25532 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices

4The requester stated, ‘‘The requested extension

is necessary to allow for substantive review and

comment on what are extremely important issues

for the securities industry.’’ Letter from Mari-Anne

Pisarri, Pickard and Djinis, on behalf of Thomson

Financial Services (April 30, 1998).

5 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from John Ramsay, Vice President

and Deputy General Counsel, NASDR, to Katherine

A. England, Assistant Director, Division of Market

Regulation, Commission, dated April 29, 1998

(‘‘Amendment No. 1’’). In Amendment No. 1, the

NASDR proposes to amend its filing to clarify that

in determing whether a given communication

constitutes correspondence for purposes of the rule,

NASD members, as well as NASDR staff, should

consider, among other things, the form and content

of the communication.

extended for thirty days from May 4,

1998, to June 3, 1998.4 The Commission

finds that extending the comment

period is appropriate in order to give

interested persons additional time to

comment on the matters that the

proposals address.

It is therefore ordered, pursuant to

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

comment period for the proposed rule

changes of the NYSE (File No. SR–

NYSE–98–07), the NASD (File No. SR–

NASD–98–20), and the MSRB (File No.

SR–MSRB–(98–06) be and hereby is

extended from May 4, 1998, to June 3,

1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.5

Jonathan G. Katz,

Secretary.

[FR Doc. 98–12263 Filed 5–7–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39942; File No. SR–NASD–

98–29]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 to Proposed Rule

Change by the National Association of

Securities Dealers, Inc. Relating to

Standards for Individual

Correspondence

May 1, 1998.

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 April 6,

1998, the NASD Regulation, Inc.

(‘‘NASDR’’) 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 NASDR. On April 30,

1998, the NASDR filed Amendment No.

1 to the proposed rule change.3 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

NASDR proposes to amend Rule 2210

of the Conduct Rules of the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) to require

that written or electronic

communications prepared for a single

customer be subject to the general

standards and those specific standards

of Rule 2210 that prohibit misleading

statements.

Below is the text of the proposed rule

change. Proposed new language is in

italics; proposed deletions are in

brackets.

2200. COMMUNICATIONS WITH

CUSTOMERS AND THE PUBLIC

2210. Communications with the Public

(a) Definitions—Communications

with the public shall include:

(1) Advertisement—For purposes of

this Rule and any interpretation thereof,

‘‘advertisement’’ means material

published, or designed for use in, a

newspaper, magazine or other

periodical, radio, television, telephone

or tape recording, videotape display,

signs or billboards, motion pictures,

telephone directories (other than routine

listings), electronic of other public

media.

(2) Sales Literature—For purposes of

this Rule and any interpretation thereof,

‘‘sales literature’’ means any written or

electronic communication distributed or

made generally available to customers

or the public, which communication

does not meet the foregoing definition of

‘‘advertisement.’’ Sales literature

includes, but is not limited to, circulars,

research reports, market letters,

performance reports or summaries, form

letters, telemarketing scripts, seminar

texts, and reprints or excerpts of any

other advertisement, sales literature or

published article.

(3) Correspondence—For purposes of

this Rule and any interpretation thereof,

‘‘correspondence’’ means any written or

electronic communication prepared for

delivery to a single current or

prospective customer, and not for

dissemination to multiple customers or

the general public.

Cross Reference—Rules Concerning

Review and Endorsement of

Correspondence are Found in paragraph

(d) to Conduct Rule 3010.

(b) Approval and Recordkeeping

(1) Each item of advertising and sales

literature shall be approved by signature

or initial, prior to use or filing with the

Association, by a registered principal of

the member.

(2) A separate file of all

advertisements and sales literature,

including the name(s) of the person(s)

who prepared them and/or approved

their use, shall be maintained for a

period of three years from the date of

each use.

(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) 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.

(2) Advertisements concerning

collateralized mortgage obligations

registered under the Securities Act of

1933, and advertisements and sales

literature concerning registered

investment companies (including

mutual funds, variable contracts and

unit investment trusts) that include or

incorporate rankings or comparisons of

the investment company with other

investment companies where the

ranking or comparison category is not

generally published or is the creation,

either directly or indirectly, of the

investment company, its underwriter or

an affiliate, shall be filed with the

Department for review at least 10 days

prior to use (or such shorter period as

the Department may allow in particular
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices 25533

circumstances) for approval and, if

changed by the Association, shall be

withheld from publication or circulation

until any changes specified by the

Association have been made or, if

expressly disapproved, until the

advertisement has been refiled for, and

has received, Association approval. The

member must provide with each filing

the actual or anticipated date of first

use. Any member filing any investment

company advertisement or sales

literature pursuant to this paragraph

shall include a copy of the data, ranking

or comparison on which the ranking or

comparison is based.

(3)(A) Each member of the

Association which has not previously

filed advertisements with the

Association (or with a registered

securities exchange having standards

comparable to those contained in this

Rule) shall file its initial advertisement

with the Department at least ten days

prior to use and shall continue to file its

advertisements at least ten days prior to

use for a period of one year. The

member must provide with each filing

the actual or anticipated date of first

use.

(B) Except for advertisements related

to exempted securities (as defined in

Section 3(a)(12) of the Act), municipal

securities, direct participation programs

or investment company securities,

members subject to the requirements of

paragraph (c)(3)(A) [or (B)] of this Rule

may, in lieu of filing with the

Association, file advertisements on the

same basis, and for the same time

periods specified in [those] that

subparagraph[s], with any registered

securities exchange having standards

comparable to those contained in this

Rule.

(4)(A) Notwithstanding the foregoing

provisions, any District Business

Conduct Committee of the Association,

upon review of a member’s advertising

and/or sales literature, and after

determining that the member has

departed and there is a reasonable

likelihood that the member will again

depart from the standards of this Rule,

may require that such member file all

advertising and/or sales literature, or the

portion of such member’s material

which is related to any specific types or

classes of securities or services, with the

Department and/or the District

Committee, at least ten days prior to

use. The member must provide with

each filing the actual or anticipated date

of first use.

(B) The Committee shall notify the

member in writing of the types of

material to be filed and the length of

time such requirement is to be in effect.

The requirement shall not exceed one

year, however, and shall not take effect

until 30 days after the member receives

the written notice, during which time

the member may request a hearing

before the District Business Conduct

Committee, and any such hearing shall

be held in reasonable conformity with

the hearing and appeal procedures of

the Code of Procedure as contained in

the Rule 9000 Series.

(5) In addition to the foregoing

requirements, every member’s

[advertising] advertisements and sales

literature shall be subject to a routine

spot-check procedure. Upon written

request from the Department, each

member shall promptly submit the

material requested. Members will not be

required to submit material under this

procedure which has been previously

submitted pursuant to one of the

foregoing requirements and, except for

material related to exempted securities

(as defined in Section 3(a)(12) of the

Act), municipal securities, direct

participation programs or investment

company securities, the procedure will

not be applied to members who have

been, within the Association’s current

examination cycle subjected to a spotcheck by a registered securities

exchange or other self-regulatory

organization using procedures

comparable to those used by the

Association.

(6) The following types of material are

excluded from the foregoing filing

requirements and spot-check

procedures:

(A) Advertisements or sales literature

solely related to changes in a member’s

name, personnel, location, ownership,

offices, business structure, officers or

partners, telephone or teletype

members, or concerning a merger with,

or acquisition by, another member;

(B) Advertisements or sales literature

which do no more than identify the

Nasdaq symbol of the member and/or of

a security in which the member is a

Nasdaq registered market maker;

(C) Advertisements or sales literature

which do no more than identify the

member and/or offer a specific security

at a stated price;

(D) Material sent to branch offices or

other internal material that is not

distributed to the public;

(E) Prospectuses, preliminary

prospectuses, offering circulars and

similar documents used in connection

with an offering of securities which has

been registered or filed with the

Commission or any state, or which is

exempt from such registration, except

that an investment company prospectus

published pursuant to SEC Rule 482

under the Securities Act of 1933 shall

not be considered a prospectus for

purposes of this exclusion;

(F) Advertisements prepared in

accordance with Section 2(10)(b) of the

Securities Act of 1933, as amended, or

any rule thereunder, such as SEC Rule

134, unless such advertisements are

related to direct participation programs

or securities issued by registered

investment companies.

(7) Material which refers to

investment company securities or direct

participation programs, or exempted

securities (as defined in Section 3(a)(12)

of the Act) solely as part of a listing of

products and/or services offered by the

member, is excluded from the

requirements of subparagraphs (1) and

(2).

(d) Standards Applicable to

Communications With the Public

(1) General Standards

(A) All member communications with

the public shall be based on principles

of fair dealing and good faith and

should provide a sound basis for

evaluating the facts in regard to any

particular security or securities or type

of security, industry discussed, or

service offered. No material fact or

qualification may be omitted if the

omission, in the light of the context of

the material presented, would cause the

[advertising or sales literature]

communication to be misleading.

(B) Exaggerated, unwarranted or

misleading statements or claims are

prohibited in all public communications

of members. In preparing such

[literature] communications, members

must bear in mind that inherent in

investments are the risks of fluctuating

prices and the uncertainty of dividends,

rates of return and yield, and no

member shall, directly or indirectly,

publish, circulate or distribute any

public communication that the member

knows or has reason to know contains

any untrue statement of a material fact

or is otherwise false or misleading.

(C) When sponsoring or participating

in a seminar, forum, radio or television

interview, or when otherwise engaged

in public appearances or speaking

activities which may not constitute

advertisements, members and persons

associated with members shall

nevertheless follow the standards of

paragraphs (d) and (f) of this Rule.

(D) In judging whether a

communication of a particular element

of a communication may be misleading,

several factors should be considered,

including but not limited to:

(i) the overall context in which the

statement or statements are made. A

statement made in one context may be
25534 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices

misleading even though such a

statement could be [perfectly]

appropriate in another context. An

essential test in this regard is the

balance of treatment of risks and

potential benefits.

(ii) the audience to which the

communication is directed. Different

levels of explanation or detail may be

necessary depending on the audience to

which a communication is directed, and

the ability of the member given the

nature of the media used, to restrict the

audience appropriately. If the

statements made in a communication

would be applicable only to a limited

audience or a single customer, or if

additional information might be

necessary for other audiences, it should

be kept in mind that it is not always

possible to restrict the readership of a

particular communication.

(iii) the overall clarity of the

communication. A statement or

disclosure made in an unclear manner

[obviously] can result in a lack of

understanding of the statement, or in a

serious misunderstanding. A complex or

overly technical explanation may be

[worse] more confusing than too little

information. Likewise, material

disclosure relegated to legends or

footnotes [realistically] may not enhance

the reader’s understanding of the

communication.

(2) Specific Standards

In addition to the foregoing general

standards, the following specific

standards apply:

(A) Necessary Data. Advertisements

and sales literature shall contain the

name of the member, unless such

advertisements and sales literature

comply with paragraph (f). Sales

literature shall contain the name of the

person or firm preparing the material, if

other than the member, and the date on

which it is first published, circulated or

distributed. If the information in the

material is not current, this fact should

be stated.

(B) Making [R]recommendations in

advertisements and sales literature.

(i) In making a recommendation,

whether or not labeled as such, a

member must have a reasonable basis

for the recommendation and must

disclose any of the following situations

which are applicable:

a. that the member usually makes a

market in the securities being

recommended, or in the underlying

security if the recommended security is

an option, [and/]or that the member or

associated persons will sell to or buy

from customers on a principal basis;

b. that the member and/or its officers

or partners own options, rights or

warrants to purchase any of the

securities of the issuer whose securities

are recommended, unless the extent of

such ownership is nominal;

c. that the member was manager or comanager of a public offering of any

securities of the recommended issuer

within the last three years.

(ii) The member shall also provide, or

offer to furnish upon request, available

investment information supporting the

recommendation. Recommendations on

behalf of corporate equities must

provide the price at the time the

recommendation is made.

(iii) A member may use material

referring to past recommendations if it

sets forth all recommendations as to the

same type, kind, grade or classification

of securities made by a member within

the last year. Longer periods of years

may be covered if they are consecutive

and include the most recent year. Such

material must also name each security

recommended and give the date and

nature of each recommendation (e.g.,

whether to buy or sell), the price at the

time of the recommendation, the price

at which or the price range within

which the recommendation was to be

acted upon, and indicate the general

market conditions during the period

covered.

(iv) Also permitted is material which

does not make any specific

recommendation but which offers to

furnish a list of all recommendations

made by a member within the past year

or over longer periods of consecutive

years, including the most recent year, if

this list contains all the information

specified in subparagraph (iii). Neither

the list of recommendations, nor

material offering such list, shall imply

comparable future performance.

Reference to the results of a previous

specific recommendation, including

such a reference in a follow-up research

report or market letter, is prohibited if

the intent or the effect is to show the

success of a past recommendation,

unless all of the foregoing requirements

with respect to past recommendations

are met.

(C) Claims and Opinions.

Communications with the public must

not contain promises of specific results,

exaggerated or unwarranted claims or

unwarranted superlatives, opinions for

which there is no reasonable basis, or

forecasts of future events which are

unwarranted, or which are not clearly

labeled as forecasts.

(D) Testimonials. In testimonials

concerning the quality of a firm’s

investment advice, the following points

must be clearly stated in [the]

advertisement or sales literature

[communication]:

(i) The testimonial may not be

representative of the experience of other

clients.

(ii) The testimonial is not indicative

of future performance or success.

(iii) If more than a nominal sum is

paid, the fact that it is a paid testimonial

must be indicated.

(iv) If the testimonial concerns a

technical aspect of investing, the person

making the testimonial must have

knowledge and experience to form a

valid opinion.

(E) Offers of Free Service. Any

statement in communications with the

public to the effect that any report,

analysis, or other service will be

furnished free or without any charge

must not be made unless such report,

analysis or other service actually is or

will be furnished entirely free and

without condition or obligation.

(F) Claims for Research Facilities. No

claim or implication in communications

with the public may be made for

research or other facilities beyond those

which the member actually possesses or

has reasonably capacity to provide.

(G) Hedge Clauses. No cautionary

statements or caveats, often called hedge

clauses, may be used in

communications with the public if they

are misleading or are inconsistent with

the content of the material.

(H) Recruiting Advertising.

Advertisements in connection with the

recruitment of sales personnel must not

contain exaggerated or unwarranted

claims or statements about

opportunities in the investment banking

or securities business and should not

refer to specific earnings figures or

ranges which are not reasonable under

the circumstances.

(I) Periodic Investment Plans.

Advertisements and sales literature

[Communications with the public]

should not discuss or portray any type

of continuous or periodic investment

plan without disclosing that such a plan

does not assure a profit and does not

protect against loss in declining

markets. In addition, if the material

deals specifically with the principles of

dollar-cost averaging, it should point

out that since such a plan involves

continuous investment in securities

regardless of fluctuating price levels of

such securities, the investor should

consider his financial ability to continue

his purchases through periods of low

price levels.

(J) References to Regulatory

Organizations. Communications with

the public shall not make any reference

to membership in the Association or to

registration or regulation of the

securities being offered, or of the

underwriter, sponsor, or any member or
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices 25535

associated person, which reference

could imply endorsement or approval

by the Association or any federal or

state regulatory body. References to

membership in the Association or

Securities Investors Protection

Corporation shall comply with all

applicable By-Laws and Rules

pertaining thereto.

(K) Identification of Sources.

Statistical tables, charts, graphs or other

illustrations used by members in

advertising or sales literature should

disclose the source of the information if

not prepared by the member.

(L) Claims of Tax Free/Tax Exempt

Returns. Income or investment returns

may not be characterized in

communications with the public as tax

free or exempt from income tax where

tax liability is merely postponed or

deferred. If taxes are payable upon

redemption, that fact must be disclosed.

References to tax free/tax exempt

current income must indicate which

income taxes apply or which do not

unless income is free from all applicable

taxes. For example, if income from an

investment company investing in

municipal bonds may be subject to state

or local income taxes, this should be

stated, or the illustration should

otherwise make it clear that income is

free from federal income tax.

(M) Comparisons. In making a

comparison in advertisements or sales

literature, either directly or indirectly,

the member must make certain that the

purpose of the comparison is clear and

must provide a fair and balanced

presentation, including any material

differences between the subjects of

comparison. Such differences may

include investment objectives, sales and

management fees, liquidity, safety,

guarantees or insurance, fluctuation of

principal and/or return, tax features,

and any other factors necessary to make

such comparisons fair and not

misleading.

(N) Predictions and projections. In

communications with the public.

i[I]nvestment results cannot be

predicted or projected. Investment

performance illustrations may not imply

that gain or income realized in the past

will be repeated in the future. However,

for purposes of this Rule, hypothetical

illustrations of mathematical principles

are not considered projections of

performance; e.g., illustrations designed

to show the effects of dollar cost

averaging, tax-free compounding, or the

mechanics of variable annuity contracts

or variable life policies.

* * * * *

IM–2210–1. Communications with the

Public About Collateralized Mortgage

Obligations (CMOs)

(a) General Considerations

For purposes of the following

guidelines, the term ‘‘collateralized

mortgage obligation’’ (CMO) refers to a

multiclass bond backed by a pool of

mortgage pass-through securities or

mortgage loans. CMOs are also known

as ‘‘real estate mortgage investment

conduits’’ (REMICs). As a result of the

1986 Tax Reform Act, most CMOs are

issued in REMIC form to create certain

tax advantages for the issuer. The term

CMO and REMIC are now used

interchangeably. In order to prevent [a

communication about] advertisements

and sales literature regarding CMOs

from being false or misleading, there are

certain factors to be considered,

including, but not limited to, the

following:

(1) Product Identification

In order to assure that investors

understand exactly what security is

being discussed, all communications

concerning CMOs should clearly

describe the product as a ‘‘collateralized

mortgage obligation.’’ Member firms

should not use the proprietary names

for CMOs as they do not adequately

identify the product. To prevent

confusion and the possibility of

misleading the reader, communications

should not contain comparisons

between CMOs and any other

investment vehicle, including

Certificates of Deposit.

(2) Educational Material

In order to ensure that customers are

adequately informed about CMOs

members are required to offer to

customers education material which

covers the following matters:

(A) A discussion of CMO

characteristics an investments and their

attendant risks;

(B) An explanation of the structure of

a CMO, including the various types of

tranches;

(C) A discussion of mortgage loans

and mortgage securities;

(D) Features of CMOs, including:

credit quality, prepayment rates and

average lives, interest rates (including

effect on value and prepayment rates),

tax considerations, minimum

investments, transactions costs and

liquidity;

(E) Questions an investor should ask

before investing; and

(F) A glossary of terms that may be

helpful to an investor considering an

investment.

(3) Safety Claims

A communication should not

overstate the relative safety offered by

the CMO. Although CMOs generally

offer low investment risk, they are

subject to market risk like all investment

securities and there should be no

implication otherwise. Accordingly,

references to liquidity should be

balanced with disclosure that, upon

resale, an investor may receive more or

less than his original investment.

(4) Claims About Government

Guarantees

(A) Communications should

accurately depict the guarantees

associated with CMO securities. For

example, in most cases it would be

misleading to state that CMOs are

‘‘government guaranteed’’ securities. A

government agency issue could instead

be characterized as government agency

backed. Of course, private- issue CMO

advertisements should not contain

references to guarantees or backing, but

may disclose the rating.

(B) If the CMO is offered at a

premium, the communication should

clearly indicate that the government

agency backing applies only to the face

value of the CMO, and not to any

premium paid. Furthermore,

communications should not imply that

either the market value or the

anticipated yield of the CMO is

guaranteed.

(5) Simplicity Claims

CMOs are complex securities and

require full, fair and clear disclosure in

order to be understood by the investor.

A communication should not imply that

these are simple securities that may be

suitable for any investor seeking high

yields. All CMOs do not have the same

characteristics and it is misleading to

indicate otherwise. Even though two

CMOs may have the same underlying

collateral, they may differ greatly in

their prepayment speed and volatility.

(6) Claims About Predictability

A communication would be

misleading if it indicated that the

anticipated yield and average life of a

CMO were assured. It should disclose

that the yield and average life will

fluctuate depending on the actual

prepayment experience and changes in

current interest rates.

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

NASDR included statements concerning

the purpose of and basis for the
25536 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices

4See, In the Matter of Peter Stuart Bevington,

Complaint No. C8A940021 (March 5, 1997); In the

Matter of William Stafford Thurmond, Complaint

No. C06930051 (Feb. 1, 1996): In the Matter of

Jeffery Steven Stone, Complaint No. C06940036

(Feb. 1, 1996); and In the Matter of Micah C.

Douglas, Complaint Nos. C06920046 and

C06930068 (Sept. 19, 1995).

5The NBCC is now called the National

Adjudicatory Council. 6See Amendment No. 1, supra note 3.

proposed rule change an 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 NASDR 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

NASD Conduct Rule 2210 imposes

various requirements on member

communications with the public,

designed to ensure that those

communications are fair, balanced and

not misleading. Rule 2210 does not

expressly apply to the content of

correspondence (i.e., a communication

to only one person). In addition, there

is no definition of correspondence in

the NASD rules, even though members

are required to supervise the use of

correspondence by their associated

persons under Rule 3010.

Recently, several NASD disciplinary

matters raised the issue of whether

correspondence to a single customer

constitutes ‘‘sales literature’’ subject to

the requirements of Rule 2210.4 The

National Business Conduct Committee

(‘‘NBCC’’) 5 consistently took the

position in these cases that a document

prepared for use with a single customer,

and not for dissemination to the general

public, is not ‘‘sales literature’’ as that

term is defined in subparagraph (a)(2) to

NASD Rule 2210. However, the NBCC

also agreed that the application to

correspondence of particular standards

in the rules for communications to the

public would be appropriate and would

enable NASD staff to bring enforcement

actions on the basis of clear violations

of certain proscribed behavior. The

NBCC recommended that the NASD

define ‘‘correspondence’’ in Rule 2210

and amend the rule to clarify which

standards apply to correspondence. In

June 1997, the NASDR requested

comment on these proposed

amendments in Notice to Members 97–

37 (June 1997).

As first proposed, the amendments to

Rule 2210 would have required that

communications prepared for a single

customer be subject to the standards,

but not the filing and review

requirements, of Rule 2210. Some of

these standards define or prohibit the

dissemination of statements that could

be considered misleading. Others

require that certain additional

disclosure, e.g., that the member makes

a market in a particular security, be

included in certain cases in the

communication. Most commenters

thought it was appropriate only to apply

the general standards of Rule 2210,

which, among other things, prohibit

untrue statements of material facts, the

omission of material facts, and

statements that are exaggerated,

misleading or unwarranted. These

commenters stated that imposing all of

the specific standards on each item of

correspondence, particularly those that

require additional disclosure, would

unduly complicate communication with

clients and unnecessarily burden

supervisory programs without

materially contributing to the protection

of investors. A few commenters

supported the proposed amendments,

stating that the proposed exemption of

correspondence from the NASD filing

and review requirements strikes the

proper balance. One commenter

suggested applying the proposed

amendment only to solicitations,

recommendations, and sales letters

directed at an individual customer.

Discussion

The NASDR believes that certain

statements pose similar dangers

regardless of whether they are

communicated to one person or many

persons. An amendment to Rule 2210 to

clarify how the rule applies to

correspondence would provide better

guidance to the membership and would

help to assure that investors are

adequately protected with respect to the

communications they receive

individually. At the same time, the

NASDR recognizes that correspondence

is highly individualized in nature and

that much correspondence (unlike

advertising and sales literature) is

directed by registered representatives

(‘‘RR’’) to customers with whom the RR

already has an established relationship.

Therefore, the NASDR has determined

that the proposed rule change should

subject correspondence to the general

standards and those specific standards

of Rule 2210 that prohibit misleading

statements, but not to the specific

standards of the rule that prescribe

specific disclosure.

The proposed rule change creates a

category defined as ‘‘communications

with the public’’ to include the current

definitions of ‘‘advertisement’’ and

‘‘sales literature,’’ and a new definition

of ‘‘correspondence.’’ ‘‘Correspondence’’

is defined as ‘‘* * * any written or

electronic communication prepared for

delivery to a single current or

prospective customer, and not for

dissemination to multiple customers or

the general public.’’ In determining

when a written or electronic

communication is prepared for delivery

to a single current or prospective

customer, NASD members should

consider and the staff of the NASDR

should examine,6 among other things,

the form and content of the

communication. Thus, a written or

electronic communication addressed to

a single current or prospective

customer, the content of which is

substantially identical to that of written

or electronic communications sent to

one or more other current or prospective

customers, is a form letter, not

‘‘correspondence.’’ Because form letters

are considered ‘‘sales literature’’ under

Rule 2210, they would be subject to all

of the general and specific standards of

Rule 2210.

The proposed rule change amends

Rule 2210 to subject individual

correspondence to the general standards

under subparagraph (d)(1) and the

following specific standards under

subparagraph (d)(2) of Rule 2210: (i)

subparagraph (d)(2)(C), which prohibits

exaggerated, unwarranted, or certain

other specific claims or opinions, (ii)

subparagraph (d)(2)(E), which prohibits

certain offers of free services, (iii)

subparagraph (d)(2)(F), which prohibits

certain claims for research services, (iv)

subparagraph (d)(2)(G), which prohibits

certain hedge clauses, (v) subparagraph

(d)(2)(J), which prohibits the

implication of endorsement or approval

by regulatory organizations, (vi)

subparagraph (d)(2)(L), which prohibits

certain statements regarding tax free or

tax exempt returns, and (vii)

subparagraph (d)(2)(N), which prohibits

predictions and projections of

investment results. Each of these

specific provisions derive from

members’ general obligations not to

make statements that are misleading or

without a reasonable basis in fact.

Individual correspondence will not be

subject to the following specific

standards of Rule 2210: (i) subparagraph

(d)(2)(A), which requires the inclusion

of certain information regarding

members’ names, (ii) subparagraph

(d)(2)(B), which requires that a member

disclose specified information to the

customer when making a

recommendation, (iii) subparagraph
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices 25537

7 15 U.S.C. 78o–3(b)(6).

(d)(2)(D), which requires the inclusion

of certain statements regarding

testimonials, (iv) subparagraph

(d)(2)(H), which prohibits exaggerated

or unwarranted claims in

advertisements for the recruitment of

sales personnel, (v) subparagraph

(d)(2)(I), which requires certain

disclosures regarding periodic

investment plans; (vi) subparagraph

(d)(2)(K), which requires the

identification and disclosure of sources

other than the member for certain

statistical tables, charts, graphs, or other

illustrations, and (vii) subparagraph

(d)(2)(M), which requires the inclusion

of certain information when making

comparisons of investment alternatives.

The proposed rule change is not

intended to change the current

application of Interpretive Memoranda

under Rule 2210. Therefore paragraph

(a) to IM–2210–1 (interpretation

regarding collaterlized mortgage

obligations) has been amended to clarify

that only advertisements and sales

literature are covered by the

interpretation.

Finally, the proposed amendments

also incorporate several minor technical

changes that are non-substantive in

nature.

2. Statutory Basis

The NASDR believes that the

proposed rule change is consistent with

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

the Act,7 which require that the

Association adopt and amend its rules

to promote just and equitable principles

of fair trade, and generally provide for

the protection of investors and the

public interest. By subjecting individual

correspondence to the general standards

and those individual standards in Rule

2210 that prohibit misleading

statements, the NASDR believes that the

proposed rule change strikes the

appropriate balance between protecting

investors from misleading or

inappropriate communications in

correspondence and imposing workable

regulatory requirements that reasonably

permit member firms to exercise

effective compliance oversight with

respect to correspondence.

The NASDR is requesting that the

proposed rule change be effective

within 45 days of SEC approval.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASDR does not believe 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.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

The proposed rule change was

published for comment in Notice to

Members 97–37 (June 1997). Eighteen

comments were received in response

thereto. Of the 18 comment letters

received, 4 were in favor of the

proposed rule change and 14 were

opposed. Most of the commenters either

opposed the proposed rule change or

thought only the general standards of

Rule 2210 should apply.

American Express strongly supported

the proposed rule change stating that

the NASD’s willingness to address the

dangers of misleading or unwarranted

statements in correspondence while

exempting such correspondence from

NASD filing and review requirements is

the proper balance.

AmeriTrade Holding Corporation

stated that the proposed rule change

would be beneficial as long as it only

applies to solicitations,

recommendations, and sales letters

directed at an individual customer.

The Equitable and Banc One were

generally supportive of goals of the

proposed rule change but thought it was

appropriate to focus on applying only

the general standards of the Rule, rather

than the specific standards. The

Equitable stated that imposing all of the

specific standards of Rule 2210 on each

item of correspondence would unduly

complicate communication with clients

and unnecessarily burden supervisory

programs without materially

contributing to the protection of

investors.

PSA, The Bond Market Trade

Association, The Securities Industry

Association, The Investment Company

Institute, New York Life Insurance Co.,

American Funds Distributors, Inc.,

Mutual Service Corporation, A. G.

Edwards & Sons, Inc., T. Rowe Price

Associates, Inc., Arlington Securities

Inc., JP Morgan, and CUSO Financial

Services, Inc. all opposed the proposed

rule change stating that (i) existing

NASD rules sufficiently govern the

content and use of correspondence, (ii)

the application of the Rule to a large

amount of a firm’s correspondence

would be irrelevant, and (iii) review of

all such correspondence would be

burdensome.

Merrill Lynch stated that if the

proposed rule change is adopted as

proposed, a letter to a client disclosing

his or her quarterly mutual fund

distributions would presumably be

subject to the requirements of Securities

Act Rule 482, and would require

inclusion of the five-year, ten-year and

since-inception performance of the

fund, disclosures that past performance

is no assurance of future results, and

disclosures that the investment return

and principal value will fluctuate so

that the investor’s shares, when

redeemed, may be worth more or less

than their original cost.

PSA stated that the proposed rule

change would unnecessarily inhibit the

use of electronic communications

media, because electronic

correspondence, unlike sales literature

and advertisements, often takes the form

of an ongoing dialogue between two

parties, involving the exchange of

multiple messages, and that the

application of the specific content

requirements of Rule 2210 to all such

communications would require member

firms to repeat large amounts of

information in each message.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the 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 the self-regulatory organization

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.

IV. Solicitation of Comments

Interested persons are invited to

submit data, views and arguments

concerning the foregoing, including

whether the proposed rule change, as

amended, 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. Copies of the

submissions, 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 at

the Commission’s Public Reference

Room, 450 Fifth Street, NW,

Washington, D.C. 20549. Copies of such

filing will also be available for
25538 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Notices

8 17 CFR 200.30–3(a)(12).

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

2The Commission has modified parts of these

statements.

3Securities Exchange Act Release No. 39630

(February 17, 1998), 63 FR 7848.

4PACE, an acronym for the Philadelphia Stock

Exchange Automated Communication and

Execution System, is a real time order routing and

execution system.

5 15 U.S.C. 78q–1(b)(3)(D).

6 15 U.S.C. 78s(b)(3)(A)(ii).

7 17 CFR 240.19b–4(e)(2).

8 17 CFR 200.30–3(a)(12).

inspection and copying at the principal

office of the NASD. All submissions

should refer to File No. SR–NASD–98–

29 and should be submitted by May 29,

1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Jonathan G. Katz,

Secretary.

[FR Doc. 98–12264 Filed 5–7–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39948; File No. SR–SCCP–

98–02]

Self-Regulatory Organizations; Stock

Clearing Corporation of Philadelphia;

Notice of Filing and Immediate

Effectiveness of a Proposed Rule

Change Reducing Certain Trade

Recording Fees

May 4, 1998.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 23, 1998, the Stock Clearing

Corporation of Philadelphia (‘‘SCCP’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which items

have been prepared primarily by SCCP.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

parties.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to extend on a pilot basis for

two months through June 30, 1998, a

reduction in SCCP’s fee schedule for

trade recording fees for certain

specialists.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

In its filing with the Commission,

SCCP included statements concerning

the propose of a statutory basis for the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. SCCP

has prepared summaries, set forth in

sections (A), (B), and (C) below, of the

most significant aspects of such

statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

SCCP proposes to extend, for a two

month period, its pilot program

reducing SCCP’s trade recording fees for

certain specialists. On February 9, 1998,

the Commission temporarily approved

the trade recording fee reduction

effective for trades settling January 2,

1998, through April 30, 1998.3

Prior to the approval and

implementation of the pilot program,

SCCP charged a trade recording fee of

$.47 per side for regular trades. The

proposed pilot program bifurcates the

category of trade recording fees for

regular trades into trades not matching

with PACE orders and trades matching

with PACE orders.4 The trade recording

fees for trades not matching with PACE

orders remains $.47 per side. The

proposed pilot program reduces SCCP’s

trade recording fees for trades matching

with PACE orders. For these trades, the

trade recording fee is reduced to: (i) $.27

per side for the first 2,500 trades per

month (a reduction of $.20 per trade)

and (ii) $.10 per side for trades in excess

of 2,500 per month (a reduction of $.37

per trade).

SCCP has been working closely with

the Philadelphia Stock Exchange, Inc.

(‘‘PHLX’’) to reevaluate its fees. In

connection with this effort, SCCP is

proposing to extend the pilot program

reducing these trade recording fees on a

temporary basis through June 30, 1998.

SCCP believes that the proposed rule

change is consistent with Section

17A(b)(3)(D) of the Act,5 which requires

that the rules of a registered clearing

agency provide for equitable allocation

of reasonable dues, fees, and other

charges for services which it provides to

its participants.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

SCCP does not believe that the

proposed rule change will impact or

impose a burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

No written comments have been

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing rule change

establishes or changes a due, fee, or

other charge imposed by SCCP, it has

become effective pursuant to Section

19(b)(3)(A)(ii) of the Act 6 and Rule 19b–

4(e)(2) thereunder.7 At any time within

sixty 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.

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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at SCCP. All

submissions should refer to the File No.

SR–SCCP–98–02 and should be

submitted by May 29, 1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Jonathan G. Katz,

Secretary.

[FR Doc. 98–12262 Filed 5–7–98; 8:45 am]

BILLING CODE 8010–01–M