finra

FINRA


                    Friday, November 14, 1997

NASD Regulation Statement on Bond Fund Ratings

The NASD Regulation, Inc. Board of Directors today approved a proposed rule that would establish an 18-month pilot program allowing brokerage firms to use bond fund volatility ratings in supplemental sales material. The proposed rule will now be submitted to the NASD Board of Governors for approval. The proposed rule also requires Securities and Exchange Commission (SEC) approval.

 

The Board stressed that the trial program is being undertaken to permit investors to receive additional information concerning how market factors may affect bond funds in which they may wish to invest. Furthermore, the rule imposes a number of conditions to assure that the broad spectrum of investors that may use these ratings are not misled or confused and that the ratings are not predictive, or otherwise inappropriate. The proposed rule will prohibit:

  • Calling the ratings "risk" ratings;
  • A single number or symbol being used to describe the volatility; and
  • Subjective factors being used to make the volatility calculation.

The proposed rule would also require that:

  • The criteria used to determine the rating be disclosed to investors;
  • A disclaimer stating that the rating is not a recommendation to buy the fund;
  • Disclosure of the fact that consideration was paid in connection with the issuance of the rating;
  • The rating be current as of the most recent calendar quarter; and
  • If a rating is used, then all ratings issued on that same fund must also be disclosed, in order to discourage so-called "rate shopping."

Materials that include the volatility ratings will have to be filed and approved by NASD Regulation prior to use. During the 18-month trial period, NASD Regulation will collect data from bond rating agencies, fund groups, and brokerage firms to assess the program’s effect.