[Federal Register Volume 70, Number 173 (Thursday, September 8, 2005)]
[Notices]
[Pages 53405-53407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4874]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52372; File No. SR-NASD-2005-104]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Extend on a Pilot Basis Rules Concerning Bond Mutual 
Fund Volatility Ratings

August 31, 2005.
    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 29, 2005, 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 and II below, which Items have been prepared by NASD. NASD has 
filed the proposal as a ``non-controversial'' rule change pursuant to

[[Page 53406]]

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. 
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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to extend on a pilot basis the provisions of NASD 
Rule 2210(c)(3) and Interpretive Material 2210-5 concerning bond mutual 
fund volatility ratings (collectively, the ``Rules'') until December 
29, 2005, unless the Rules are extended or approved on a permanent 
basis before that date. Below is the text of the proposed rule change. 
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] December 
29, 2005, unless extended or permanently approved by 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, NASD included statements 
concerning the purpose of and basis for 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
    Background and Description of the NASD's Rules on Bond Mutual Fund 
Volatility Ratings. On February 29, 2000, the SEC approved the adoption 
of NASD 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).\5\ At that time, the SEC 
also approved NASD Rule 2210(c)(3), which sets forth the filing 
requirements and review procedures applicable to sales literature 
containing bond mutual fund volatility ratings. IM-2210-5 and Rule 
2210(c)(3) initially were approved on an 18-month pilot basis that was 
scheduled to expire on August 31, 2001.\6\ On August 10, 2001, 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.\7\ On August 
7, 2003, NASD filed a similar proposed rule change with the Commission 
that was effective upon filing and that extended the effectiveness of 
IM-2210-5 and Rule 2210(c)(3) until August 31, 2005.\8\ Prior to the 
pilot, NASD staff interpreted NASD rules to prohibit the use of bond 
fund volatility ratings in sales material. Under the pilot, IM-2210-5 
permits the use of bond fund volatility ratings only in supplemental 
sales literature and only if certain conditions are met, including 
that:
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    \5\ See Securities Exchange Act Release No. 42476 (February 29, 
2000); 65 FR 12305 (March 8, 2000) (SR-NASD-97-89).
    \6\ Id.
    \7\ See Securities Exchange Act Release No. 44737 (August 22, 
2001); 66 FR 45350 (August 28, 2001) (SR-NASD-2001-49); NASD Notice 
to Members 01-58 (September 2001).
    \8\ See Securities Exchange Act Release No. 48353 (August 15, 
2003); 68 FR 50568 (August 21, 2003) (SR-NASD-2003-126); NASD Notice 
to Members 03-48 (August 2003).
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     The word ``risk'' may not be used to describe the rating.
     The rating must be the most recent available and be 
current to the most recent calendar quarter ended prior to use.
     The rating must be based exclusively on objective, 
quantifiable factors.
     The entity issuing the rating must provide detailed 
disclosure on its rating methodology to investors through a toll-free 
telephone number, a Web site, or both.
     A disclosure statement containing all of the information 
required by the rule must accompany the rating. The statement must 
include such information as the name of the entity issuing the rating, 
the most current rating and the date it was issued, and a description 
of the rating in narrative form containing certain specified 
disclosures.
    Rule 2210(c)(3) requires members to file bond mutual fund sales 
literature that includes or incorporates volatility ratings with the 
Advertising Regulation Department of NASD (``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 re-filed and approved.
    Proposed Rule Change to Extend IM-2110-5 and Rule 2210(c)(3) for 
120 Days. NASD intends shortly to submit to the Commission a proposed 
rule change to make the Rules effective on a permanent basis. However, 
the process to obtain Commission approval, including publication of the 
proposal for comment in the Federal Register and responding to any 
comments received, will extend beyond the expiration of the current 
pilot on August 31, 2005. Therefore, to maintain operation of the pilot 
pending the approval process of the Rules on a permanent basis, NASD is 
proposing to extend the pilot for 120 days until December 29, 2005, 
unless the Rules are extended or approved on a permanent basis before 
that date.
    The proposed rule change will become effective upon filing, will be 
implemented at the close of business, August 31, 2005, and will expire 
on December 29, 2005, unless the Rules are extended or approved on a 
permanent basis before that date.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that extending the effectiveness of IM-
2210-5 and Rule 2210(c)(3) for 120 days unless the Rules are extended 
or approved on a permanent basis before that date will allow members to 
publish sales material that contains bond fund volatility ratings 
during this interim period in a manner that will protect investors and 
serve the public interest.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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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.

[[Page 53407]]

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

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder \11\ 
because the proposal: (i) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
prior to 30 days after the date of filing or such shorter time as the 
Commission may designate.\12\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ A proposed rule change filed under Rule 19b-4(f)(6) 
normally does not become operative prior to 30 days after the date 
of the filing. However, pursuant to Rule 19b-4(f)(6)(iii), the 
Commission may designate a shorter time if such action is consistent 
with the protection of investors and the public interest.
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    NASD has requested that the Commission waive the requirement that 
the rule change not become operative for 30 days after the date of the 
filing so that NASD can begin implementation of this proposed rule 
change as of the close of business on August 31, 2005, in order to 
prevent the current pilot Rules from lapsing. The Commission believes 
that such waiver is consistent with the protection of investors and the 
public interest because the proposed rule change would prevent the 
current pilot Rules from lapsing while the permanent adoption of the 
Rules is under consideration.
    At any given 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.

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-2005-104 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-104. 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 Room, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of 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 the File Number SR-NASD-2005-104 and should 
be submitted on or before September 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
Jonathan G. Katz,
Secretary.
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-4874 Filed 9-7-05; 8:45 am]
BILLING CODE 8010-01-P