finra

FINRA

 

For Release:
Contact:
Thursday, December 11, 1997
Nancy A. Condon - (202) 728-8379


NASD Approves Bond Fund Pilot Program

Washington, D.C.--The National Association of Securities Dealers, Inc. (NASDâ) today announced that its Board of Governors approved submission to the Securities and Exchange Commission (SEC) of a proposal to establish an 18-month pilot program that would allow brokerage firms to use certain bond fund volatility ratings in supplemental sales material.

 

The rule establishes a number of conditions to assure that investors who use these ratings are not misled or confused, and that the ratings are not predictive, or otherwise inappropriate. Third party ratings may be used only if issued by nationally recognized statistical rating organizations.

 

The rule will specifically prohibit:

  • Calling the ratings "risk" ratings;
  • Describing volatility with a single number or symbol; and
  • Using subjective factors to make the volatility calculation.

The rule will also require:

  • 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 any payment made in connection with the issuance of the rating;
  • The rating be current as of the most recent calendar quarter; and
  • If a fund uses one rating, it must use every rating it has obtained for a specific time period.

"Giving investors additional information on how market factors may affect bond funds is extremely important. As a growing number of investors enter the debt and equity marketplace for the first time, it’s important to ensure that they have as much information as possible on which to base their investing decisions. During this trial period, we will actively monitor the ratings process and the way that these ratings are being used," said Frank G. Zarb, Chairman, Chief Executive Officer, and President of the NASD. He added: "The SEC will now seek public comment on this proposal. Given the amount of debate thus far, we expect a thoughtful and active comment period."

 

Materials that include the volatility ratings will have to be filed with, 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.

 

The NASD Regulation Board of Directors approved the proposed rule at its November 14th meeting.

 

The National Association of Securities Dealers is the largest securities-industry self-regulatory organization in the United States. Through its subsidiaries, NASD Regulation, Inc., and The Nasdaq Stock Market, Inc., the NASD develops rules and regulations; provides a dispute resolution forum; conducts regulatory reviews of members’ activities; and designs, operates, and regulates securities markets all for the benefit and protection of investors.