RCA - September 1998 - Limited Review of Communications with the Public

In 1997 the Advertising/Investment Companies Regulation Department (the Department) adopted a review procedure that focused on advertisements and sales literature that raised the greatest likelihood of investor protection concerns. The Department continues to review each and every communication filed by NASD member firms for compliance with applicable standards. The Department scrutinizes items that raise investor protection concerns on a line-by-line basis and provides detailed comments to member firms documenting the outcome of these reviews. Under the new procedure, the Department reviews on a more limited basis certain investment company communications that the rules allow members to file after they have been used with the public. The Department provides written responses to member firms documenting these limited reviews.


Members may use most investment company advertisements and sales literature with the public and then file them with the Department within 10 days of first use pursuant to NASD Conduct Rule 2210(c)(1). Investment company communications include material on behalf of mutual funds, variable contracts, unit investment trusts, and closed-end funds. Like all other communications with the public, member firms bear responsibility for ensuring that investment company advertisements and sales literature comply with applicable standards. A registered principal must sign or initial all communications before they are used with the public and before they are filed with the Department. The rules require documentation of this sign-off in all filings (see "Advertising Update," March 1998 NASD NASD Regulatory & Compliance Alert). The Department's experience shows that investment company communications filed after use with the public have a high rate of compliance with the applicable standards. Accordingly, the Department determined that a more limited review approach may be appropriate for selected investment company communications filed after use with the public.


The Department reviews every investment company communication filed after use with the public against a set of internal criteria that focus on areas of regulatory concern. The criteria address areas such as concerns raised by the SEC staff, new rules, or communications about new products. Should an advertisement or item of sales literature meet one of the criteria, the staff will review that communication on the same line-by-line basis as it reviews other filings and provide a comment letter to the NASD member firm reflecting the outcome of such review. Many communications that receive this type of line-by-line review are found to be fully compliant. If the communication does not meet one of the Department's internal criteria, the staff will send the member a comment letter stating that the material has been the subject of a limited review and that the staff had no comments at the time of the review.


Each limited review letter explains that the advertisements or sales literature may be subject to further review at a later date. The Department may provide further comments should circumstances change. For example, if additional information comes to light about a communication, the manner in which it is used, or about the securities product or service advertised in the communication, the staff may send the member an additional comment letter on the advertisement or sales literature. The additional review letter may materially alter the substance of the prior review. All such additional review letters contain an explanation as to why further comments became necessary.


The new review procedure has enabled the Department to focus resources on and prioritize areas of highest regulatory concern with a minimal impact on the timing of members' use of compliant materials. Any questions regarding the review of communications with the public may be directed to the Department at (202) 728-8330.