RCA - Summer 1999 - Sudden Performance Changes May Require More Information

Recently, NASD Regulation has commented when member firms have used communications that overstated a security's historical performance while obscuring its recent, less favorable track record. These situations have arisen when a security's performance has been negatively effected by sudden changes in market conditions. These changes could be a spike in interest rates, currency devaluations, or other similar factors that may effect a market sector. Typically, the data used in these communications is factually accurate; however, the time period for which it is reported fails to reflect a more recent time frame during which market conditions may have hurt performance severely. When such a significant drop in performance occurs, communications must include further disclosure in order to comply with NASD Conduct Rules.


For example, pursuant to Securities and Exchange Commission (SEC) rules, mutual funds must advertise historical total return data current to the most recent calendar quarter ended prior to the submission of an advertisement for publication. Thus, prior to June 30, 1999, mutual fund advertisements will show returns current to March 31, 1999. Nevertheless, the use of such March 31, 1999, data alone has the potential to mislead, if the fund's performance suffers materially prior to updating at the next calendar quarter end.


NASD Regulation advises that if a security experiences an abrupt negative change in performance, member firms should amend their historical performance communications to add either updated performance figures or clear disclosure that current performance is less than the figures shown. This additional disclosure is necessary to ensure the communications are fair and not misleading. Conduct Rule 2210(d)(1)(A) specifically requires that members' communications provide a sound basis for evaluating the facts with respect to any product offered. The Rule also prohibits the omission of a material fact or qualification from a communication if such omission would cause the communication to be misleading.


Any questions regarding the presentation of historical performance in communications with the public may be directed to the Advertising/ Investment Companies Regulation Department at (202) 728-8330.