[Federal Register Volume 60, Number 111 (Friday, June 9, 1995)]
[Notices]
[Pages 30618-30622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14191]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35801; File No. SR-NASD-95-12]
Self-Regulatory Organizations; Notice of Filing Proposed Rule
Change by National Association of Securities Dealers, Inc., Relating to
Advertising and Sales Literature Filing and Review Requirements Under
the Rules of Fair Practice and the Government Securities Rules
June 2, 1995.
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 May 10,
1995,\1\ the National Association of Securities Dealers, Inc.
(``NASD'') or ``Association'') 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 NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\ The proposed rule change was initially submitted on April
10, 1995, but was amended on May 10, 1995, in order to make
technical changes and clarify rule language.
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Self-Regulatory Organization's Statement of the Terms of Substance of
the Proposed Rule Change
The NASD is herewith filing a proposed rule change to Article III,
Section 35 of the Rules of Fair Practice and Section 8 of the
Government Securities Rules. Proposed new language is italicized and
proposed deletions are bracketed.
ARTICLE III
Rules of Fair Practice
* * * * *
Communications With the Public
Sec. 35.
(a) Definitions
(1) Advertisement--For purposes of this section 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
listings), electronic or other public media.
(2) Sales literature--For purposes of this section 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.
(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 NASD, by a
registered principal [(or his designee)] of the member.
* * * * *
(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
Subsection (c)(2) of this section, and public direct participation
programs (as defined in Article III, Section 34 of the Rules of Fair
Practice) shall be filed with the Association's Advertising Regulation
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 members filing any
investment company advertisement or sales literature pursuant to this
Subsection 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 Association's Advertising Regulation
Department for review at least 10 days prior to use (or such shorter
period as the Department may allow in particular circumstances) for
approval and, if [[Page 30619]] changed [or expressly disapproved] by
the Association, shall be withheld from publication or circulation
until any changes specified by the Association has been made or, [in
the event of disapproval] 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 Subsection 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 section) shall file its initial advertisement with the
Association's Advertising 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) Each member which, on the effective date of this section, had
been filing advertisements with the Association (or with a registered
securities exchange having standards comparable to those contained in
this section) for a period of less than one year shall continue to file
its advertisements, at least ten days prior to use, until the
completion of one year from the date the first advertisement was filed
with the Association or such exchange.]
* * * * *
(4) 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 section, 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
Association's Advertising 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.
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 hearings
shall be held in reasonable conformity with the hearing and appeal
procedures of the Code of Procedure.
* * * * *
(d) Standards Applicable to Communications With the Public
* * * * *
(2) Specific Standards
In addition to the foregoing general standards, the following
specific standards apply:
* * * * *
(B) Recommendations: In making a recommendation, whether or not
labeled as such, a member must have a reasonable basis for the
recommendation and must disclose [the price at the time the
recommendation is made, as well as] any of the following situations
which are applicable:
(i) 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;
(ii) 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;
(iii) That the member was manager or co-manager of a public
offering of any securities of the recommended issuer within the last 3
years.
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.
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 was to be acted upon, and indicate the general
market conditions during the period covered.
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 the previous paragraph.
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.
* * * * *
GOVERNMENT SECURITIES RULES
* * * * *
Communications With the Public
Sec. 8
(a) Definitions
(1) Advertisement--For purposes of this section 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 or other public media.
(2) Sales Literature--For purposes of this section and any
interpretation thereof, ``sales literature'' means any written or
electronic communication distributed or made generally available to
customers or the public that 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, standard forms of option worksheets,
telemarketing scripts, seminar texts, and reprints or excerpts of any
other advertisement, sales literature, or published article.
(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 NASD, by a
registered principal [(or designee)] of the member.
* * * * * [[Page 30620]]
(c) Filing Requirements and Review Procedures
(1) Members shall file advertisements for review with the
Association's Advertising Regulation Department as follows:
(A) Advertisements concerning government securities (as defined in
Section 3(a)(42) of the Securities Exchange Act of 1934) other than
collateralized mortgage obligations shall be filed by members with the
Association's Advertising Department within 10 days of first use or
publication; and
(B) Advertisements concerning collateralized mortgage obligations
shall be filed with the Association's Advertising Regulation Department
for review at least 10 days prior to use (or such shorter period as the
Department may allow in particular circumstances) for approval and, if
changed [or expressly disapproved] by the Association, shall be
withheld from publication or circulation until any changes specified by
the Association have been made or, [in the event of disapproval] if
expressly disapproved, until the advertisement has been refiled for,
and has received, Association approval. The member must provide with
each filing concerning government securities, including collateralized
mortgage obligations, the actual or anticipated date of first use.
(2) Each member of the Association that has not previously filed
advertisements with the Association shall file its initial
advertisement concerning government securities with the Association's
Advertising Department at least 10 days prior to use and shall continue
to file its advertisements concerning government securities at least 10
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.
(3) Notwithstanding the foregoing provisions, any District Business
Conduct Committee of the Association, upon review of a member's
government securities advertising and/or sales literature, and after
determining that the member will again depart from the standards of
this section, may require that such member file all government
securities advertising and/or sales literature, or the portion of such
member's material that is related to any specific types or classes of
securities or services, with the Association's Advertising Department
and/or the District Committee, at least 10 days prior to use. The
member must provide with each filing the actual or anticipated date of
first use.
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 hearings
shall be held in reasonable conformity with the hearing and appeal
procedures of the Code of Procedure.
* * * * *
(d) Standards Applicable to Communications With the Public
* * * * *
(2) Specific Standards
In addition to the foregoing general standards, the following
specific standards apply:
* * * * *
(B) Recommendations: In making a recommendation, whether or not
labeled as such, a member must have a reasonable basis for the
recommendation made and must disclose [the price at the time the
recommendation is made, as well as] any of the following situations
which are applicable:
* * * * *
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 NASD 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
test of these statements may be examined at the places specified in
Item IV below. The NASD 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
Article III, Section 35 of the Rules of Fair Practice and Section 8
of the Government Securities Rules (``Rules'') govern members'
communications with the public regarding general securities and
government securities, respectively. The Rules contain definitions,
internal approval and recordkeeping requirements, filing requirements
and standards applicable to the content of such communications. The
NASD is proposing to modify certain sections of the Rules in order to
revise the definitions of, and the internal approval and timeliness of
filing requirements for, advertising and sales literature and the scope
of rules relating to ``Recommendations.'' The revisions will codify
existing rule interpretations, rectify inconsistencies, and clarify
issues which have been the source of member misunderstanding. It is not
anticipated that these proposals will create additional regulatory
burdens on the membership.
The NASD is proposing to modify the definitions of
``Advertisement'' and ``Sales Literature'' in Article III, Subsections
35(a) (1) and (2) of the Rules of Fair Practice and Subsections 8(a)
(1) and (2) of the Government Securities Rules to include electronic
messages. The NASD has consistently applied its standards for
communications with the public to electronic messages sent via
computer. The inclusion of the term ``electronic'' in the definition of
``Advertisement'' is intended to apply to communications available to
all network subscribers including items displayed over network bulletin
boards. The inclusion of the term ``electronic'' in the definition of
``Sales Literature'' is intended to apply to messages sent directly to
individuals or targeted groups. The NASD believes that the proposed
rule change will reduce member confusion by clarifying that the
requirements set forth in these sections are applicable to such
electronic communications.
The NASD is proposing to further modify the definition of ``Sales
Literature'' in Article III, Subsection 35(a)(2) of the Rules of Fair
Practice and Subsection 8(a)(2) of the Government Securities Rules to
include telemarketing scripts. Members often file for review with the
Advertising Regulation Department telemarketing scripts intended to be
read to prospects and existing customers or delivered electronically
through a telemarketing service. These scripts differ from other forms
of telephone prospecting and customer contact in that they are followed
without variation by the caller or callers. The NASD considers these
scripts as comparable to a form letter delivered orally. The inclusion
of telemarketing scripts in the definition will reduce confusion among
members and promote more consistent application of the rules.
The NASD is proposing to modify Article III, Subsection 35(b)(1) of
the Rules of Fair Practice and Subsection 8(b)(1) of the Government
Securities Rules to require that each item of advertising and sales
literature be [[Page 30621]] approved internally prior to use only by a
registered principal. Currently, the Rules allow a registered principal
to perform the review or to delegate this responsibility to a designee.
The rules contain no guidelines regarding the level of experience,
expertise, or qualification that the designee must have in order to
assume this compliance responsibility. However, Part II of Schedule C
to the By-Laws sets forth the categories and requirements of registered
principals and subsection (2)(g)(ii)c.3 thereunder states definitively
that a Limited Principal-General Securities Sales Supervisor shall not
be qualified to perform final approval of advertising. Since the
internal approval rule currently does not address the qualifications
necessary for the designee, individuals less qualified than principals
are being designated by registered principals to provide internal
approval. The proposed amendment eliminates the potential for
inconsistent internal standards applied by different members regarding
the review of communications with the public.
The NASD is also proposing to modify Article III, Subsection
35(b)(1) of the Rules of Fair Practice and Subsection 8(b)(1) of the
Government Securities Rules to require that advertising and sales
literature be approved internally by members prior to being filed with
the NASD Advertising Regulation Department. The current rules for
review of advertisements and sales literature require that the material
be approved internally by the member prior to first use, but do not
require that material be approved internally by the member before being
filed with the NASD. Members have verified to the NASD that their
internal review sometimes occurs after the NASD response is received.
This practice places the NASD in the role of providing the initial
compliance review, a role that should, in the NASD's view, be
maintained within the member firms' compliance departments. The
proposed amendment will ensure that members are accountable for
submitting material which is in reasonable conformity to the applicable
rules. It is anticipated that this amendment will reduce the amount of
refiling requested by the Advertising Regulation Department due to
extensive deficiencies in the original filings.
The NASD is proposing to modify Article III, Subsections 35(c) (1),
(2), (3)(A) and (4) to the Rules of Fair Practice and Subsections
8(c)(1)(A) and (B), (c)(2) and (c)(3) of the Government Securities
Rules to require that, for filing requirements that have timeliness
requirements, the member provide the actual or expected date of first
use or publication of the item filed. Currently the rules provide that
material be filed within ten days of first use or ten days prior to
use, depending on the status of the firm and the subject matter of the
communication. For example, the rules require that firms which have
never filed material with the Advertising Regulation Department shall
file their advertisement at least ten days prior to first use and
continue to file their advertisements ten days prior to use for a
period of one year from the date of first filing. For advertisements
and sales literature for registered investment companies, direct
participation programs and government securities, the rules currently
require that they be filed on an ongoing basis within ten days of first
use. Advertisements for collateralized mortgage obligations must always
be filed at least ten days prior to use.
Under these guidelines, members file communications for review in
various stages of a document's production. These stages range from
first drafts to finished products. It is often impossible to determine
the date of first use unless the information is provided voluntarily by
the member or requested by the NASD reviewer. Because the NASD
Advertising Regulation Department reviews approximately 3500 to 4000
items per month, it is impractical to routinely contact members and
request they provide the date of use for each piece filed.
Consequently, the NASD is unable to determine systematically if the
member firms are meeting their filing obligations. The proposed
amendment will enable the NASD to enforce the existing rules more
effectively and consistently.
The NASD is proposing to delete Article III, Subsection 35(c)(3)(B)
to the Rules of Fair Practice. This provision was always intended to be
temporary in that it applied the pre-filing requirements of Subsection
35(c)(3)(A) for a period of one year to those firms that had been
filing advertisements for less than one year when the pre-filing
provisions became effective. The provision ensured that such firms
continued to pre-file advertisements for a period of at least one year
from the date their first advertisements were filed. As such, the
provision became inapplicable exactly one year from its effective date.
The NASD is proposing to modify Article III, Subsection 35(d)(2)(B)
to the Rules of Fair Practice and Subsection 8(d)(2)(B) to the
Government Securities Rules to clarify that the requirement to disclose
the price of the security applies only to recommendations for corporate
equities. The literal language of the current rule arguably would
require price disclosure with respect to all securities products in all
communications deemed to be recommendations. However, the NASD has a
longstanding practice of not requiring price disclosure on
communications for securities products other than corporate equities.
The proposed amendment specifies that the price requirement applies
only to communications on behalf of corporate equities and deletes the
price requirement entirely from the Government Securities Rules. In
proposing this modification, the NASD has considered that both the
Rules of Fair Practice and the Government Securities Rules prohibit
members from omitting material information in communications with the
public. Therefore, if inclusion of the price of the security is
necessary to make the material not misleading, then the member is
required to include the price as applicable.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act,\2\ 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
customers and the public interest in that the proposed rule change
codifies existing rule interpretations, rectifies inconsistencies and
clarifies issues which have been the source of member misunderstanding
regarding the filing, review and approval of advertising and sales
literature, and improves the efficiency of the advertising filing,
review and approval process without creating additional regulatory
burdens on the membership.
\2\ 15 U.S.C. Sec. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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 [[Page 30622]] Register or within such longer period (i) as the
Commission may designate up to 90 days of such date if it finds no
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 approved 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 file number SR-NASD-95-12 and
should be submitted by June 30, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\3\
\3\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-14191 Filed 6-8-95; 8:45 am]
BILLING CODE 8010-01-M
