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Notice To Members 89-77

Proposed Amendments to Article III, Section 12 of the NASD Rules of Fair Practice Re: Disclosure on Confirmations When Investment Companies Impose a Deferred Sales Charge on Redemption; Last Date For Comment: January 2, 1990

Published Date:
Last Date For Comment: January 2, 1990


Senior Management
Legal & Compliance
Mutual Fund

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The NASD requests comments on a proposal to amend the NASD confirmation rule, Article III, Section 12 of the NASD Rules of Fair Practice. The amendment would add a new subsection requiring disclosure on confirmations when an investment company imposes a deferred sales charge on redeemed shares.


In April 1989, the NASD Board of Governors authorized a notice (Notice to Members 89-35) to be sent to members advising them that it would be a violation of the NASD Rules of Fair Practice for a registered representative to state or imply to a prospective investor that an investment company with a contingent deferred sales charge is a "no load fund."

The notice resulted from a number of complaints from investors who claimed they were unaware of the existence of a sales charge on redemption and that they had been advised that the companies were "no load" or "no initial load" funds.

In that notice, the NASD indicated that contingent deferred sales loads are sales loads that are charged on redemption on a declining-percentage basis annually and are usually reduced to zero percent by the sixth or seventh year of share ownership. The NASD concluded that to assert that a mutual fund with a contingent deferred sales load is a "no load" fund is an unacceptable misrepresentation and that to state that there is "no initial load" without explanation of the nature of the contingent deferred sales load is an omission of material information. In the Board's view, it is the responsibility of all members and their registered representatives to ensure that prospective investors understand the nature of the various charges made by mutual funds to defray sales and sales promotion expenses, regardless of whether they are deducted from an initial investor's purchase payment, charged on redemption, or levied against the net assets of the fund.


The Board of Governors believes that many investors do not study the prospectus thoroughly before making a purchase of investment company shares and often rely only on the oral representations of a registered representative. Thus, through inadvertence or design, they may not be aware of the possibility of a sales charge on redemption.

The Board, on the recommendation of the Investment Companies Committee, believes that disclosure on confirmations of the possibility of a deferred sales charge on redemption would help to alert prospective investors to the existence of such charges before they have paid for the shares.

The proposed amendment to Section 12 would add a new paragraph (b) containing a short, simple disclosure statement that would be required Lo be included on all confirmations for investment company shares that impose a deferred sales charge on redemption.

The NASD encourages all members and 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, NW
Washington, DC 20006-1506.

Questions concerning this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8328.

Comments must be received no later than January 2, 1990. Changes to NASD Rules of Fair Practice must be approved by a vote of the NASD membership and filed with, and approved by, the Securities and Exchange Commission before becoming effective.


(Note: New text is underlined.)

Disclosure on Confirmations

Sec. 12(a) A member at or before the completion of each transaction with a customer shall give or send to such customer written notification disclosing (1) whether such member is acting as a broker for such customer, as a dealer for his own account, as a broker for some other person, or as a broker for both such customer and some other person; and (2) in any case in which such member is acting as a broker for such customer or for both such customer and some other person, either the name of the person from whom the security was purchased or to whom it was sold for such customer and the date and time when such transaction took place or the fact that such information will be furnished upon the request of such customer, and the source and amount of any commission or other remuneration received or to be received by such member in connection with the transaction.

(b) In addition to the requirements in sub-section (a) of this section 12, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, such written notification shall also include the following, in at least 8-point type, "On selling your shares, you may pay a sales charge. For this charge and other fees, see the prospectus."