Adoption of Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Regarding Advertising and Sales Literature for Direct Participation Programs
TO: All NASD Members and Other Interested Persons
This notice announces adoption of an amendment to Article HI, Section 35 of the NASD Rules of Fair Practice. The amendment was adopted by the NASD Board of Governors in response to the use by certain members of misleading advertising and improper sales literature in the marketing of public direct participation programs.
The amendment requires that advertising and sales literature concerning publicly offered direct participation programs be filed with the NASD Advertising Department for review within 10 days of first use or publication by an NASD member.
The text of the amended section is attached.
Article III, Section 35 of the NASD Rules of Fair Practice regulates members' communications with the public. It requires that all such communications be based on principles of fair dealing and good faith and that the communications provide a sound basis for evaluating the facts regarding the securities offered by members.
Material facts and qualifications may not be omitted if, in the context of the material presented, the omission would make the advertising or sales literature misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communications that the member knows or has reason to know contain any untrue statements of material fact or are otherwise false or misleading.
Article III, Section 35 currently requires a member to file advertisements with the NASD Advertising Department for review prior to use for one year after becoming a member, commencing with the member's initial advertisement. In addition, an NASD District Business Conduct Committee may, under certain circumstances, require a member to file advertising and sales literature with the NASD Advertising Department at least 10 days prior to use. All members are also subject to routine spot checks of their advertising and sales literature.
The NASD has noted that certain advertising and sales literature used in connection with public direct participation programs have involved misleading illustrations of past performance, the inclusion of information on projected performance, and the unbalanced presentation of programs by not including a statement of significant risks. The NASD has referred such practices to the appropriate District Business Conduct Committees.
The NASD Direct Participation Programs/Real Estate Committee considered whether specific guidelines should be developed and applied to sales literature and advertising used in connection with public direct participation program offerings but concluded that current guidelines contained in Article III, Section 35 are adequate to regulate the content of member communications with the public. However, the Board of Governors believes that a filing requirement for public direct participation program advertising and sales literature is necessary.
SUMMARY OF AMENDMENT
The amendment, which was approved by the SEC on June 5, 1987, requires that advertising and sales literature used in connection with public direct participation programs be filed with the NASD Advertising Department within 10 days of first use or publication by a member. Filing prior to use is recommended. The NASD will review the material for conformance with the standards contained in Article III, Section 35 of the NASD Rules of Fair Practice.
The responsibility of members to comply with the filing requirement applies regardless of whether the advertising and/or sales literature is prepared by a sponsor, general partner, underwriter, or member. However, the member need not file advertising and/or sales literature that was previously filed by the sponsor, general partner, or underwriter.
In order to expedite the review of this material, the NASD Advertising Department suggests that a prospectus for the offering accompany the filing of advertising and/or sales literature relating to that offering.
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Questions regarding this notice should be directed to Ms. R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.
Frank J. Wilson
Executive Vice President and General Counsel
AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE
(New language is underscored.)
Section 35. Communications with the Public
Note: Current subsections (3) through (7) will be renumbered (4) through (8), respectively.