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87-40 Request for Comments on a Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Concerning Testimonials
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENT: JULY 22, 1987.
The NASD requests comments on a proposed amendment to Article III, Section 35(d)(2)(D) relating to testimonials used in members' communications with the public. The amendment would conform the NASD rule to that of the New York Stock Exchange.
The text of the proposed amendment is attached.
Article III, Section 35 of the NASD Rules of Fair Practice relates to members' communications with the public and contains specific standards governing testimonials used in such communications. When the rule was originally adopted in 1980, these standards were patterned after those of the New York Stock Exchange for purposes of consistency and reduction of unnecessary regulatory burdens on dual NASD/Exchange members. The current NASD rule applies to testimonial material concerning any advice, analysis, report, or other investment or related service rendered by the member and requires that members make clear that such experience is not necessarily indicative of future performance or of results obtained by others. Testimonials also must disclose compensation paid to the maker and if they imply a specialized opinion, the qualifications of the maker of the testimonial must be stipulated.
It was brought to the attention of the NASD's Advertising Department that the New York Stock Exchange had amended its testimonial rule and the question of a conforming amendment was presented to the National Business Conduct Committee in March 1987. At that time, the NBCC referred the issue for further study and subsequent to a report submitted to it at its May meeting, the NBCC recommended that the NASD amend its rule to conform to the NYSE rule.
The proposed amendment would conform the NASD rule to New York Stock Exchange Rule 472.40(8). The NYSE rule differs from the current NASD rule in two respects. First, and of the greatest significance, the NYSE's rule applies only to testimonials concerning the quality of a firm's investment advice. Secondly, the NYSE rule only requires disclosure of compensation if it is more than a nominal amount. Limiting testimonial treatment to communications that relate to the quality of investment advice is consistent with other provisions of the rule that focus upon disclosing that future performance may not be consistent with the experience of the individual giving the testimonial. The "nominal sum" exclusion allows payment to announcers or non-customer actors without requiring disclosure of such payment.
The NASD Board of Governors believes that this amendment will eliminate inconsistent regulation in the securities industry and that it is appropriate to limit the scope of testimonial amendments to communications relating to the quality of investment advice.
* * * * *
The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506.
Comments must be received no later than July 22, 1987. Comments received by this date will be considered by the NASD National Business Conduct Committee and the NASD Board of Governors. If approved by the Board, the amendment will be submitted to the membership for a vote. If approved by the membership, the amendment must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice may be directed to Ms. R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.
Frank J. Wilson
Executive Vice President Legal and Compliance
PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE*
Communications With the Public
In testimonials concerning the quality of a firm's investment advice, the following points must be clearly stated in the communication:
New language is underlined; deleted language is bracketed.