FINRA Manual: Contents
|View Whole Section||Text only||Print Manager||Link|
99-79 NASD Regulation Requests Comment on Proposed Amendments to Provisions Governing Communications with the Public
ACTION REQUESTED BY OCTOBER 29, 1999
Comment Period Expires October 29, 1999
NASD Regulation Requests Comment on Proposed Amendments to Provisions Governing Communications with the Public; Comment Period Expires October 29, 1999
Legal & Compliance
Communications with the Public
NASD Rule 2210
The Suggested Routing function is meant to aid the reader of this document. Each NASD member firm should consider the appropriate distribution in the context of its own organizational structure.
NASD Regulation, Inc. (NASD Regulation®) requests comment from members and other interested parties on proposed amendments to modernize, simplify, and clarify the rules governing member communications with the public. One of the most significant aspects of the proposal is to exempt all member firm communications to institutional investors from pre-use approval and NASD Regulation filing requirements. Form letters and group e-mail to existing customers and fewer than 25 prospective retail customers also would be eligible for this exemption. Additionally, the proposal would exempt article reprints and certain press releases regarding investment companies from the filing requirements and simplify the standards applicable to member communications.
Included with this Notice are Attachment A (the text of the proposed amendments) and Attachment B (specific questions that NASDR requests comments on from members and interested parties).
Request For Comment
NASD Regulation encourages members and other interested parties to comment on all aspects of the proposed rules. Comments must be received by October 29, 1999. For your convenience we have provided a checklist (see Attachment B) so that in a minimum amount of time you can provide NASD Regulation with your general comments.
Note: Each Notice to Members may contain different and more specific questions we encourage you to consider. While information concerning how many members are generally for or against a proposal is important to the Board, in considering whether to proceed with or modify a proposal, the Board will also heavily rely upon information and data concerning the substantive merits of the proposal. Therefore, even when using the checklist, we encourage you to provide any specific comments you can.
Members and interested parties can submit their comments using the following methods:
If you decide to send comments using both the checklist and one of the other methods listed above, please let us know. The checklist and/or written comments should be mailed to:
Joan C. Conley
Office of the Corporate Secretary
NASD Regulation, Inc.
1735 K Street, NW
Washington, DC 20006-1500
You may also e-mail comments to: email@example.com
Before a rule change becomes effective, the NASD Regulation Board of Directors must adopt, and the Securities and Exchange Commission (SEC) must approve, any rule change. The National Association of Securities Dealers, Inc. (NASD®) Board of Governors also may review the rule change.
As noted, written comments should be submitted to Joan Conley. Questions concerning this Notice may be directed to Thomas M. Selman, Vice President, Investment Companies/Corporate Financing, NASD Regulation, at (240) 386-4533; Thomas A. Pappas, Director, Advertising/Investment Companies Regulation, NASD Regulation, at (202) 728-8453; Joseph P. Savage, Counsel, Advertising/Investment Companies Regulation, NASD Regulation, at (202) 728-8233; or Laura Gansler, Assistant General Counsel, NASD Regulation, at (202) 728-8275.
NASD Regulation is proposing the most comprehensive set of amendments to the NASD advertising rules in recent history. These amendments are intended to enhance the effectiveness with which the advertising rules protect investors. The proposed amendments would modernize the advertising rules so that they reflect technological developments and appropriate business activities. The amendments would dramatically simplify many of the provisions of the advertising rules, and would provide greater clarity and conciseness to those rules.
NASD Regulation has consulted with five of its member committees and its National Adjudicatory Council (NAC) to develop these proposed amendments. Additionally, in October 1998, NASD Regulation issued Notice to Members (NtM) 98-81, which sought comment on whether any NASD rules or By-Laws should be repealed as obsolete, should be modernized in light of technological or industry developments, or should distinguish between retail and institutional customers in their application. The proposed amendments reflect many of the comments received in response to NtM 98-81.
Members should note that the existing NASD advertising rules and the interpretations of these rules by NASD Regulation staff will continue to govern members' communications with the public until NASD Regulation's Board of Directors and the SEC approve the proposed amendments.
Additionally, the proposal does not reflect proposed amendments to Rule 2210 and its related Interpretive Materials that are currently pending at the SEC, including those concerning independently prepared research reports, related performance information, and bond fund volatility ratings. If the SEC approves any of these proposed amendments, we anticipate revising the proposal to incorporate such amendments.
As discussed below, the proposal would amend the definition of "correspondence," and would create new definitions of "institutional sales material," "institutional investor," "existing retail customer," and "prospective retail customer." The proposal would exclude from the definitions of "advertisement" and "sales literature" institutional sales material, which is discussed more fully below. The proposal also would amend the definition of "sales literature" to include expressly press releases concerning a member's product or service. This amendment would codify the existing interpretation of this definition by NASD Regulation's Advertising/Investment Companies Regulation Department (the Department). As discussed below, the proposal would exempt certain press releases regarding investment companies from the filing requirements of Rule 2210.
Approval And Recordkeeping
The proposal would reword, but otherwise maintain, the current provisions requiring registered principals to approve, initial, and date each advertisement or item of sales literature before the earlier of its first use or filing with the Department, and requiring that a separate file of sales material be maintained for a three-year period from the date of last use.1 The proposal would maintain the current provision allowing supervising analysts of New York Stock Exchange members to approve corporate debt and equity security research reports. As discussed below, the proposal also would exempt institutional sales material, certain retail form letters, and group e-mail from the pre-use approval requirements.
A commenter to NtM 98-81 recommended that NASD Regulation revise Rule 2210(b) to indicate that a principal's approval of sales material may be evidenced by an electronic as well as a written signature.2 NASD Regulation has already issued an interpretive letter stating that the principal approval requirements of NASD Conduct Rules 3010 and 3110 (which require the signature of the principal that accepts a customer account opening) may be satisfied through the use of electronic signatures, provided certain safeguards are in place.3
Although the letter does not cite the principal approval requirements under Rule 2210, the principles articulated in that letter should apply to Rule 2210(b) as well. Consequently, a principal's approval of sales material may be evidenced by an electronic as well as a written signature.
Filing Requirements And Review Procedures
The proposal would significantly revise the pre-use approval and the filing requirements applicable to certain types of member communications. The proposal would create a separate category of advertisements and sales literature distributed solely to institutional investors, which would be exempted from Rule 2210's pre-use approval and filing requirements. The proposal also would exempt from the pre-use approval and filing requirements all form letters and group e-mail sent to existing retail customers and to fewer than 25 prospective retail customers. Finally, the proposal would exempt from only the filing requirements article reprints used as sales material and press releases regarding investment companies that are made available only to members of the media.
Institutional Sales Material
Today Rule 2210 does not expressly distinguish between retail and institutional sales material. Moreover, the rule currently defines "sales literature" to include any "form letter," which the NASD has interpreted to mean written communications, including e-mail messages, sent to at least two persons. Consequently, any communication sent to two or more institutional investors is deemed "sales literature," must comply with the content standards of Rule 2210, must be pre-approved by a registered principal, and may have to be filed with the Department, depending upon its content.
A number of commenters to NtM 98-81 urged that communications sent only to institutional investors should not be subject to all of the specific content, pre-use approval, and filing standards of Rule 2210 to which retail communications are subject.4 NASD Regulation agrees with this conclusion. The proposed amendments would eliminate the pre-use approval and filing requirements applicable to sales material sent only to institutional investors ("Institutional Sales Material"). Sales material that is distributed to beneficiaries of institutional accounts, such as 401(k) plan participants, would be treated as retail sales material. NASD Regulation believes that plan participants and other beneficiaries of institutional accounts should receive the same investor protections as other retail investors. Moreover, Institutional Sales Material would continue to be subject to Rule 2210's content and recordkeeping requirements.
The proposal would define "institutional investor" as:
- any natural person or entity described in Rule 3110(c)(4) (regardless of whether they have an account with an NASD member); and
- any NASD member or associated person of a member.
Rule 3110(c)(4) defines the term "institutional account" as the account of:
- a bank, savings and loan, insurance company, or registered investment company;
- an investment adviser registered with either the SEC or any state; or
- any other entity or individual with total assets of at least $50 million.
Form Letters And Group E-Mail
The use of group e-mail has become commonplace in many firms. For example, registered representatives may provide customers with information concerning their accounts, changes in market conditions, or current economic conditions. Given the volume of form letters and group e-mail that members and their associated persons may send and the speed with which this material can be dispatched to customers, a pre-use approval requirement may be less effective than standards that are more specifically tailored to these forms of communication.
NASD Regulation believes that Rule 3010(d), which governs the approval and review of correspondence, provides a more effective means of supervising form letters and group e-mail. Rule 3010(d) requires members to adopt written procedures for the review of correspondence by registered principals. Any member that does not pre-approve all correspondence must educate and train associated persons as to NASD rules governing communications with the public and the firm's procedures, must document this training, and must monitor adherence to these procedures. Members must retain all correspondence of registered representatives related to the member's investment banking or securities business.
Several commenters to NtM 98-81 recommended that Rule 2210 be amended to clarify that only those letters that meet the definition of "form letter" in Rule 24b-1 under the Investment Company Act of 1940 (i.e., a sales letter sent to 25 or more persons within a 90-day period) are subject to the filing requirements.5 Others have urged NASD Regulation to look to content rather than the number of recipients in determining whether a communication is subject to the filing requirements.6
NASD Regulation is concerned that an exemption based solely on the number of recipients may not address the practical issues related to the supervision of group e-mail and form letters. It would seem that a content-based approach would be difficult to implement due to the inherently subjective nature of determining which communications are intended to solicit products and services.
Accordingly, NASD Regulation has proposed an alternative approach, which would subject form letters and group e-mail sent to existing retail customers and fewer than 25 prospective retail customers ("Group Correspondence") to the supervisory and review requirements of Rule 3010(d) applicable to correspondence, and would exempt Group Correspondence from the pre-use approval and filing requirements of Rule 2210. "Existing retail customer" would be defined as any person, other than an institutional investor, who has opened an account with a member. "Prospective retail customer" would be defined as any person, other than an institutional investor, who has not opened an account with the member.
This approach would continue to require filing and pre-use approval for sales material that raises the greatest potential for abuse - material sent to large numbers of prospective retail investors. At the same time, the proposal would subject Group Correspondence to the supervisory requirements of Rule 3010(d) and the content and recordkeeping requirements of Rule 2210.
In connection with the exemption from the pre-use approval and filing requirements for Group Correspondence, the definition of "correspondence" also would be revised. Currently, "correspondence" means any written or electronic communication prepared for delivery to a single current or prospective customer, and not for dissemination to multiple customers or the general public. As proposed, "correspondence" would simply mean any written or electronic communication that does not meet the definition of "advertisement" or "sales literature."
Article Reprints And Press Releases
Rule 2210 defines "sales literature" to include "reprints or excerpts of any other . . . sales literature or published article." Article reprints thus may have to be filed with the Department, depending upon their content (such as whether they pertain to mutual funds or variable products). NASD Regulation has received comments in the past, including those made in response to NtM 98-81,7 that third-party article reprints that are used as sales literature should not be subject to the filing requirements of Rule 2210. Commenters have argued that reprints often are available to the public through large-circulation periodicals published by firms that are not NASD members. Commenters have thus argued that it makes little sense to require members to file reprints with the Department, especially when members have no control over the content of these articles.
In response to these concerns, the proposal would eliminate the need to file any article reprint that has not been materially altered by the member. Members still would have to ensure that article reprints comply with the content standards of Rule 2210. Thus, members could not distribute an article reprint that contains false or misleading statements. Moreover, article reprints would continue to be subject to the pre-use approval and recordkeeping requirements of Rule 2210.
Rule 2210 also defines "sales literature" to include "any written or electronic communication distributed or made generally available to customers or the public," which the Department historically has interpreted to include press releases.8 Commenters to NtM 98-81 have argued that press releases should be excluded from the filing requirements on the ground that media outlets typically excerpt only certain portions of press releases for their stories, and members have no editorial control over the content of the article that will appear.9 In response to this concern, the proposal would exclude from the filing requirements press releases concerning investment companies, provided that such releases are made available only to members of the media. These press releases would continue to be subject to the content, pre-use approval, and recordkeeping requirements of Rule 2210.
Several commenters to NtM 98-81 have argued that investment company annual and semi-annual reports that are used as sales material also should be exempt from the filing requirements.10 These commenters note that shareholder reports are already subject to specific content requirements under SEC rules and are filed with the SEC, and argue that these requirements should address any investor protection concerns.
Members are not required to file shareholder reports with NASD Regulation if they are only sent to current fund shareholders. However, if a member uses a shareholder report as sales material with prospective investors, the member must file the management's discussion of fund performance (MDFP) portion of the report (as well as any supplemental sales material attached to or distributed with the report) with the Department. The Department is concerned that members frequently supplement the MDFP with marketing material that goes far beyond the SEC regulatory requirements for shareholder reports. Accordingly, NASD Regulation does not propose at this time to exempt mutual fund shareholder reports. However, interested parties are encouraged to comment on this issue.
Television And Video Advertisements
The proposal would require members that have filed a draft version or "story board" of a television or video advertisement pursuant to a filing requirement also to file the final filmed version within 10 business days of first use or broadcast. This rule change would codify an existing Department policy regarding television and video sales material.
Electronic Filing Of Sales Material
NASD Regulation received a number of recommendations regarding ways to allow members to file sales material and receive Department comments electronically.11 NASD Regulation agrees with these commenters that electronic filing may improve the speed and efficiency of the filing and review process over the current paper-based system. Due to possible regulatory and technological constraints, however, NASD Regulation is not prepared at this time to allow electronic filing. NASD Regulation is examining the means to allow electronic filing and looks forward to working with its committees and members to determine whether electronic filing would be feasible.
Other Filing Issues
One commenter to NtM 98-81 requested that NASD Regulation eliminate the requirement that members file a copy of the ranking or comparison used in sales material that contains rankings. This comment appears to assume that the filing is pro forma because the ranking information is reflected in the sales material itself, or that the ranking information is readily available to NASD Regulation staff. In fact, it is not unusual for the Department to comment on sales material that presents a ranking in a manner inconsistent with the backup ranking information. Additionally, many sales material items contain rankings that are not readily available. Because the Department staff relies on the backup filings when reviewing sales material that contains rankings, elimination of this requirement could significantly delay completion of the staff's review. Accordingly, NASD Regulation does not propose to eliminate the backup filing requirement for sales material that contains rankings. The public is invited to comment further on this issue, however.
Another commenter recommended exempting from the filing requirements generic mutual fund advertisements that comply with Rule 135a under the Securities Act of 1933.12 Members rarely file generic advertisements. To the extent the Department has received generic advertisements, however, it has found that members sometimes misunderstand the content requirements of Rule 135a, and sometimes misclassify advertising that falls under other rules as generic advertisements. We are concerned that an exemption for generic advertisements could lead some members not to file investment company sales material that should be filed due to their misunderstanding of Rule 135a. Accordingly, NASD Regulation does not propose to exempt generic fund advertisements. Nevertheless, we invite further public comment on this issue.
Standards Applicable To Member Communications
The proposal would substantially shorten and simplify the standards applicable to communications with the public that are contained in Rule 2210(d). The proposal would essentially eliminate the distinction between general and specific standards applicable to communications with the public, and would rewrite many of the standards in "plain English."
The proposal would relocate certain standards from Rule 2210(d) to a new Interpretive Material 2210-1, Guidelines to Ensure that Communications Are Not Misleading. New proposed IM-2210-1 would clarify that members have the primary responsibility to ensure that their communications with the public are fair, balanced, and not misleading, including determining what disclosures are necessary to meet this standard. IM-2210-1 also would note that, while member communications must comply with these guidelines, they do not represent an exclusive list of considerations that a member must make in determining whether a communication complies with all applicable standards.
IM-2210-1 would not contain certain of the specific standards currently in Rule 2210. Partially in response to comments received on NtM 98-81,13 the proposal would eliminate the current specific standards regarding offers of free service, claims for research facilities, hedge clauses, recruiting advertising, and periodic investment plans, for the following reasons.
First, to the extent that these provisions prohibit statements that are misleading, unbalanced, or inaccurate regarding particular types of communications, the rule already prohibits the use of such statements.
Second, certain required disclosures, such as those currently applicable to any advertisement or sales literature that discusses periodic investment plans, may not be necessary depending upon the context.
The proposal also would delete current Rule 2210(d)(2)(J), regarding references to regulatory organizations, for similar reasons. However, the proposal would relocate the prohibition on communications that imply NASD or regulatory agency endorsement or approval of securities to Interpretive Material 2210-4 (Limitations on the Use of Association's Name).
The proposal would streamline and clarify the current provisions in Rule 2210(d)(2)(B) regarding use of recommendations in sales material, including research reports. The proposal also would move these provisions to IM-2210-1(6).
The proposal would clarify that a member making a recommendation in sales material must disclose if the member or any officer, director, or the associated person making the recommendation has any financial interest in the recommended security or any related security. Further, the member would be required to disclose the nature of such financial interest, including whether the financial interest consists of any options or warrants on the recommended security.
The proposal would continue to require any member to disclose, if applicable, that the member usually makes a market in the recommended security or any related security of the issuer. Additionally, the proposal would continue to require the member to disclose, if applicable, that the member was manager or comanager of a public offering of any securities of the recommended issuer within the last 12 months. The proposal would shorten the underwriting look-back period contained in the current rule from three years to 12 months to better reflect current underwriting practices.
The proposal also would require the recommendation to disclose the price at the time the recommendation was made and the date of the recommendation. When presenting past recommendations in sales material, the proposal would require disclosure of all of the member's recommendations for similar securities and time periods.
One commenter requested that NASD Regulation rescind its policy announced in NtM 98-107 regarding the obligations of members to portray mutual fund fees and expenses in a balanced manner.14 That Notice addressed several concerns with the presentation of mutual fund fees and expenses, including the need to ensure that a discussion of fees that are not charged is balanced with a discussion of fees and expenses that are charged. Since publication of NtM 98-107, NASD Regulation has detected a marked improvement in the quality of this disclosure. Consequently, NASD Regulation reaffirms its position in NtM 98-107.
Use And Disclosure Of A Member's Name
The proposal would dramatically simplify the provisions concerning disclosure of member names. Every member communication that promotes a product or service would have to prominently disclose the member's name, although a member could disclose a fictional name by which the member is commonly recognized or that is required in any state in addition to the member's name. The proposal also would require disclosure of any relationship between the member and any non-member or individual who is named.
To prevent confusion, communications that include names other than the member name would be required to describe which products or services are being offered by the member. Members would not be required to disclose their names in "blind" recruiting advertisements (employment advertisements that do not identify the potential employer).
Variable Products Communications
The proposal would not amend Interpretive Material 2210-2, Communications with the Public About Variable Life Insurance and Variable Annuities. NASD Regulation believes it would be premature to amend these provisions before the SEC takes final action on its proposed Form N-6, the registration form for insurance company separate accounts that are registered as unit investment trusts and that offer variable life insurance policies.15
The proposal would make several changes to the Ranking Guidelines contained in Interpretive Material 2210-3.
One commenter requested that NASD Regulation amend the Ranking Guidelines to allow sales material to include rankings of entire fund families, in addition to rankings of individual funds.19 NASD Regulation is concerned that fund family rankings would confuse or even mislead investors. Accordingly, NASD Regulation does not propose to amend the Ranking Guidelines in this manner. Nevertheless, NASD Regulation solicits comment on whether the Ranking Guidelines should permit sales material to include rankings of entire fund families.
Limitations On Use Of The Association's Name
The proposal would simplify and shorten the requirements in Interpretive Material 2210-4 concerning the use of the NASD's name. The proposal would permit a member to use the NASD's name in any public communication, so long as it complies with the requirements of Rule 2210 and does not imply that the NASD or any other regulatory authority endorses or guarantees the member's business practices, selling methods, or securities offered. The provisions of IM-2210-4 regarding use of the NASD's name in an over-thecounter transaction confirmation and certification of membership would generally remain the same. The proposal would delete paragraph (c), which prohibits the fraudulent or misleading use of the NASD's name, and paragraph (d), which deems a violation of IM-2210-4 to be a violation of NASD Rule 2110. NASD Regulation believes that these paragraphs simply repeat standards that already exist in Rules 2110 and 2210.
Communications About Collateralized Mortgage Obligations
The proposal would rewrite Interpretive Material 2210-1 (the CMO Guidelines), which governs communications about collateralized mortgage obligations (CMOs), and renumber it as IM-2210-6. The current CMO Guidelines may give the impression that different standards apply to educational material, advertisements, and "communications." The proposal attempts to simplify, shorten, and reorganize the CMO Guidelines to provide a more straightforward and uniform list of disclosure requirements for all CMO communications.
The proposal would reorganize the CMO Guidelines by expanding the "General Considerations" section of existing IM-2210-1 to incorporate all of the requirements generally applicable to CMO communications. The proposal would separate out requirements concerning specific products and CMO educational material.
The CMO Guidelines require all member communications to describe CMOs as "collateralized mortgage obligations" and prohibit the use of "proprietary names." This prohibition was designed to prevent the use of names that mimic government agency nicknames (e.g., Freddie Mac, Ginnie Mae). Nevertheless, the term "proprietary" may be confusing. The proposal would replace these provisions with a general requirement that the name of the product include the term "Collateralized Mortgage Obligation."
The CMO Guidelines require members to accurately depict CMO guarantees, and state that in most cases it would be misleading to use the term "government guaranteed." They also state that private-issue CMO advertisements should not refer to guarantees or backing, but may disclose the rating.
NASD Regulation believes that the more specific requirements concerning use of the term "government guaranteed" and private-issue CMOs already are covered by the general requirement that guarantees be accurately depicted. Moreover, the language used for these specific issues is admonishing rather than compulsory. For these reasons, the proposal would eliminate these specific standards in favor of the general requirement that guarantees be accurately depicted. Members could continue to present ratings in their CMO communications, provided use of the rating is not otherwise misleading.
The proposal would clarify that educational material must be offered before a CMO sale. The proposal also would also reorganize this portion of the CMO Guidelines to make it clearer.
The current CMO Guidelines provide a set of general requirements concerning print advertisements. The proposal would eliminate this section because it is redundant of other provisions of the new IM and the other advertising rules. Of course, print advertisements would still be permitted, subject to the advertising rules and IM-2210-6.
The proposal would eliminate the provisions regarding television advertisement story boards and non-material updating of previously filed radio or television CMO advertising, since Rule 2210 as amended would cover these areas. The proposal also would significantly reduce the number of required disclosures for radio and television CMO advertisements.
The proposal would move the current "Standardized CMO Advertisement" section into a new section entitled "Specific CMO Communications with the Public." The new CMO Guidelines would clarify that any communication discussing a specific CMO must provide a standardized presentation of anticipated yield and other disclosures. The proposal would revise the standardized sample communication to reflect interest rates that are more common today (7.5 percent rather than 8.5 percent) and to update the maturity date.
One commenter to NtM 98-81 recommended that NASD Regulation exempt communications to institutional investors regarding CMOs from the CMO Guidelines, on the grounds that many of the Guidelines' required disclosures assume a retail investor's level of knowledge.20 NASD Regulation solicits comment on whether it should exempt institutional sales material regarding CMOs from the CMO Guidelines.
Text Of Proposed Amendments To Rule 2210 And Related Interpretive Materials
(Note: Rule 2210 and Interpretive Materials 2210-1, 2210-3, and 2210-4 are deleted in their entirety and the following new language is substituted in their place.)
2200. MEMBER COMMUNICATIONS
2210. Communications with the Public
The file must include the name of each person who prepared and approved each advertisement and item of sales literature or institutional sales material and the date that approval was given.
Cross Reference - NASD Conduct Rule 3010 (Supervision) and Rule 3110 (Books and Records)
Any violation by a member of any rule of the SEC, the Securities Investor Protection Corporation or the Municipal Securities Rulemaking Board applicable to member communications with the public will be deemed a violation of this Rule.
Cross Reference — SEC Rules Concerning Investment Company Sales Literature and Advertising (SEC Rules and Regulation T Tab)
Cross Reference - Conduct Rule 3010(g)(2) (Concerning telephone directory line listings, business cards and letterhead)
IM-2210-1. Guidelines to Ensure That Communications Are Not Misleading
Every member is responsible for determining whether any communication with the public, including material that has been filed with the Department, complies with all applicable standards, including the requirement that the communication not be misleading. In order to meet this responsibility, member communications with the public must conform with the following guidelines. These guidelines do not represent an exclusive list of considerations that a member must make in determining whether a communication with the public complies with all applicable standards.
IM-2210-2. Communications with the Public About Variable Life Insurance and Variable Annuities
IM-2210-3. Use of Rankings in Investment Company Advertisements and Sales Literature
For purposes of the following guidelines, the term "Ranking Entity" refers to any entity that provides general information about investment companies to the public, that is independent of the investment company and its affiliates, and whose services are not procured by the investment company or any of its affiliates to assign the investment company a ranking.
Members may not use investment company rankings in an advertisement or sales literature other than rankings developed and produced by Ranking Entities and conforming to the following requirements.
A headline or other prominent statement may not state or imply that an investment company is the best performer in a category unless it is actually ranked first in the category.
IM-2210-4. Limitations on Use of Association's Name
Upon request to the Association, a member will be entitled to receive an appropriate certification of membership, which may be displayed in the principal office or a registered branch office of the member. The certification will remain the property of the Association and must be returned by the member upon request of the NASD Board or the Chief Executive Officer of the Association.
IM-2210-5. Presentation of Mutual Fund Related Performance Information
IM-2210-6 Communications with the Public About Collateralized Mortgage Obligations (CMOs)
For purposes of the following guidelines, the term "collateralized mortgage obligation" (CMO) refers to a multi-class debt instrument backed by a pool of mortgage passthrough securities or mortgage loans, including real estate mortgage investment conduits (REMICs) as defined in the Tax Reform Act of 1986.
All communications with the public concerning CMOs:
In addition to the standards set forth above, communications that promote a specific security or contain yield information must conform to the standards set forth below. An example of a compliant communication appears at the end of this section.
Title - Collateralized Mortgage Obligations
Anticipated Yield/Average Life
Specific Tranche - Number & Class
Final Maturity Date
Section 2 Disclosure Statement:
"The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions."
Product Features (Optional):
Income Payment Structure
Generic Description of Tranche (e.g., PAC, Companion)
Yield to Maturity of CMOs Offered at Par
"The following is an advertisement for Collateralized Mortgage Obligations. Contact your representative for information on CMOs and how they react to different market conditions."
"The yield and average life reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life."
7.75% Anticipated Yield to 22-Year Average Life FNMA 9532X, Final Maturity
Collateral 100% FNMA 7.50%
The yield and average life shown above reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions.
$5,000 Minimum Income Paid Monthly Implied Rating/Volatility Rating Principal and Interest Payments Backed by FNMA PAC Bond
Offered subject to prior sale and price change.
Call Mary Representative at (800)555-1234
Your Company Securities,
Inc., Member SIPC
123 Main Street
Anytown, USA 12121
1 See NASD Conduct Rule 2210(b).
2 See Letter from Bruce Saxon, Compliance Specialist, Van Kampen Investments Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 12, 1999).
3 See Letter from David A. Spotts, NASD Regulation, Inc. to Laura Moret, American Express Financial Corporation (Nov. 26, 1997) (available on the NASD Regulation Web Site).
4 Letter from Brian C. Underwood, Senior Vice President, A.G. Edwards & Sons, Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Nov. 24, 1998); Letter from Joanne Medero, Managing Director and Chief Counsel, Barclays Global Investors, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 13, 1999); Letter from Kathryn V. Natale, Chairman, NASD Rule Review Task Force, The Bond Market Association, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 15, 1999) ("BMA Letter"); Letter from Cornelius J. Sullivan and Debra S. Wekstein, Eaton Vance Distributors, Inc., to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Jan. 14, 1999); Letter from David A. Spotts, Senior Legal Counsel, Fidelity Investments, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 15, 1999) ("Fidelity Letter"); Letter from Craig S. Tyle, General Counsel, Investment Company Institute, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 12, 1999) ("ICI Letter"); Letter from Michael W. Reinhardt, House Counsel, Ragen MacKenzie Incorporated, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Nov. 30, 1998); Letter from James A. Tricarico, R. Gerald Baker, and Howard J. Schwartz, the Securities Industry Association, to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 23, 1999) ("SIA Letter"); Letter from Henry H. Hopkins and David A. Roscum, T. Rowe Price Associates, Inc. to Joan Conley, Corporate Secretary, NASD Regulation, Inc. (Feb. 11, 1999) ("T. Rowe Price Letter").
5 Fidelity Letter; ICI Letter.
6 SIA Letter; see also Letter from R. Gerald Baker, Securities Industry Association, to Thomas A. Pappas and Robert J. Smith, NASD Regulation, Inc. (Nov. 9, 1998).
7 Fidelity Letter; T. Rowe Price Letter.
8 Additionally, the proposal would amend the definition of "sales literature" expressly to include press releases to conform it to this interpretation.
9 See T. Rowe Price Letter; ICI Letter; see also Letter from Craig S. Tyle, Vice President and Senior Counsel, Investment Company Institute, to Thomas M. Selman, Director, Advertising/Investment Companies Regulation, NASD Regulation, Inc. (April 9, 1997).
10 ICI Letter; T. Rowe Price Letter.
11 Fidelity Letter; ICI Letter.
12 ICI Letter.
13 See Fidelity Letter; ICI Letter.
14 T. Rowe Price Letter.
15 See Securities and Exchange Release Nos. 33-7514 and IC-23066 (Mar. 2, 1998), 63 Fed. Reg. 13988 (Mar. 23, 1998).
16 These disclosures include the investment company's ranking, the total number of investment companies in the category, the name of the category, and the period on which the ranking is based (i.e., the length of the period and the ending date, or the first day of the period and the ending date).
17 T. Rowe Price Letter.
18 Currently when an investment company ranking is based on a subcategory, sales material that contains such a ranking must disclose the name of the full category, the investment company's ranking in the full category, and the number of funds in the full category (this requirement does not apply under certain circumstances). See IM-2210-3(e)(3). Sales material containing a headline or other prominent statement that proclaims an internally created ranking must indicate, in close proximity to the headline or statement, that the fund ranking is based on a category created by the fund or its affiliate. See IM-2210-3(e)(6). The proposal would eliminate these disclosure requirements; however, proposed IM-2210-3(c)(2) would require prominent disclosure if an investment company or its affiliate created a ranking category or subcategory.
If an advertisement uses a category or subcategory created by the investment company or its affiliate, the advertisement must prominently disclose the fact that the investment company or its affiliate created the ranking category, the number of investment companies in the category, the basis for selecting the category, and the ranking entity that developed the research on which the ranking is based. See IM-2210-3(e)(5). These disclosure requirements would be eliminated in IM-2210-3(e)(5), but they would be reflected in proposed IM-2210-3(c)(2).
19 Fidelity Letter.
20 BMA Letter.
Request For Comment Checklist—Questions For Members And Other Interested Parties
The following list of questions provides a quick and easy means to comment on some of the provisions contained in the proposal to modernize the advertising rules. This list of questions does not cover all of the changes contained in the proposal, including proposed changes regarding the standards applicable to member communications, other filing and pre-use approval exemptions, limitations on the use of the NASD's name, and fund rankings. Accordingly, we encourage members and other interested parties to review the entire proposal and to comment separately on all aspects of the proposal.
Comments must be received by October 29, 1999. Members and interested parties can submit their comments using the following methods:
- mailing in this checklist
- mailing in written comments
- e-mailing written comments to firstname.lastname@example.org
- submitting comments online at the NASDR Web Site (www.nasdr.com)
The checklist and/or written comments and should be mailed to:
Joan C. Conley, Office of the Corporate Secretary, NASD Regulation, Inc.
1735 K Street, NW
Washington, DC 20006-1500
Institutional Sales Material
|Yes||No||See my attached written comments|
Article Reprints and Press Releases
|Yes||No||See my attached written comments|
|Yes||No||See my attached written comments|
Use and Disclosure of a Member's Name
|Yes||No||See my attached written comments|
Communications About Collateralized Mortgage Obligations
|Yes||No||See my attached written comments|
|An NASD Member|
|A Registered Representative|