[Federal Register Volume 59, Number 57 (Thursday, March 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6873]
[[Page Unknown]]
[Federal Register: March 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33780; File No. SR-NASD-93-66]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to Filing
Requirements for Use of Mutual Fund Rankings and Elimination of Sunset
Provisions in Pre-Filing Requirements of Advertising and Government
Securities Rules
March 17, 1994.
On February 7, 1994, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule
change pursuant to section 19(b)(1) of the Securities Exchange Act of
1934 (``Act''),\2\ and rule 19b-4 thereunder.\3\ The proposed rule
change amends Article III, section 35 of the NASD Rules of Fair
Practice\4\ and section 8 of the NASD Government Securities Rules\5\
to: (1) Require filing of advertisements and sales literature relating
to investment companies; (2) made the pre-filing requirement of Article
III, subsection 35(c)(2) of the Rules of Fair Practice and in
subsection 8(c)(1)(B) of the Government Securities Rules permanent; and
(3) properly reference the ``Advertising Regulation Department''
throughout Article III, section 35 of the Rules of Fair Practice and
the Government Securities Rules.
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\1\The NASD initially submitted the proposed rule change on
November 4, 1993. However, on February 7, 1994, the NASD filed
Amendment No. 1, which amended and superseded the original rule
filing.
\2\15 U.S.C. 78s(b)(1) (1988).
\3\17 CFR 240.19b-4 (1993).
\4\NASD Manual, Rules of Fair Practice, Article III, Sec. 35
(CCH) 2195.
\5\NASD Manual, Government Securities Rules, Sec. 8 (CCH) 2428.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 33603, February 8, 1994) and by
publication in the Federal Register (59 FR 7282, February 15, 1994).
One comment letter favoring the proposed rule change was received. This
order approves the proposed rule change.
As the number of mutual funds has increased substantially in recent
years, so has the number of mutual fund ranking entities (``Ranking
Entities''). Ranking Entities, as well as mutual funds and fund
affiliates, categorize and rank mutual funds by, for example, fund
type, performance over a given period of years, total return,
standardized yield calculated pursuant to Commission rules, the
variations in sales charges, and risk/reward. References to such
rankings in mutual fund advertisements and sales literature have also
increased substantially in recent years as members have attempted to
boost the sale of fund shares by touting the performance of various
mutual funds.
The Commission believes that it is important that the NASD review
and regulate the use of ranking materials and the development of
customized rankings in order to prevent the misleading use of such
rankings. The NASD, therefore, has proposed to amend Article III,
section 35(c) of the NASD Rules of Fair Practice to require that copies
of mutual fund rankings and the data on which the rankings are based be
submitted to the Association's Advertising Regulation Department for
review. The proposed rule change requires members filing advertisements
or sales literature for review which use or incorporate mutual fund
rankings to include in the filing a copy of the ranking or
comparison.\6\
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\6\The NASD also has proposed Guidelines for the Use of Rankings
in Mutual Fund Advertisements and Sales Literature (``Guidelines'')
on which the NASD review will be based. See Securities Exchange Act
Release No. 33606 (Feb. 8, 1994), 59 FR 7276 (Feb. 15, 1994)
(noticing File No. SR-NASD-93-69).
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Subsection 35(c)(1) will require that any member that files any
investment company advertisements or items of sales literature pursuant
to subsection 35(c)(1) which include or incorporate rankings or
comparisons of the investment company with other investment companies,
shall include a copy of the ranking or comparison used in the
advertising or sales literature. The requirements of this provision
will permit the staff to immediately determine whether the use of the
ranking complies with the Guidelines, and avoid the need for the NASD
staff to research the ranking or attempt to obtain a copy of the source
information in order to verify the accuracy of the material.
The proposed rule change amends subsection 35(c)(2), which
currently requires certain advertisements to be filed by members 10
days prior to use, to require such pre-use filing for all investment
company advertisements or items of sales literature which incorporates
rankings or comparisons of the investment company with other investment
companies where the ranking or comparison is not generally published or
is the creation, directly or indirectly, of the investment company, its
underwriter or an affiliate.\7\ While the NASD is concerned about
permitting ranking categories to be created by investment companies or
their affiliates, rather than by a Ranking Entity, customized ranking
nonetheless may provide meaningful information to the investor. Such
filing also must include a copy of the data, ranking or comparison on
which the ranking or comparison is based.
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\7\The proposed Guidelines permit the use of a ranking based on
a category or subcategory created by a fund or a fund affiliate
rather than by a Ranking Entity, so long as the ranking is based on
the performance measurements of a Ranking Entity.
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The NASD also is amending Article III, subsection 35(c)(2) of the
Rules of Fair Practice and subsection 8(c)(1)(B) of the Government
Securities Rules to eliminate sunset provisions relating to
collateralized mortgage obligations (``CMOs''). This change would make
the pre-filing requirement for CMO advertisements permanent.
Finally, the NASD is modifying references to the Advertising
Department to reference the Advertising Regulation Department in
Article III, Section 35 of the Rules of Fair Practice and the
Government Securities Rules.
The Commission finds that the proposed rule change is consistent
with the provisions of section 15A(b)(6) of the Act\8\ because it
ensures that the use of rankings of investment companies in advertising
and sales literature is accurate and presents investors with fair and
meaningful data upon which to make an informed investment decision.
With respect to the proposed elimination of the sunset provisions for
the prefiling of CMO advertisements, the Commission believes that the
positive regulatory benefits seen since implementation of the
provision, i.e., the reduction in misleading advertising, warrants
making the prefiling requirement provision permanent. Finally, the
clarifications referring to the phrase ``Advertising Regulation
Department,'' rather than ``Advertising Department'' will reduce
unnecessary confusion among NASD members.
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\8\15 U.S.C. 78o-3.
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It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that File No. SR-NASD-93-66 be, and hereby is approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6873 Filed 3-23-94; 8:45 am]
BILLING CODE 8010-01-M
