[Federal Register Volume 69, Number 166 (Friday, August 27, 2004)]
[Notices]
[Pages 52738-52740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1950]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50226; File No. SR-NASD-2004-043]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Disclosure of Fees and Expenses in Mutual Fund Performance Sales 
Material

August 20, 2004.
    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 March 9, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. The 
Commission is publishing this notice to solicit 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Rules 2210 and 2211 of NASD to require 
mutual fund communications with the public that provide performance 
data to disclose the fund's fees, expenses and standardized 
performance. Below is the text of the proposed rule change. Proposed 
new language is in italics.
* * * * *
    2210. Communications With the Public
    (a) through (c) No change.
    (d) Content Standards
    (1) through (2) No change.
    (3) Disclosure of Fees, Expenses and Standardized Performance
    (A) Communications with the public, other than institutional sales 
material and public appearances, that present performance data for any 
non-money market, open-end management investment company that has 
registered on Form N-1A under the Investment Company Act of 1940, as 
permitted by Rule 482 under the Securities Act of 1933 and Rule 34b-1 
under the Investment Company Act of 1940, must disclose:
    (i) the standardized performance information mandated by Rule 482 
and Rule 34b-1; and
    (ii) to the extent applicable:
    a. the maximum sales charge imposed on purchases or the maximum 
deferred sales charge, as required by Item 3 of Form N-1A and stated in 
the investment company's prospectus current as of the date of 
submission of an advertisement for publication, or as of the date of 
distribution of other communications with the public; and
    b. annual fund operating expenses, as stated in the investment 
company's prospectus described in subparagraph a.
    (B) All of the information required by subparagraph (A) must be set 
forth:
    (i) clearly and prominently, and standardized performance 
information must be in a type size that is at least as large as that 
used to present any nonstandardized performance;
    (ii) with respect to any radio, television or video advertisement, 
with equal emphasis to that given to any nonstandardized performance; 
and
    (iii) in any advertisement other than a radio, television or video 
advertisement, in a prominent text box that contains only the required 
information.
    (e) No change.
* * * * *
    2211. Institutional Sales Material and Correspondence
    (a) through (c) No change.
    (d) Content Standards Applicable to Institutional Sales Material 
and Correspondence
    (1) All institutional sales material and correspondence are subject 
to the content standards of Rule 2210(d)(1) and the applicable 
Interpretive Materials under Rule 2210, and all correspondence is 
subject to the content standards of paragraph (d)(3) of this rule.
    (2) through (3) 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 included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD 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
    NASD proposes to amend Rules 2210 and 2211 to require member 
communications with the public, other than institutional sales 
material, that present mutual fund performance information to disclose 
the fund's fees, expenses and standardized performance. These new 
requirements would improve investor awareness of the costs of buying 
and owning a mutual fund, facilitate comparison of funds and make the 
presentation of standardized performance more prominent. The proposed 
rule change would require that:
     Performance sales material disclose the fees and expenses 
associated with purchase and ownership of the fund, derived from the 
fund's most recent prospectus and stated as a percentage of net assets;
     Performance sales material disclose the standardized 
performance of the mutual fund, as prescribed in SEC Rules 482 and 34b-
1; and
     Advertisements (other than radio, television or video 
advertisements)

[[Page 52739]]

present the required disclosure in a prominent text box.
2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act, which requires, among other things, that 
NASD's rules be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and 
to protect investors and the public interest. The proposed rule change 
will enhance investor protection by making more transparent the true 
costs of purchasing and owning a mutual fund and providing useful 
information on which to base investment decisions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    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

    The proposed rule change was published for comment in NASD Notice 
to Members 03-77 (the ``NtM''). NASD received 11 comments in response 
to the NtM. Of the 11 comment letters received, six supported the 
proposed rule change, and five opposed it.
    Some commenters asserted that the proposed rule change would 
confuse investors or is otherwise unnecessary.\3\ One commenter argued 
that NASD should not adopt the proposed rule change because its 
greatest impact would be on directly-marketed mutual funds and the 
lowest-cost funds, despite the fact that most funds are broker-sold.\4\ 
T. Rowe Price suggested that the disclosure requirements should apply 
only to funds with expense ratios above the average for their category.
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    \3\ Letter from the Securities Industry Association (January 22, 
2004) (``SIA''); letter from Sherrets & Boecker LLC (January 27, 
2004) (``Sherrets & Boecker'').
    \4\ Letter from T. Rowe Price Investment Services, Inc. (January 
23, 2004) (``T. Rowe Price'').
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    SEC Rules 482 and 34b-1 already require disclosure of a broker-sold 
fund's sales load in performance sales material. The proposed rule 
change also would require the disclosure of the fund's expense ratio in 
performance sales material, whether the sales material is distributed 
by a full-service broker/dealer, a discount broker/dealer, or the 
underwriter for a directly-marketed fund. Moreover, NASD finds no 
convincing rationale why lower-cost or directly-marketed funds should 
object to the proposed presentation of their expense ratios. Indeed, 
several no-load and directly-marketed mutual fund complexes supported 
the proposed rule change.\5\
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    \5\ See letter from Fidelity Investments (January 23, 2004) 
(``Fidelity''); letter from The Vanguard Group (January 22, 2004) 
(``Vanguard'').
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    Some commenters also asserted that the proposed rule change would 
invite investors to pay undue attention to a fund's performance.\6\ 
NASD finds this argument to be without merit. As these commenters 
surely are aware, performance sales material, especially 
advertisements, by their nature seek to focus an investor's attention 
on a fund's historical performance. The proposed rule change would 
simply balance this emphasis on performance with disclosure concerning 
the fund's fees and expenses. In addition, the proposed rule change 
would better ensure that standardized performance is presented in a 
clear and prominent manner.
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    \6\ See Fidelity; SIA; letter from Oppenheimer Funds 
Distributor, Inc., (January 23, 2004) (``Oppenheimer'').
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    Some commenters opposed the requirement that the required 
disclosure appear in a prominent text box.\7\ These commenters 
especially objected to the imposition of such a requirement in sales 
literature, such as fund fact sheets and brochures concerning a family 
of funds. The proposed text box would facilitate the ability of any 
investor to compare expense information for different funds. 
Nevertheless, in order to balance this advantage with the practical 
concerns raised by commenters, the proposed rule change has been 
amended to impose the text box requirement only on advertisements as 
defined by Rule 2210.\8\ Some commenters also objected to application 
of the text box requirement to advertisements for multiple funds.\9\ 
While application of the requirement to these advertisements may 
present practical concerns, the advantages of the text box requirement 
outweigh the burdens of designing advertisements for multiple funds in 
a compliant manner.\10\
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    \7\ See T. Rowe Price; letter from the Investment Company 
Institute (January 23, 2004) (``ICI'').
    \8\ Rule 2210 defines ``advertisement'' as ``any material, other 
than an independently prepared reprint and institutional sales 
material, that is published, or used in any electronic or other 
public media, including any Web site, newspaper, magazine or other 
periodical, radio, television, telephone or tape recording, 
videotape display, signs or billboards, motion pictures, or 
telephone directories (other than routine listings).''
    \9\ See, e.g., ICI.
    \10\ The ICI also asserts that the sample disclosure attached to 
the NtM fails to comply with the proposed requirement that the text 
box include no information other than the required disclosure. ICI 
refers to the statement in the sample disclosure that the 
performance numbers reflect the deduction of sales charges and 
annual expenses. As the ICI is aware, mutual fund sales material is 
subject to a filing requirement under Rule 2210 and the exclusivity 
requirement would be a matter for review. At the outset, however, it 
can be said that the exclusivity requirement would not preclude the 
use of such language, which merely states that the disclosed 
performance data reflects the disclosed fees and expenses.
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    The NtM requested comment on whether the proposed rule change 
should require disclosure of the dollar amount of expenses incurred by 
a hypothetical shareholder in the fund. Commenters generally opposed 
such an approach.\11\ It appears that in order to adopt such an 
approach NASD either would have to require disclosure of dollar amounts 
based on the actual returns of a fund, in which case a fund with 
superior returns would disclose higher expenses, or base the dollar 
amounts on an assumed rate of return (e.g., 0 percent or 5 percent). An 
assumed rate of return in sales material could confuse or mislead 
investors, by either understating the actual dollar amount of expenses 
or by indicating that the fund may attain a specified performance. For 
that reason NASD has determined not to amend the proposed rule change 
in this manner.
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    \11\ See T. Rowe Price; ICI.
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    Several commenters recommended that the proposed rule change not 
apply to institutional sales material, in light of the sophistication 
and expertise of institutional investors.\12\ NASD has amended the 
proposed rule change accordingly. NASD also has excluded public 
appearances and communications with the public regarding money market 
funds from the proposed rule change.
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    \12\ See ICI; Fidelity; Vanguard; Oppenheimer.
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    Some commenters recommended that the proposed rule change require 
disclosure of fund expenses as calculated in Item 9 of Form N-1A, 
rather than Item 3.\13\ Item 3 establishes the standards for 
calculating fees and expenses for purposes of the prospectus fee table, 
while Item 9 imposes the standards for calculation of fees and expenses 
for purpose of shareholder reports. The principal difference between 
the two forms of calculation is that the expenses calculated under Item 
3 may not reflect the effect of fee waivers and expense reimbursements 
that are subject to termination, while those calculated according to 
Item 9 may reflect these waivers and reimbursements. The prospective 
purchaser is better informed with disclosure of fees and expenses that 
do

[[Page 52740]]

not reflect fee waivers and expense reimbursements that are subject to 
termination. Consequently, NASD has amended the proposed rule change to 
require fee and expense disclosure derived from the most recent 
prospectus.\14\
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    \13\ See ICI; Fidelity; Vanguard.
    \14\ The proposed rule change would not preclude members from 
including additional information regarding fee waivers and expense 
reimbursements, outside the text box in the case of advertisements.
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    Some commenters objected to the proposed requirement that the 
disclosure of fund expenses be current as of the most recent calendar 
quarter.\15\ The new requirement that the information be derived from 
the most recent prospectus should address this concern.
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    \15\ See ICI; Fidelity; Vanguard.
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    Vanguard requested that NASD adopt a ``one click away'' rule for 
the depiction of the required disclosure in electronic communications. 
Under this approach, an investor could click on a hyperlink in close 
proximity to nonstandardized performance in order to obtain the 
required disclosure. In its recent amendments to Rule 482, the SEC 
rejected a ``one-click away'' rule for performance-related disclosures 
required by paragraph (b)(3).\16\ NASD similarly has determined that 
broker/dealers should not rely on a ``one click away'' rule for the 
disclosure of information that would be required by the proposed rule 
change. NASD also has amended the proposed rule change to clarify the 
disclosure standards applicable to different forms of sales material.
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    \16\ See SEC Release No. 33-8294 (Sept. 29, 2003), 68 FR 57760, 
57767 (Oct. 6, 2003).
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    The NtM would have provided that the required disclosure be in a 
type size at least as large as that of the nonstandardized performance. 
The ICI requested that the proposed rule change instead require that 
the type size of the required information be at least as large as that 
used in the major part of a print advertisement. A purpose of the 
proposed rule change is to require fee, expense and standardized 
performance disclosure that will balance the nonstandardized 
performance. In order to meet this particular purpose, NASD has revised 
the proposal to require that all disclosure be set forth clearly and 
prominently, and to require that disclosure of standardized performance 
be in a type size at least as large as that of the nonstandardized 
performance.
    NASD also has amended the proposed rule change to clarify certain 
other disclosure requirements. We have eliminated the provision that 
allows communications delivered through an electronic medium to present 
the disclosure ``in a manner that is intended to draw investor 
attention to it.'' Upon further consideration we have determined that 
this standard may be too vague. Under the proposed rule change as 
amended, Web sites would have to comply with the prominent text box and 
type size requirements and radio, television and video advertisements 
would have to provide the required disclosure ``with equal emphasis'' 
to that given to any nonstandardized performance.
    Some commenters also requested that NASD amend the proposed rule 
change to require disclosure of the ``maximum deferred sales charge'' 
rather than the ``maximum contingent deferred sales charge,'' and to 
clarify that disclosure of the maximum front-end or deferred sales 
charge is required only to the extent that the fund imposes such a 
charge.\17\ NASD has amended the proposed rule change accordingly.
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    \17\ ICI; Fidelity.
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    Two commenters requested clarification of whether the proposed rule 
change would apply to variable annuity sales material.\18\ NASD has 
amended the proposed rule change to clarify that it would only apply to 
open-end management investment companies.
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    \18\ See letter from Northwestern Mutual Investment Services 
(January 23, 2004) (opposing application of the proposed rule change 
to variable products); e-mail message from Brian Wilkerson, Nations 
Financial Group, Inc. (December 11, 2003).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-043 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-043. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2004-043 and should be submitted on or before September 17, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-1950 Filed 8-26-04; 8:45 am]
BILLING CODE 8010-01-P