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86-68 Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Relating to Advertising and Sales Literature for Direct Participation Programs
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS NOVEMBER 3, 1986.
NASD members are invited to vote on a proposed amendment to the NASD Rules of Fair Practice that would require advertising and sales literature for publicly offered direct participation programs to be filed with the NASD's Advertising Department. The NASD will review the material for conformance with the guidelines contained in Article III, Section 35 of the Rules of Fair Practice.
A proposed amendment to Article III, Section 35 of the NASD Rules of Fair Practice has been approved by the NASD Board of Governors and now is being submitted for membership approval. Prior to becoming effective, the rule change must also be approved by the Securities and Exchange Commission.
The proposed amendment would require advertising and sales literature concerning publicly offered direct participation programs to be filed with the NASD's Advertising Department. If the literature has been filed with the NASD by the program's sponsor, general partner, underwriter or another member, a second filing would not be required. The text of the proposed rule change is attached.
Article III, Section 35 of the NASD Rules of Fair Practice regulates members' communications with the public. It requires that all such communications be based on principles of fair dealing and good faith and that the communications provide a sound basis for evaluating the facts regarding the securities offered by members.
Material facts and qualifications may not be omitted if, in the context of the material presented, the omission would make the advertising or sales literature misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communications that the member knows or has reason to know contain any untrue statements of material fact or are otherwise false or misleading.
Article III, Section 35 currently requires a member to file all advertisements with the NASD's Advertising Department for review prior to use for one year after becoming a member, commencing with the member's initial advertisement. In addition, an NASD District Business Conduct Committee may, under certain circumstances, require a member to file advertising and sales literature with the Advertising Department at least 10 days prior to use. All members are also subject to routine spot checks of their advertising and sales literature.
The NASD has become aware that certain advertising and sales literature used in connection with public direct participation programs has involved misleading illustrations of past performance, the inclusion of information on projected performance, and the unbalanced presentation of programs by not including a statement of significant risks. The NASD has referred such practices to the appropriate District Business Conduct Committees.
The NASD Direct Participation Programs/Real Estate Committee considered whether specific guidelines should be developed and applied to sales literature and advertising used in connection with public direct participation program offerings but concluded that current guidelines contained in Article III, Section 35 are adequate to regulate the content of member communications with the public. However, the Board of Governors believes that a filing requirement for public direct participation programs' advertising and sales literature is necessary.
The proposed amendment to Article III, Section 35 was published for comment in Notice to Members 85-69 on October 21, 1985. The NASD received 48 comments on the proposed amendment. Of these, 28 commentators were generally in favor of the proposed amendment and 19 were generally opposed.
Those commentators in favor of the proposed amendment generally expressed concern that a substantial amount of the material currently being used contains information of questionable accuracy and that review of such material by the NASD is necessary. Commentators opposed to the amendment stated that the current procedures in place under Article III, Section 35 are adequate to ensure that advertising and sales literature used by members does not contain exaggerated or misleading statements. These commentators indicated that the current filing requirement of one year for new members, along with routine spot checks of advertising and sales literature, is adequate to educate members and protect the public.
Further, these commentators pointed out that examples of inappropriate or misleading advertising are readily identifiable, without burdening all members with the requirement to file on a regular basis. Newspaper and magazine advertisements can be monitored by the NASD without imposing such a filing requirement on members.
The Board, however, concluded that the filing requirement was appropriate and in the public interest. The Board also approved an amendment to the provision to recommend pre-use filing of direct participation program materials.
The committee discussed the issue of material marked "broker-dealer use only," and concluded that, if such material is provided to a member's customers, the material is considered to be sales literature and subject to the filing requirement.
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The Board of Governors believes that the amendment to Article III, Section 35 of the NASD Rules of Fair Practice is necessary and appropriate and recommends that members vote their approval. Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than November 3, 1986.
Questions concerning this notice may be directed to either R. Clark Hooper, NASD Advertising Department, at (202) 728-8330, or T. Grant Callery, NASD Office of the General Counsel, at (202) 728-8285.
PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE
(New language is underscored.)
Section 35. Communications with the Public*
* Current subsections (3) through (7) will be renumbered as (4) through (8), respectively.