Notice To Members 87-40

Request for Comments on a Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Concerning Testimonials

Published Date:

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: JULY 22, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on a proposed amendment to Article III, Section 35(d)(2)(D) relating to testimonials used in members' communications with the public. The amendment would conform the NASD rule to that of the New York Stock Exchange.

The text of the proposed amendment is attached.

BACKGROUND

Article III, Section 35 of the NASD Rules of Fair Practice relates to members' communications with the public and contains specific standards governing testimonials used in such communications. When the rule was originally adopted in 1980, these standards were patterned after those of the New York Stock Exchange for purposes of consistency and reduction of unnecessary regulatory burdens on dual NASD/Exchange members. The current NASD rule applies to testimonial material concerning any advice, analysis, report, or other investment or related service rendered by the member and requires that members make clear that such experience is not necessarily indicative of future performance or of results obtained by others. Testimonials also must disclose compensation paid to the maker and if they imply a specialized opinion, the qualifications of the maker of the testimonial must be stipulated.

It was brought to the attention of the NASD's Advertising Department that the New York Stock Exchange had amended its testimonial rule and the question of a conforming amendment was presented to the National Business Conduct Committee in March 1987. At that time, the NBCC referred the issue for further study and subsequent to a report submitted to it at its May meeting, the NBCC recommended that the NASD amend its rule to conform to the NYSE rule.

PROPOSED AMENDMENT

The proposed amendment would conform the NASD rule to New York Stock Exchange Rule 472.40(8). The NYSE rule differs from the current NASD rule in two respects. First, and of the greatest significance, the NYSE's rule applies only to testimonials concerning the quality of a firm's investment advice. Secondly, the NYSE rule only requires disclosure of compensation if it is more than a nominal amount. Limiting testimonial treatment to communications that relate to the quality of investment advice is consistent with other provisions of the rule that focus upon disclosing that future performance may not be consistent with the experience of the individual giving the testimonial. The "nominal sum" exclusion allows payment to announcers or non-customer actors without requiring disclosure of such payment.

The NASD Board of Governors believes that this amendment will eliminate inconsistent regulation in the securities industry and that it is appropriate to limit the scope of testimonial amendments to communications relating to the quality of investment advice.

* * * * *

The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506.

Comments must be received no later than July 22, 1987. Comments received by this date will be considered by the NASD National Business Conduct Committee and the NASD Board of Governors. If approved by the Board, the amendment will be submitted to the membership for a vote. If approved by the membership, the amendment must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Ms. R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

Sincerely,

Frank J. Wilson
Executive Vice President Legal and Compliance

Attachment

PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE*

Communications With the Public

Section 35

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(d) Standards Applicable to Communications With the Public
(2) Specific Standards

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(D) Testimonials: [Testimonial material concerning the member or concerning any advice, analysis, report or other investment or related service rendered by the member must make clear that such experience is not necessarily indicative of future performance or results obtained by others. Testimonials must also disclose that compensation has been paid to the maker directly or indirectly, if applicable, and if they imply an experienced or specialized opinion, the qualifications of the maker of the testimonial should be given.]
In testimonials concerning the quality of a firm's investment advice, the following points must be clearly stated in the communication:
(i) The testimonial may not be representative of the experience of other clients.
(ii) The testimonial is not indicative of future performance or success.
(iii) If more than a nominal sum is paid, the fact that it is a paid testimonial must be indicated.
(iv) If the testimonial concerns a technical aspect of investing, the person making the testimonial must have knowledge and experience to form a valid opinion.

New language is underlined; deleted language is bracketed.