[Federal Register Volume 63, Number 89 (Friday, May 8, 1998)]
[Notices]
[Pages 25532-25538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12264]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39942; File No. SR-NASD-98-29]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Standards for
Individual Correspondence
May 1, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 6, 1998, the NASD Regulation, Inc. (``NASDR'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the NASDR. On April 30, 1998, the NASDR
filed Amendment No. 1 to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from John Ramsay, Vice President and Deputy
General Counsel, NASDR, to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated April 29, 1998
(``Amendment No. 1''). In Amendment No. 1, the NASDR proposes to
amend its filing to clarify that in determing whether a given
communication constitutes correspondence for purposes of the rule,
NASD members, as well as NASDR staff, should consider, among other
things, the form and content of the communication.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASDR proposes to amend Rule 2210 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') to require that written or electronic communications
prepared for a single customer be subject to the general standards and
those specific standards of Rule 2210 that prohibit misleading
statements.
Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC
2210. Communications with the Public
(a) Definitions--Communications with the public shall include:
(1) Advertisement--For purposes of this Rule and any interpretation
thereof, ``advertisement'' means material published, or designed for
use in, a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards,
motion pictures, telephone directories (other than routine listings),
electronic of other public media.
(2) Sales Literature--For purposes of this Rule and any
interpretation thereof, ``sales literature'' means any written or
electronic communication distributed or made generally available to
customers or the public, which communication does not meet the
foregoing definition of ``advertisement.'' Sales literature includes,
but is not limited to, circulars, research reports, market letters,
performance reports or summaries, form letters, telemarketing scripts,
seminar texts, and reprints or excerpts of any other advertisement,
sales literature or published article.
(3) Correspondence--For purposes of this Rule and any
interpretation thereof, ``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.
Cross Reference--Rules Concerning Review and Endorsement of
Correspondence are Found in paragraph (d) to Conduct Rule 3010.
(b) Approval and Recordkeeping
(1) Each item of advertising and sales literature shall be approved
by signature or initial, prior to use or filing with the Association,
by a registered principal of the member.
(2) A separate file of all advertisements and sales literature,
including the name(s) of the person(s) who prepared them and/or
approved their use, shall be maintained for a period of three years
from the date of each use.
(c) Filing Requirements and Review Procedures
(1) Advertisements and sales literature concerning registered
investment companies (including mutual funds, variable contracts and
unit investment trusts) not included within the requirements of
paragraph (c)(2), and public direct participation programs (as defined
in Rule 2810) shall be filed with the Association's Advertising/
Investment Companies Regulation Department (Department) within 10 days
of first use or publication by any member. The member must provide with
each filing the actual or anticipated date of first use. Filing in
advance of use is recommended. Members are not required to file
advertising and sales literature which have previously been filed and
which are used without change. Any member filing any investment company
advertisement or sales literature pursuant to this paragraph (c) that
includes or incorporates rankings or comparisons of the investment
company with other investment companies shall include a copy of the
ranking or comparison used in the advertisement or sales literature.
(2) Advertisements concerning collateralized mortgage obligations
registered under the Securities Act of 1933, and advertisements and
sales literature concerning registered investment companies (including
mutual funds, variable contracts and unit investment trusts) that
include or incorporate rankings or comparisons of the investment
company with other investment companies where the ranking or comparison
category is not generally published or is the creation, either directly
or indirectly, of the investment company, its underwriter or an
affiliate, shall be filed with the Department for review at least 10
days prior to use (or such shorter period as the Department may allow
in particular
[[Page 25533]]
circumstances) for approval and, if changed by the Association, shall
be withheld from publication or circulation until any changes specified
by the Association have been made or, if expressly disapproved, until
the advertisement has been refiled for, and has received, Association
approval. The member must provide with each filing the actual or
anticipated date of first use. Any member filing any investment company
advertisement or sales literature pursuant to this paragraph shall
include a copy of the data, ranking or comparison on which the ranking
or comparison is based.
(3)(A) Each member of the Association which has not previously
filed advertisements with the Association (or with a registered
securities exchange having standards comparable to those contained in
this Rule) shall file its initial advertisement with the Department at
least ten days prior to use and shall continue to file its
advertisements at least ten days prior to use for a period of one year.
The member must provide with each filing the actual or anticipated date
of first use.
(B) Except for advertisements related to exempted securities (as
defined in Section 3(a)(12) of the Act), municipal securities, direct
participation programs or investment company securities, members
subject to the requirements of paragraph (c)(3)(A) [or (B)] of this
Rule may, in lieu of filing with the Association, file advertisements
on the same basis, and for the same time periods specified in [those]
that subparagraph[s], with any registered securities exchange having
standards comparable to those contained in this Rule.
(4)(A) Notwithstanding the foregoing provisions, any District
Business Conduct Committee of the Association, upon review of a
member's advertising and/or sales literature, and after determining
that the member has departed and there is a reasonable likelihood that
the member will again depart from the standards of this Rule, may
require that such member file all advertising and/or sales literature,
or the portion of such member's material which is related to any
specific types or classes of securities or services, with the
Department and/or the District Committee, at least ten days prior to
use. The member must provide with each filing the actual or anticipated
date of first use.
(B) The Committee shall notify the member in writing of the types
of material to be filed and the length of time such requirement is to
be in effect. The requirement shall not exceed one year, however, and
shall not take effect until 30 days after the member receives the
written notice, during which time the member may request a hearing
before the District Business Conduct Committee, and any such hearing
shall be held in reasonable conformity with the hearing and appeal
procedures of the Code of Procedure as contained in the Rule 9000
Series.
(5) In addition to the foregoing requirements, every member's
[advertising] advertisements and sales literature shall be subject to a
routine spot-check procedure. Upon written request from the Department,
each member shall promptly submit the material requested. Members will
not be required to submit material under this procedure which has been
previously submitted pursuant to one of the foregoing requirements and,
except for material related to exempted securities (as defined in
Section 3(a)(12) of the Act), municipal securities, direct
participation programs or investment company securities, the procedure
will not be applied to members who have been, within the Association's
current examination cycle subjected to a spot-check by a registered
securities exchange or other self-regulatory organization using
procedures comparable to those used by the Association.
(6) The following types of material are excluded from the foregoing
filing requirements and spot-check procedures:
(A) Advertisements or sales literature solely related to changes in
a member's name, personnel, location, ownership, offices, business
structure, officers or partners, telephone or teletype members, or
concerning a merger with, or acquisition by, another member;
(B) Advertisements or sales literature which do no more than
identify the Nasdaq symbol of the member and/or of a security in which
the member is a Nasdaq registered market maker;
(C) Advertisements or sales literature which do no more than
identify the member and/or offer a specific security at a stated price;
(D) Material sent to branch offices or other internal material that
is not distributed to the public;
(E) Prospectuses, preliminary prospectuses, offering circulars and
similar documents used in connection with an offering of securities
which has been registered or filed with the Commission or any state, or
which is exempt from such registration, except that an investment
company prospectus published pursuant to SEC Rule 482 under the
Securities Act of 1933 shall not be considered a prospectus for
purposes of this exclusion;
(F) Advertisements prepared in accordance with Section 2(10)(b) of
the Securities Act of 1933, as amended, or any rule thereunder, such as
SEC Rule 134, unless such advertisements are related to direct
participation programs or securities issued by registered investment
companies.
(7) Material which refers to investment company securities or
direct participation programs, or exempted securities (as defined in
Section 3(a)(12) of the Act) solely as part of a listing of products
and/or services offered by the member, is excluded from the
requirements of subparagraphs (1) and (2).
(d) Standards Applicable to Communications With the Public
(1) General Standards
(A) All member communications with the public shall be based on
principles of fair dealing and good faith and should provide a sound
basis for evaluating the facts in regard to any particular security or
securities or type of security, industry discussed, or service offered.
No material fact or qualification may be omitted if the omission, in
the light of the context of the material presented, would cause the
[advertising or sales literature] communication to be misleading.
(B) Exaggerated, unwarranted or misleading statements or claims are
prohibited in all public communications of members. In preparing such
[literature] communications, members must bear in mind that inherent in
investments are the risks of fluctuating prices and the uncertainty of
dividends, rates of return and yield, and no member shall, directly or
indirectly, publish, circulate or distribute any public communication
that the member knows or has reason to know contains any untrue
statement of a material fact or is otherwise false or misleading.
(C) When sponsoring or participating in a seminar, forum, radio or
television interview, or when otherwise engaged in public appearances
or speaking activities which may not constitute advertisements, members
and persons associated with members shall nevertheless follow the
standards of paragraphs (d) and (f) of this Rule.
(D) In judging whether a communication of a particular element of a
communication may be misleading, several factors should be considered,
including but not limited to:
(i) the overall context in which the statement or statements are
made. A statement made in one context may be
[[Page 25534]]
misleading even though such a statement could be [perfectly]
appropriate in another context. An essential test in this regard is the
balance of treatment of risks and potential benefits.
(ii) the audience to which the communication is directed. Different
levels of explanation or detail may be necessary depending on the
audience to which a communication is directed, and the ability of the
member given the nature of the media used, to restrict the audience
appropriately. If the statements made in a communication would be
applicable only to a limited audience or a single customer, or if
additional information might be necessary for other audiences, it
should be kept in mind that it is not always possible to restrict the
readership of a particular communication.
(iii) the overall clarity of the communication. A statement or
disclosure made in an unclear manner [obviously] can result in a lack
of understanding of the statement, or in a serious misunderstanding. A
complex or overly technical explanation may be [worse] more confusing
than too little information. Likewise, material disclosure relegated to
legends or footnotes [realistically] may not enhance the reader's
understanding of the communication.
(2) Specific Standards
In addition to the foregoing general standards, the following
specific standards apply:
(A) Necessary Data. Advertisements and sales literature shall
contain the name of the member, unless such advertisements and sales
literature comply with paragraph (f). Sales literature shall contain
the name of the person or firm preparing the material, if other than
the member, and the date on which it is first published, circulated or
distributed. If the information in the material is not current, this
fact should be stated.
(B) Making [R]recommendations in advertisements and sales
literature.
(i) In making a recommendation, whether or not labeled as such, a
member must have a reasonable basis for the recommendation and must
disclose any of the following situations which are applicable:
a. that the member usually makes a market in the securities being
recommended, or in the underlying security if the recommended security
is an option, [and/]or that the member or associated persons will sell
to or buy from customers on a principal basis;
b. that the member and/or its officers or partners own options,
rights or warrants to purchase any of the securities of the issuer
whose securities are recommended, unless the extent of such ownership
is nominal;
c. that the member was manager or co-manager of a public offering
of any securities of the recommended issuer within the last three
years.
(ii) The member shall also provide, or offer to furnish upon
request, available investment information supporting the
recommendation. Recommendations on behalf of corporate equities must
provide the price at the time the recommendation is made.
(iii) A member may use material referring to past recommendations
if it sets forth all recommendations as to the same type, kind, grade
or classification of securities made by a member within the last year.
Longer periods of years may be covered if they are consecutive and
include the most recent year. Such material must also name each
security recommended and give the date and nature of each
recommendation (e.g., whether to buy or sell), the price at the time of
the recommendation, the price at which or the price range within which
the recommendation was to be acted upon, and indicate the general
market conditions during the period covered.
(iv) Also permitted is material which does not make any specific
recommendation but which offers to furnish a list of all
recommendations made by a member within the past year or over longer
periods of consecutive years, including the most recent year, if this
list contains all the information specified in subparagraph (iii).
Neither the list of recommendations, nor material offering such list,
shall imply comparable future performance. Reference to the results of
a previous specific recommendation, including such a reference in a
follow-up research report or market letter, is prohibited if the intent
or the effect is to show the success of a past recommendation, unless
all of the foregoing requirements with respect to past recommendations
are met.
(C) Claims and Opinions. Communications with the public must not
contain promises of specific results, exaggerated or unwarranted claims
or unwarranted superlatives, opinions for which there is no reasonable
basis, or forecasts of future events which are unwarranted, or which
are not clearly labeled as forecasts.
(D) Testimonials. In testimonials concerning the quality of a
firm's investment advice, the following points must be clearly stated
in [the] advertisement or sales literature [communication]:
(i) The testimonial may not be representative of the experience of
other clients.
(ii) The testimonial is not indicative of future performance or
success.
(iii) If more than a nominal sum is paid, the fact that it is a
paid testimonial must be indicated.
(iv) If the testimonial concerns a technical aspect of investing,
the person making the testimonial must have knowledge and experience to
form a valid opinion.
(E) Offers of Free Service. Any statement in communications with
the public to the effect that any report, analysis, or other service
will be furnished free or without any charge must not be made unless
such report, analysis or other service actually is or will be furnished
entirely free and without condition or obligation.
(F) Claims for Research Facilities. No claim or implication in
communications with the public may be made for research or other
facilities beyond those which the member actually possesses or has
reasonably capacity to provide.
(G) Hedge Clauses. No cautionary statements or caveats, often
called hedge clauses, may be used in communications with the public if
they are misleading or are inconsistent with the content of the
material.
(H) Recruiting Advertising. Advertisements in connection with the
recruitment of sales personnel must not contain exaggerated or
unwarranted claims or statements about opportunities in the investment
banking or securities business and should not refer to specific
earnings figures or ranges which are not reasonable under the
circumstances.
(I) Periodic Investment Plans. Advertisements and sales literature
[Communications with the public] should not discuss or portray any type
of continuous or periodic investment plan without disclosing that such
a plan does not assure a profit and does not protect against loss in
declining markets. In addition, if the material deals specifically with
the principles of dollar-cost averaging, it should point out that since
such a plan involves continuous investment in securities regardless of
fluctuating price levels of such securities, the investor should
consider his financial ability to continue his purchases through
periods of low price levels.
(J) References to Regulatory Organizations. Communications with the
public shall not make any reference to membership in the Association or
to registration or regulation of the securities being offered, or of
the underwriter, sponsor, or any member or
[[Page 25535]]
associated person, which reference could imply endorsement or approval
by the Association or any federal or state regulatory body. References
to membership in the Association or Securities Investors Protection
Corporation shall comply with all applicable By-Laws and Rules
pertaining thereto.
(K) Identification of Sources. Statistical tables, charts, graphs
or other illustrations used by members in advertising or sales
literature should disclose the source of the information if not
prepared by the member.
(L) Claims of Tax Free/Tax Exempt Returns. Income or investment
returns may not be characterized in communications with the public as
tax free or exempt from income tax where tax liability is merely
postponed or deferred. If taxes are payable upon redemption, that fact
must be disclosed. References to tax free/tax exempt current income
must indicate which income taxes apply or which do not unless income is
free from all applicable taxes. For example, if income from an
investment company investing in municipal bonds may be subject to state
or local income taxes, this should be stated, or the illustration
should otherwise make it clear that income is free from federal income
tax.
(M) Comparisons. In making a comparison in advertisements or sales
literature, either directly or indirectly, the member must make certain
that the purpose of the comparison is clear and must provide a fair and
balanced presentation, including any material differences between the
subjects of comparison. Such differences may include investment
objectives, sales and management fees, liquidity, safety, guarantees or
insurance, fluctuation of principal and/or return, tax features, and
any other factors necessary to make such comparisons fair and not
misleading.
(N) Predictions and projections. In communications with the public.
i[I]nvestment results cannot be predicted or projected. Investment
performance illustrations may not imply that gain or income realized in
the past will be repeated in the future. However, for purposes of this
Rule, hypothetical illustrations of mathematical principles are not
considered projections of performance; e.g., illustrations designed to
show the effects of dollar cost averaging, tax-free compounding, or the
mechanics of variable annuity contracts or variable life policies.
* * * * *
IM-2210-1. Communications with the Public About Collateralized Mortgage
Obligations (CMOs)
(a) General Considerations
For purposes of the following guidelines, the term ``collateralized
mortgage obligation'' (CMO) refers to a multiclass bond backed by a
pool of mortgage pass-through securities or mortgage loans. CMOs are
also known as ``real estate mortgage investment conduits'' (REMICs). As
a result of the 1986 Tax Reform Act, most CMOs are issued in REMIC form
to create certain tax advantages for the issuer. The term CMO and REMIC
are now used interchangeably. In order to prevent [a communication
about] advertisements and sales literature regarding CMOs from being
false or misleading, there are certain factors to be considered,
including, but not limited to, the following:
(1) Product Identification
In order to assure that investors understand exactly what security
is being discussed, all communications concerning CMOs should clearly
describe the product as a ``collateralized mortgage obligation.''
Member firms should not use the proprietary names for CMOs as they do
not adequately identify the product. To prevent confusion and the
possibility of misleading the reader, communications should not contain
comparisons between CMOs and any other investment vehicle, including
Certificates of Deposit.
(2) Educational Material
In order to ensure that customers are adequately informed about
CMOs members are required to offer to customers education material
which covers the following matters:
(A) A discussion of CMO characteristics an investments and their
attendant risks;
(B) An explanation of the structure of a CMO, including the various
types of tranches;
(C) A discussion of mortgage loans and mortgage securities;
(D) Features of CMOs, including: credit quality, prepayment rates
and average lives, interest rates (including effect on value and
prepayment rates), tax considerations, minimum investments,
transactions costs and liquidity;
(E) Questions an investor should ask before investing; and
(F) A glossary of terms that may be helpful to an investor
considering an investment.
(3) Safety Claims
A communication should not overstate the relative safety offered by
the CMO. Although CMOs generally offer low investment risk, they are
subject to market risk like all investment securities and there should
be no implication otherwise. Accordingly, references to liquidity
should be balanced with disclosure that, upon resale, an investor may
receive more or less than his original investment.
(4) Claims About Government Guarantees
(A) Communications should accurately depict the guarantees
associated with CMO securities. For example, in most cases it would be
misleading to state that CMOs are ``government guaranteed'' securities.
A government agency issue could instead be characterized as government
agency backed. Of course, private- issue CMO advertisements should not
contain references to guarantees or backing, but may disclose the
rating.
(B) If the CMO is offered at a premium, the communication should
clearly indicate that the government agency backing applies only to the
face value of the CMO, and not to any premium paid. Furthermore,
communications should not imply that either the market value or the
anticipated yield of the CMO is guaranteed.
(5) Simplicity Claims
CMOs are complex securities and require full, fair and clear
disclosure in order to be understood by the investor. A communication
should not imply that these are simple securities that may be suitable
for any investor seeking high yields. All CMOs do not have the same
characteristics and it is misleading to indicate otherwise. Even though
two CMOs may have the same underlying collateral, they may differ
greatly in their prepayment speed and volatility.
(6) Claims About Predictability
A communication would be misleading if it indicated that the
anticipated yield and average life of a CMO were assured. It should
disclose that the yield and average life will fluctuate depending on
the actual prepayment experience and changes in current interest rates.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASDR included statements
concerning the purpose of and basis for the
[[Page 25536]]
proposed rule change an discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The NASDR has prepared
summaries, set forth in Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
NASD Conduct Rule 2210 imposes various requirements on member
communications with the public, designed to ensure that those
communications are fair, balanced and not misleading. Rule 2210 does
not expressly apply to the content of correspondence (i.e., a
communication to only one person). In addition, there is no definition
of correspondence in the NASD rules, even though members are required
to supervise the use of correspondence by their associated persons
under Rule 3010.
Recently, several NASD disciplinary matters raised the issue of
whether correspondence to a single customer constitutes ``sales
literature'' subject to the requirements of Rule 2210.\4\ The National
Business Conduct Committee (``NBCC'') \5\ consistently took the
position in these cases that a document prepared for use with a single
customer, and not for dissemination to the general public, is not
``sales literature'' as that term is defined in subparagraph (a)(2) to
NASD Rule 2210. However, the NBCC also agreed that the application to
correspondence of particular standards in the rules for communications
to the public would be appropriate and would enable NASD staff to bring
enforcement actions on the basis of clear violations of certain
proscribed behavior. The NBCC recommended that the NASD define
``correspondence'' in Rule 2210 and amend the rule to clarify which
standards apply to correspondence. In June 1997, the NASDR requested
comment on these proposed amendments in Notice to Members 97-37 (June
1997).
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\4\ See, In the Matter of Peter Stuart Bevington, Complaint No.
C8A940021 (March 5, 1997); In the Matter of William Stafford
Thurmond, Complaint No. C06930051 (Feb. 1, 1996): In the Matter of
Jeffery Steven Stone, Complaint No. C06940036 (Feb. 1, 1996); and In
the Matter of Micah C. Douglas, Complaint Nos. C06920046 and
C06930068 (Sept. 19, 1995).
\5\ The NBCC is now called the National Adjudicatory Council.
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As first proposed, the amendments to Rule 2210 would have required
that communications prepared for a single customer be subject to the
standards, but not the filing and review requirements, of Rule 2210.
Some of these standards define or prohibit the dissemination of
statements that could be considered misleading. Others require that
certain additional disclosure, e.g., that the member makes a market in
a particular security, be included in certain cases in the
communication. Most commenters thought it was appropriate only to apply
the general standards of Rule 2210, which, among other things, prohibit
untrue statements of material facts, the omission of material facts,
and statements that are exaggerated, misleading or unwarranted. These
commenters stated that imposing all of the specific standards on each
item of correspondence, particularly those that require additional
disclosure, would unduly complicate communication with clients and
unnecessarily burden supervisory programs without materially
contributing to the protection of investors. A few commenters supported
the proposed amendments, stating that the proposed exemption of
correspondence from the NASD filing and review requirements strikes the
proper balance. One commenter suggested applying the proposed amendment
only to solicitations, recommendations, and sales letters directed at
an individual customer.
Discussion
The NASDR believes that certain statements pose similar dangers
regardless of whether they are communicated to one person or many
persons. An amendment to Rule 2210 to clarify how the rule applies to
correspondence would provide better guidance to the membership and
would help to assure that investors are adequately protected with
respect to the communications they receive individually. At the same
time, the NASDR recognizes that correspondence is highly individualized
in nature and that much correspondence (unlike advertising and sales
literature) is directed by registered representatives (``RR'') to
customers with whom the RR already has an established relationship.
Therefore, the NASDR has determined that the proposed rule change
should subject correspondence to the general standards and those
specific standards of Rule 2210 that prohibit misleading statements,
but not to the specific standards of the rule that prescribe specific
disclosure.
The proposed rule change creates a category defined as
``communications with the public'' to include the current definitions
of ``advertisement'' and ``sales literature,'' and a new definition of
``correspondence.'' ``Correspondence'' is defined as ``* * * 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.'' In determining when a written or
electronic communication is prepared for delivery to a single current
or prospective customer, NASD members should consider and the staff of
the NASDR should examine,\6\ among other things, the form and content
of the communication. Thus, a written or electronic communication
addressed to a single current or prospective customer, the content of
which is substantially identical to that of written or electronic
communications sent to one or more other current or prospective
customers, is a form letter, not ``correspondence.'' Because form
letters are considered ``sales literature'' under Rule 2210, they would
be subject to all of the general and specific standards of Rule 2210.
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\6\ See Amendment No. 1, supra note 3.
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The proposed rule change amends Rule 2210 to subject individual
correspondence to the general standards under subparagraph (d)(1) and
the following specific standards under subparagraph (d)(2) of Rule
2210: (i) subparagraph (d)(2)(C), which prohibits exaggerated,
unwarranted, or certain other specific claims or opinions, (ii)
subparagraph (d)(2)(E), which prohibits certain offers of free
services, (iii) subparagraph (d)(2)(F), which prohibits certain claims
for research services, (iv) subparagraph (d)(2)(G), which prohibits
certain hedge clauses, (v) subparagraph (d)(2)(J), which prohibits the
implication of endorsement or approval by regulatory organizations,
(vi) subparagraph (d)(2)(L), which prohibits certain statements
regarding tax free or tax exempt returns, and (vii) subparagraph
(d)(2)(N), which prohibits predictions and projections of investment
results. Each of these specific provisions derive from members' general
obligations not to make statements that are misleading or without a
reasonable basis in fact.
Individual correspondence will not be subject to the following
specific standards of Rule 2210: (i) subparagraph (d)(2)(A), which
requires the inclusion of certain information regarding members' names,
(ii) subparagraph (d)(2)(B), which requires that a member disclose
specified information to the customer when making a recommendation,
(iii) subparagraph
[[Page 25537]]
(d)(2)(D), which requires the inclusion of certain statements regarding
testimonials, (iv) subparagraph (d)(2)(H), which prohibits exaggerated
or unwarranted claims in advertisements for the recruitment of sales
personnel, (v) subparagraph (d)(2)(I), which requires certain
disclosures regarding periodic investment plans; (vi) subparagraph
(d)(2)(K), which requires the identification and disclosure of sources
other than the member for certain statistical tables, charts, graphs,
or other illustrations, and (vii) subparagraph (d)(2)(M), which
requires the inclusion of certain information when making comparisons
of investment alternatives.
The proposed rule change is not intended to change the current
application of Interpretive Memoranda under Rule 2210. Therefore
paragraph (a) to IM-2210-1 (interpretation regarding collaterlized
mortgage obligations) has been amended to clarify that only
advertisements and sales literature are covered by the interpretation.
Finally, the proposed amendments also incorporate several minor
technical changes that are non-substantive in nature.
2. Statutory Basis
The NASDR believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act,\7\ which require that
the Association adopt and amend its rules to promote just and equitable
principles of fair trade, and generally provide for the protection of
investors and the public interest. By subjecting individual
correspondence to the general standards and those individual standards
in Rule 2210 that prohibit misleading statements, the NASDR believes
that the proposed rule change strikes the appropriate balance between
protecting investors from misleading or inappropriate communications in
correspondence and imposing workable regulatory requirements that
reasonably permit member firms to exercise effective compliance
oversight with respect to correspondence.
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\7\ 15 U.S.C. 78o-3(b)(6).
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The NASDR is requesting that the proposed rule change be effective
within 45 days of SEC approval.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASDR does not believe the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The proposed rule change was published for comment in Notice to
Members 97-37 (June 1997). Eighteen comments were received in response
thereto. Of the 18 comment letters received, 4 were in favor of the
proposed rule change and 14 were opposed. Most of the commenters either
opposed the proposed rule change or thought only the general standards
of Rule 2210 should apply.
American Express strongly supported the proposed rule change
stating that the NASD's willingness to address the dangers of
misleading or unwarranted statements in correspondence while exempting
such correspondence from NASD filing and review requirements is the
proper balance.
AmeriTrade Holding Corporation stated that the proposed rule change
would be beneficial as long as it only applies to solicitations,
recommendations, and sales letters directed at an individual customer.
The Equitable and Banc One were generally supportive of goals of
the proposed rule change but thought it was appropriate to focus on
applying only the general standards of the Rule, rather than the
specific standards. The Equitable stated that imposing all of the
specific standards of Rule 2210 on each item of correspondence would
unduly complicate communication with clients and unnecessarily burden
supervisory programs without materially contributing to the protection
of investors.
PSA, The Bond Market Trade Association, The Securities Industry
Association, The Investment Company Institute, New York Life Insurance
Co., American Funds Distributors, Inc., Mutual Service Corporation, A.
G. Edwards & Sons, Inc., T. Rowe Price Associates, Inc., Arlington
Securities Inc., JP Morgan, and CUSO Financial Services, Inc. all
opposed the proposed rule change stating that (i) existing NASD rules
sufficiently govern the content and use of correspondence, (ii) the
application of the Rule to a large amount of a firm's correspondence
would be irrelevant, and (iii) review of all such correspondence would
be burdensome.
Merrill Lynch stated that if the proposed rule change is adopted as
proposed, a letter to a client disclosing his or her quarterly mutual
fund distributions would presumably be subject to the requirements of
Securities Act Rule 482, and would require inclusion of the five-year,
ten-year and since-inception performance of the fund, disclosures that
past performance is no assurance of future results, and disclosures
that the investment return and principal value will fluctuate so that
the investor's shares, when redeemed, may be worth more or less than
their original cost.
PSA stated that the proposed rule change would unnecessarily
inhibit the use of electronic communications media, because electronic
correspondence, unlike sales literature and advertisements, often takes
the form of an ongoing dialogue between two parties, involving the
exchange of multiple messages, and that the application of the specific
content requirements of Rule 2210 to all such communications would
require member firms to repeat large amounts of information in each
message.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit data, views and arguments
concerning the foregoing, including whether the proposed rule change,
as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. Copies of the submissions, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying at the Commission's Public Reference Room, 450 Fifth Street,
NW, Washington, D.C. 20549. Copies of such filing will also be
available for
[[Page 25538]]
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-98-29 and should be
submitted by May 29, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-12264 Filed 5-7-98; 8:45 am]
BILLING CODE 8010-01-M
