[Federal Register Volume 66, Number 167 (Tuesday, August 28, 2001)]
[Notices]
[Pages 45350-45351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21669]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44737; File No. SR-NASD-2001-49]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment No. 1 by the
National Association of Securities Dealers, Inc. To Extend the
Expiration Date of Rules Concerning Bond Mutual Fund Volatility Ratings
August 22, 2001.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 10, 2001, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly owned
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), filed with the
Securities and Exchange Commission (``Commission'' or ``SEC'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by NASD Regulation. On August 16, 2001, NASD
Regulation amended the proposal.\3\ NASD Regulation filed the proposal
pursuant to Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(6)
thereunder,\5\ which renders the proposal effective upon with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See August 16, 2001 letter from Patrice M. Gliniecki, Vice
President and Deputy General Counsel, NASD Regulation, to Katherine
A. England, Assistant Director, Division of Market Regulation, SEC
(``Amendment No. 1''). In Amendment No. 1, NASD Regulation (a)
clarified that the trial period will be extended through August 31,
2003; (b) clarified that the trial period applies to Rule 2210(c)(3)
as well as IM-2210-5; and (c) made technical, non-substantive
changes to the proposal.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(6). NASD Regulation provided written
notice of its intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, on August 1,
2001.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation proposes to amend Interpretive Material (``IM'')
2210-5 to extend the expiration date of IM-2210-5 and NASD Rule
2210(c)(3) from August 31, 2001 through August 31, 2003.\6\ The text of
the proposed rule change is below. Proposed new language is in italics.
Proposed deletions are in brackets. IM-2210-5. Requirements for the Use
of Bond Mutual Fund Volatility Ratings (This rule and Rule 2210(c)(3)
will expire on August 31, [2001] 2003, unless extended or permanently
approved by the Association at or before such date.)
---------------------------------------------------------------------------
\6\ In Securities Exchange Act Release No. 42476 (February 29,
2000), 65 FR 12305 (March 8, 2000), the SEC approved IM-2210-5 and
NASD Rule 2210(c)(3) on a trial basis. This proposal clarifies in
the language of IM-2210-5 that the trial period applies to Rule
2210(c)(3) as well as IM-2210-5.
---------------------------------------------------------------------------
(a) No change.
(b) No change.
(c) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation included
statements concerning the purpose of and basis for its proposal and
discussed any comment it received regarding the proposal. The text of
these statements may be examined at the places specified in Item IV
below. NASD Regulation has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background and Description of the NASD's Rules on Bond Mutual Fund
Volatility Ratings
On February 29, 2000, the SEC approved the adoption of NASD IM-
2210-5, which permits members and their associated persons to include
bond fund volatility ratings in supplemental sale literature (mutual
fund sales material that is accompanied or preceded by a fund
prospectus).\7\ The SEC also approved at that time, new NASD Rule
2210(c)(3), which sets forth the filing requirements and review
procedures applicable to sales literature containing bond mutual fund
volatility ratings. Previously, the NASD Regulation staff interpreted
NASD rules to prohibit the use of bond fund volatility ratings in sales
material.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 42476 (February 29,
2000), 65 FR 12305 (March 8, 2000) at 12306.
---------------------------------------------------------------------------
IM-2210-5 permits the use of bond fund volatility ratings only in
supplemental sales literature and only if certain conditions are met:
The word ``risk'' may not be used to describe the rating.
The rating must be the most recent available and be
current to the most recent calendar quarter ended prior to use.
The rating must be based exclusively on objective,
quantifiable factors.
The entity issuing the rating must provide detailed
disclosure on its rating methodology to investors through a toll-free
telephone number, a web site, or both.
A disclosure statement containing all of the information
required by the rule must accompany the rating. The statement must
include such information as the name of the entity issuing the rating,
the most current rating and the date it was issued, and a description
of the rating in narrative form containing certain specified
disclosures.
Rule 2210(c)(3) requires members to file bond mutual fund sales
literature that includes or incorporates volatility ratings with the
Advertising Regulation Department of NASD Regulation (``Department'')
at least 10 days prior to use for Department approval. If the
Department requests changes to the material, the material must be
withheld from publication or circulation until the requested changes
have been made or the material has been refiled and approved.
IM-2210-5 and the new Rule 2210(c)(3) were approved on an 18-month
trial basis, which trial period expires on August 31, 2001, unless
extended or permanently approved by NASD Regulation at or before that
date.
Proposed Rule Change to Extend the Expiration Date of IM-2210-5 and to
Clarify the Related Expiration Date of NASD Rule 2210(c)(3)
As indicated in the SEC's order approving IM-2210-5 and Rule
2210(c)(3), NASD Regulation requested the 18-month trial period to
provide an opportunity to assess whether the rule change had
facilitated the dissemination of useful, understandable information to
investors, and whether it had prevented the dissemination of
inappropriate and misleading information.
As of July 2001, the Department had received only six filings
pursuant to
[[Page 45351]]
these provisions. In general, these filings met the requirements of IM-
2210-5. However, the staff does not believe that it has received a
sufficient number of filings to adequately evaluate the provisions'
effectiveness. While there may be a number of reasons for the low
number of filings, the staff believes that low investor demand for bond
funds coupled with the strong promotion of equity mutual funds during
much of the trial period may have contributed to the low level of
filings. The staff believes that additional experience with these
provisions is necessary to evaluate the effect on the delivery of
accurate and useful information to investors concerning bond mutual
fund volatility.
Accordingly, NASD Regulation is proposing to extend the expiration
date of IM-2210-5 and Rule 2210(c)(3) for an additional two years,
until August 31, 2003, to allow more filings to be made. Before this
period expires, the staff will evaluate IM-2210-5 and Rule 2210(c)(3)
and determine whether to recommend that they be eliminated, modified,
or permanently approved as is. Further, NASD Regulation is proposing to
amend IM-2210-5 to clarify that upon its expiration, Rule 2210(c)(3)
will also expire.
2. Statutory Basis
Nasdaq believes that the proposed extension is consistent with the
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among
other things, that the Association's rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general to protect investors and
the public interest. NASD Regulation believes that extending the
expiration date of IM-2210-5 and Rule 2210(c)(3) will provide the
additional experience necessary to filly analyze and evaluate the
provisions.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \9\ and
Rule 19b-4(f)(6)\10\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
NASD Regulation has asked that the Commission accelerate the
operative date. The Commission finds good cause to waive the 30-day
operative waiting period, because such designation is consistent with
the protection of investors and the public interest. Acceleration of
the operative date will ensure that the operation of the Rule will be
uninterrupted by the expiration provision currently contained in IM-
2210-5. For these reasons, the Commission finds good cause to waive the
30-day operative waiting period.\11\
---------------------------------------------------------------------------
\11\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f). The NASD will announce the proposed rule change in a Notice
To Members, to be published no later than 30 days after August 10,
2001, the date that NASD Regulation filed the proposed rule change.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying in the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the Association. All
submissions should refer to file number SR-NASD-2001-49 and should be
submitted by September 18, 2001.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21669 Filed 8-27-01; 8:45 am]
BILLING CODE 8010-10-M