11510 Federal Register / Vol. 62, No. 48 / Wednesday, March 12, 1997 / Notices

1On November 21, 1996, the NASD filed

Amendment No. 1 with the Commission. The

amendment clarified that rankings based on yield

may be based on periods of less than one year. The

amendment also made technical amendments to the

text of the rule. See Letter from John Ramsay,

Deputy General Counsel, NASD Regulation, Inc. to

Katherine A. England, Assistant Director, Division

of Market Regulation, Commission, dated November

20, 1996.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4Securities Exchange Act Release No. 34354 (July

12, 1994), 59 FR 36461 (July 18, 1994).

5For example, one ranking entity has developed

a ranking system that summarizes an investment

company’s risk/reward profile for three, five, and

ten year periods. This system provides a composite

ranking that seeks to measure how well an

investment company has balanced return and risk

in the past.

6NASD Manual, Conduct Rules, Interpretative

Material of the Rules of the Association (CCH), IM–

2210–3.

7The Guidelines define ‘‘Ranking Entity’’ as

‘‘* * * any entity that provides general information

about investment companies to the public, that is

independent of the investment company and its

affiliates, and whose services are not procured by

the investment company or any of its affiliates to

assign the investment company a ranking.’’

8 In its discussions of how the terms ‘‘short,’’

‘‘medium’’ and ‘‘long term’’ might be interpreted,

NASDR staff considered time frames of 1–4 years,

5–9 years and 10 years or more, respectively, as an

acceptable interpretation.

9See letters to Jonathan G. Katz, Secretary, SEC,

from Banc One Corporation, Investment Company

Institute, and Morningstar, Incorporated, dated

December 24, 1996, December 24,1996, and

December 20, 1996 respectively; letter to Margaret

H. McFarland, Deputy Secretary, SEC, from Lipper

Analytical Services, Incorporated, dated December

23, 1996; and letter to Katherine A. England,

Assistant Director, Market Regulation, SEC, from

John Ramsay, Deputy General Counsel, NASDR,

dated January 23, 1997 (‘‘NASDR letter’’).

[Release No. 34–38369; File No. SR–NASD–

96–39]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change Amending the

Requirements for the Use in

Advertisements and Sales Literature of

Investment Company Rankings

March 5, 1997.

I. Introduction

On October 17, 1996,1 the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) submitted

to the Securities and Exchange

Commission (‘‘Commission’’), pursuant

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

Exchange Act of 1934 (‘‘Act’’) 2 and Rule

19b–4 thereunder,3 a proposed rule

change to amend the requirements for

the use in advertisements and sales

literature of investment company

rankings.

Notice of the proposed rule change as

amended, together with the substance of

the proposal, was published for

comment in Securities Exchange Act

Release No. 37987 (November 25, 1996),

61 FR 64185 (December 3, 1996)

(‘‘Notice’’). Four comment letters were

received on the proposal. This order

approves the proposed rule change.

II. Description

In 1994, the Commission approved

what is now IM–2210–3 of the NASD

Conduct Rules, which provides

guidelines for the use of rankings in

investment companies’ advertisements

and sales literature (‘‘Guidelines’’).4

Among other things, the Guidelines

require that all rankings used in

advertising and sales literature by

member firms to promote non-money

market mutual fund performance

include rankings over one, and, if

available, five and ten year periods.

Prior to the guidelines, there were no

specific standards for the use of

rankings. Members generally had

selected rankings for whatever time

period produced the most favorable

rankings for an investment company.

Since the approval of the Rankings

Guidelines, the staff of NASD

Regulation, Inc. (‘‘NASDR’’) has

considered whether to allow for greater

flexibility in the use of time periods

other than those prescribed by the

Guidelines. The staff noted that some

rankings, which are based on adjusted

total return to reflect criteria and

methodologies established and imposed

by the ranking entities, use time periods

that do not meet the three specifically

prescribed time periods contained

within the Guidelines.5 NASDR staff

determined that the Guidelines, as

originally approved, should be revised

consistent with the original goal that

would prevent selectivity of time

periods. The NASD filed a proposed

rule change to IM–2210–3 6 of the

NASD’s Conduct Rules to allow for the

use in advertisements and sales

literature of investment company

rankings that represent short, medium

and long term performance.

The rule change revises

subparagraphs (2) (B) and (C) to

paragraph (d) of IM–2210–3. The rule

change clarifies that the use of one, five

and ten year time periods is required if

such time periods are published by the

ranking entity.7 If rankings for the

required time periods are not published

by the ranking entity, the rule change

provides that rankings representing

short, medium and long term

performance must be provided in place

of rankings for the required time

periods.8

The rule change also replaces the

phrase ‘‘in the category’’ in

subparagraphs (2) (B) and (C) with the

phrase ‘‘relating to the same investment

category,’’ to clarify that when members

provide rankings for advertisements and

sales literature, rankings for the

prescribed time periods must be for the

same investment category or

subcategory as the total return ranking

that is being accompanied by the

prescribed ranking.

III. Summary of Comments

The Commission received four

comment letters, three of which

supported the proposed rule change,

and one that did not, and a response to

the comment letters.9 The comment

letter from Lipper Analytical Services,

Incorporated (‘‘Lipper’’) divides its

criticisms into several different areas.

Lipper stresses the importance of having

one, five and ten year performance

periods as a way to stop ranking

companies from ‘‘cherry picking’’

performance periods in order to

maximize attractiveness of the funds.

Lipper believes that the fact that some

funds do not have one, five or ten year

histories is sometimes very important to

investors and that lowering the

‘‘barriers’’ will not alert the investor to

the potential of an unseasoned mutual

fund.

Lipper next addresses the validity of

the categories of funds that are ranked.

Lipper says that funds with similar

investment characteristics should be

compared to each other but that

comparing dissimilar funds could be

misleading. In addition, Lipper argues

that the one year measure is important

to investors who may want to know the

short term performance of a fund and to

different mutual fund participants who

may have different time requirements.

Lipper adds that all performance based

advertising, including returns, rankings

and ratings, should be on the same

basis. Lipper also argues against the use

of a single number that represents risk

for an investment company, saying that

investors do not believe there can be a

useful single measure of risk. Any

measure that involves the use of the

word ‘‘risk’’ should have an explanation

of the calculation procedures. Lipper

says that any measure that compares

funds with securities indices and other

indices risks comparing unlike entities.

Last, Lipper agrees that there should be

some improvement in the disclosure of

fund advertising to investors, and

suggests that performance of funds

should be measured in rising and falling

market conditions.

The comment letter from the

Investment Company Institute (‘‘ICI’’),
Federal Register / Vol. 62, No. 48 / Wednesday, March 12, 1997 / Notices 11511

10The Commission notes that the correct time

period suggested by the NASD was 5–9 years for he

medium time period and that a mistake was made

in the Notice, which reads ‘‘5–5 years.’’

11 15 U.S.C. 78o–3

12See Notice and NASDR letter.

13See NASDR letter.

14The Commission believes that the concern

about risk-based rankings is not relevant to this

proposed rule change because this filing does not

deal with the method of calculating the

performance-based rankings themselves, other than

the length of time over which the rankings must be

calculated. The Commission also believes that the

suggestion that performance should be measured

over rising and falling market conditions is not

relevant to this proposed rule filing because this

filing is concerned with the length of the time

period for measuring performance.

15For example, if a one-year ranking is used that

coincides with the tenure at the firm of a particular

fund manager, the fact that the fund manager has

changed could be relevant. Similarly, if a three-year

ranking is used that encompasses a change in fund

managers at the firm, the fact that the ranking

covers a period with more than one fund manager

could be relevant.

16NASD Conduct Rule 2210(d)(1)(A) states that

‘‘[a]ll member communications with the public

should provide a sound basis for evaluating the

facts in regard to any particular security * * *. No

material fact or qualification may be omitted if the

omission * * * would cause the advertising or

sales literature to be misleading.’’ NASD Conduct

Rule 2210(d)(1)(B) further states that ‘‘[e]xaggerated,

unwarranted or misleading statements or claims are

prohibited in all public communications of

members.’’

17See Amendment #1, filed November 21, 1996

and NASDR letter.

18 15 U.S.C. 78s(b)(2).

19 17 CFR 200.30–3(a)(12).

although in support of the proposed rule

change, has two comments on the

content of the filing. The ICI states that

is does not believe that the NASDR’s

suggestions of 1–4 years, 5–9 years and

10 years or more 10 are intended as

definitions of short, medium and long,

but rather as an interpretation by the

NASDR staff of the relative lengths of

time for each period. In addition, ICI

states that the rule change does not

explicitly address whether a NASD

member could use a short or medium

term ranking for a fund that has been in

existence for at least one or at least five

years and for which rankings for the

specified time periods are not published

by the ranking entity, but it supports

that result.

IV. Discussion

The Commission finds that the

proposed rule change is consistent with

Section 15A(b) of the Act and the rules

and regulations thereunder, and, in

particular, with the requirements of

Section 15A(b)(6)11 that the rules of an

association be designed to promote just

and equitable principles of trade, to

prevent fraudulent and manipulative

acts, and, in general, to protect investors

and the public. The rule change

provides a flexible framework within

which ranking entities using different

methodologies can provide useful

information to investors in a way that is

not harmful or misleading and that still

prevents selectivity of time periods. The

Commission believes that performanceadjusted rankings which use different

time periods than those prescribed by

the Guidelines can help investment

company investors make informed

investment decisions if presented in a

way that is not misleading.

The Commission believes that a

concern about selectivity of time

periods is adequately addressed by the

rule change. The Commission notes that

under the proposed rule change, short,

medium and long-term rankings can

only be used if one, five and ten year

rankings are not available. The

Commission also notes that short,

medium and long term rankings are still

uniform in nature and do not allow

Ranking Entities to randomly choose

any time periods they want.

Lipper raises a valid concern about

only comparing similar funds, but the

Commission believes that concern is

addressed by the proposed rule change.

The rule change clarifies language in the

rule by stating that rankings for

prescribed time periods must be ‘‘* * *

by the same Ranking Entity, relating to

the same investment category, and

based on the same time period.’’ The

NASD, further clarifying the ‘‘relating to

the same investment category’’

language, stated that rankings for the

prescribed time period must be for the

same investment category or

subcategory as the total return ranking

that is being accompanied by the

prescribed ranking.12

The Commission notes Lipper’s

concern that a one year performance

ranking is important to investors who

want to know the short-term

performance of a fund. The Commission

believes that this concern is adequately

addressed by the requirement that one,

five and ten year time periods must be

used if they are published by the

ranking entity.13 The Commission also

believes that Lipper’s concern that

different mutual fund participants have

different time requirements is addressed

by the proposed rule change in that it

now permits the use of time periods

other than one, five and ten years in

certain instances.14

The Commission also realizes that

there may be instances where nondisclosure of certain factors could cause

the use of a ranking to be misleading,

notwithstanding that the ranking is in

technical compliance with the Ranking

Guidelines.15 NASD recognized these

concerns and stressed that NASD rules

governing communications with the

public require that all advertising and

sales literature submitted for review not

be misleading,16 and that those rules

give the NASDR broad authority to

prohibit the use of the misleading

ranking.17

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–NASD–96–

39) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–6197 Filed 3–11–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

[Public Notice 2516]

Advisory Committee on Historical

Diplomatic Documentation; Notice of

Meeting

The Advisory Committee on

Historical Diplomatic documentation

will meet in the Department of State,

March 18–19, 1997 in Conference

Rooms 1205 and 1406.

The Committee will meet in open

session from 1:00 p.m. on the afternoon

of Tuesday, March 18, 1997, until 5:00

p.m. The remainder of the Committee’s

sessions from 9:00 a.m.—5:00 p.m. on

March 19, 1997, will be closed in

accordance with Section 10(d) of the

Federal Advisory Committee Act (P.L.

92–463). It has been determined that

discussions during these portions of the

meeting will involve consideration of

matters not subject to public disclosure

under 5 U.S.C. 552b(c)(1), and that the

public interest requires that such

activities will be withheld from

disclosure.

Questions concerning the meeting

should be directed to William Z. Slany,

Executive Secretary, Advisory

Committee on Historical Diplomatic

Documentation, Department of State,

Office of the Historian, Washington, DC

20520, telephone (202) 663–1123, (email histoff@ix.netcom.com).

Dated: February 20, 1997.

William Z. Slany,

Executive Secretary.

[FR Doc. 97–6228 Filed 3–11–97; 8:45 am]

BILLING CODE 4710–22–M