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90-14 Proposed Amendments to Article III, Section 35 of NASD's Rules of Fair Parctice Re: Communications With the Public; Last Voting Date: April 5, 1990
*These are suggested departments only. Others may be appropriate for your firm.
Members are invited to vote on proposed amendments to Article III, Section 35 of the NASD's Rules of Fair Practice that would: (1) subject advertisements and sales literature concerning public direct participation programs to routine spot-checking by the Association, notwithstanding that a spot check may have been conducted by another self-regulatory organization or securities exchange using procedures and time cycles comparable to those used by the Association; (2) adjust the time period when spot-check reviews of members' advertising and sales literature may be conducted, to coordinate with similar reviews conducted by other self-regulatory organizations and securities exchanges; (3) exempt advertising and sales literature concerning direct participation programs from the review requirement of Section 35(c)(3), in which the material was only part of a listing of products and/or services offered by the member; and (4) require conformity of members' public communications with all applicable SEC rules. The text of the proposed Rules amendments follows this notice.
On November 17, 1989, the NASD's Board of Governors approved a resolution calling for a member vote and filing with the Securities and Exchange Commission amendments to Article III, Section 35 of the NASD's Rules of Fair Practice, which governs members' communications with the public.
The rule contains internal approval and recordkeeping requirements, filing requirements, and standards applicable to the content of such communications.
An amendment to Article III, Section 35(c)(3), adopted by the Association on July 1, 1987, requires that advertising and sales literature concerning publicly offered direct participation programs be filed with the NASD for review within 10 days of first use or publication.
The Board of Governors believes that the adoption of the filing requirement has created the necessity for making conforming amendments to three other sections of Article III, Section 35: Section 35(c)(6), Section 35(c)(8), and Section 35(e).
Spot Check - Direct Participation Program Securities
Section 35(c)(6) sets forth the procedures for conducting a spot check of every member's advertising and sales literature. The procedures do not apply to members that have been subjected to a spot check by a registered securities exchange or other self-regulatory organization utilizing comparable procedures, except for material relating to municipal securities and investment company securities, which remain subject to the Association's spot-check procedure regardless of whether there has been a spot-check by an exchange or self-regulatory organization within the preceding calendar year. The Association has sole jurisdiction for regulation of municipal securities advertising and sales literature and, therefore, does not defer to another self-regulatory organization or exchange in the review of municipal communications. Article III, Section 35(c)(l) sets forth a filing requirement for investment company securities advertising and sales literature. Parallel to the direct participation program filing requirement, it states that all investment company advertising and sales literature must be filed with the NASD within 10 days of first use.
Furthermore, there are similar requirements for government securities advertising and sales literature found in Section 8(c) of the Association's Government Securities Rules. Such advertising is required to be filed with the NASD within 10 days of first use, and government securities advertising and sales literature is subject to a periodic spot check by the Association, regardless of the timing of any previous Association review of such material.
Therefore, to be consistent with the spot-check requirements for these other securities products, the Board of Governors believes that Article III, Section 35(c)(6) should be amended to require that advertising and sales literature on behalf of public direct participation programs should be submitted in response to the Association's spot-check request, regardless of whether such material has been spot-checked by an exchange or self-regulatory organization.
Timetable For Spot-Checking
Section 35(c)(6) also states that, except for material related to municipal securities or investment company securities, the spot-check procedure will not be applied to members that have been spot-checked "within the preceding calendar year" by a registered securities exchange or other self-regulatory organization using comparable procedures. When this rule was originally adopted in 1980, the NASD conducted annual spot checks of each member firm. Since then, the volume of filings and complaints has increased to such a degree that the Association cannot effectively spot-check all members within a one-year period, and the cycle has been changed to conduct the spot check biennially. The New York Stock Exchange (NYSE) also conducts a spot check of its members' advertising and sales literature on a two-year cycle.
The current language in the rule means that some NASD members may be required to respond fully to an NASD spot check because they were spot checked by the NYSE beyond the "preceding calendar year," even though the spot check was conducted within the same cycle for both the NYSE and NASD. The Board of Governors believes that this section of the rule should be amended to eliminate the fixed time period in order to insert a flexible time period that would parallel the time frame used by the NYSE. This would create a more efficient spot-check process that would avoid duplicative spot-checking of members.
The NASD has become aware that the NYSE has filed with the SEC a proposed rule change that would eliminate the NYSE spot-check procedure. At such time as this change becomes effective, dual NASD/NYSE members no longer will have this exception available.
Exclusion From Filing
Section 35(c)(8) allows an exclusion from all filing requirements and spot-check procedures for advertising and sales material that refers to investment company securities or options communicated solely in a listing of the member's products or services. Section 35(c)(l) requires the filing of investment company advertising and sales literature, and Section 35(c)(2) requires the filing of all options communications used prior to the delivery of the risk disclosure document. Similarly, government securities communications required to be filed under Section 8(c)(l) or spot checked under Section (8)(c)(A) of the Government Securities Rules are exempted under Section 8(c)(6) from these requirements only if referred to in such a listing.
The Board of Governors believes that Section 35(c)(8) should be amended to allow direct participation program securities to be excluded from the review and spot-check procedures in cases when the information communicated is merely a listing of the member's products or services. The Board of Governors believes that this amendment would fairly include public direct participation programs with the other categories of securities exempted from such review and spot-checking requirements.
Compliance With SEC Rules
Section 35(e) sets forth "Standards Applicable to Investment Company-Related Communications." This section provides for conforming such communications to applicable SEC rules, in addition to the standards set forth in Section 35(d).
The Board of Governors believes that this section should be amended to require that all communications with the public conform to applicable SEC rules. Protection of the public and maintaining public trust in the securities markets is an important priority of the Association. Therefore, the Board believes expanding the scope of Section 35(e) to require that members' communications with the public conform with applicable SEC rules is consistent with the NASD's longstanding policy of ensuring that, in conjunction with making informed investment decisions, the investing public receives accurate and complete information from Association members.
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 April 5, 1990.
Questions concerning this notice may be directed to R. Clark Hooper, Director of Advertising, at (202) 728-8330.
PROPOSED AMENDMENT TO ARTICLE III, RULES OF FAIR PRACTICE
(Note: New language is underlined; deleted language is in brackets.)
Section 35. Communications with the Public
In addition to the provisions of paragraph (d) of this section, members' public communications [concerning investment company securities] shall conform to all applicable rules of the SEC, as in effect at the time the material is used.