[Federal Register Volume 63, Number 114 (Monday, June 15, 1998)]
[Notices]
[Pages 32690-32691]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15781]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40074; File No. SR-NASD-98-32]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Filing Requirements for Independently Prepared Research Reports
June 4, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Deregistration under the Investment
Company Act of 1940 (the ``Act'').
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 9,
1998, the National Association of Securities Dealers, Inc. (``NASD'')
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 NASD Regulation, Inc.
(``NASD Regulation''). On May 14, 1998, the NASD filed an amendment,
which has been incorporated in this filing, to clarify the proposed
change and delete its request for accelerated approval. \1\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ Letter from John Ramsey, Vice President, Deputy General
Counsel, NASD Regulation, Inc., to Katherine A. England, Assistant
Director, Division of Market Regulation, SEC, dated May 13, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend Rule 2210 of the Conduct
Rules of the NASD to exclude independently-prepared research reports
from the filing requirements of Rule 2210. Below is the text of the
proposed rule change. Proposed new language is in italics.
AMENDMENTS TO NASD CONDUCT RULE 2210
Paragraph (c)(6) of Conduct Rule 2210 is amended by adding new
paragraph (G), as follows: (6) The following types of material are
excluded from the foregoing filing requirements and (except for
research reports under paragraph (G)) the foregoing spot-check
procedures:
* * *
(G) any research report concerning an investment company registered
under the Investment Company Act of 1940, provided that:
(i) the report is prepared by an entity (the ``research firm'')
that is independent of the investment company, its affiliates, and the
member using the report;
(ii) in preparing the report, the services of the research firm
have not been procured by the investment company, any of its affiliates
or any member using the report;
(iii) the research firm prepares and distributes similar types of
reports with respect to a substantial number of investment companies;
(iv) the report is distributed and updated with reasonable
regularity in the normal course of the research firm's business; and
(v) the report has not been materially altered by the member using
the report.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation included
statements concerning the purpose of and basis for the proposed rule
change and 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. NASD Regulation 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
(a) Purpose
NASD Conduct Rule 2210 requires that any ``advertisement'' or
``sales literature'' (as defined by the rule) concerning a registered
investment company be filed with the Advertising/Investment Companies
Regulation Department (``Department'') and meet the content standards
of that rule, as well as all applicable Commission rules. The rule
defines ``sales literature'' to include a research report.
Consequently, Rule 2210 requires that NASD members file all investment
company research reports, including any research report that has been
prepared by an entity that is independent of the investment company and
its affiliates and of any NASD member, and whose services are not
produced by the investment company or any of its affiliates or any NASD
member to prepare the report (``independent research firms'').
As the investment company industry has grown in recent years, so
too has the coverage of this industry by independent research firms.
Many of these firms publish reports that analyze a wide variety of
investment companies and provide information, such as each investment
company's historical performance, the investment company's fees and
expenses, and a description and narrative analysis of the investment
company's investment strategies and portfolio management style.
NASD members use these independently-prepared research reports in a
number of ways. Some members may make the entire research service
available to customers at a branch office. Members may also distribute
an independently-prepared research report concerning a particular
investment company as part of the selling process.
The proposed rule change would clarify the meaning, administration
and enforcement of Rule 2210 insofar as it may appear to apply to
certain types of independently-prepared research
[[Page 32691]]
reports. The proposed rule change would clarify that these types of
independently-prepared research reports would not have to be filed with
the Department. The Department intends to interpret the term
``independent'' in (G)(i) of the proposed rule change in a manner
similar to the use of that term in NASD Rule IM-2210-3 regarding
rankings.
Under the proposed rule change, these research reports would
continue to be subject to the Department's spot-check procedures.
Moreover, the proposed rule change would impose certain conditions
designed to ensure that the opinions in the research reports are
objective, that the presentation is balanced, and that investors have
access to regular updates of the reports. In particular, the proposed
rule change would impose several requirements derived from an analogous
SEC rule, Rule 139, which provides a safe harbor from the definition of
``offer for sale'' and ``offer to sell'' in the Securities Act of 1933.
Thus, under the proposed rule change, a published article that
analyzes only a few funds or that is not regularly updated in the
normal course of business would have to be filed with the Department if
it is to be distributed or made generally available to customers or the
public. Moreover, while a member could distribute an independently-
prepared research report concerning a particular fund without filing
the report with the Department, if the member alters the report in any
material way, then the member would have to file it with the Department
if it is to be distributed or made generally available to customers or
the public.
NASD Regulation believes that the proposed rule change would not
raise significant investor protection concerns. In its filing and
review program, the Department rarely has found significant issues with
the types of research reports that would be expected by the proposed
rule change. Moreover, to ensure that investors are adequately
protected, the proposed rule change would except these types of
research reports only from the filing requirements, and not the content
requirements of applicable NASD rules. Under the proposed rule change,
these research reports would continue to be subject to the content
requirements of Rule 2210 as well as Conduct Rule 2110 (requiring that
a member ``observe high standards of commercial honor and just and
equitable principles of trade''); Rule 2120 (prohibiting use of
manipulative, deceptive or other fraudulent devices); and IM-2310-2
(requiring fair dealing with customers, including an avoidance of fraud
violations). In addition, Conduct Rule 2210 would continue to require
that these research reports be approved prior to use by a registered
principal of the member.
The proposed rule change would apply to independently-prepared
research reports that are contained in software or that are
electronically communicated, as well as those on paper.
(b) Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) \2\ of the Act,
which require that the Association adopt and amend its rules to promote
just and equitable principles of trade, and generally provide for the
protection of investors and the public interest in that the proposed
rule change allows the dissemination of certain research reports,
subject to the content requirements of the NASD Conduct Rules.
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\2\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that 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, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of 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 written data, views and
arguments concerning the foregoing, including whether the proposed rule
change 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 submission, 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 in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by July 6, 1998.
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. 98-15781 Filed 6-12-98; 8:45 am]
BILLING CODE 8010-01-M
