[Federal Register Volume 68, Number 162 (Thursday, August 21, 2003)]
[Notices]
[Pages 50568-50570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21449]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48353; File No. SR-NASD-2003-126]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Extend the Pilot Period for Rules Relating 
to Bond Fund Volatility Ratings

August 15, 2003.
    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 7, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the NASD. The NASD filed 
the proposal pursuant to section 19(b)(3)(A) of the Act,\3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission.\5\ The Commission is publishing this notice 
to solicit

[[Page 50569]]

comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The NASD provided written notice of its intention to file 
the proposed rule change on August 5, 2003. The Commission reviewed 
the NASD's submission, and told the NASD it was acceptable to file 
the proposed rule change immediately. The NASD asked the Commission 
to waive the 30-day operative delay. See Rule 19b-4(f)(6)(iii). 17 
CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to extend the expiration date of the pilot period 
for the NASD's rules concerning bond mutual fund volatility ratings. 
The current pilot is scheduled to expire on August 31, 2003. The 
proposed rule change extends the pilot period until August 31, 2005. 
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, [2003] 
2005, unless extended or permanently approved by [the Association] NASD 
at or before such date.)
    (a) through (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, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD 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 Commission approved the 
adoption of NASD Interpretive Material 2210-5, which permits members 
and their associated persons to include bond fund volatility ratings in 
supplemental sales literature (mutual fund sales material that is 
accompanied or preceded by a fund prospectus).\6\ The Commission 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 staff interpreted NASD rules to prohibit the use of bond fund 
volatility ratings in sales material.
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    \6\ See Securities Exchange Act Release No. 42476 (February 29, 
2000), 65 FR 12305 (March 8, 2000) (SR-NASD-97-89).
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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:
    [sbull] The word ``risk'' may not be used to describe the rating.
    [sbull] The rating must be the most recent available and be current 
to the most recent calendar quarter ended prior to use.
    [sbull] The rating must be based exclusively on objective, 
quantifiable factors.
    [sbull] 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.
    [sbull] 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 the NASD (``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) initially were approved on an 
18-month trial basis that was scheduled to expire on August 31, 
2001.\7\ On August 10, 2001, the NASD filed with the Commission a 
proposed rule change that was effective upon filing that extended the 
effectiveness of IM-2210-5 and Rule 2210(c)(3) an additional two years 
until August 31, 2003.\8\
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    \7\ Id.
    \8\ See Securities Exchange Act Release No. 44737 (August 22, 
2001), 66 FR 45350 (August 28, 2001) (SR-NASD-2001-49).
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    Proposed Rule Change to Extend the Expiration Date of IM-2210-5 and 
Rule 2210(c)(3). As indicated in the Commission's order approving IM-
2210-5 and Rule 2210(c)(3), the NASD requested the 18-month trial 
period to provide an opportunity to assess whether the rule had 
facilitated the dissemination of useful, understandable information to 
investors, and whether it had prevented the dissemination of 
inappropriate and misleading information.\9\ During the initial 18-
month pilot period, the Department received very few filings that 
contained bond fund volatility ratings. Although these filings 
generally met the rule's requirements, the staff did not believe that 
it had received a sufficient number of filings to adequately evaluate 
the rule's effectiveness. Accordingly, in July 2001, the NASD 
Regulation, Inc. Board of Directors authorized a rule filing with the 
Commission to extend the pilot for two years. The NASD subsequently 
filed with the Commission a proposed rule change, which was effective 
upon filing, to extend the pilot period until August 31, 2003.\10\
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    \9\ See footnote 6, supra.
    \10\ See footnote 8, supra.
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    Since August 2001, the Department has continued to receive very few 
filings under this rule. During the entire period from February 2000, 
when the rule was first approved, until the present, the NASD has 
received a total of 41 submissions from three NASD members. 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 rule's effectiveness.
    In particular, the NASD believes that, because of the low interest 
rates over the last two years, bond mutual funds have had little reason 
to distribute sales material that contains volatility ratings. The NASD 
believes that it needs to review the rule in an environment in which 
there is greater demand for sales literature that includes bond mutual 
fund volatility ratings to determine the rule's effectiveness. The NASD 
believes there is a reasonable probability that such environment will 
exist over the next two years.
    Accordingly, the NASD proposes to extend the expiration date of IM-
2210-5 and Rule 2110(c)(3) for an additional two years, until August 
31, 2005, to allow more filings to be made. Before this period expires, 
the staff will evaluate the rule and determine whether to recommend 
that the rule be eliminated, modified, or permanently approved as is. 
The proposal contains no substantive changes to the way in which the 
pilot has operated during the past two years; it only extends the pilot 
period by an additional two years.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the

[[Page 50570]]

Act,\11\ which requires, among other things, that the NASD's rules be 
designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, and, in general, 
protect investors and the public interest. The NASD believes that 
extending the expiration date of IM-2210-5 and Rule 2210(c)(3) will 
provide the additional experience necessary to fully analyze and 
evaluate the provisions.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will 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 \12\ and 
Rule 19b-4(f)(6) thereunder.\13\ 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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    The NASD has asked the Commission to waive the 30-day operative 
delay. The Commission believes waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Such waiver will allow the pilot to operate without interruption 
through August 31, 2005. For these reasons, the Commission designates 
the proposal to be effective and operative upon filing with the 
Commission.\14\
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    \14\ 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).
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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 NASD. All 
submissions should refer to file number SR-NASD-2003-126 and should be 
submitted by September 11, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-21449 Filed 8-20-03; 8:45 am]
BILLING CODE 8010-01-P