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91-80 Request for Comments on Proposed Amendments to Article III, Section 15 of the NASD Rules of Fair Practice Re: Exemption from the Rule for Negative Comment Letters Used in Certain Bulk Exchanges of Money Market Mutual Funds; Last Date For Comments

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EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to Article III, Section 15 of the NASD Rules of Fair Practice. The amendments would exempt certain bulk exchanges of money market mutual funds utilizing negative response letters from the provisions of the rule. The text of the proposed amendments follows this notice.

BACKGROUND

The NASD Board of Governors, in Notice to Members 91-39, June 1991, reminded members that the use of negative response letters to facilitate the exchange of mutual fund shares may violate the provisions of Article III, Section 15 of the NASD Rules of Fair Practice.

Such a violation would occur if a member executed an exchange automatically for a nonreplier to the letter without prior written authority from the shareholder giving the member discretion over the account.

Following the distribution of the notice, the NASD received a number of comments requesting that an exemption from the rule be adopted for the bulk transfer of money market mutual funds using negative response letters in certain situations. Such instances would include mergers and acquisitions, changes of clearing members, and exchanges of money market mutual funds used in sweep accounts where investment performance is not the primary reason for the exchange.

In these situations, it is often necessary to notify hundreds and, sometimes, several thousand money market mutual fund shareowners of an impending exchange. It would be an almost impossible task to contact each nonreplier to a negative response letter and solicit approval of the exchange, as well as cause considerable time delays and added cost in effecting the exchange.

SUMMARY OF PROPOSED AMENDMENT

The NASD is proposing to permit the use of negative response letters in the limited situations outlined above by adopting an exemption from the provisions of Article III, Section 15. Such an exemption would require that certain standards be adopted governing the use of negative response letters.

The NASD is proposing to create an exemption for bulk exchanges of money market mutual funds utilizing negative response letters provided the following conditions are met: (1) that bulk exchanges be limited to mergers and acquisitions of funds, changes of clearing members, and exchanges of funds used in sweep accounts; (2) that the negative response letter includes a tabular comparison of the nature and amount of fees charged by each fund (e.g., management fees, fees under Rule 12(b)-l of the Investment Company Act of 1940, and similar fees); (3) that the negative response letter includes a comparative description of the investment objectives of each fund; and (4) that the negative response feature not be activated until at least 30 days after the date on which the letter was mailed. In addition, the NASD proposes that a prospectus of the fund to be purchased accompany the letter.

REQUEST FOR COMMENTS

The Board of Governors asks members and other interested persons to comment on the proposed amendments to Article III, Section 15 of the NASD Rules of Fair Practice. Comments should be directed to:

Stephen D. Hickman Office of the Secretary National Association of Securities Dealers, Inc. 1735 K Street, NW Washington, DC 20006-1506.

Comments must be received no later than January 15, 1992. Comments received by this date will be considered by the NASD Investment Companies Committee and the Board of Governors. Prior to becoming effective, the amendments must be adopted by the Board of Governors and the membership and then filed with the Securities and Exchange Commission for its approval.

Questions concerning this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202)728-8328.

AMENDMENTS TO ARTICLE III, SECTION 15 OF THE NASD RULES OF FAIR PRACTICE

(Note: New text is underlined.)

Discretionary Accounts

Sec. 15.

Excessive transactions

(a) No member shall effect with or for any customer's account in respect to which such member or his agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.

Authorization and acceptance of account

(b) No member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Section 27 of these rules.

Approval and review of transactions

(c) The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.

Exceptions

(d)(1) This section shall not apply to discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite amount of a specified security shall be executed.
(d)(2) This section shall not apply to bulk ex-changes of money market mutual funds ("funds") utilizing negative response letters provided:
(i) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts.
(ii) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund, (iii) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased, (iv) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.

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