Notice To Members 88-52

Amendment to Rule: Testimonial Advertisements.

Published Date:

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EXECUTIVE SUMMARY

The Securities and Exchange Commission recently approved an amendment to Article III, Section 35(d)(2)(D) of the NASD Rules of Fair Practice relating to testimonials used in members' communications with the public. The rule amendment limits application of the rule on testimonial advertisements to testimonials concerning the quality of a member's investment advice and requires the disclosure of compensation paid to the person making a testimonial only if the compensation is more than a nominal amount. The text of the amendment follows this notice.

BACKGROUND AND SUMMARY OF AMENDMENT

Article m, 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. The rule's provisions were originally adopted in 1980 and were patterned after the rules of other self-regulatory organizations for purposes of consistency and reduction of unnecessary burdens on dual members. Because the New York Stock Exchange has amended its testimonial rule provisions since then, a conforming amendment to Article m, Section 35(d)(2)(D) was approved by the NASD Board of Governors at its meeting on September 15,1987, and then sent for NASD member vote. (See Notice to Members 87-67, dated October 14,1987).

To conform with NYSE Rule 472.40(8), the NASD thereafter amended Article in, Section 35(d)(2)(D) to limit the standards governing testimonials to those testimonials that concern the quality of a firm's investment advice. In addition, the amended rule limits the requirement to disclose compensation paid to the person giving the testimonial to those situations when the compensation is more than a nominal amount

Questions can be directed to either Eneida Rosa, NASD Assistant General Counsel, at (202) 728-8284, or R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.

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

Note: New language is underlined; deleted language is in brackets.

Communications With the Public

Sec. 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 successful
(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 andjexperience to form a valid opinion.