[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Notices]
[Pages 42200-42202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20152]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36076; File No. SR-NASD-95-12]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to
Advertising and Sales Literature Filing and Review Requirements Under
the Rules of Fair Practice and the Government Securities Rules
August 9, 1995.
I. Introduction
On May 10, 1995, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act'') \2\ and Rule 19b-4 thereunder.\3\ The rule change
amends Article III, Section 35 of the Rules of Fair Practice and
Section 8 of the Government Securities Rules.
\1\ The proposed rule change was initially submitted on April
10, 1995, and was amended on May 10, 1995, prior to the publication
in the Federal Register.
\2\ 15 U.S.C. Sec. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
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Notice of the proposed rule change, together with its terms of
substance was provided by issuance of a Commission release \4\ and by
publication in the Federal Register.\5\ Two comments were received in
response to the Commission release, both raising concerns about the
proposal. This order approves the proposed rule change.
\4\ Securities Exchange Act Release No. 35801 (June 2, 1995).
\5\ 60 FR 30618 (June 9, 1995).
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II. Description
Under the rules as amended, the definitions of ``advertisement''
and ``sales literature'' will include electronic messages. The
inclusion of the term ``electronic'' with regard to advertisements is
intended to apply to communications available to all network
subscribers including items displayed over network bulletin boards. As
it applies to sales literature, the term ``electronic'' is intended to
apply to messages sent directly to individuals or targeted groups. The
term ``sales literature'' also will include telemarketing scripts.
Generally, these scripts are intended to be read to prospective and
existing customers or delivered electronically through a telemarketing
service. They differ from other forms of telephone prospecting and
customer contact in that these scripts are followed without variation
by the caller.
Further, the rules will require that advertising and sales
literature be approved internally by a registered principal prior to
filing such materials with the NASD. Currently, the rules only require
internal approval prior to the use of advertising and sales literature.
Also, a registered principal will no longer be able to delegate his or
her responsibility regarding internal approval procedures.
When material must be filed within a specified time frame, the
rules will require members to provide the actual or anticipated date of
first use or publication. For example, a firm that has never filed
material with the Advertising Regulation Department is required to file
its first advertisement at least ten days prior to first use and,
therefore, under the rules as amended, will be required to provide the
actual or anticipated date of first use.
The proposed rule change also will amend the scope of the rules
relating to the use of recommendations by members. The amendment will
make clear that the price of the security at the time the
recommendation is made must be provided only when the recommendation is
for corporate equities.
III. Comments
As noted above the Commission received two comment letters in
response to the NASD's proposed rule change. The Investment Company
Institute (``ICI'') expressed general support for the NASD's
initiative, but indicated a number of concerns about the proposal.\6\
First the ICI believes the requirements that only registered principals
may approve advertising and sales literature would impose unnecessary
burdens on members. The ICI believes legal or compliance officers are,
in most cases, more qualified to handle the review and approval of
advertising and sales literature than are registered principals. The
ICI argues that since most legal or compliance officers are not
registered principals, members will be forced to register such officers
as principals, transfer review procedures to less qualified principals,
or allow principals to rely on the opinions of the officers. The ICI
sees no benefit in achieving such results. The ICI recommends that,
instead of disrupting an industry practice that appears to be working
well, the NASD should deal directly with the problem firms.
\6\ Letter from Craig S. Tyle, Vice President & Senior Counsel,
Securities and Financial Regulation, Investment Company Institute,
to Jonathan G. Katz, Secretary, SEC (June 30, 1995).
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The ICI also recommends that the proposal to require materials to
be
[[Page 42201]]
approved internally prior to filing with the NASD should be revised to
state that the material is submitted on a voluntary basis. The ICI is
concerned that the use of the term ``accountable'' in the Commission's
release could be construed as an attempt to impose liability on members
based on filing materials with the NASD.
Lastly, the ICI is concerned that the application of the rules to
electronic communications would be inconsistent with the application of
the rules with respect to other forms of communications. For example,
the ICI claims that if a member sponsors an electronic bulletin board,
the NASD proposal would not distinguish between member advertising and
other material posted by the public. The ICI recommends that the
definition of ``advertisement'' be revised to clarify that messages
posted by the public on member sponsored bulletin boards are not
included in the definition. Further, the ICI believes that the
definition of ``sales literature'' is overbroad. The ICI is concerned
that the definition would include a personalized message to a
particular individual and, instead, recommends limiting the definition
to form letters sent to individuals or targeted groups.
The second commenter strongly endorsed the comments made by the
ICI.\7\ In particular, this commenter was concerned about the proposed
requirement relating to registered principal approval of advertising
and sales literature and the proposed inclusion of the word
``electronic'' in the definitions of ``advertisement'' and ``sales
literature.'' \8\
\7\ Letter from Laura Chasney, T. Rowe Price Associates, Inc.,
to Jonathan G. Katz, Secretary, SEC (July 5, 1995).
\8\ Id. These concerns already have been summarized in the
context of the ICI letter above.
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The NASD responded to these comments in a letter dated July 24,
1995.\9\ In response to the requirement that only registered principals
will be able to approve advertising and sales literature, the NASD
notes that while some unregistered legal or compliance officers perform
the review function very well, the expertise and skill among the
reviewers are inconsistent on an industry-wide basis and can result in
inferior submissions to the NASD. The NASD believes that any burden
imposed by the rule will be minimal. The NASD states that a significant
number of firms have legal and compliance personnel that are already
registered principals. Additionally, the NASD states that under the
rule as proposed, such personnel do not need to be registered to
continue to review materials, as long as a registered principal
approved the material prior to submission. Moreover, the NASD argues
that the steps necessary to register such personnel, which includes a
one-time examination, are not overly burdensome. The NASD believes the
requirement that a registered principal assume final approval
responsibility will help ensure a satisfactory level of review is
conducted by all reviewers. The NASD concludes that the improvement of
the efficiency and quality of the review process, and the resulting
benefits to the investing public, far outweigh the burdens discussed by
the commenters.
\9\ Letter from Suzanne E. Rothwell, Associate General Counsel,
NASD, to Mark P. Barracca, Branch Chief, SEC (July 24, 1995).
The NASD also responded to the commenters' concern that the
requirement regarding internal approval by members prior to filing
submissions with the NASD could be interpreted as an attempt to
establish a standard of culpability. In its letter, the NASD states
that the rule is not intended to attach liability to, or establish a
standard of culpability for, prefiled material. Instead, the rule will
ensure that member firms' communications are in reasonable compliance
with relevant SEC and NASD rules prior to submission to the NASD for
review. The NASD states that this requirement is consistent with SEC
recommendations made pursuant to the Commission's inspection of the
NASD's program for reviewing member communications with the public.
Under the rule, deficient filings will be returned and, if a pattern of
deficiency is discovered, an internal review of member procedures may
be appropriate.
Finally, the NASD responded to the commenters concerns regarding
the inclusion of the term ``electronic'' in the definitions of
``advertisement'' and ``sales literature.'' The NASD states that the
definition of advertisement in the proposed rule is not intended to
apply to communications posted by members of the public on electronic
bulletin boards sponsored by NASD members. The NASD claims that the
definition of advertisement has never applied to communications by
members of the general public. The NASD argues, therefore, that there
is no need to amend the definition to clarify that it does not apply
communications by the general public.
The NASD also claims that the definition of sales literature in the
proposed rule is not intended to apply to a personalized message sent
to a particular individual via electronic mail. The NASD states that
such messages are not treated as sales literature but generally are
treated as correspondence under Article III, Section 27(d) of the Rules
of Fair Practice. The NASD stresses, however, that the definition of
sales literature does apply to messages sent directly to targeted
individuals or groups.
IV. Discussion
The Commission has determined to approve the NASD's proposal. The
Commission finds that the rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the NASD, including the requirements of Section 15A(b)(6)
of the Act.\10\ Section 15A(b)(6) requires, in part, that the rules of
a national securities association be designed to prevent fraudulent and
manipulative acts and practices; to promote just and equitable
principles of trade; and to protect the public and the public interest.
\10\ 15 U.S.C. Sec. 78o-3(b)(6).
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The proposed rule change applies to member communication with the
public. It will act to clarify issues regarding advertising and sales
literature, as well as to codify existing rule interpretations
regarding the scope of rules applicable to member recommendations.
The changes to the definitions of ``advertisement'' and ``sales
literature'' will update those terms in an effort to alert members of
their responsibilities when contacting the public via electronic means
or by way of telemarketing scripts. The result should be reduced
confusion among members and a more consistent application of NASD
rules.
The proposed changes to the internal approval procedures will
ensure an adequate degree of expertise and uniformity in the execution
of such procedures. Further, the requirement that material be approved
internally prior to filing with the NASD will ensure that members
satisfy their existing compliance duties. The proposed amendment also
will require members to include the actual or anticipated date that a
particular communication will be published which will enable the NASD
to enforce the existing rules regarding time tables for filing certain
communications more effectively.
Lastly, the proposal will reduce member confusion by clarifying an
existing interpretation with respect to recommendations made by
members. The rules will be consistent with the existing practice of
requiring the price at the time a recommendation is made to
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apply only to recommendations for corporate equity securities.
All of the changes noted above will promote fairness and protect
investors and the public. The changes will provide members with a
greater understanding of their responsibilities when communicating with
the public. This, in turn, should result in an improved level of
compliance by members. Additionally, the NASD will be in a better
position to monitor such compliance.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
the proposed rule change SR-NASD-95-12 be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20152 Filed 8-14-95; 8:45 am]
BILLING CODE 8010-01-M
