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90-27 Proposed Amendment to Article III, Section 26 of the NASD Rules of Fair Practice Re: Disclosure of Deferred Sales Charges on Confirmations of the Sale of Investment Company Shares; Last Voting Date: June 5, 1990


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NASD members are invited to vote on proposed new subsection (n) of Article III, Section 26 of the NASD Rules of Fair Practice that, if adopted, would require disclosure on confirmations of share purchases when an investment company imposes a deferred sales charge on the redemption of shares.


In Notice to Members 89-77 (December 1989), the NASD distributed for comment a proposed amendment to Article III, Section 12 of the NASD Rules of Fair Practice that would require disclosure on confirmations when investment company shares may be subject to a deferred sales charge on redemption. The NASD received 23 comment letters.

After reviewing the comments, the Investment Companies Committee recommended to the Board of Governors the following changes to the original proposal:

The proposal would have involved an amendment to Section 12 of the NASD Rules of Fair Practice, which is a confirmation rule of general application to the sale of securities by NASD members. A number of commenters suggested that, since most separate accounts of insurance companies issuing variable contracts (variable annuities and variable life insurance) are registered with the Securities and Exchange Commission under the provisions of the Investment Company Act of 1940, the NASD should clarify that the proposed amendment to Section 12 was not intended to apply to variable contracts.

The committee recommended that, to avoid uncertainty about the scope of the new requirement, the proposal should be made a part of Article III, Section 26 of the NASD Rules of Fair Practice rather than an amendment to Section 12. Section 26 is the investment company rule. It specifically exempts variable contracts from its provisions.

The committee also recommended that the proposed disclosure legend should be required to be placed on the front of a confirmation to ensure that the disclosure is highly visible to a prospective investor.

The Board of Governors agreed to both of these recommendations.

Although most of the remaining commenters were in favor of the proposal, some raised the following objections:

Two believe that current disclosure requirements in prospectuses and sales literature are adequate, while some thought that more prominent disclosure of a deferred sales charge should be made in prospectuses. Others believe that the proper place for disclosure is in the prospectus and not in a confirmation. Some commenters asked for more extensive disclosure language and requested that members be permitted to draft their own legend.

The Board concedes that the proper place for most disclosures is the prospectus, but it regards the current proposal as an additional safeguard so that investors who have not read a prospectus will be alerted to the presence of a deferred sales charge. The Board does not agree that the proposed disclosure language should be expanded or that members should be permitted to develop their own disclosure legend. Space on confirmations is limited and, in the Board's view, the proposed legend is clear, concise, and will be readily understood by investors. The Board also considers that, in a disclosure of this type, there is great merit in uniformity.

The Board of Governors believes the proposal 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. Ballots must be postmarked no later than June 5, 1990.

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


(n) In addition to the requirements for disclosure on written confirmations of transactions contained in Section 12 of the NASD Rules of Fair Practice, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, such written confirmation shall also include the following legend: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." The legend shall appear on the front of a confirmation and in, at least, 8-point type.

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