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93-1 SEC Approval of Amendment to Article III, Section 15 of the NASD® Rules of Fair Practice; Effective December 3, 1992

SUGGESTED ROUTING

Senior Management
Legal & Compliance
Mutual Fund
Operations

Executive Summary

The Securities and Exchange Commission (SEC) has approved an amendment to Article III, Section 15 of the NASD® Rules of Fair Practice. The amendment permits NASD members to use negative-response letters in bulk exchanges of money market mutual funds, provided the bulk exchanges are effected at net asset value and are limited to situations involving mergers and acquisitions of money market mutual funds, a change of clearing members, or an exchange of money market mutual funds used in sweep accounts. The amendment requires that the negative-response letter contain a tabular comparison of the nature and amount of fees charged by each fund as well as a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased. In addition, members cannot take action based on the negative-response letter until at least 30 days after the date the letter was mailed. The text of the amendment follows this Notice.

Background

To protect against abuse of discretion and overreaching, Article III, Section 15 of the NASD Rules of Fair Practice requires written authority from a customer before a member or a registered representative can exercise discretion in a customer's account. In Notice to Members 91-39 (June 1991), the NASD reminded members that the use of negative-response letters may violate the provisions of Article III, Section 15. Negative-response letters permit the automatic execution of a recommendation, contained in such letters, to exchange mutual funds if a customer does not respond to the letter by a specific date. The violation would occur if a member automatically executed an exchange without prior written authority from the customer permitting the member to exercise discretion in the account.

Following the distribution of Notice to Members 91-39, the NASD received requests from members to consider amending Article III, Section 15 to exempt the use of negative-response letters in bulk exchanges of money market mutual funds in certain situations involving mergers and acquisitions of such funds, a change of clearing members, and the exchange of money market mutual funds used in sweep accounts where investment performance is not the primary reason for the exchange.

The NASD recognized that it is often necessary to notify hundreds and, sometimes, several thousand money market mutual fund share-owners of an impending fund exchange. It may be an extremely difficult, if not impossible, administrative task to contact each non-replier and solicit approval of the fund exchange. At best, contacting individuals for approval results in considerable delays and added cost. The NASD determined that, by eliminating an obstacle to the efficient and timely execution of such bulk exchanges, where customers are at little or no risk, customers and NASD members would benefit.

Description of Amendment

Article III, Section 15 has been amended to permit an exemption for the use of negative-response letters in bulk exchanges of money market mutual funds provided the bulk exchanges are effected at net asset value and are limited to three situations. The first situation involves the use of a negative-response letter to effect the bulk exchange of money market mutual funds resulting from the merger or acquisition of a currently used money market fund. The second situation involves the use of a negative-response letter to effect the bulk exchange of money market mutual funds necessitated by the member's change of its respective clearing member and the money market mutual fund that such clearing member utilizes. The third situation involves the use of a negative-response letter to effect the bulk exchange of money market mutual funds to enable a member to utilize a different fund from that which is being used currently as the investment vehicle for a sweep account. In such sweep accounts, a customer's credit balances are automatically invested in the sweep account for the benefit of the customer.

Four requirements apply to the availability of the negative-response letter exemption. The negative-response letter must include a tabular comparison of the nature and amount of fees charged by each fund. The negative-response letter must also include a comparative description of the investment objective of each fund.

A prospectus of the fund to be purchased must accompany the negative-response letter. The negative-response feature also cannot be activated until at least 30 days after the date the negative-response letter was mailed.

Effective Date

The amendment was approved by the SEC on December 3, 1992 and was immediately effective. Questions concerning this Notice may be directed to R. Clark Hooper at (202) 728-8329.

Amendment to Article III, Section 15 to the NASD Rules of Fair Practice

(Note: New language is underlined.)

Discretionary Accounts

Sec. 15

* * * * *

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 exchanges at net asset value 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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