[Federal Register Volume 63, Number 171 (Thursday, September 3, 1998)]
[Notices]
[Pages 47062-47064]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23769]
[[Page 47062]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40365; File No. SR-NASD-98-29]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1
Thereto and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 to Proposed Rule Change Relating to Standards for
Individual Correspondence
August 26, 1998.
I. Introduction
On April 6, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly-owned
subsidiary, the NASD Regulation, Inc. (``NASDR''), submitted to the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend NASD Conduct Rule 2210 to require that written or electronic
communications prepared for a single customer be subject to the general
standards and those specific standards of NASD Rule 2210 that prohibit
misleading statements. On April 30, 1998, the NASDR filed Amendment No.
1 to the proposed rule change.\3\
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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 (``Division''), Commission, dated
April 29, 1998 (``Amendment No. 1'').
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The proposed rule change, as amended, was published for comment in
the Federal Register on May 8, 1998.\4\ One comment letter was received
on the proposal.\5\ On August 4, 1998, the NASDR filed Amendment No. 2
to the proposed rule change.\6\ The Commission solicits comments on
Amendment No. 2 from interested persons. This order approves the
proposed rule change and Amendment No. 1 thereto and approves Amendment
No. 2 to the proposed rule change on an accelerated basis.
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\4\ See Securities Exchange Act Release No. 39942 (May 1, 1998),
63 FR 25532.
\5\ See Letter from Joseph P. Savage, Assistant Counsel,
Investment Company Institute (``ICI''), to Jonathan G. Katz,
Secretary, Commission, dated May 29, 1998 (``ICI Letter'').
\6\ See Letter from John M. Ramsay, Vice President and Deputy
General Counsel, NASDR, to Katherine A. England, Assistant Director,
Division, Commission, dated August 4, 1998 (``Amendment No. 2''). In
Amendment No. 2, the NASDR responds to the concerns raised in the
ICI Letter and proposes to amend its filing to delete the phrase
``or a single customer'' in subparagraph (d)(1)(D)(ii) to NASD Rule
2210 and to revise subparagraph (d)(2)(L) to NASD Rule 2210 to
specify that the requirements apply solely to advertisements and
sales literature.
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II. Background and Description of the Proposal
Currently, NASD Rule 2210 imposes various requirements on member
communications with the public, designed to ensure that those
communications are fair, balanced, and not misleading. However, NASD
Rule 2210 does not expressly apply to the content of correspondence,
defined as a communication to only one person. In addition, there is
presently no definition of correspondence in the NASD rules, even
though members are required to supervise the use of correspondence by
their associated persons under NASD Rule 3010.
In June 1997, the NASDR requested comment on proposed amendments to
NASD Rule 2210 to define ``correspondence'' and amend the rule to
clarify which particular standards would apply to correspondence.\7\ As
first proposed, the amendments to NASD 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 NASD Rule
2210. The general standards of NASD Rule 2210 define or prohibit the
dissemination of statements that could be considered misleading. The
specific standards of NASD Rule 2210, set forth in subparagraph (d)(1)
require certain additional disclosures to be included in certain cases.
Most commenters supported applying to correspondence only the general
standards of NASD 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.
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\7\ See NASD Notice to Members 97-37 (June 1997).
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The NASDR believes that certain statements pose similar dangers
regardless of whether they are communicated to one person or many
persons. Therefore, the NASDR proposed to subject correspondence to the
general standards and those specific standards of NASD Rule 2210 that
prohibit misleading statements, but not to the specific standards of
the rule that require specific disclosure. The proposal would create 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
in the proposal as ``* * * [a]ny 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.''
The NASDR also proposes that in determining whether 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, 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.'' Form letters are
considered ``sales literature'' under NASD Rule 2210 and therefore,
would be subject to all of the general and specific standards of NASD
Rule 2210.
The proposed rule change would amend NASD Rule 2210 to subject
individual correspondence to the general standards under subparagraph
(d)(1) and the following specific standards under subparagraph (d)(2)
of NASD 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; and
(vi) subparagraph (d)(2)(N), which prohibits predictions and
projections of investment results.\8\ Each of these specific provisions
derive from members' general obligations not to make statements that
are misleading or without a reasonable basis in fact. In addition, as
the proposed rule change is not intended to change the current
[[Page 47063]]
application of Interpretive Memoranda under NASD Rule 2210, paragraph
(a) to IM-2210-1, relating to collateralized mortgage obligations, has
been amended to clarify that the interpretation applies only to
advertisements and sales literature.
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\8\ As initially proposed, subparagraph (d)(2)(L), which
prohibits certain statements regarding tax free or tax exempt
returns, also would have applied to correspondence. In response to
the ICI Letter, the NASDR, in Amendment No. 2, eliminated this
requirement. See Amendment No. 2, supra note 6.
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III. Summary of Comments
The Commission received one comment letter on the proposed rule
change.\9\ The commenter generally opposed the proposal. Specifically,
the ICI believes the proposed changes are unnecessary given recent
amendments to NASD Rule 3010 and 3110 and the fact that NASDR based the
rule on three isolated incidents occurring more than two years ago. The
ICI also requested: (1) clarification as to the applicability of
correspondence to the Commission's advertising rules; (2) that the
proposal be limited to correspondence made ``in connection with the
offer or sale of any security;'' (3) that subparagraph (d)(1)(A) to
NASD Rule 2210 be revised to limit the applicability of the ``sound
basis'' requirement to advertisements and sales literature; (4) that
the phrase ``or a single customer'' be deleted from subparagraph
(d)(1)(D)(ii) to NASD Rule 2210; and (5) that subparagraph (d)(2)(L) to
NASD Rule 2210 be revised to apply only to advertisements and sales
literature.
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\9\See ICI Letter, supra note 5.
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In response, the NASDR proposes to amend its filing to delete the
phrase ``or a single customer'' in subparagraph (d)(1)(D)(ii) to NASD
Rule 2210 and to revise subparagraph (d)(2)(L) to NASD Rule 2210 to
specify that the requirements apply solely to advertisements and sales
literature.
IV. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\10\ Specifically, the Commission believes the proposal is
consistent with the requirements of Section 15A(b)(6) of the Act \11\
in that it is designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest. The
Commission believes that the proposal, which applies the general and
certain specific standards of the NASD's communications rules to
correspondence directed towards a single customer, is designed to
protect existing and prospective customers by requiring that such
correspondence not be misleading.
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\10\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78o-3(b)(6).
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The NASDR proposes to define the word ``correspondence'' in new
subparagraph (a)(3) to NASD Rule 2210 as ``. . .[a]ny written or
electronic communication prepared for delivery to a single current or
prospective member, and not for dissemination to multiple customers or
the general public.'' The Commission believes that the proposed new
definition of the word ``correspondence'' adequately addresses the type
of communications sent by member firms to prospective and existing
customers that satisfy the definitions of neither ``advertising'' nor
``sales literature'' under the rule. In addition, the Commission
believes the proposal appropriately advises members and NASD examiners
to consider, among other things, the form and content of the
communication when determining whether a given communication
constitutes correspondence.
As discussed above, the NASDR proposal would apply the general and
certain specific standards of NASD Rule 2210 to correspondence directed
towards a single customer. The Commission believes that the NASD Rule
2210 requirements, which are designed to ensure that communications are
fair, balanced, and not misleading, are consistent with the Act. The
Commission believes that the application of such standards to
correspondence directed towards a single customer is appropriate, as
such persons have as much, if not more, reason to rely on the veracity
and accuracy of the content of such correspondence as would the
recipient of a ``form'' letter, which is subject to all of the general
and specific standards of NASD Rule 2210. The Commission recognizes
that several existing NASD Rules, including NASD Rules 2110, 3010, and
IM-2310-2,\12\ impose broad-based requirements on NASD member firms to
deal fairly with the public. Nonetheless, the Commission believes that
the more specific requirements set forth in the current proposal should
help to clarify member firms' obligations with respect to written and
electronic correspondence directed towards a single existing or
prospective customer.
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\12\ NASD Rule 2110 requires that ``[a] member, in the conduct
of his business, shall observe high standards of commercial honor
and just and equitable principles of trade.'' NASD Rule 3010(d) sets
forth members' responsibilities relating to the supervision of
correspondence. IM-2310-2 sets forth member firms' obligations in
their dealings with customers.
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The Commission also believes that the NASDR's proposal to apply
only certain of the specific standards set forth in subparagraph (d)(2)
to NASD Rule 2210 to correspondence directed towards a single customer
is reasonable. To require each of the specific standards of NASD Rule
2210 to be applied would likely overwhelm the recipient of such
correspondence with irrelevant, and possibly confusing, information.
The Commission believes that the NASDR's proposal to apply certain of
the specific standards set forth in subparagraph (d)(2) to NASD Rule
2210 reasonably balances member firms' need for workable regulatory
guidelines with investors' need for reliable information. Accordingly,
the Commission believes that the proposed rule change, as amended, is
consistent with the Act.
The Commission finds good cause for approving proposed Amendment
No. 2 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. In Amendment No. 2,
the NASDR addresses the concerns raised in the one comment letter
received by the Commission on this proposal. Amendment No. 2 modifies
the original filing only slightly, in response to specific comments
made in the ICI Letter. Specifically, Amendment No. 2 deletes the
phrase ``or a single customer'' in subparagraph (d)(1)(D)(ii) to NASD
Rule 2210 and limits the applicability of subparagraph (d)(2)(L) to
NASD Rule 2210 to advertisements and sales literature. As the
modifications proposed in Amendment No. 2 are reasonable and do not
significantly alter the original proposal, the Commission believes that
Amendment No. 2 raises no issues of regulatory concern. Accordingly,
the Commission believes that it is consistent with Section 15A(b)(6) of
the Act \13\ to approve Amendment No. 2 to the proposed rule change on
an accelerated basis.
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\13\ 15 U.S.C. 78o-3(b)(6).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether Amendment No. 2
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
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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, 450 Fifth Street, NW, Washington,
DC 20549. Copies of all such filings will also be available for
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 September 24, 1998.
VI. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-NASD-98-29), as amended, is
approved.
\14\ 15 U.S.C. 78s(b)(2).
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Jonathan G. Katz,
Secretary.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23769 Filed 9-2-98; 8:45 am]
BILLING CODE 8010-01-M
