Request for Comments on Proposed Amendment to Article III, Section 35 of the NASD Rules of Fair Practice Relating to Advertising and Sales Literature for Investment Company Securities
TO: All NASD Members and Other Interested Persons
LAST DATE FOR COMMENT: APRIL 14, 1988.
The NASD requests comments on a proposed amendment to Article III, Section 35 of the NASD Rules of Fair Practice. The amendment would require advertising and sales literature for registered investment company securities to be filed by members with the NASD Advertising Department within 10 days of first use or publication.
Currently, the rule requires members that are investment company underwriters to file advertising and sales literature concerning such companies. The proposed amendment would extend this filing requirement to all NASD members.
The NASD Board has observed that a majority of investment company advertising prepared by dealers reflects a lack of knowledge or observance of SEC and NASD rules.
The text of the proposed amendment 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 they provide a sound basis for evaluating the facts regarding any securities offered by members. Material facts and qualifications may not be omitted if, in the context of material presented, the omission would make the communication misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communication that the member knows or has reason to know contains any untrue statements of material facts or is otherwise false or misleading.
Article III, Section 35 currently requires a member to file all advertisements with the NASD Advertising Department for review 10 days prior to use for one year, commencing with the member's initial advertisement. Under certain circumstances, an NASD District Business Conduct Committee may also require a member to file advertising and/or sales literature with the Advertising Department at least 10 days prior to use. All members are subject to routine spot-checks of their advertising and sales literature.
Members must also file advertising and sales literature pertaining to direct participation programs within 10 days of first use, and certain options materials must be filed 10 days prior to first use. In addition, advertising and sales literature concerning registered investment company securities must be filed within 10 days of first use by members that are underwriters of such companies.
During the past two years, attention has been focused on problems with mutual fund advertising, particularly income fund advertising. The Securities and Exchange Commission (SEC) recently adopted extensive rule amendments governing the presentation of investment company performance (See SEC Release Nos. 33-6753; IC-16245). The NASD Board of Governors also addressed these concerns in Notice to Members 86-41 regarding the presentation of investment companies' yield quotations.
One of the Board's concerns was that the problems were not limited to material prepared by investment company underwriters, but were also common in material prepared by dealers. The Board noted that the majority of complaints received by the NASD about investment company communications related to material prepared by dealers. Much of the material was written and published by individual representatives or branch managers and reflects a lack of knowledge or observance of SEC and NASD rules.
In addition to the problems resulting from dealer preparation of investment company advertising, numerous violations have resulted from a dealer revising an advertisement prepared by an underwriter. Such problems include using outdated performance data, eliminating required disclosure, failing to offer the prospectus, adding or omitting information, and changing terminology (such as referring to one figure as "yield," "current return," and "distribution rate").
Of the 240 complaints about investment company material received by the NASD in 1987, 193 (80 percent) concerned advertising prepared by dealers while 47 (20 percent) related to material prepared by underwriters. The Board believes that the reason for this is that investment company underwriters are required to file sales material for review, whereas dealers are not. Therefore, the Board believes that a filing requirement for investment company advertising and sales literature is necessary for all NASD members.
The proposed amendment would require that advertising and sales literature used in connection with investment company securities be filed with the NASD Advertising Department within 10 days Of first use or publication by an NASD member. The responsibility of members to comply with the filing requirement would apply regardless of whether the advertising and sales literature were prepared by the underwriter, distributor, or member. However, the member need not file advertising and/or sales literature that was previously filed by the underwriter or distributor of the securities or by another member.
REQUEST FOR COMMENTS
The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506
Comments must be received by no later than April 14, 1988. Comments received by this date will be considered by the NASD Investment Companies Committee and the NASD Board of Governors. If approved by the Board, the proposed amendment will be submitted to the membership for a vote. Thereafter, the proposed amendment must be filed with and approved by the SEC before becoming effective.
Questions concerning this notice should be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.
Frank J. Wilson
Executive Vice President
Legal and Compliance
PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE*
Communications with the Public
*New language is underlined; deleted language is in brackets.