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Interpretive Letter to Yukako Kawata, Davis Polk & Wardwell

December 30, 2003

Ms. Yukako Kawata
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017

Re: Use of Related Performance Information in Sales Material for Private Equity Funds and Other Similar Funds

Dear Ms. Kawata:

This letter responds to your letter of December 1, 2003, which you submitted on behalf of Credit Suisse First Boston for the purpose of seeking interpretive guidance concerning how NASD Rule 2210 applies to sales material for certain kinds of private equity funds. Your letter states that you are seeking this guidance in light of NASD's letter to the Securities Industry Association dated October 2, 2003 (the "SIA Letter"), in which the NASD staff stated, among other things, that Rule 2210 prohibits members from providing related performance information1 in sales material for hedge funds.

In particular, your letter asks whether the SIA Letter was intended to prohibit members from presenting related performance information in sales material for private equity funds. For purposes of your letter, you define a "private fund" as an investment fund (i) the interests of which are sold through private placements exempt from registration under the Securities Act of 1933, as amended ("1933 Act"), (ii) that are exempt from registration as investment companies under the Investment Company Act of 1940, as amended ("1940 Act"), and (iii) the interests of which are exempt from registration under the Securities Exchange Act of 1934, as amended (the "1934 Act"). You indicate that private equity funds are one category of private funds, as are hedge funds.

You state that private funds are pooled investment vehicles that are only made available to investors that meet the requirements applicable to "qualified institutional buyers" as defined in Rule 144A(a)(1) of the Securities and Exchange Commission ("SEC") under the 1933 Act, "qualified purchasers" as defined in Section 2(a)(51) of the 1940 Act, or "accredited investors" as defined in Rule 501(a) under the 1933 Act. You state that private equity funds are a category of private funds that have certain characteristics that often require investors to invest at the time the fund is initially formed or shortly thereafter, require investors to commit their capital over a long investment horizon, and often prohibit investors from withdrawing their investments except under narrow circumstances. You also note that a private equity fund does not have a performance history prior to its formation, and typically will not have a meaningful performance record during the period it is open to new investors. Accordingly, you note that investors frequently request information regarding a private equity fund manager's prior performance history as part of the investors' due diligence investigation of the private equity fund and its sponsor.

You state that the SIA Letter places unnecessary burdens on broker/dealers and the private equity fund market generally in providing track record information to prospective investors. For these reasons, you have requested that the NASD staff exclude the application of the SIA Letter to sales material for private equity funds and other private funds that share similar characteristics. You also have presented six separate situations in which you believe it would be appropriate for NASD to allow the presentation of related performance information in member sales material.

The question that was presented to the NASD staff in the SIA Letter was whether, as a general matter, the staff would permit members to present related performance information in sales material for hedge funds or funds of hedge funds, including registered funds of hedge funds that could be sold to retail investors. In the SIA Letter, the NASD staff did not believe that it would be appropriate to allow members to present related performance information in hedge fund or fund of hedge fund sales material in all cases, particularly where the audience for such sales material could be retail investors. The SIA letter reflects the fact that NASD prohibits the presentation of most types of related performance information. Accordingly, the NASD staff declined to state that, as a general matter, hedge fund and fund of hedge fund sales material may include related performance information.

Nevertheless, the NASD staff recognizes the concerns that you have outlined in your letter. In particular, NASD staff recognizes that the presentation of related performance information with respect to an unregistered private fund (including an unregistered private hedge fund) that is excluded from the definition of "investment company" under Section 3(c)(7) of the 1940 Act does not present the same investor protection concerns as the presentation of related performance information with respect to the sale of mutual fund shares. Accordingly, as a general matter, the NASD staff would not object if a member includes related performance information in sales material for Section 3(c)(7) funds, provided that the member ensures that all recipients of such sales material are "qualified purchasers" under Section 2(a)(51) of the 1940 Act.

Of course, any private fund sales material remains subject to the applicable standards of Rule 2210 and the Interpretive Materials that follow Rule 2210, as well as all other applicable securities laws and regulations. In this regard, Rule 2210(d) requires that all member communications with the public must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts regarding the security or service being promoted. Members may not omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communication to be misleading. Rule 2210(d) further prohibits members from making any false, exaggerated, unwarranted or misleading claim in a communication with the public, and communications with the public may not predict or project performance, imply that past performance will recur or make any unwarranted claim, opinion or forecast.

I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions and have not been reviewed or endorsed by the NASD Board. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not address any other NASD rule or interpretation or all the possible regulatory and legal issues involved.


Thomas M. Selman
Senior Vice President



1 For purposes of your letter, you have defined "related performance information" as including the performance of investment companies, funds, portfolios, accounts or composites thereof that are managed by the same investment adviser, sub-investment adviser or portfolio manager that manages the fund that is being promoted.