Rule 2210 would impose a filing fee only 
when the draft version or story board is filed. No additional fee would 
be assessed when the final filmed version is filed.
8. Approval and Record-keeping
    The proposed rule change would make three additional modifications 
to the pre-use approval and record-keeping requirements. First, it 
would clarify that the pre-use approval requirement could be met with 
respect to a research report concerning any debt or equity security, 
including non-corporate securities, by signature or initial of a 
supervisory analyst under New York Stock Exchange Rule 344. Second, the 
proposed rule change would clarify that members must maintain a file 
with the name of the registered principal who approved any 
advertisement or sales literature. Members would not be required to 
maintain a file with the name of the person who prepared those items, 
however.\18\ Third, the proposed rule change would clarify that members 
must maintain a file with information concerning the source, but not 
necessarily the data, of any statistical table, chart, graph or other 
illustration.
---------------------------------------------------------------------------

    \18\ Proposed NASD Rule 2211 would require members to maintain 
all institutional sales material in a file that includes the name of 
the person who prepared each item.
---------------------------------------------------------------------------

9. Filing Requirements
    The proposed rule change would retain the existing provision 
concerning the obligation of a member that has not filed an 
advertisement with the Department, to pre-file its advertisements for a 
one-year period.
    The proposed rule change also would clarify that advertisements and 
sales literature for continuously offered closed-end funds must be 
filed with the Department. This clarification codifies a long-standing 
position of the Department.\19\
---------------------------------------------------------------------------

    \19\ See, e.g., NASD Regulatory and Compliance Alert (April 
1995) at p. 9.
---------------------------------------------------------------------------

    The proposed rule change would clarify that members need not file 
advertisements and sales literature that previously have been filed and 
that are to be used without material change. This provision would 
codify existing practice, which excludes from the filing requirement 
material that has been filed previously, but in which performance data 
is updated or there are other changes that are not material for purpose 
of the filing requirement.
    The proposed rule change would specifically list institutional 
sales material as one type of communication that need not be filed. The 
proposed rule change also would list correspondence, independently 
prepared reprints, and certain press releases as other types of 
communications that need not be filed. In addition, the proposed rule 
change would state that when these items concern investment companies, 
then they will be deemed filed with the NASD for purposes of section 
24(b) of the Investment Companies Act of 1940 and Rule 24b-3 
thereunder. This provision would eliminate the need to file this 
material with the SEC.
    The proposed rule change also would exclude from the filing 
requirement announcements as a matter of record that a member has 
participated in a private placement.
    Members are not required to file shareholder reports that only 
consist of statistical reporting information such as financial 
statements and portfolio holdings. However, members must file the 
management's discussion of fund performance (``MDFP'') portion of a 
report (as well as any supplemental sales material attached to or 
distributed with the report) with the Department.
10. Standards Applicable to Member Communications
    The proposed rule change would substantially shorten and simplify 
the standards applicable to communications with the public that are 
contained in NASD Rule 2210(d). The proposed rule change would relocate 
certain standards from NASD Rule 2210(d) to a new Interpretive Material 
2210-1, Guidelines to Ensure that Communications Are Not 
Misleading.\20\ New proposed IM-2210-1 would make clear that members 
have the primary responsibility to ensure that their communications 
with the public are not misleading, and would rewrite many standards to 
make them more clear and consistent with the principles of plain 
English.
---------------------------------------------------------------------------

    \20\ The current IM-2210-1 concerning collateralized mortgage 
obligations would be redesignated as IM-2210-7.
---------------------------------------------------------------------------

    Proposed IM-2210-1 would not contain certain of the specific 
standards currently in NASD Rule 2210. The proposed rule change would 
eliminate the specific standards regarding non-existent or self-
conferred degrees or designations, offers of free service, claims for 
research facilities, hedge clauses, recruiting advertising, and 
periodic investment plans. To the extent that these provisions prohibit 
statements that are misleading, unbalanced, or inaccurate regarding 
particular types of communications, the rule already prohibits the use 
of such statements. Moreover, certain required disclosures, such as 
those currently applicable to statements concerning periodic investment 
plans, may not be necessary depending upon the context in which they 
are made.
    The proposed rule change also would clarify which guidelines 
concerning references to tax free or tax exempt income apply to all 
communications with the public, and which guidelines apply only to 
advertisements or sales literature.
11. Legends and Footnotes
    NASD Rule 2210 cautions members concerning the placement of 
footnotes, and in the filing review process the Department has insisted 
that members adopt an appropriate use of footnotes. The proposed rule 
change would provide that information may be placed in a legend or 
footnote only in the event that such placement would not inhibit an 
investor's understanding of the communication. Thus, for example, 
footnotes in especially small type in an advertisement might be deemed 
to inhibit an investor's understanding of the advertisement. Similarly, 
an advertisement that presents bold claims that are supposedly 
``balanced'' only with footnote disclosure might not comply with this 
content standard.
12. Hypothetical Illustrations
    In proposed NASD Rule 2210(d)(1)(D), NASD Regulation would insert 
language similar to the existing language. Under the proposed rule 
change, a member could present a hypothetical illustration of 
mathematical principles, provided that the illustration does not 
predict or project the performance of an investment or investment 
strategy and is not used in such a manner. The proposed rule change 
thus would permit the use of mutual fund cost calculators and other 
hypothetical illustrations that are permitted by existing NASD Rule 
2210.
13. Testimonials
    The proposed rule change would apply testimonial standards to 
advertisements or sales literature concerning the investment advice or

[[Page 27120]]

investment performance of a member or its products.
14. Recommendations
    The proposed rule change would clarify certain aspects of the 
existing standards governing recommendations in order to provide 
investors with adequate disclosure about the financial interests that 
research analysts, other associated persons, or their firms may have in 
securities that they recommend.
15. Use and Disclosure of a Member's Name
    The proposed rule change would simplify the provisions concerning 
disclosure of member names. In addition, the proposed rule change would 
make clear that the requirement to disclose the member's name applies 
to advertisements, sales literature, and correspondence, which for 
purposes of this provision would include business cards and 
letterhead.\21\ The provision would clarify that the advertisement, 
sales literature or correspondence must ``reflect'' (rather than 
disclose) any relationship between the member and the other named 
person and the products and services offered by the member.
---------------------------------------------------------------------------

    \21\ The requirement thus would not apply to institutional sales 
material.
---------------------------------------------------------------------------

16. Ranking Guidelines
    The proposed rule change would modify the ranking guidelines in 
several respects. First, the proposed rule change would make clear that 
no advertisement, item of sales literature or correspondence may 
present a ranking other than rankings: (1) Created and published by a 
Ranking Entity, which the ranking guidelines define to include certain 
independent entities; or (2) created by an investment company or an 
investment company affiliate but based on the performance measurements 
of a Ranking Entity.\22\ Second, the proposed rule change would make 
clear that the ranking guidelines in IM-2210-3 apply only to 
advertisements and sales literature.
---------------------------------------------------------------------------

    \22\ The application of this limitation to correspondence would 
appear in new NASD Rule 2211(d)(3) rather than in IM-2210-3.
---------------------------------------------------------------------------

    Third, the proposed rule change would permit the use of investment 
company family rankings even in sales material that advertises only one 
investment company in the family. The proposed rule change would permit 
the presentation of investment company family rankings, provided that 
when a particular investment company is being advertised, the 
individual rankings for that investment company also must be presented. 
The definition of ``investment company family'' is substantially 
similar to the definition of ``group of investment companies'' in 
section 12(d)(1)(G) of the Investment Company Act of 1940. Use of an 
investment company family ranking would have to comply with the other 
applicable requirements of NASD Rule 2210. The proposed rule change 
would retain existing language concerning the required ranking periods.
    The proposed rule change also would eliminate the requirement that 
certain disclosures appear in ``close proximity'' to any headline or 
other prominent statement that refers to a ranking. The NASD has 
represented that the subjective nature of this requirement has 
complicated the Department's administration of the ranking guidelines 
without providing meaningful additional protection to investors. The 
proposed rule change would eliminate certain disclosure requirements 
applicable to investment company rankings that are based on 
subcategories of funds or categories created by an investment company 
or its affiliate.
17. Limitations on Use of the Association's Name
    The proposed rule change would simplify and shorten the 
requirements in IM-2210-4 concerning the use of the NASD's name. The 
proposed rule change also would delete current NASD Rule 2210(d)(2)(J) 
concerning references to regulatory organizations.
18. Communications About Collateralized Mortgage Obligations
    The proposed rule change would rewrite existing IM-2210-1 (the CMO 
Guidelines), which governs communications about collateralized mortgage 
obligations (``CMOs'') and renumber it as IM-2210-7. The current CMO 
Guidelines may give the impression that different standards apply to 
educational material, advertisements and ``communications.'' The 
proposed rule change would simplify, shorten and reorganize the CMO 
Guidelines to provide a more straightforward and uniform list of 
disclosure requirements.
    The content standards of NASD Rule 2210, in their current form and 
as they would be amended, prohibit a member from making these 
statements in any communication with the public. The proposed rule 
change would make clear that paragraphs (b)(1) and (c) apply only to 
advertisements, sales literature and correspondence. Also, the proposed 
rule change would clarify that paragraph (b)(2) does not apply to the 
sale of a CMO to an institutional investor.

III. Summary of Comments

    The Commission received ten comment letters in response to the 
proposed rule change as modified by Amendment Nos. 1 and 2 addressing a 
broad range of issues.\23\
---------------------------------------------------------------------------

    \23\ See supra note 5.
---------------------------------------------------------------------------

A. Proposed Definition of ``Institutional Investor''

    AIM, FMC, BMA, Fidelity, ICI, T. Rowe and Wilmer-Lee all commented 
that NASD should broaden the scope of its proposed definition of 
``institutional investor.'' These commenters recommended that NASD 
lower the asset dollar threshold of the ``catch-all'' category of 
institutional investors under NASD Rule 3110(c)(4)(C) from $50 million 
to either $10 million or $5 million. Commenters cited the definition of 
``accredited investor'' in SEC Regulation D under the Securities Act of 
1933 in support of a $5 million threshold. Two commenters also cited 
NASD IM-2310-3 in support of lowering the threshold to $10 million, 
which indicates that an investor that has at least $10 million invested 
in securities may be considered an institutional investor for purposes 
of NASD's suitability rule.\24\
---------------------------------------------------------------------------

    \24\ See Wilmer-Lee Letter and BMA Letter.
---------------------------------------------------------------------------

    In responding to these comments, the NASD noted that it received 
similar comments when it first published its Advertising Modernization 
proposal for comment in September 1999.\25\ At that time, the NASD 
concluded that the $50 million threshold is appropriate, particularly 
in light of the importance of the principal approval and filing 
requirements. In addition, it had previously accommodated concerns that 
the definition was too narrow by expanding it to include governmental 
entities and qualified plans with at least 100 participants. 
Accordingly, the NASD believes that the $50 million threshold is 
appropriate.
---------------------------------------------------------------------------

    \25\ See Notice to Members 99-79 (September 1999).
---------------------------------------------------------------------------

    AIM, Fidelity, and the ICI commented that the definition should 
include employee benefit plans that meet the requirements of sections 
403(b) or 457 of the Internal Revenue Code, in addition to ``qualified 
plans,'' as defined in section 3(a)(12)(C) of the Exchange Act,\26\ 
that have at least 100 participants.\27\ Fidelity also noted that the 
definition should refer to

[[Page 27121]]

``participants'' rather than ``beneficiaries.'' The NASD agreed and 
amended the proposed rule change accordingly.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78c(a)(12)(C).
    \27\ Fidelity also commented that the requirement for a 
qualified plan to have 100 participants should be eliminated. The 
NASD disagreed with this comment, stating that it believes that 
small employee benefit plans may lack the sophistication to qualify 
as institutional investors.
---------------------------------------------------------------------------

    BMA and Wilmer-Lee objected to the limitation that a member may not 
treat sales material as institutional sales material if the member has 
``reason to believe'' that the material will be forwarded to retail 
investors. BMA argued that as long as institutional sales material 
includes a disclosure that it is limited to institutional investors, 
that should be sufficient. Wilmer-Lee argued that the standard should 
be changed to whether a member ``knowingly permits'' the forwarding of 
institutional sales material to retail investors. Wilmer-Lee also 
argued that as long as material includes appropriate disclosure, 
members should be able to rely on the institutional sales material 
exceptions. The NASD disagreed with these comments because the proposed 
changes would not ensure that institutional sales material is kept out 
of the hands of retail investors, and declined to make the changes 
recommended.
    BMA and Wilmer-Lee also requested that NASD include a ``reasonable 
belief'' safe harbor for members relying on the institutional sales 
material exceptions. In other words, members could treat sales material 
as institutional sales material as long as they reasonably believed the 
material is only being distributed to institutional investors. The NASD 
also disagreed with this comment. The NASD stated that while it 
recognizes that members may occasionally distribute institutional sales 
material to retail investors by accident, it expects members to make 
every effort ensure that institutional sales material does not go to 
retail investors.
    Wilmer-Lee also commented that the definition of ``institutional 
investor'' should not include NASD members and their associated persons 
since broker/dealer-only communications are not covered by NASD Rule 
2210. Fidelity had a similar comment. The NASD disagreed with this 
contention noting that while NASD Rule 2210 excepts internal-use only 
materials from its filing requirements,\28\ the NASD has long taken the 
position that broker/dealer-only materials must meet the rule's content 
requirements.\29\
---------------------------------------------------------------------------

    \28\ See NASD Rule 2210(c)(7)(D).
    \29\ See, e.g., NASD Regulatory and Compliance Alert, ``Ask the 
Analyst'' (September 1998); NASD Regulatory and Compliance Alert, 
``Ask the Analyst'' (July 1996).
---------------------------------------------------------------------------

B. Proposed Definition of ``Existing Retail Customer''

    The proposed rule change would define ``correspondence'' to include 
any written letter or electronic mail message distributed by the member 
to one or more existing retail customers. As correspondence, these 
communications would not be subject to NASD Rule 2210's filing and 
principal approval requirements. The ICI requested that the NASD 
``clarify'' that the definition of ``existing retail customer'' 
includes existing customers of affiliates of NASD members and 
participants of employee retirement plans. The NASD disagreed with 
these comments explaining that often there is no nexus between a 
customer of an affiliate (such as a bank or credit card company) and a 
member broker/dealer that merits exempting communications with these 
customers from the filing and principal approval requirements. This 
exemption is intended to cover routine administrative communications 
with current brokerage customers.
    Further, the NASD noted that retirement plan participants often 
change regularly as individuals take new jobs with or leave the 
employment of the employer plan sponsor. Thus, these new employees are 
new to the products and services of a broker/dealer that services the 
plan. The NASD believes that these participants should receive the same 
level of investor protection as any other prospective retail customer.

C. Definitions of ``Advertisement,'' ``Sales Literature,'' and 
``Correspondence''

    Sullivan, T. Rowe and Wilmer-Lee had a number of comments on the 
definitions of ``advertisement,'' ``sales literature'' and 
``correspondence.'' Sullivan recommended that the NASD clarify that the 
term ``advertisement'' does not include sales literature and that 
``public appearances'' are excluded from the definitions of 
``advertisement'' and ``sales literature.'' The NASD responded to this 
comment by stating that while it believes that these concepts should be 
self-evident, it will provide this clarification in the Notice to 
Members announcing Commission approval of the proposal to the extent 
necessary.
    Sullivan and Wilmer-Lee also recommended that the NASD clarify that 
password-protected Web sites of members are sales literature rather 
than advertisements. Sullivan also commented that the current 
definition of ``advertisement'' does not reflect the latest 
technologies, such as CDs or DVDs, and recommended that the NASD 
broaden the definition to include these media. The NASD responded that 
it recognized that the definitions of ``advertisement'' and ``sales 
literature'' do not list all technologies through which sales material 
may be delivered, and it does not believe that it is useful to attempt 
to do so through rule language, especially given how quickly these 
technologies change. The NASD explained that it has already announced 
its position with regard to password-protected Web sites,\30\ and it 
believes it is best to address these issues going forward through 
interpretations rather than rule language.
---------------------------------------------------------------------------

    \30\ See ``Internet Guide for Registered Representatives,'' 
which can be found on the NASD Web site (http://www.nasdr.4040b.htm).
---------------------------------------------------------------------------

    Sullivan also recommended that the NASD exclude various 
communications from the definitions of ``advertisement'' and ``sales 
literature'' based upon the content of the communication, such as 
material not related to the member's products or services, customer-
generated material, and governmental material. In response to this 
comment, the NASD explained that it defined these terms based on the 
communication medium rather than content. The NASD believes that any 
attempt to define these terms based on content would raise numerous 
interpretive issues as to the purpose of a communication, which is 
secondary to whether a communication is fair and balanced. Accordingly, 
the NASD stated that it believed that it would not be appropriate or 
productive to attempt to draft such content-based definitions.
    T. Rowe commented that the definition of ``advertisement'' should 
be revised from ``material published, or designed for use in, any 
electronic or other public media * * *'' to ``used in any electronic or 
other public media * * *'' (emphasis added). T. Rowe pointed out that 
sales material could be ``designed for use'' but the member never 
actually uses it with the public. The NASD amended the proposed rule 
change in response to this comment.
    Proposed NASD Rule 2211(a)(1) would define ``correspondence'' as 
any written letter or electronic mail message distributed to one or 
more existing retail customers and fewer than 25 prospective retail 
customers within any 30-day period. Wilmer-Lee requested that 
``correspondence'' be defined as ``communications with prospective 
retail customers for marketing purposes.'' The NASD declined to adopt 
this definition for several reasons. First, the NASD noted that 
correspondence also includes communications with

[[Page 27122]]

existing retail customers. Second, the NASD explained that it does not 
intend this term to be limited to marketing related communications. 
Third, the NASD explained that the definition would encompass virtually 
all sales material.
    Sullivan inquired whether the fact that a member sent a mail 
message to 25 or more prospective retail customers during the course of 
a 30-day period causes the first 24 messages to become sales literature 
retroactively. The NASD acknowledged that this situation may arise; 
however, it stated that it would expect members to know in advance 
whether they intend to send a mail message to more than 25 prospective 
retail customers within 30 days, and if this possibility is likely, the 
member would be expected to obtain principal approval of the message 
before it is distributed, and file it as required. The NASD stated that 
it intends to deal with these situations on a case-by-case basis.

D. Article Reprints

    The proposed rule change would exempt ``independently prepared 
reprints'' from NASD Rule 2210's filing requirements. The proposed rule 
change defines ``independently prepared reprint'' in part as a reprint 
or excerpt of any article, provided that ``the publisher is not an 
affiliate of the member using the reprint or any underwriter or issuer 
of a security mentioned in the reprint.'' ICI and T. Rowe argued that 
this requirement is too broad, since a publisher could be affiliated 
with a security mentioned in an article without compromising its 
independence. They suggest only that the publisher should not be 
affiliated with the member. ICI also requested clarification that the 
requirements apply to any article or excerpt. T. Rowe requested that 
the requirement that the member using the reprint not materially alter 
its contents except as necessary to make it consistent with regulatory 
requirements be modified to allow removing information about investment 
companies not offered by the member.
    The NASD acknowledged the concern regarding affiliates, but 
believes that the deletion proposed by the commenters is too narrow. 
The NASD noted, for example, an article published by an affiliate of a 
third-party mutual fund being sold by the member would qualify as 
``independent'' under the proposed test. Therefore, the NASD revised 
the rule language to indicate that the publisher may not be affiliated 
with either the member or any underwriter or issuer of a security 
mentioned in the reprint that the member is promoting. The NASD 
clarified that the requirements apply to article excerpts as well as 
full articles. As for the request to allow removal of information from 
articles about non-offered investment companies, the NASD stated that 
it believes that these issues are best addressed on a case-by-case 
basis.
    Wilmer-Lee requested clarification that article reprints that would 
otherwise constitute correspondence (such as reprints sent to existing 
retail customers) or institutional sales literature do not require 
principal approval or filing, even if they do not meet the definition 
of an ``independently prepared reprint.'' The NASD explained that an 
article reprint that is sent to existing retail customers may not 
qualify as correspondence, since this category includes only written 
letters and group emails sent to existing retail customers. 
Nevertheless, to the extent clarification is needed, the NASD indicated 
that it would do so through interpretations in the future.
    Wilmer-Lee also requested that the definition not be limited to 
articles about investment companies, and that the term ``reprint'' 
include any type of document. The NASD disagreed with this comment for 
two reasons. First, the NASD stated that the definition is not limited 
to articles about investment companies. Second, the NASD explained that 
it is intentionally limited to independent press articles, noting that 
if the term were expanded to include ``any document,'' the exception 
would encompass all sales material regardless of source and lose all 
meaning.

E. Filing Issues

    AIM, Fidelity and ICI all urged NASD to permit electronic filing of 
sales material as soon as possible. In response, the NASD explained 
that recently it began implementing an electronic filing system. 
Currently, members may receive email notifications when the Advertising 
Regulation Department (``Department'') has reviewed filed material, and 
may view the NASD comments on the filed material online. The NASD 
explained that it is working on expanding this system to permit 
electronic filing of sales material in the future. In this regard, it 
plans to fully implement the electronic filing program in 2003.
    ICI and T. Rowe commented that NASD should eliminate the current 
requirement in NASD Rule 2210(c)(3)(A) to file a copy of any ranking or 
comparison used in advertisements or sales literature. In response to 
this comment, the NASD noted that it received this comment in response 
to Notice to Members 99-79, and continues to believe that this back-up 
filing requirement is necessary to properly review sales material that 
includes rankings. The NASD stated that the Department has found 
through experience that sales material that includes rankings often 
does not meet the NASD ranking guidelines contained in IM-2210-3, which 
necessitates review of the backup ranking materials. The NASD explained 
that the filing requirement expedites the Department's review of this 
backup material.
    Under the proposed rule change, the NASD may require a member to 
submit pre-filings if it determines that the member has departed from 
the standards contained in NASD Rule 2210. The NASD also eliminated the 
restriction of one-year during which it could require a member to 
submit pre-filings upon such a finding. ICI objected to the deletion of 
language in current NASD Rule 2210(c)(4)(A) that requires the 
Department to find that there is a reasonable likelihood that a member 
will depart again from NASD Rule 2210's standards before the Department 
may require a member to pre-file all or a portion of the member's sales 
material. ICI also objected to deletion of language in current NASD 
Rule 2210(c)(4)(B) that limits the imposition of a pre-use filing 
requirement to one year. While the NASD stated that it recognizes these 
concerns, it explained that the pre-use filing requirement is an 
important tool to ensure compliance with its advertising standards. The 
NASD stated that it would use this requirement judiciously.
    ICI and Wilmer-Lee also commented that NASD should exempt 
investment company shareholder reports from NASD Rule 2210's filing 
requirements, and ICI commented that generic investment company 
advertisements also should be exempt. The NASD stated that it addressed 
these comments previously in response to Notice to Members 99-79. As 
the NASD explained at that time, the management's discussion in 
shareholder reports sometimes contains misleading sales material that 
triggers comments from the NASD staff. In addition, the NASD stated, 
members sometimes miscategorize investment company advertisements as 
``generic'' ads. When this error occurs, the sales material will omit 
the disclosures required by these rules. For these reasons, the NASD 
continues to believe that shareholder reports and investment company 
generic advertisements should be filed with NASD.
    NASD Rule 2210 requires new members to file advertisements 
(including Web sites) at least 10 days

[[Page 27123]]

prior to use for a period of one year.\31\ Sullivan commented that NASD 
should amend the rule to allow the Department to ``pre-clear'' certain 
elements of a new member's Web site so that the member can update the 
Web site daily or more frequently without a 10-day pre-filing review. 
The NASD stated that it has found that new members are the most likely 
to commit violations of Rule 2210's content standards, which is the 
basis for the new member pre-use filing requirement. Consequently, it 
will not relax this standard.
---------------------------------------------------------------------------

    \31\ See NASD Rule 2210(c)(4)(A).
---------------------------------------------------------------------------

F. Predictions and Projections

    Current NASD Rule 2210(d)(2)(N) prohibits member communications 
from predicting or projecting investment results, but allows the 
presentation of hypothetical illustrations of mathematical principles 
such as dollar-cost averaging, tax-free compounding, or the mechanics 
of variable insurance products. The proposed rule change retains this 
provision, but the NASD has moved it to proposed NASD Rule 
2210(d)(1)(D). ICI expressed concern that the new proposed provision 
provides that a hypothetical illustration may not ``predict or project 
the performance of an investment or investment strategy.'' Similarly, 
Wilmer-Becker requested that the NASD interpret current Rule 
2210(d)(2)(N) to allow members to use certain portfolio analysis tools.
    The NASD filed a proposed rule with the Commission on February 3, 
2003 that would allow members to provide customers with access to 
certain investment analysis tools that otherwise would be prohibited by 
Rule 2210(d)(2)(N).\32\ The Commission published this proposed rule 
change for public comment on April 3, 2003.\33\ The NASD stated that 
the outcome of this rulemaking process will address the concerns raised 
by ICI and Wilmer-Becker.
---------------------------------------------------------------------------

    \32\ See NASD Notice to Members 02-51 (August 2002).
    \33\ See Securities Exchange Act Release No. 47590 (March 28, 
2003), 68 FR 16325.
---------------------------------------------------------------------------

G. Other Comments

    ICI commented that its members have complained about receiving 
inconsistent comments on filed materials based upon the subjective 
views of the Department analyst reviewing the material. The NASD 
responded to this comment by stating that the Department continues to 
work toward providing uniform guidance through the filing and comment 
process. It explained that NASD procedures include frequent meetings 
among managers and analyst teams to ensure that everyone is 
interpreting the advertising rules consistently, particularly with 
respect to new products and advertising campaigns. The NASD represented 
that as a result of this effort, it receives relatively few complaints 
concerning inconsistent interpretations, and when it does receive such 
a complaint, it reviews it to determine whether an inconsistent 
interpretation has occurred and what if any action should be taken.
    Sullivan advocated relaxing the requirement for a principal to pre-
approve advertisements and sales literature that are posted on a 
member's Web site. Sullivan has argued because this material changes 
frequently, the pre-approval requirement should be waived in certain 
circumstances, or members should be allowed to delegate this function 
to affiliates or others. The NASD disagreed with this comment stating 
that the principal approval requirement is vital to ensuring that 
advertising is fair and balanced.
    Sullivan also requested that the NASD permit special record 
retention procedures for Web sites and other new technologies. The NASD 
addressed certain of these issues in an interpretive letter to T. Rowe 
Price.\34\ The NASD plans to address any additional issues as they 
arise on a case-by-case basis rather than through the rulemaking 
process.
---------------------------------------------------------------------------

    \34\ See Letter from Thomas M. Selman, Senior Vice President, 
NASD, to Forrest Foss, Vice President, T. Rowe Price Associates 
(January 28, 2002).
---------------------------------------------------------------------------

    Proposed NASD Rule 2210(d)(2)(C)(i) would require member sales 
material to ``prominently'' disclose the member's name. T. Rowe 
commented that this requirement should be changed to require members to 
``clearly'' disclose their names. T. Rowe argued that most members that 
distribute mutual funds feature the fund's name rather than the name of 
the member so that there is little room for confusion as to whom to 
contact for more information. The NASD acknowledged this concern, but 
noted that member advertisements that do not prominently indicate the 
member's name sometimes suggest that securities products are offered by 
a non-member entity rather than the member, which can be misleading and 
confusing to investors. The NASD stated that its staff often cites the 
current prominence requirement in Rule 2210(f)(2)(A) to comment upon 
these deficiencies. For this reason, it is retaining the prominence 
requirement.
    Wilmer-Lee commented that the proposed rule change should provide 
NASD with broader authority to grant exemptions from the filing 
requirements. The NASD disagreed, and accordingly declined to amend the 
proposed rule change to expand this authority.
    Wilmer-Lee also opposed a requirement in both current NASD Rule 
2210(d)(2)(M) and proposed NASD Rule 2210(d)(2)(B) that any comparison 
in advertisements or sales literature between investments or services 
must disclose all material differences between them, including 
investment objectives, costs and expenses, liquidity, safety, 
guarantees or insurance, fluctuation of principal or return, and tax 
features. Wilmer-Lee argued that having to disclose these differences 
is burdensome on members and that the standard is vague. The NASD 
disagreed explaining that the standard is quite specific as to the 
types of differences it is looking for. In addition, any burden on 
members is justified. Without this standard, the NASD stated, members 
would be permitted to include misleading comparisons of products or 
services in sales material that do not disclose material differences.
    Wilmer-Lee also objected to proposed NASD Rule 2210(e), which 
provides that violations of any rule of the SEC, SIPC or MSRB 
applicable to member communications is deemed a violation of NASD Rule 
2210. Wilmer-Lee argued that this provision has no incremental benefit 
and is ``anathema to efficient regulation.'' Again, the NASD disagreed 
with this comment. The NASD explained that its examinations and 
enforcement actions regularly apply non-NASD rules to member 
communications, and that proposed NASD Rule 2210(e) will assist 
regulatory efforts in ensuring compliance with all applicable 
advertising rules.
    Sullivan also had several comments on NASD Rule 2220, which governs 
member communications about options, however, because the NASD is not 
proposing at this time to revise Rule 2220, these comments are beyond 
the scope of this rule proposal.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\35\ In particular, the Commission believes the proposal is 
consistent with the requirements of

[[Page 27124]]

section 15A(b)(6) of the Act,\36\ which requires, among other things, 
that the Association's rules are 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.
---------------------------------------------------------------------------

    \35\ In approving this rule proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The primary purpose of this proposed rule change is to modernize 
and clarify the rules governing member communications with the public. 
To this end, the NASD has proposed to reorganize NASD Rule 2210 and 
create new NASD Rule 2211. As discussed in detail below, the proposal 
also makes changes to several definitions, which affect the filing and 
pre-use requirements.

A. Definition of ``Public Appearance''

    The Commission believes that categorizing ``Public Appearances'' as 
a type of communication with the public and thus subjecting these 
appearances to the same content standards as other forms of 
communications with the public is appropriate. The Commission believes 
that the proposed rule change will simplify the standards which members 
must comply with when making public appearances, and will likely 
enhance compliance with the rules. Further, the Commission believes 
that codifying the NASD staff's position that Internet chat rooms 
constitute public appearances rather than advertisements or sales 
literature for purposes of NASD Rule 2210 by defining ``Public 
Appearance'' to include interactive electronic forums will also help to 
ensure compliance with the Rule.

B. Institutional Sales Material

    The Commission believes that the proposed treatment of 
``Institutional Sales Material,'' as amended in response to concerns 
expressed by commenters and Commission staff, adequately balances the 
needs of members to contact sophisticated institutional investors 
without being subjected to pre-use approval and filing requirements, 
while still providing protection to ensure that inappropriate materials 
do not reach retail customers without first being reviewed for content 
by the NASD. For example, the proposed definition of ``institutional 
investor'' includes any ``employee benefit plan that meets the 
requirements of section 403(b) or section 457 of the Internal Revenue 
Code and has at least 100 participants, but does not include any 
participant of such a plan.'' This provision allows members to use 
sales material with the sponsors, administrators or consultants of such 
plans without having to file the material with the NASD while also 
preventing such material from reaching individual plan participants who 
are clearly not institutional investors.

C. Form Letters and Group Electronic Mail

    The Commission agrees with the NASD's proposal to treat form 
letters and group electronic mail sent to existing retail customers and 
to fewer than 25 prospective customers as a separate category of 
communication (''Group Correspondence''), and to subject these 
communications to procedures governing the approval and review of 
correspondence, and applicable content standards. The Commission notes 
that the NASD has stated that it expects that each member will review 
its procedures to ensure that they adequately address potential 
concerns with the distribution of Group Correspondence and consider 
whether to adopt stricter procedures that require registered principal 
pre-use approval and filing with NASD of Group Correspondence that 
presents a higher risk to investors. The Commission similarly 
encourages members to be proactive in this regard.

D. Article Reprints

    The Commission believes that the NASD's proposal to create a new 
category of article reprint, ``independently prepared reprint'' is 
appropriate. An independently prepared reprint would consist of any 
article reprint that meets certain standards that are designed to 
ensure that the reprint was issued by an independent publisher and was 
not materially altered by a member.\37\ The proposed rule would exempt 
such reprints, and any excerpt therefrom, from filing requirements and 
most content standards. The new rule recognizes that reprints are often 
available to the public through large-circulation periodicals that are 
published by firms that are not NASD members, and that it would not be 
productive to require members to file such reprints.
---------------------------------------------------------------------------

    \37\ The Commission notes that under the proposed rule change, 
members would be permitted to alter the content of an independently 
prepared reprint in a manner necessary to make it consistent with 
applicable regulatory standards or to correct factual errors.
---------------------------------------------------------------------------

E. Press Releases

    The Commission believes that it is appropriate to exempt press 
releases that are made available only to members of the media from the 
filing requirements of NASD Rule 2210. The Commission recognizes that 
often these releases are time-sensitive and that the filing 
requirements may represent an unnecessary regulatory burden. However, 
the Commission notes that although these releases do not need to be 
filed, they are still subject to applicable content, pre-use approval 
and record-keeping requirements.

F. Television and Video Advertisements

    The Commission believes that it is appropriate for the NASD to 
codify in the proposed rules an existing policy that requires members 
to file the final filmed version of any television or video 
advertisement within ten business days of its first use or broadcast.

G. Filing and Record-keeping Requirements

    The Commission believes that the NASD's proposed changes to the 
Filing and Record-keeping Requirements are appropriate. The proposed 
rules clarify members' responsibilities for retaining documents as well 
as simplify members' obligations for filing documents with the NASD for 
approval. Further, the proposed rules appropriately codify current NASD 
practices regarding the types of materials that must be filed with the 
NASD. The Commission believes that the proposed change will assist 
members in complying with filing and record-keeping requirements.

H. Standards Applicable to Member Communications

    The NASD proposed to shorten and simplify the standards applicable 
to communications with the public that are contained in NASD Rule 
2210(d). The rules clarify that members will be required to examine 
their communications with the public to ensure that statements are not 
misleading, unbalanced or inaccurate. The Commission supports the 
proposed changes to the rule, as they will make clear to members that 
they have the primary responsibility for ensuring that their 
communications with the public are not inappropriate.

I. Legends and Footnotes

    The Commission believes that the NASD's proposal to limit 
information that can be placed in a footnote or legend is appropriate 
and will aid in the protection of investors from misleading information 
contained in sales material. Specifically, the NASD proposed rule 
change provides that information may be placed in a legend or footnote 
only in the event that such placement would not inhibit an investor's 
understanding of the communication. The Commission

[[Page 27125]]

believes that this is an appropriate limitation.

J. Hypothetical Illustrations

    The proposed NASD rules would permit a member to present a 
hypothetical illustration of mathematical principles, but would not 
permit the illustration to predict or project the performance of an 
investment or investment strategy. The Commission believes that this 
rule strikes an appropriate balance in that members may still use, for 
example, mutual fund cost calculators and other hypothetical 
illustrations, but they may not make predictions based on those 
calculations, which could be misleading to investors.

K. Testimonials

    The NASD proposed rules regarding establishing standards for 
testimonials would apply only to advertisements or sales literature 
concerning the investment advice or investment performance of a member 
or its products. The Commission believes that the application of these 
standards is appropriately tailored to ensure that the standards 
imposed on testimonials on investment performance do not inadvertently 
encompass testimonials regarding matters other than investment 
performance, such as the member's general services.

L. Use and Disclosure of Member's Name

    The Commission believes that the NASD's proposal to simplify the 
provisions concerning disclosure of member names is appropriate. The 
proposed rule requires that all advertisements and sales literature 
must prominently disclose the name of the member sponsoring the 
advertisement or sales literature, as well as reflect any relationship 
between the member and any non-member who is also named. The Commission 
believes that requiring that such information be provided will help 
assure that members do not mislead investors about their relationships 
with non-members involved with an advertisement or sales literature.

M. Ranking Guidelines

    The Commission believes that the changes proposed to the NASD's 
rules regarding ranking guidelines are appropriate. The proposed 
guidelines are designed to ensure that investors do not receive 
misleading or inaccurate information in advertisements or sales 
literature about potential investments, but are also narrowly tailored 
so that members are not subject to unduly restrictive requirements in 
this regard.

N. Communications About Collateralized Mortgage Obligations

    The Commission believes that the NASD's proposed changes to the 
rule governing Communications about Collateralized Mortgage Obligations 
(``CMOs'') will aid retail investors in making informed decisions about 
these investments products by ensuring that they are provided with 
appropriate information and disclosure in all advertisements and sales 
literature regarding these products. Further, the Commission believes 
that the NASD appropriately simplified the rule, which will likely 
enhance compliance with provisions thereof.

O. Operational Date

    The Commission notes that the NASD will publish a Notice to Members 
announcing the Commission's approval of the proposed rule change within 
60 calendar days of the Commission's order, and that the proposed rule 
changes will take effect on Monday, November 3, 2003.\38\

V. Amendment Nos. 3 and 4

    The Commission finds good cause for accelerating approval of 
Amendments Nos. 3 and 4 to the proposed rule change prior to the 
thirtieth day after publication of notice of the filings thereof in the 
Federal Register. The Commission is accelerating approval of Amendment 
Nos. 3 and 4 because these amendments are consistent with section 
15A(b)(6) of the Act,\39\ and address issues raised by commenters and 
Commission staff on the original proposal. The changes made in these 
amendments are described below.
---------------------------------------------------------------------------

    \38\ See letter from Patrice Gliniecki, Vice President and 
Deputy General Counsel, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated May 8, 2003.
    \39\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    First, in Amendment No. 3, the NASD amended the proposed definition 
of ``institutional investor'' to include employee benefit plans that 
meet the requirements of sections 403(b) or 457 of the Internal Revenue 
Code and also to change the term ``beneficiary'' to ``participant'' 
with respect to qualified plans as defined in section 3(a)(12)(C) of 
the Act. In Amendment No. 4, the NASD clarified that for purposes of 
the definition of ``institutional investor,'' employee benefit plans 
and qualified plans do not include any participant of such a plan. The 
NASD explained that the purpose of including certain large employee 
benefit plans within the definition of ``institutional investor'' was 
so that members could use sales material with the sponsors, 
administrators or consultants of those plans without having to file the 
material with the NASD or have a registered principal approve the 
material. The NASD stated that it did not intend to include sales 
material that is distributed to the participants of those plans in the 
definition of institutional sales material. The Commission concurs with 
this analysis, and believes that the proposed changes to the definition 
of institutional investor are appropriate.
    Second, in Amendment No. 3, the NASD revised the definition of 
``advertisement.'' In the original proposal, the NASD described an 
advertisement as ``material published, or designed for use in any 
electronic or other public media * * *'' In response to a commenter 
that pointed out that sales material could be ``designed for use'' but 
never actually used, the NASD amended the definition to describe 
advertisements as ``material published, or used in any electronic or 
other public media * * *'' The Commission believes that this change 
appropriately narrows the scope of the definition.
    Third, with respect to the proposal to exempt ``independently 
prepared reprints'' from filing requirements, the NASD made two changes 
to the proposed rule change in Amendment No. 3. The NASD amended NASD 
Rule 2210 to indicate that to qualify for the exemption, a publisher 
may not be affiliated with either the member or any underwriter or 
issuer of a security mentioned in a reprint that the member is 
promoting in an effort to narrow the exclusion from the exemption. 
Further, the NASD clarified that the requirements apply to article 
excerpts as well as full articles. The Commission believes that these 
changes will appropriately exempt members from filing requirements in 
situations where there is no regulatory need for review of an 
advertisement or sales literature.
    Fourth, the NASD made changes NASD 2210 and IM-2210-7 to 
incorporate new requirements relating to securities futures. 
Specifically, the Commission notes that on October 15, 2002, it 
approved rule changes that, among other things, amended Rule 2210 and 
created a new Interpretive Material 2210-7 to regulate communications 
with the public regarding security futures.\40\ The original Proposal 
did not include the newly approved provisions concerning security 
futures. Therefore, in Amendment No. 3, the NASD incorporated the 
approved changes to

[[Page 27126]]

Rule 2210 and the creation of IM-2210-7 into the proposed rule text. 
The Commission believes that these are technical changes, as the 
proposed changes have already been addressed by the Commission in a 
separate filing, and therefore do not need to be readdressed here.
---------------------------------------------------------------------------

    \40\ See Securities Exchange Act Release No. 46663, 67 FR 64944 
(October 22, 2002).
---------------------------------------------------------------------------

    Fifth, in Amendment No. 3, the NASD made changes to NASD Rule 
2210's disclosure requirements for recommendations. These changes were 
made to conform the rule to the requirements contained in NASD Rule 
2711,\41\ which governs research analysts and research reports. 
Previously, only NASD Rule 2210 imposed disclosure requirements on 
research reports.
---------------------------------------------------------------------------

    \41\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002).
---------------------------------------------------------------------------

    The new disclosure requirements imposed by NASD Rule 2711 differ 
from those contained in current NASD Rule 2210, therefore, for 
consistency, the NASD amended NASD Rule 2210 to be more similar to the 
new requirements imposed by NASD Rule 2711 and to incorporate 
references to security futures. The Commission believes that 
coordinating the disclosure requirements contained in NASD Rules 2210 
and 2711 is appropriate and will aid members in complying the rules.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3 and 4, including whether the 
Amendments are 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 NASD. All submissions should 
refer to File No. SR-NASD-00-12 and should be submitted by June 9, 
2003.

VII. Conclusion

    It is therefore ordered pursuant to section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-NASD-00-12), as amended, is 
approved.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland
Deputy Secretary
[FR Doc. 03-12451 Filed 5-16-03; 8:45 am]
BILLING CODE 8010-01-P