Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67509 

11See PIM Order, supra note 6. 

12See PIM Order, supra note 6. 

13 15 U.S.C. 78s(b)(2). 

14 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 42476 

(February 29, 2000); 65 FR 12305 (March 8, 2000) 

(SR–NASD–97–89). 

Commission stated that the critical issue 

is determining whether the three-second 

timeframe would give participants in a 

fully automated marketplace sufficient 

time to respond to a PIM broadcast, to 

compete, and to provide price 

improvement for orders, and whether 

electronic systems were available to ISE 

members that would allow them to 

respond to PIM broadcasts in a 

meaningful way within the proposed 

timeframe.11 The Commission noted 

that the ISE is a fully electronic 

exchange where crowd members 

interact by electronic means, and that 

electronic systems were readily 

available, if not already in place, that 

would allow ISE members to respond to 

PIM broadcasts.12

The Commission believes that its 

rationale for approving the three-second 

PIM auction applies equally to auctions 

in the Facilitation and Solicited Order 

Mechanisms. In this regard, the 

Commission notes that in contrast to the 

PIM, which provides an interactive 

auction in which ISE members may 

receive and respond to multiple price 

updates within the three-second 

exposure period, the Facilitation and 

Solicited Order Mechanisms provide 

ISE members with only one message at 

the start of the auctions. Accordingly, 

the Commission believes that the 

electronic systems that would allow ISE 

members to receive and respond to 

multiple price updates during a threesecond PIM auction also should allow 

them to respond in a meaningful way to 

three-second auctions in the Facilitation 

and Solicited Order Mechanisms. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,13 that the 

proposed rule change (SR–ISE–2004–

04), as amended, is approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.14

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22179 Filed 11–4–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52709; File No. SR–NASD–

2005–117] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change and 

Amendment No. 1 Thereto Seeking 

Permanent Approval of Rules 

Concerning Bond Mutual Fund 

Volatility Ratings Prior to Expiration of 

Pilot 

November 1, 2005. 

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 

September 28, 2005 and October 24, 

2005 (Amendment No. 1), the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) 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 NASD. 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 

NASD is seeking permanent approval 

of NASD Rule 2210(c)(3) and 

Interpretive Material 2210–5 concerning 

bond mutual fund volatility ratings 

prior to the expiration of the pilot on 

December 29, 2005. 

Below is the text of the proposed rule 

change. Proposed new language is in 

italics; proposed deletions are in 

brackets. 

* * * * * 

IM–2210–5. Requirements for the Use of 

Bond Mutual Fund Volatility Ratings 

[(This rule and Rule 2210(c)(3) will 

expire on December 29, 2005, unless 

extended or permanently approved by 

NASD at or before such date.)] 

(a) through (c) No change. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD included statements concerning 

the purpose of and basis for the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. 

NASD has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background and Description of NASD’s 

Rules on Bond Mutual Fund Volatility 

Ratings 

On February 29, 2000, the SEC 

approved on a pilot basis NASD 

Interpretive Material 2210–5, which 

permits members and their associated 

persons to include bond fund volatility 

ratings in supplemental sales literature 

(mutual fund sales material that is 

accompanied or preceded by a fund 

prospectus).3 At that time, the SEC also 

approved as a pilot NASD Rule 

2210(c)(3), which sets forth the filing 

requirements and review procedures 

applicable to sales literature containing 

bond mutual fund volatility ratings. 

Previously, NASD staff interpreted 

NASD rules to prohibit the use of bond 

fund volatility ratings in sales material. 

IM–2210–5 permits the use of bond 

fund volatility ratings only in 

supplemental sales literature and only if 

certain conditions are met: 

• The word ‘‘risk’’ may not be used to 

describe the rating. 

• The rating must be the most recent 

available and be current to the most 

recent calendar quarter ended prior to 

use. 

• The rating must be based 

exclusively on objective, quantifiable 

factors. 

• The entity issuing the rating must 

provide to investors through a toll-free 

telephone number or Web site (or both) 

a detailed disclosure on its rating 

methodology. 

• A disclosure statement containing 

all of the information required by the 

rule must accompany the rating. The 

statement must include such 

information as the name of the entity 

issuing the rating, the most current 

rating and the date it was issued, and a 

description of the rating in narrative 

form containing certain specified 

disclosures. 

Rule 2210(c)(3) requires members to 

file for approval with NASD’s 

Advertising Regulation Department 

(‘‘Department’’), at least 10 days prior to 

67510 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

4 Id. 

5See Securities Exchange Act Release No. 52372 

(Aug. 31, 2005); 70 FR 53405 (Sept. 8, 2005) (SR–

NASD–2005–104); Securities Exchange Act Release 

No. 48353 (Aug. 15, 2003); 68 FR 50568 (Aug. 21, 

2003) (SR–NASD–2003–126); NASD Notice to 

Members 03–48 (Aug. 2003); Securities Exchange 

Act Release No. 44737 (August 22, 2001); 66 FR 

45350 (August 28, 2001) (SR–NASD–2001–49); 

NASD Notice to Members 01–58 (Sept. 2001). 

6See Securities Exchange Act Release No. 42476 

(February 29, 2000); 65 FR 12305 (March 8, 2000) 

(SR–NASD–97–89); NASD Notice to Members 00–

23 (April 2000). 

7See Securities Exchange Act Release No. 42476 

(February 29, 2000); 65 FR 12305 (March 8, 2000) 

(SR–NASD–97–89). 8SEC Rule 482(g). 

use, bond mutual fund sales literature 

that includes or incorporates volatility 

ratings. If the Department requests 

changes to the material, the material 

must be withheld from publication or 

circulation until the requested changes 

have been made or the material has been 

re-filed and approved. 

IM–2210–5 and Rule 2210(c)(3) 

initially were approved on an 18-month 

pilot basis that was scheduled to expire 

on August 31, 2001.4 NASD 

subsequently renewed the pilot several 

times, most recently with a proposed 

rule change that was effective upon 

filing and extended the pilot provisions 

until December 29, 2005.5

Proposed Rule Change To Make 

Permanent IM–2110–5 and Rule 

2210(c)(3) 

As indicated in the SEC’s original 

order approving IM–2210–5 and Rule 

2210(c)(3) on a pilot basis and the 

NASD Notice to Members announcing 

such approval,6 NASD requested the 18- 

month pilot period to consider whether: 

• The rule has facilitated the 

dissemination of useful, understandable 

information to investors; 

• The rule has prevented the 

dissemination of inappropriate or 

misleading information by members and 

associated persons; 

• Additional guidance concerning the 

use of certain terminology may be 

necessary; 

• The rule should apply to in-house 

ratings; 

• The rule should apply to all 

investment companies; and 

• Additional standards or guidance is 

needed to prevent investor confusion or 

minimize excessive variability among 

ratings of similar portfolios. 

Due to the small number of bond 

volatility ratings filings received during 

the Rule’s initial 18-month pilot, NASD 

extended the pilot to accumulate more 

data with which to evaluate the 

program. Ultimately, during the entire 

period from February 2000, when the 

Rule was first approved, until the 

present, NASD has received a total of 47 

submissions from seven NASD 

members. In general, the filings of sales 

material that contained bond fund 

volatility ratings have met the Rule’s 

requirements. 

Based on its findings during this 

period, NASD has concluded that the 

Rule’s provisions are appropriate and do 

not require further amendment before 

being made permanent. In particular, 

NASD believes that the Rule has 

facilitated the dissemination of useful 

and understandable information to 

investors and has prevented the 

dissemination of inappropriate or 

misleading information. In this regard, 

virtually all of the filings NASD has 

received under the Rule have met the 

Rule’s requirements, and NASD is not 

aware of any investor complaints 

concerning sales material that contains 

volatility ratings. The level of member 

compliance with the Rule also suggests 

that members do not require additional 

guidance concerning the use of certain 

terminology in the Rule. Similarly, 

NASD is not aware of any concerns that 

investors may be confused or that there 

may be excessive variability among 

ratings or similar portfolios. 

NASD also has examined the issue of 

whether the Rule should apply to inhouse ratings. At the time the Rule was 

approved, NASD observed that the Rule 

should not apply to in-house ratings on 

the grounds that they are not procured 

for a fee, are used primarily by fund 

investors as an aid in distinguishing 

between risk levels within a family of 

funds, and may be calculated using 

different methods from those used in 

calculating volatility ratings.7 NASD 

continues to believe that those are 

persuasive reasons to not apply the Rule 

to in-house ratings. NASD believes that 

in-house ratings do not raise the same 

concerns as third-party ratings, and thus 

do not merit application of the bond 

fund volatility ratings rule. 

NASD also believes that it is 

unnecessary at this time to apply the 

rule to other types of investment 

companies, such as unit investment 

trusts. At no time throughout the 

extended pilot period has a member 

requested that the rule apply to such 

material, and NASD is not aware of 

third-party volatility ratings that are 

being used to assess other types of 

investment companies. Accordingly, 

NASD sees no need to expand the rule’s 

scope in this manner. NASD has stated 

its willingness to re-evaluate this 

conclusion if comments on the proposal 

suggest that the Rule should be 

expanded to cover other types of 

investment companies. 

NASD believes that the rule strikes an 

appropriate balance between the desire 

of some funds to advertise volatility 

ratings and the need to include 

appropriate disclosures related to those 

ratings in sales material. Accordingly, 

NASD believes that the Commission 

should approve the Rule, as is, on a 

permanent basis. 

Nevertheless, NASD suggests that the 

Commission seek comment on whether 

the timeliness requirements of IM–

2210–5 continue to be appropriate in 

light of changes to SEC Rule 482 under 

the Securities Act of 1933 that have 

occurred since the adoption of IM–

2210–5 and Rule 2210(c)(3). In this 

regard, IM–2210–5(b)(2) requires 

supplemental sales literature that 

includes bond fund volatility ratings to 

present the most recently available 

rating that ‘‘reflects information that, at 

a minimum, is current to the most 

recently completed calendar quarter 

ended prior to use.’’

At the time IM–2210–5 was adopted, 

this standard mirrored the timeliness 

standard for mutual fund performance 

advertising under Rule 482. However, in 

2003, the SEC amended Rule 482 to 

require mutual fund performance 

advertising to show performance that is 

current to the most recent calendar 

quarter ended prior to submission of an 

advertisement for publication, and to 

indicate where the reader may obtain 

performance that is current to the most 

recent month ended seven business 

days prior to use through a toll-free (or 

collect) telephone number or web site, 

or to present performance that meets 

this most recent month-end standard.8

Accordingly, NASD suggests that the 

Commission seek comment on whether 

the timeliness requirements of IM–

2210–5(b)(2) should be modified to 

mirror those of amended Rule 482. More 

specifically, should the rule require all 

supplemental sales literature that 

includes a bond fund volatility rating 

either to show a rating that is current to 

the most recent calendar quarter ended 

prior to use, and disclose where the 

reader may find the most recent monthend rating, or provide the most recent 

month-end rating in the sales literature? 

NASD understands that rating agencies 

typically monitor bond funds on a 

monthly basis, but that it is quite rare 

for such agencies to revise a volatility 

rating on a month-to-month basis. 

Accordingly, NASD does not believe 

that it is necessary to require that 

volatility ratings be current as of the 

most recent month end given that, 

among other things, unlike fund 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67511 

9 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Amendment No. 1 superseded and replaced the 

filing in its entirety. 

4Amendment No. 2 superseded and replaced the 

amended filing in its entirety. 

performance, such ratings do not 

frequently change once they are issued. 

NASD will announce the effective 

date of the proposed rule change in a 

Notice to Members to be published no 

later than 30 days following 

Commission approval. If the 

Commission approves the proposed rule 

change without material amendment, 

NASD is proposing that the rule change 

become effective immediately upon 

Commission approval, since the 

proposed rule is already in effect on a 

pilot basis. If the proposed rule change 

is approved only after material 

amendment that would require 

members to substantially modify their 

compliance systems or procedures, 

NASD will propose a later effective date 

to provide adequate time for such 

modifications. 

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act, which 

requires, among other things, that NASD 

rules must be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

NASD believes that making IM–2210–5 

and Rule 2210(c)(3) effective on a 

permanent basis will allow members to 

continue to publish sales material that 

contains bond fund volatility ratings in 

a manner that will protect investors and 

serve the public interest. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASD does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act, as amended. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

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 the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change; or 

(B) institute proceedings to determine 

whether such proposed rule change 

should be disapproved. 

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. The 

Commission particularly urges 

commenters to consider the proposed 

rule change in light of the specific 

comments that the NASD urged the 

Commission to seek. 

Specifically, the Commission requests 

comment on whether the timeliness 

requirements of IM–2210–5(b)(2) should 

be modified to mirror the requirements 

pursuant to Rule 482 under the 

Securities Act of 1933. In other words, 

should the rule require all supplemental 

sales literature that includes a bond 

fund volatility rating either to show a 

rating that is current to the most 

recently ended calendar quarter prior to 

use, and disclose where the reader may 

find the most recent month-end rating, 

or provide the most recent month-end 

rating in the sales literature? 

Comments may be submitted by any 

of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2005–117 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–NASD–2005–117. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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, 100 F Street, NE., Washington, 

DC 20549. Copies of such filing also will 

be available for inspection and copying 

at the principal office of NASD. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to the File 

Number SR–NASD–2005–117 and 

should be submitted on or before 

November 28, 2005. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22178 Filed 11–4–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52712; File No. SR–NASD–

2004–162] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Order Approving 

Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto To 

Establish Fee and Notice 

Requirements for Substitution Listing 

Events and Other Corporate Changes 

November 1, 2005. 

I. Introduction 

On October 26, 2004, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’), through its subsidiary, The 

Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to establish fee and notice 

requirements for substitution listing 

events and to provide additional 

transparency for corporate changes 

requiring a record-keeping fee. Nasdaq 

amended the proposal on May 11, 

2005 3 and August 18, 2005.4 The 

proposed rule change, as amended, was