Federal Register / Vol. 65, No. 217 / Wednesday, November 8, 2000 / Notices 67025

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See August 7, 1998 letter from Joan C. Conley,

Secretary, NASD Regulation, and attachments to

Katherine A. England, Assistant Director, Division

of Market Regulation (‘‘Division’’), SEC

(‘‘Amendment No. 1’’ )

4See October 16, 2000 letter (‘‘October 16 Letter’’

and attachments from Alden S. Adkins, General

Counsel and Senior Vice President, NASD

Regulation, and attachments, to Katherine A.

England, Assistant Director, Division, SEC

(‘‘Amendment No. 2’’ ). In Amendment No. 2,

NASD Regulation proposes that (i) members

presenting clone performance present total return

information for all related clone funds; (ii) the

predecessor and the advertised mutual fund share

sub-investment advisers as well as investment

advisers, and substantially all of the predecessor

portfolio’s assets must have been transferred to the

advertised mutual fund, upon conversion the

predecessor portfolio would have to cease to exist

as a separate entity, to present predecessor

performance; (iii) comparison portfolio performance

reflect the total return of other investment

companies as wellas other portfolios managed by

the investment adviser or sub-investment adviser;

(iv) several changes be made to the general

standards set forth in paragraph (d) of proposed IM–

2210–5; (v) no material difference may exist

between the portfolio to which the related

performance information refers and the advertised

mutual fund, except that the portfolio may not have

been registered under the Investment Company Act

of 1940, and material difference may exist between

the fees and expenses of a clone fund and the

advertised mutual fund; and (vi) any member filing

sales material that presents related performance

information to maintain books and records that

demonstrate the basis for and calculation of the

related performance information.

The draft notice in Amendment No. 2 includes

all of the changes implemented in Amendment Nos.

1 and 2. See October 19, 2000 telephone

conversation between Sarah Williams, Assistant

General Counsel, NASD Regulation and Joseph P.

Morra, Special Counsel, Division of Market

Regulation, SEC.

5See October 30, 2000 letter from Alden S.

Adkins, Senior Vice President and General Counsel,

NASD Regulation to Katherine A. England,

Assistant Director, Division, SEC (‘‘Amendment No.

3’’ ).

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43507; File No. SR–NASD–

98–11]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment Nos. 1, 2, and 3 by the

National Association of Securities

Dealers, Inc. Concerning Related

Performance Information

November 2, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 Rule 19b–4 thereunder,2

notice is hereby given that on February

12, 1998, 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 10, 1998, NASD Regulation filed

an amendment that completely replaced

and superseded the original proposed

rule change.3 On October 17, 2000,

NASD Regulation again amended the

proposal.4 On October 30, 2000, NASD

Regulation filed an amendment that

made minor, technical changes to the

proposed rule language.5 The

Commission is publishing this notice to

solicit comments on the proposed rule

change, as amended, from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing a new

Interpretive Material 2210–5 and

conforming amendments to existing

Rule 2210 and IM–2210–2 of the NASD.

Below is the text of the proposed rule

change, as amended. Proposed new

language is in italics. Proposed

deletions are in brackets.

2200. Communications with

Customers and the Public

2210. Communications With the

Public

(a) and (b) No change.

(c) Filing Requirements and Review

Procedures.

(1) Advertisements and sales

literature concerning registered

investment companies (including

mutual funds, variable contracts and

unit investment trusts) not included

within the requirements of paragraph

(c)(2), and public direct participation

programs (as defined in Rule 2810), and

advertisements concerning governments

securities (as defined in Section 3(a)(42)

of the Act) shall be filed with the

Association’s Advertising/Investment

Companies Regulation Department

(Department) within 10 days of first use

or publication by any member. The

member must provide with each filing

the actual or anticipated date of first

use. Filing in advance of use is

recommended. Members are not

required to file advertising and sales

literature which have previously been

filed and which are used without

change. Any member filing any

investment company advertisement or

sales literature pursuant to this

paragraph (c) that includes or

incorporates rankings or comparisons of

the investment company with other

investment companies shall include a

copy of the ranking or comparison used

in the advertisement or sales literature.

Any member filing a mutual fund or

variable contract advertisement or sales

literature that presents Comparison

Portfolio Performance (as defined by IM

2210–5) shall include a copy of the

proof of independent verification

required by IM 2210–5(c)(1)(B).

(c)(2) through (f) No change.

IM 2210–2. Communications With the

Public About Variable Life Insurance

and Variable Annuities

(a) No change.

(b) Specific Considerations

(1) Fund Performance Predating

Inclusion in the Variable Product

In order to show how an existing fund

would have performed had it been an

investment option within a variable life

insurance policy or variable annuity,

communications may contain the fund’s

historical performance that predates its

including in the policy or annuity. Such

performance may only be used provided

that no significant changes occurred to

the fund at the time or after it became

part of the variable product. However,

communications may not include the

performance of an existing fund for the

proposes of promoting investment in a

similar, but new Investment option (i.e.,

clone fund or model fund) available in

a variable contract. The presentation of

historical performance must conform to

applicable Association and SEC

standards. Particular attention must be

given to including all elements of return

and deducting applicable charges and

expenses.

(b)(2) through (5) No change.

IM–2210–5 Presentation of Mutual

Fund Related Performance Information

Any advertisement or sales literature

concerning an open-end management

investment company (the ‘‘Advertised

Mutual Fund’’ ) may present the

following types of performance

information (collectively, ‘‘Related

Performance Information’’ ).

(a) ‘‘Clone’’ Performance

The total return of all registered openend management investment

companies, calculated in accordance

with Item 21 of SEC Form N–1A, that

have the same investment policies,

investment objectives, investment

strategies, investment adviser and subinvestment adviser as an Advertised

Mutual Fund, provided that the

presentation of this Related

Performance Information complies with

the general standards in paragraph (d).

(b) ‘‘Predecessor’’ Performance

The total return of an Advertised

Mutual Fund, calculated in accordance

with Item 21 of SEC Form N–1A, that

includes the performance of an

insurance company separate account,

67026 Federal Register / Vol. 65, No. 217 / Wednesday, November 8, 2000 / Notices

common trust fund or private

investment company that had been

converted into, and had the same

investment adviser and sub-investment

adviser as, the Advertised Mutual Fund;

that had investment policies, investment

objectives and investment strategies that

were in all material respects equivalent

to those of the Advertised Mutual Fund;

and that was not created in order to

establish a performance record,

provided that:

(1) in the conversion, substantially all

of the assets of the predecessor portfolio

were transferred to the Advertised

Mutual Fund and upon conversion the

predecessor portfolio ceased to exist as

a separate entity;

(2) the performance of the predecessor

portfolio is adjusted as of the conversion

date only, to reflect all current fees and

expenses of the Advertised Mutual

Fund, as disclosed in the fee table in the

Advertised Mutual Fund’s current

prospectus, but not reflecting any fee

waiver or expense reimbursement for

the Advertised Mutual Fund; and

(3) the presentation of this Related

Performance Information complies with

the general standards in paragraph (d).

(c) ‘‘Comparison Portfolio’’ Performance

(1) The total return of a composite of

other portfolios, including other

investment companies, managed by the

investment adviser (or, as appropriate,

the sub-investment adviser) of an

Advertised Mutual Fund, provided that:

(A) The composite:

(i) Consists of all actual fee-paying,

discretionary portfolios managed by the

investment adviser (or sub-investment

adviser) with substantially similar

investment policies, investment

objectives, and investment strategies to

the Advertised Mutual fund, including

the Advertised Mutual Fund itself;

(ii) Excludes terminated portfolios

after the last full performance

measurement period the portfolios were

under management, but includes

terminated portfolios or all periods prior

termination;

(iii) Does not reflect any portfolio that

has been switched into the composite or

exclude any portfolio that had been

switched into the composite or exclude

any portfolio that had been switched

from the composite, unless documented

changes in guidelines communicated by

the client made the switching

appropriate; and

(iv) Adjusts the gross performance

information of any portfolio to reflect all

current fees and expenses of the

Advertised Mutual Fund, as disclosed

in the fee table in the Advertised Mutual

Fund’s current prospectus;

(B) The investment adviser (or subinvestment adviser) has obtained

verification from an independent third

party that the creation and maintenance

of the composite complies with

paragraph (1)(A) and proof of this

independent verification, current as of

the investment adviser’s (or subinvestment adviser’s) most recently

ended fiscal year, has been field with

the Advertising/Investment Companies

Regulation Department; and

(C) The presentation of this Related

Performance Information complies with

the general standards in paragraph (d).

(2) No member may imply that the

Association or any of its affiliates

endorses or approves of any composite

or the manner in which it was created

or maintained.

(d) General Standards

(1) No material difference may exist

between the portfolio to which the

Related Performance Information refers

and the Advertised Mutual Fund,

except;

(A) The portfolio may not have been

registered under the Investment

Company Act of 1940 and therefore may

not be subject to the restrictions that the

Investment Company Act and the

Internal Revenue Code impose; and

(B) Material differences may exist

between the fees and expenses of an

investment company reflected in Clone

Performance and the Advertised Mutual

Fund.

(2) Any Related Performance

Information presented in an

advertisement or sales literature:

(A) Must be, at a minimum, current to

the most recent calendar quarter ended

prior to submission for publication (in

the case of an advertisement) or prior to

use (in the case of sales literature); and

(B) Must be accompanied by Related

Performance Information for one, five

and ten years periods, provided that if

the Related Performance Information is

available for less than one, five or ten

years, the time period during which the

Related Performance Information is

available must be substituted for the

period otherwise prescribed.

(3) Any advertisement or sales

literature that presents Related

Performance Information:

(A) Must identify the length of, and

the date of the last day in, the period

used to compute the Related

Performance Information:

(B) Must present, in a more prominent

manner than the Related Performance

Information, the total return of the

Advertised Mutual Fund(excluding the

performance of any predecessor

portfolio) calculated and presented in

accordance with the applicable SEC

rules, provided that the registration

statement for the Advertised Mutual

Fund has been effective for at least one

year;

(C) When applicable, mut

prominently disclose that the

Advertised Mutual Fund has been in

operation for less than one year;

(D) Must disclose;

(i) Any material difference between

the fees and expenses of an investment

company reflected in Clone

Performance and the Advertised Mutual

Fund;

(ii) In the case of all Related Performance

Information:

a. That the Related Performance

Information is not the performance of the

Advertised Mutual Fund and should not be

considered indicative of or a substitute for

that performance and;

b. When applicable, that some or all of the

portfolios reflected in the Related

Performance Information (including any

predecessor portfolios) are not registered

under the Investment Company Act of 1940

and therefore were not subject to certain

investment restrictions that the Investment

Company Act and the Internal Revenue Code

impose, and that the performance of those

portfolios may have been adversely affected

had they been registered under the

Investment Company Act; and

(iii) Any other information that may be

necessary to ensure that the Related

Performance Information is not presented in

a misleading manner;

(E) May not refer to the Related

Performance Information in any headline or

other prominent statement;

(F) May not contain any ranking based on

the Related Performance Information; and

(G) Must accompany any graph or

illustration concerning Related Performance

Information with a more prominent graph or

illustration concerning the total return of the

Advertised Mutual Fund, calculated and

presented in accordance with applicable SEC

rules, provided that the registration statement

for the Advertised Fund has been effective

for at least one year.

(4) No advertisement or sales literature for

a money market fund may present Related

Performance Information.

(5) Any member filing an advertisement or

sales literature presenting Related

Performance with the Department must

maintain books and records that demonstrate

the basis for and calculation of the Related

Performance Information. Retention by the

member of copies of all such records

maintained by any investment advisers under

Rule 204–2(16) of the Investment Advisers

Act of 1940 would satisfy this requirement.

Such records must be maintained for three

years following the last distribution or

publication of the advertisement or sales

literature.

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

Federal Register / Vol. 65, No. 217 / Wednesday, November 8, 2000 / Notices 67027

6The position of the Commission’s staff

continues to be that manager performance

information in a mutual fund’s prospectus,

advertisements or sales literature is not per se

misleading under the federal securities laws,

provided that the performance is not presented in

a misleading manner and is not presented as a

substitute for the advertised mutual fund’s

performance. See Bramwell Growth Fund (pub.

avail. August 7, 1996); ITT Hartford Mutual Funds

(pub. avail. February 7, 1997). The Commission’s

staff believes that whether manager performance

information is misleading depends on the totality

of the circumstances, including the manner in

which it is presented. Id.

7 15 U.S.C. 78o–3(b)(6).

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. 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

Rule 2210 requires the filing of

various forms of advertisement and

sales literature with the Advertising/

Investment Companies Regulation

Department of NASD Regulation. NASD

Regulation staff reviews these filings to

determine whether they meet applicable

standards in the NASD Conduct Rules,

which are generally designed to ensure

that sales material is fair, balanced and

not misleading.

The SEC’s Division of Investment

Management recently issued a series of

‘‘no-action letters’’ that essentially

permit mutual funds to present a range

of performance information in their

sales material and prospectuses, subject

to specific factual circumstances and

regulatory conditions. These letters

generally permit the presentation of the

performance of (i) a mutual fund from

which the offered fund has been

‘‘cloned’’; (ii) a non-investment

company account that had been

converted into the advertised mutual

fund; (iii) private, investment company

or institutional accounts that are

managed by the mutual fund’s adviser;

and (iv) a mutual fund that was

previously managed by the offered

fund’s portfolio manager (‘‘manager

performance’’). (Together, these types of

performance information will be

referred to as ‘‘Related Performance

Information.’’)

The SEC’s no-action letters note that

the NASD Conduct Rules impose

standards on mutual fund and variable

product sales material separate from the

Commission rules, and the Commission

staff reached no conclusion concerning

whether the presentation of Related

Performance Information under the

conditions imposed by the no-action

letters would comply with the NASD

Conduct Rules.

Historically, the NASD has prohibited

the presentation of any Related

Performance Information, except

predecessor performance, in mutual

fund and variable product sales

material. In light of the Commission

staff’s recent no-action letters and

apparent public interest in the potential

benefits and concerns with the

presentation of Related Performance

Information in mutual fund and variable

product sales material, NASD

Regulation requested comment in

August 1997 on whether the NASD

should permit Related Performance

Information to be included in

advertisements or sale literature (Notice

to Members 97–47).

NASD Regulation received 55

comment letters from investors,

Chartered Financial Analysts, mutual

funds, money managers, and trade

associations. Forty-four commenters

supported the presentation of some type

of Related Performance Information,

while 11 opposed the presentation of

any Related Performance Information.

Commenters disagreed about the types

of Related Performance Information that

NASD Regulation should permit. The

highest level of opposition was raised to

the presentation of manager

performance information. Indeed, even

some of those who otherwise supported

the presentation of Related Performance

Information opposed the presentation of

portfolio manager performance. Of the

44 commenters who generally

supported the presentation of Related

Performance Information, 11

specifically discussed the presentation

of manager performance. Of these 11,

six opposed any presentation of

manager performance information.

The proposed rule change would

permit the presentation of Related

Performance Information (other than

manager performance information) in

mutual fund and variable product sales

material, subject to certain conditions

designed to make the presentation fair,

balanced and not misleading. The

proposed rule change would generally

permit, subject to certain conditions, the

presentation of the performance of (i) a

mutual fund from which the offered

fund had been ‘‘cloned’’; (ii) a noninvestment company account that had

been converted into the advertised

mutual fund; and (iii) private,

investment company or institutional

accounts that are managed by the

mutual fund’s adviser. The proposed

rule change thus represents a significant

liberalization of the types of

performance information that members

may present in mutual fund and

variable product sales material, subject

to conditions designed to protect

investors.

At the same time, the NASD Board of

Directors reaffirmed the NASD’s

longstanding policy of prohibiting the

presentation of manager performance in

mutual fund advertisements and sales

literature. The NASD believes that the

presentation of manager performance

could mislead or confuse investors

about the contributions of other

personnel of the investment adviser to

the mutual fund’s performance, such as

research analysts who recommend

securities to the portfolio manager and

traders who obtain best execution. The

efforts of these personnel and the

resources of the investment adviser are,

in most cases, critical to the mutual

fund’s performance. Moreover, a

relatively long time period may elapse

between the departure of a portfolio

manager from the previous mutual fund

and the advertisement of the new

mutual fund’s performance, thus

rendering the manager performance

information stale.6

2. Statutory Basis

NASD Regulation believes that the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act,7 in that the proposed rule

change is designed to prevent

fraudulent acts and practices, and to

promote just and equitable principles of

trade. In particular, NASD Regulation

believes the proposal would establish

conditions designed to ensure that the

presentation of Related Performance

Information is fair, balanced, and not

misleading.

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

See discussion of comment letters in

Item II(A)(1) above.

67028 Federal Register / Vol. 65, No. 217 / Wednesday, November 8, 2000 / Notices

8See October 16, 2000 Letter at page 1. NASD

Regulation also consents to an extension of the time

period for Commission action to 30 days after the

expiration of the 45-day comment period. The

Commission notes that a further extension of the

time period for Commission action may be needed

to allow for Commission analysis of comment

letters, and to allow NASD Regulation to provide

a response to comment letters.

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Currently, the Securities Industry Automation

Corporation (‘‘SIAC’’) is the only NYSE affiliated

company that administers its own corporate

employee disclosure program. In this regard, SIAC

has a rule similar to NYSE Rule 407.10 requiring

SIAC employees to apply to SIAC for permission to

open a securities or commodities account. SIAC

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which NASD Regulation

consents, the Commission will:

A. By order approve such proposed

rule change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

NASD Regulation has requested that

the Commission provide the public with

at least 45 days in which to comment on

the proposed rule change.8 The

Commission agrees to allow a 45-day

comment period on 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 proposed rule

change is consistent with the Act.

Additionally, as previously noted, the

Commission’s staff disagrees with the

NASD’s decision to per se exclude

manager performance information from

the rule. Interested persons are

specifically invited to comment on this

issue.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

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 NASD. All

submissions should refer to file number

SR–NASD–98–11 and should be

submitted by December 26, 2000.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–28653 Filed 11–7–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43488; File No. SR–NYSE–

00–41]

Self-Regulatory Organization’s; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by New York

Stock Exchange, Inc., Relating to

Approval Procedures for Exchange

Employee Securities Accounts

October 27, 2000.

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 October

6, 2000, the New York Stock Exchange,

Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend

NYSE Rule 407.10 to make the

Exchange’s Ethics Officer the party to

whom employees of the Exchange or

any of its affiliates must apply for

permission to open a securities or

commodities account. The Exchange

also proposes to clarify that the Rule’s

provisions are not applicable to any

affiliated company (as that term is

defined by the Rule) which administers

a corporate employee securities account

disclosure program.

The text of the proposed rule change

is available at the NYSE and at the

Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange 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

NYSE Rule 407.10 directs Exchange

employees, and employees of Exchange

affiliates, who wish to open a securities

or commodities account to apply to the

Secretary of the Exchange for

permission. The purpose of the

proposed rule change is to require those

employees to submit those applications

for approval to the Exchange’s Ethics

Officer rather than the Exchange’s

Secretary.

The Exchange’s ethics functions are

performed by the office of the

Exchange’s senior Human Resources

officer, who is also the Exchange’s

Ethics Officer. The Human Resources

Division, as part of its traditional

function and as part of its ethics

function, maintains a database on

Exchange employees. The Exchange

Secretary also maintains a database on

Exchange employees for the purpose of

authorizing securities and commodities

accounts.

The Exchange believes that shifting

the account-approval function to the

Ethics Officer will eliminate duplicative

record-keeping and will place the

function with the officer most

appropriate for making accountapproval decisions.

The Exchange also proposes to amend

NYSE Rule 407.10 to clarify that the

Rule’s provisions are not applicable to

any affiliated company (as that term is

defined by the Rule) which administers

a corporate employee securities account

disclosure program. This will avoid

duplicative approval processes.3