[Federal Register Volume 59, Number 57 (Thursday, March 24, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-6873] [[Page Unknown]] [Federal Register: March 24, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33780; File No. SR-NASD-93-66] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Filing Requirements for Use of Mutual Fund Rankings and Elimination of Sunset Provisions in Pre-Filing Requirements of Advertising and Government Securities Rules March 17, 1994. On February 7, 1994, the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'')\1\ a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\2\ and rule 19b-4 thereunder.\3\ The proposed rule change amends Article III, section 35 of the NASD Rules of Fair Practice\4\ and section 8 of the NASD Government Securities Rules\5\ to: (1) Require filing of advertisements and sales literature relating to investment companies; (2) made the pre-filing requirement of Article III, subsection 35(c)(2) of the Rules of Fair Practice and in subsection 8(c)(1)(B) of the Government Securities Rules permanent; and (3) properly reference the ``Advertising Regulation Department'' throughout Article III, section 35 of the Rules of Fair Practice and the Government Securities Rules. --------------------------------------------------------------------------- \1\The NASD initially submitted the proposed rule change on November 4, 1993. However, on February 7, 1994, the NASD filed Amendment No. 1, which amended and superseded the original rule filing. \2\15 U.S.C. 78s(b)(1) (1988). \3\17 CFR 240.19b-4 (1993). \4\NASD Manual, Rules of Fair Practice, Article III, Sec. 35 (CCH) 2195. \5\NASD Manual, Government Securities Rules, Sec. 8 (CCH) 2428. --------------------------------------------------------------------------- Notice of the proposed rule change, together with the substance of the proposal, was provided by issuance of a Commission release (Securities Exchange Act Release No. 33603, February 8, 1994) and by publication in the Federal Register (59 FR 7282, February 15, 1994). One comment letter favoring the proposed rule change was received. This order approves the proposed rule change. As the number of mutual funds has increased substantially in recent years, so has the number of mutual fund ranking entities (``Ranking Entities''). Ranking Entities, as well as mutual funds and fund affiliates, categorize and rank mutual funds by, for example, fund type, performance over a given period of years, total return, standardized yield calculated pursuant to Commission rules, the variations in sales charges, and risk/reward. References to such rankings in mutual fund advertisements and sales literature have also increased substantially in recent years as members have attempted to boost the sale of fund shares by touting the performance of various mutual funds. The Commission believes that it is important that the NASD review and regulate the use of ranking materials and the development of customized rankings in order to prevent the misleading use of such rankings. The NASD, therefore, has proposed to amend Article III, section 35(c) of the NASD Rules of Fair Practice to require that copies of mutual fund rankings and the data on which the rankings are based be submitted to the Association's Advertising Regulation Department for review. The proposed rule change requires members filing advertisements or sales literature for review which use or incorporate mutual fund rankings to include in the filing a copy of the ranking or comparison.\6\ --------------------------------------------------------------------------- \6\The NASD also has proposed Guidelines for the Use of Rankings in Mutual Fund Advertisements and Sales Literature (``Guidelines'') on which the NASD review will be based. See Securities Exchange Act Release No. 33606 (Feb. 8, 1994), 59 FR 7276 (Feb. 15, 1994) (noticing File No. SR-NASD-93-69). --------------------------------------------------------------------------- Subsection 35(c)(1) will require that any member that files any investment company advertisements or items of sales literature pursuant to subsection 35(c)(1) which include or incorporate rankings or comparisons of the investment company with other investment companies, shall include a copy of the ranking or comparison used in the advertising or sales literature. The requirements of this provision will permit the staff to immediately determine whether the use of the ranking complies with the Guidelines, and avoid the need for the NASD staff to research the ranking or attempt to obtain a copy of the source information in order to verify the accuracy of the material. The proposed rule change amends subsection 35(c)(2), which currently requires certain advertisements to be filed by members 10 days prior to use, to require such pre-use filing for all investment company advertisements or items of sales literature which incorporates rankings or comparisons of the investment company with other investment companies where the ranking or comparison is not generally published or is the creation, directly or indirectly, of the investment company, its underwriter or an affiliate.\7\ While the NASD is concerned about permitting ranking categories to be created by investment companies or their affiliates, rather than by a Ranking Entity, customized ranking nonetheless may provide meaningful information to the investor. Such filing also must include a copy of the data, ranking or comparison on which the ranking or comparison is based. --------------------------------------------------------------------------- \7\The proposed Guidelines permit the use of a ranking based on a category or subcategory created by a fund or a fund affiliate rather than by a Ranking Entity, so long as the ranking is based on the performance measurements of a Ranking Entity. --------------------------------------------------------------------------- The NASD also is amending Article III, subsection 35(c)(2) of the Rules of Fair Practice and subsection 8(c)(1)(B) of the Government Securities Rules to eliminate sunset provisions relating to collateralized mortgage obligations (``CMOs''). This change would make the pre-filing requirement for CMO advertisements permanent. Finally, the NASD is modifying references to the Advertising Department to reference the Advertising Regulation Department in Article III, Section 35 of the Rules of Fair Practice and the Government Securities Rules. The Commission finds that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act\8\ because it ensures that the use of rankings of investment companies in advertising and sales literature is accurate and presents investors with fair and meaningful data upon which to make an informed investment decision. With respect to the proposed elimination of the sunset provisions for the prefiling of CMO advertisements, the Commission believes that the positive regulatory benefits seen since implementation of the provision, i.e., the reduction in misleading advertising, warrants making the prefiling requirement provision permanent. Finally, the clarifications referring to the phrase ``Advertising Regulation Department,'' rather than ``Advertising Department'' will reduce unnecessary confusion among NASD members. --------------------------------------------------------------------------- \8\15 U.S.C. 78o-3. --------------------------------------------------------------------------- It is therefore ordered, pursuant to section 19(b)(2) of the Act, that File No. SR-NASD-93-66 be, and hereby is approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority, 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-6873 Filed 3-23-94; 8:45 am] BILLING CODE 8010-01-M