67586 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

6See Securities Exchange Act Release No. 42652

(April 7, 2000) 65 FR 20235 (April 14, 2000).

7QT would allocate the order(s) for each series

separately. Telephone conversation between Claire

P. McGrath, Amex, and Ira L. Brandriss, Division,

Commission, on December 5, 2001.

8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). 10 17 CFR 200.30–3(a)(12).

$5.00, $5.05, $5.10, $5.15, and $5.20; in

aggregate these orders represent 50

contracts. The specialist has determined

to buy all 50 contracts at $5.20. The

contracts would be allocated by QT to

the specialist and registered traders in

accordance with the ratios set forth

above.

Auto-Match

The Auto-Match feature currently in

AODB, which automatically matches

and executes market and marketable

limit orders that have by-passed the

Exchange’s automatic execution system

(‘‘Auto-Ex’’) with limit orders on the

AODB, would be modified to include

registered trader participation when an

imbalance exists.6 Imbalances would be

distributed among the specialist and

registered traders according to the above

allocation ratio. For example, the best

bid is represented by a limit order to

buy 10 contracts in an option class

whose Auto-Ex eligible size is 20

contracts. A market order of 20 contracts

to sell by-passes Auto-Ex and is routed

to the AODB; 10 contracts are matched

and executed with the limit order. The

remaining 10 contracts would be

allocated through QT to the specialists

and registered traders.

Sweep of the Book

The Sweep of the Book function

allows a specialist to simultaneously

execute orders in multiple series at the

quoted market. Following

implementation of Quick Trade,

contracts executed through the Sweep of

the Book function would be

automatically allocated by QT on a per

series basis to the specialist and

registered traders in accordance with

the above allocation ratio.7

The Exchange believes that

implementation of Quick Trade would

increase the Exchange’s competitiveness

while furthering the efficient processing

of customer option orders. Further, the

Exchange believes that Quick Trade

would enhance the fair and orderly

allocation of orders executed on the

Exchange especially during times of

high trading volume by automating the

allocation process.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Act 8 in general and

furthers the objectives of Section 6(b)(5)

of the Act 9 in particular in that it is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any 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 were solicited

or received with respect to the proposed

rule change.

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 Exchange 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 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, NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the principal offices of the Amex. All

submissions should refer to File No.

SR–Amex–2001–65 and should be

submitted by January 22, 2002.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–32084 Filed 12–28–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45181; File No. SR–NASD–

00–12]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendments Nos. 1 and 2 Thereto by

the National Association of Securities

Dealers, Inc. Concerning Amendments

to Rules Governing Member

Communications with the Public

December 20, 2001.

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

Securities Exchange Act of 1934

(‘‘Act’’)1 and Rule 19b–4 thereunder,2

notice is hereby given that on June 9,

2000, NASD Regulation, Inc. (‘‘NASD

Regulation’’) 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 Regulation.3 On

August 8, 2001, NASD Regulation filed

Amendment No. 1 to the proposed rule

change.4 On December 12, 2001, NASD

Regulation filed Amendment No. 2 to

the proposed rule change. 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 to

amend Rule 2210 and the Interpretive

Materials thereunder, promulgate new

Rule 2211, and renumber existing Rule

2211, of the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’). Below is the text of the

proposed rule change. Proposed new

language is italicized; proposed

deletions are in brackets.

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67587

2200. Communications With Customers

and The Public

2210. Communications with the Public

(a) Definitions [Communications with

the public shall include] For purposes

of this Rule and any interpretation

thereof, ‘‘communications with the

public’’ consist of:

(1) ‘‘Advertisement.’’ [For purposes of

this Rule and any interpretation thereof,

‘‘advertisement’’ means material] Any

material, other than an independently

prepared reprint and institutional sales

material, that is published, or designed

for use in, any electronic or other public

media, including any Web site, [a]

newspaper, magazine or other

periodical, radio, television, telephone

or tape recording, videotape display,

signs or billboards, motion pictures, or

telephone directories (other than routine

listings), [electronic or other public

media].

(2) ‘‘Sales Literature.’’ [For purposes

of this Rule and any interpretation

thereof, ‘‘sales literature’’ means any]

Any written or electronic

communication, other than an

advertisement, independently prepared

reprint, institutional sales material and

correspondence, that is generally

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], including circulars, research

reports, market letters, performance

reports or summaries, form letters,

telemarketing scripts, seminar texts,

[and] reprints (that are not

independently prepared reprints) or

excerpts of any other advertisement,

sales literature or published article, and

press releases concerning a member’s

products or services.

(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.] as defined in Rule

2211(a)(1).

(4) ‘‘Institutional Sales Material’’ as

defined in Rule 2211(a)(2).

(5) ‘‘Public Appearance.’’

Participation in a seminar, forum

(including an interactive electronic

forum), radio or television interview, or

other public appearance or public

speaking activity.

(6) ‘‘Independently Prepared

Reprint.’’

(A) Any reprint or excerpt of any

article issued by a publisher, provided

that:

(i) the publisher is not an affiliate of

the member using the reprint or any

underwriter or issuer of a security

mentioned in the reprint;

(ii) neither the member using the

reprint nor any underwriter or issuer of

a security mentioned in the reprint has

commissioned the reprinted article; and

(iii) the member using the reprint has

not materially altered its contents

except as necessary to make the reprint

consistent with applicable regulatory

standards or to correct factual errors;

(B) Any report concerning an

investment company registered under

the Investment Company Act of 1940,

provided that:

(i) the report is prepared by an entity

that is independent of the investment

company, its affiliates, and the member

using the report (the ‘‘research firm’’); 

(ii) the report’s contents have not been

materially altered by the member using

the report except as necessary to make

the report consistent with applicable

regulatory standards or to correct

factual errors;

(iii) the research firm prepares and

distributes reports based on similar

research with respect to a substantial

number of investment companies;

(iv) the research firm updates and

distributes reports based on its research

of the investment company with

reasonable regularity in the normal

course of the research firm’s business;

(v) neither the investment company,

its affiliates nor the member using the

research report has commissioned the

research used by the research firm in

preparing the report; and 

(vi) if a customized report was

prepared at the request of the

investment company, its affiliate or a

member, then the report includes only

information that the research firm has

already compiled and published in

another report, and does not omit

information in that report necessary to

make the customized report fair and

balanced.

(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. This requirement may be

met, only with respect to corporate debt

and equity securities that are the subject

of research reports as that term is

defined in Rule 472 of the New York

Stock Exchange, by the signature or

initial of a supervisory analyst approved

pursuant to Rule 344 of the New York

Stock Exchange.]

[(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.]

(1) Registered Principal Approval for

Advertisements, Sales Literature and

Independently Prepared Reprints

A registered principal of the member

must approve by signature or initial and

date each advertisement, item of sales

literature and independently prepared

reprint before the earlier of its use or

filing with the Association’s Advertising

Regulation Department (‘‘Department’’).

With respect to debt and equity

securities that are the subject of

research reports as that term is defined

in Rule 472 of the New York Stock

Exchange, this requirement may be met

by the signature or initial of a

supervisory analyst approved pursuant

to Rule 344 of the New York Stock

Exchange.

(2) Record-Keeping

(A) Members must maintain all

advertisements, sales literature, and

independently prepared reprints in a

separate file for a period of three years

from the date of last use. The file must

include the name of the registered

principal who approved each

advertisement, item of sales literature,

and independently prepared reprint and

the date that approval was given.

(B) Members must maintain in a file

information concerning the source of

any statistical table, chart, graph or

other illustration used by the member in

communications with the public.

(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 government

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

67588 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

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.]

(1) Date of First Use and Approval

Information

The member must provide with each

filing under this paragraph the actual or

anticipated date of first use, the name

and title of the registered principal who

approved the advertisement or sales

literature, and the date that the

approval was given.

(2) Requirement to File Certain Material

Within 10 business days of first use or

publication, a member must file the

following advertisements and sales

literature with the Department:

(A) Advertisements and sales

literature concerning registered

investment companies (including

mutual funds, variable contracts,

continuously offered closed-end funds,

and unit investment trusts) not included

within the requirements of paragraph

(c)(3). The filing of any advertisement or

sales literature that includes or

incorporates a performance ranking or

performance comparison of the

investment company with other

investment companies must include a

copy of the ranking or comparison used

in the advertisement or sales literature.

(B) Advertisements and sales

literature concerning public direct

participation programs (as defined in

Rule 2810).

(C) Advertisements concerning

government securities (as defined in

Section 3(a)(42) of the Act).

[(2) Advertisements concerning

collateralized mortgage obligations, 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

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) Requirement to File Certain Material

Prior to Use

At least 10 business days prior to first

use or publication (or such shorter

period as the Department may allow), a

member must file the following

communications with the Department

and withhold them from publication or

circulation until any changes specified

by the Department have been made:

(A) Advertisements and sales

literature concerning registered

investment companies (including

mutual funds, variable contracts,

continuously offered closed-end funds

and unit investment trusts) that include

or incorporate performance rankings or

performance comparisons of the

investment company with other

investment companies when 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.

Such filings must include a copy of the

data on which the ranking or

comparison is based.

(B) dvertisements concerning

collateralized mortgage obligations.

[(3)] 4 Requirement for Certain Members

to File Material Prior to Use

(A) Each member [of the Association]

that [which] has not previously filed

advertisements with the [Association]

Department (or with a registered

securities exchange having standards

comparable to those contained in this

Rule) [shall] must file its initial

advertisement with the Department at

least [ten] 10 business days prior to use

and shall continue to file its

advertisements at least [ten] 10 business

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) 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

that subparagraph, with any registered

securities exchange having standards

comparable to those contained in this

Rule.]

[(4) (A)] (B) Notwithstanding the

foregoing provisions, the Department,

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 that

[which] is related to any specific types

or classes of securities or services, with

the Department, at least [ten] 10

business days prior to use. [The member

must provide with each filing the actual

or anticipated date of first use.] [(B)] The

Department [shall] will 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

under Rule 9514, and any such hearing

shall be held in reasonable conformity

with the hearing and appeal procedures

of the Rule 9510 Series.] Any filing

requirement imposed under this

paragraph will take effect 30 calendar

days after the member receives the

written notice, during which time the

member may appeal pursuant to the

hearing and appeal procedures of the

Code of Procedure contained in the Rule

9510 Series.

(5) Filing of Television or Video

Advertisements

If a member has filed a draft version

or ‘‘story board’’ of a television or video

advertisement pursuant to a filing

requirement, then the member also must

file the final filmed version within 10

business days of first use or broadcast.

ø(5) In addition to the foregoing

requirements, every member’s

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 spot-check by a registered

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67589

securities exchange or other selfregulatory organization using

procedures comparable to those used by

the Association.]

(6) Spot-Check Procedures

In addition to the foregoing

requirements, each member’s written

and electronic communications with the

public may be subject to a spot-check

procedure. Upon written request from

the Department, each member must

submit the material requested in a spotcheck procedure within the time frame

specified by the Department.

[(6)] (7) Exclusions from Filing

Requirements

The following types of material are

excluded from the [foregoing] filing

requirements and (except for [research

reports under] the material in

paragraphs (G) through (J)) the foregoing

spot-check procedures:

(A) Advertisements and sales

literature that previously have been filed

and that are to be used without material

change.

[(A)] (B) Advertisements [or] and sales

literature solely related to recruitment

or changes in a member’s name,

personnel, [location,] electronic or

postal address, ownership, offices,

business structure, officers or partners,

telephone or teletype numbers, or

concerning a merger with, or acquisition

by, another member[;].

[(B)] (C) Advertisements [or] and sales

literature [which] that do no more than

identify the Nasdaq or a national

securities exchange symbol of the

member øand/or of a security in¿ or

identify a security for which the

member is a Nasdaq registered market

maker[;].

[(C)] (D) Advertisements [or] and sales

literature that [which] do no more than

identify the member [and/]or offer a

specific security at a stated priceø;¿.

[(D) Material sent to branch offices or

other internal material that is not

distributed to the public;]

(E) Prospectuses, preliminary

prospectuses, fund profiles, offering

circulars and similar documents [used

in connection with an offering of

securities which has been registered or]

that have been filed with the Securities

and Exchange Commission (the ‘‘SEC’’)

or any state, or [which] that is exempt

from such registration, except that an

investment company prospectus

published pursuant to SEC Rule 482

under the Securities Act of 1933 [shall]

will 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, and announcements as a matter of

record that a member has participated

in a private placement, unless [such] the

advertisements are related to direct

participation programs or securities

issued by registered investment

companies.

[(G) Any research report concerning

an investment company registered

under the Investment Company Act of

1940, provided that:]

[(i) the report is prepared by an entity

that is independent of the investment

company, its affiliates, and the member

using the report (the ‘‘research firm’’);]

[(ii) the report’s contents have not

been materially altered by the member

using the report except as necessary to

make the report consistent with

applicable regulatory standards or to

correct factual errors;]

[(iii) the research firm prepares and

distributes reports based on similar

research with respect to a substantial

number of investment companies;]

[(iv) the research firm updates and

distributes reports based on its research

of the investment company with

reasonable regularity in the normal

course of the research firm’s business;]

[(v) neither the investment company,

its affiliates nor the member using the

research report has commissioned the

research used by the research firm in

preparing the report; and]

[(vi) if a customized report was

prepared at the request of the

investment company, its affiliate or a

member, then the report includes only

information that the research firm has

already compiled and published in

another report, and does not omit

information in that report necessary to

make the customized report fair and

balanced.]

(G) Press releases that are made

available only to members of the media.

(H) Independently prepared reprints.

(I) Correspondence.

(J) Institutional sales material.

Although [research reports meeting

the above requirements are] the material

described in paragraphs (c)(7)(G)

through (J) is excluded from the

foregoing filing requirements, [they]

investment company communications

described in those paragraphs shall be

deemed filed with the Association for

purposes of Section 24(b) of the

Investment Company Act of 1940 and

Rule 24b–3 [of the Securities and

Exchange Commission] thereunder.

[(7)] (8) Material [which] that 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 [sub]paragraphs [(1)

and (2)] (c)(2) and (c)(3).

[(8) Exemptions.] (9) Pursuant to the

Rule 9600 Series, the Association may

exempt a member or person associated

with a member from the pre-filing

requirements of this paragraph (c) for

good cause shown.

(d) Content Standards [Applicable to

Communications With the Public]

(1) [General] Standards Applicable to

All Communications With the Public

(A) All member communications with

the public shall be based on principles

of fair dealing and good faith, must be

fair and balanced, and [should] must

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 member may omit any material fact

or qualification [may be omitted] if the

omission, in the light of the context of

the material presented, would cause the

communications to be misleading.

(B) [Exaggerated, unwarranted or

misleading statements or claims are

prohibited in all public communications

of members. In preparing such

communications, members must bear in

mind that inherent in investment are the

risks of fluctuating prices and the

uncertainty of dividends, rates of return

and yield, and no] No member may

make any false, exaggerated,

unwarranted or misleading statement or

claim in any communication with the

public. No member [shall, directly or

indirectly,] may 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 or 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

misleading even though such a

statement could be appropriate in

another context. An essential test in this

regard is the balance of treatment of

risks and potential benefits.]

67590 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

[(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 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

can result in a lack of understanding of

the statement, or in a serious

misunderstanding. A complex or overly

technical explanation may be more

confusing than too little information.

Likewise material disclosure relegated

to legends or footnotes may not enhance

the reader’s understanding of the

communication.]

(C) Information may be placed in a

legend or footnote only in the event that

such placement would not inhibit an

investor’s understanding of the

communication.

(D) Communications with the public

may not predict or project performance,

imply that past performance will recur

or make any exaggerated or

unwarranted claim, opinion or forecast.

A hypothetical illustration of

mathematical principles is permitted,

provided that it does not predict or

project the performance of an

investment or investment strategy.

(E) If any testimonial in a

communication with the public

concerns a technical aspect of investing,

the person making the testimonial must

have the knowledge and experience to

form a valid opinion.

(2) [Specific] Standards Applicable to

Advertisements and Sales Literature

[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) Recommendations.]

[(i) In making a recommendation in

advertisements and sales literature,

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, 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

co-manager 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 advertisements

or sales literature:] (A) Advertisements

or sales literature providing any

testimonial concerning the investment

advice or investment performance of a

member or its products must

prominently disclose the following:

(i) The fact that the testimonial may

not be representative of the experience

of other clients.

(ii) The fact that the testimonial is no

guarantee 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 reasonable 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

should not discuss or portray any type

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67591

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

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

in advertisements and sales literature.

References in advertisements and sales

literature 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,

investment 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.]

(B) Any comparison in advertisements

or sales literature between investments

or services must disclose all material

differences between them, including (as

applicable) investment objectives, costs

and expenses, liquidity, safety,

guarantees or insurance, fluctuation of

principal or return, and tax features.

(C) All advertisements and sales

literature must:

(i) prominently disclose the name of

the member and may also include a

fictional name by which the member is

commonly recognized or which is

required by any state or jurisdiction;

(ii) reflect any relationship between

the member and any non-member or

individual who is also named; and

(iii) if it includes other names, reflect

which products or services are being

offered by the member.

This paragraph (C) does not apply to

so-called ‘‘blind’’ advertisements used

to recruit personnel.

(e) [Application] Violation of [SEC]

Other Rules

[In addition to the provisions of

paragraph (d) of this Rule, members’

public communications shall conform to

all applicable rules of the Commission,

as in effect at the time the material is

used.] Any violation by a member of any

rule of the SEC, the Securities Investor

Protection Corporation or the Municipal

Securities Rulemaking Board applicable

to member communications with the

public will be deemed a violation of this

Rule 2210.

[(f) Standards Applicable to the Use and

Disclosure of the Association Member’s

Name]

[(1) In addition to the provisions of

paragraph (d) of this Rule, members’

public communications shall conform to

the following provisions concerning the

use and disclosure of member names.

The term ‘‘communication’’ as used

herein shall include any item defined as

either ‘‘advertising’’ or ‘‘sales literature’’

in paragraph (a). The term

‘‘communication’’ shall also include,

among other things, business cards and

letterhead.]

[(2) General Standards]

[(A) Any communication used in the

promotion of a member’s securities

business must clearly and prominently

set forth the name of the Association

member. This requirement shall not

apply to so-called ‘‘blind’’

advertisements used for recruiting

personnel or to those communications

meeting the provisions of paragraph

(f)(3).]

[(B) If a non-member entity is named

in a communication in addition to the

member, the relationship, or lack of

relationship, between the member and

the entity shall be clear.]

[(C) If a non-member entity is named

in a communication in addition to the

member and products or services are

identified, no confusion shall be created

as to which entity is offering which

products and services. Securities

products and services shall be clearly

identified as being offered by the

member.]

[(D) If an individual is named in a

communication containing the names of

the member and a non-member entity,

the nature of the affiliation or

relationship of the individual with the

member shall be clear.]

[(E) Communications that refer to

individuals may not include, with

respect to such individuals, references

to nonexistent or self-conferred degrees

or designations, nor may such

communications make reference to bona

fide degrees or designations in a

misleading manner.]

[(F) If a communication identifies a

single company, the communication

shall not be used in a manner which

implies the offering of a product or

service not available from the company

named.]

[(G) The positioning of disclosure can

create confusion even if the disclosures

or references are entirely accurate. To

avoid confusion, a reference to an

affiliation (e.g., registered

representative) shall not be placed in

proximity to the wrong entity.]

[(H) Any reference to membership

(e.g., NASD, SIPC, etc.) shall be clearly

identified as belonging to the entity that

is the actual member of the

organization.]

[(3) Specific Standards]

[The foregoing standards set forth in

subparagraphs (1) and (2) shall apply to

all communications unless at least one

of the following special circumstances

exists, in which case the standards set

67592 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

forth herein would supersede the

standards in subparagraphs (1) and (2).]

[(A) Doing Business As. An

Association member may use a fictional

name in communications provided that

the following conditions are met:]

[(i) Non-Required Fictional Name. A

member may voluntarily use a fictional

name provided that the name has been

filed with the Association and the

Commission, all business is conducted

under that name and it is the only name

by which the firm is recognized.]

[(ii) Required Fictional Name. If a

state or other regulatory authority

requires a member to use a fictional

name, the following conditions shall be

met:]

[a. The fictional name shall be used to

conduct business only within the state

or jurisdiction requiring its use.]

[b. If more than one state or

jurisdiction requires a firm to use a

fictional name, the same name shall be

used in each, wherever possible.]

[c. Any communication shall disclose

the name of the member and the fact

that the firm is doing business in that

state or jurisdiction under the fictional

name, unless the regulatory authority

prohibits such disclosure.]

[(B) Generic Names. An Association

member may use an ‘‘umbrella’’

designation to promote name

recognition, provided that the following

conditions are met:]

[(i) The name of the member shall be

clearly and prominently disclosed;]

[(ii) The relationship between the

generic name and the member shall be

clear; and]

[(iii) There shall be no implication

that the generic name is the name of a

registered broker/dealer.]

[(C) Derivative Names. An Association

member may use a derivative of the firm

name to promote certain areas of the

firm’s business, provided that the name

of the member is clearly and

prominently disclosed. Absent such

disclosure, the following conditions

must be met:]

[(i) The name used to promote a

specific area of the firm’s business shall

be a derivative of the member name;

and]

[(ii) The derivative name shall not be

misleading in the context in which it is

being used.]

[(D) ‘‘Division of.’’ An Association

member firm may designate an aspect of

its business as a division of the firm,

provided that the following conditions

are met:]

[(i) The designation shall only be used

by a bona fide division of the member.

This shall include:]

[a. a division resulting from a merger

or acquisition that will continue the

previous firm’s business; or]

[b. a functional division that conducts

or will conduct one specialized aspect

of the firm’s business.]

[(ii) The name of the member shall be

clearly and prominently disclosed.]

[(iii) The division shall be clearly

identified as a division of the member

firm.]

[(E) ‘‘Service of/Securities Offered

Through.’’ An Association member firm

may identify its brokerage service being

offered through other institutions as a

service of the member, provided that the

following conditions are met:]

[(i) The name of the member shall be

clearly and prominently disclosed.]

[(ii) The service shall be clearly

identified as a service of the member

firm.]

[(F) Telephone Directory Line

Listings, Business Cards and Letterhead.

All such listings, cards or letterhead

shall conform to the provisions of Rule

3010(g)(2).]

[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

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 educational material which

covers the following matters:]

[(A) A discussion of CMO

characteristics as 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

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67593

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.]

[(b) Print Advertising]

[(1) Educational advertising,

discussing generally the features of

CMOs, can be a very useful and

informative tool in explaining these

securities to the investing public.

However, such ‘‘generic’’ advertising

should not contain anticipated yield or

coupon rates.]

[(2) Advertising relating to CMOs

must be filed with the Association’s

Advertising/Investment Companies

Regulation Department for review at

least ten days prior to use, pursuant to

requirements in Rule 2210.]

[(3) The Association has developed a

standardized CMO advertisement that

provides information deemed necessary

to prevent the communication from

being misleading. Members must file the

standardized CMO advertisement, ten

days prior to its first use, with the

Association’s Advertising/Investment

Companies Regulation Department.]

[(4) Members are not required to use

the standardized CMO advertisement. If

firms do not elect to use the

standardized CMO advertisement, they

should ensure that their advertising

contains the same information and

meets the same conditions as the

standardized CMO advertisement.

Members using a non-standardized

format must file the advertisement ten

days prior to first use.]

[(5) After an advertisement has been

filed prior to initial use, subsequent use

of the identical advertisement, changed

only to reflect the updated information

for the security being advertised, does

not require re-filing with the

Association. Such advertisements must

be approved by a principal (or designee)

and maintained in the member firm’s

files as required by the Association’s

Rules.]

[(6) Standardized CMO Advertisement]

[(A) The standardized CMO

advertisement contains four sections,

each of which must be given an equal

portion of space in the advertisement.

The information in Sections 1 and 2 is

required to be included in advertising

for CMOs. The information suggested

for Section 3 is optional; therefore, the

member may elect to include any, all or

none of this information in the

advertisement. The information in

Section 4 may be tailored to the

member’s preferred signature. An

example of the standardized CMO

advertisement may be found at the end

of these guidelines.]

[Section 1 Title Collateralized

Mortgage Obligations

Coupon Rate

Anticipated Yield/Average Life

Specific Tranche—Number & Class

Final Maturity Date

Underlying Collateral]

[Section 2 Disclosure Statement:

‘‘The yield and average life shown

above consider prepayment

assumptions that may or may not be

met. Changes in payments may

significantly affect yield and average

life. Please contact your representative

for information on CMOs and how they

react to different market conditions.’’]

[Section 3 Product Features

(Optional):

Minimum Denominations

Rating Disclosure

Agency/Government Backing

Income Payment Structure

Generic Description of Tranche (e.g.,

PAC, Companion)]

[Section 4 Company Information:

Name, Address, Telephone Number,

Representative’s Name, Memberships]

[(B) If this standardized CMO

advertisement is used, the following

conditions must also be met:]

[(i) All figures in Section 1 must be in

equal type size.]

[(ii) The disclosure language in

Section 2 may not be altered and must

be given equal prominence with Section

1.]

[(iii) The prepayment assumption

used to determine the advertised yield

and average life must either be obtained

from a nationally recognized service

(e.g., Bloomberg, Telerate) or the

member firm must be able to justify the

assumption used. A copy of either the

service’s listing for the CMO or the

firm’s justification must be attached to

the copy of the advertisement that is

maintained in the firm’s advertising

files in order to verify that the

prepayment scenario advertised is

reasonable and to satisfy the conditions

for waiving the pre-use filing

requirement.]

[(iv) If a member intends to impose a

sales charge, a reasonable sales charge

should be reflected in the anticipated

yield.]

[(v) The advertisement must include

language stating that the security is

‘‘offered subject to prior sale and price

change.’’ This language may be included

in any one of the four sections.]

[(vi) If the bond advertised is an

accrual bond, the following language

should be included in Section 1: ‘‘This

is an accrual bond and may not

currently pay principal and interest.’’]

[(vii) If the bond is being offered at

par, the advertisement may include the

yield to maturity in Section 1.]

[(C) No additional information may be

included in the standardized

advertisement.]

[(c) Radio/Television Advertising]

[(1) Radio and television advertising

alternatives are too varied to attempt to

provide standardized formats for either

medium. Such advertisements must be

filed with the Association at least ten

days prior to first use. The storyboard or

other description should accompany the

filing of a television advertisement.]

[(2) If an advertisement is filed with

the Association prior to its initial use,

it is not necessary to subsequently refile

the advertisement if the only changes

are to update the information relating to

the security being advertised. A copy of

each advertisement should be approved

by a principal (or designee) and should

be maintained, along with a copy of the

listing for the CMO or the firm’s

justification, in the member firm’s files

in accordance with Association Rules.]

[(3) The following guidelines should

be followed when developing radio and

television advertisements:]

[(A) The advertisements must be

preceded by the following oral

disclaimer: ‘‘The following is an

advertisement for Collateralized

Mortgage Obligations. Contact your

representative for information on CMOs

and how they react to different market

conditions.’’]

[(B) The advertisements must disclose

the information contained in Section 1

of the standardized CMO advertisement

above:][Coupon Rate, Anticipated Yield,

Average Life, Final Maturity Date, Initial

Issue Tranche (Number and Class), and

Underlying Collateral.]

[(C) The advertisements must contain

the following oral disclosure statement:]

[’’The yield and average life consider

prepayment assumptions that may or

may not be met. Changes in payments

may significantly affect yield and

average life.’’]

[(D) The advertisements must state

that the CMO is ‘‘offered subject to prior

sale and price change.’’]

[(E) If a member intends to impose a

sales charge, a reasonable sales charge

should be reflected in the anticipated

yield.]

67594 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

[(F) If the bond advertised is an

accrual bond, the following language

should be included:]

[’’This is an accrual bond and may not

currently pay principal and interest.’’]

[(G) If the bond is being offered at par,

the advertisement may include the yield

to maturity.]

[Example of Standardized CMO

Advertisement (See IM–2210–1.)]

[Collateralized Mortgage Obligations]

[8.50% Coupon

8.75% Anticipated Yield to 10-Year

Average Life

FNMA 9532X, Final Maturity March

2010

Collateral 100% FNMA 8.50%]

[The yield and average life shown

above consider prepayment

assumptions that may or may not be

met. Changes in payments may

significantly affect yield and average

life. Please contact your representative

for information on CMOs and how they

react to different market conditions.]

[$5,000 Minimum

Income Paid Monthly

Implied Rating/Volatility Rating

U.S. Gov’t Agency Backed

Generic Description (e.g., PAC,

Companion, Sequential Pay Bonds)]

[Company Name

Contact Person

Address

City, State, ZIP Code

Phone Number]

[Offered subject to prior sale and price

change.]

[Member SIPC]

IM–2210–1. Guidelines To Ensure That

Communications With the Public Are

Not Misleading

Every member is responsible for

determining whether any

communication with the public,

including material that has been filed

with the Department, complies with all

applicable standards, including the

requirement that the communication

not be misleading. In order to meet this

responsibility, member communications

with the public must conform with the

following guidelines. These guidelines

do not represent an exclusive list of

considerations that a member must

make in determining whether a

communication with the public

complies with all applicable standards.

(1) Members must ensure that

statements are not misleading within

the context in which they are made. A

statement made in one context may be

misleading even though such a

statement could be appropriate in

another context. An essential test in this

regard is the balanced treatment of risks

and potential benefits. Member

communications should be consistent

with the risks of fluctuating prices and

the uncertainty of dividends, rates of

return and yield inherent to

investments.

(2) Members must consider the nature

of the audience to which the

communication will be directed.

Different levels of explanation or detail

may be necessary depending on the

audience to which a communication is

directed. Members must keep in mind

that it is not always possible to restrict

the audience that may have access to a

particular communication with the

public. Additional information or a

different presentation of information

may be required depending upon the

medium used for a particular

communication and the possibility that

the communication will reach a larger

or different audience than the one

initially targeted.

(3) Member communications must be

clear. A statement made in an unclear

manner can cause a misunderstanding.

A complex or overly technical

explanation may be more confusing

than too little information.

(4) In communications with the

public, income or investment returns

may not be characterized as tax-free or

exempt from income tax when tax

liability is merely postponed or deferred,

such as when taxes are payable upon

redemption.

(5) In advertisements and sales

literature, references to tax free or tax

exempt 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 is subject to state or

local income taxes, this fact must be

stated, or the illustration must otherwise

make it clear that income is free only

from federal income tax.

(6) Recommendations

(A) In making a recommendation in

advertisements and sales literature,

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:

(i) that the member usually makes a

market in the securities being

recommended, or in the underlying

security if the recommended security is

an option, or that the member or

associated persons will sell to or buy

from customers on a principal basis;

(ii) 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;

(iii) that the member was manager or

co-manager of a public offering of any

securities of the recommended issuer

within the last three years.

(B) 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.

(C) 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.

(D) Also permitted is material that

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 (C). 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.

IM–2210–2. Communications With the

Public About Variable Life Insurance

and Variable Annuities

The standards governing

communications with the public are set

forth in Rule 2210. In addition to those

standards, the following guidelines

must be considered in preparing

advertisements and sales literature

about variable life insurance and

variable annuities. The guidelines are

applicable to advertisements and sales

literature as defined in Rule 2210, as

well as individualized communications

such as personalized letters and

computer generated illustrations,

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67595

whether printed or made available onscreen.

(a) General Considerations

(1) Product Identification

In order to assure that investors

understand exactly what security is

being discussed, all communications

must clearly describe the product as

either a variable life insurance policy or

a variable annuity, as applicable.

Member firms may use proprietary

names in addition to this description. In

cases where the proprietary name

includes a description of the type of

security being offered, there is no

requirement to include a generalized

description. For example, if the material

includes a name such as the ‘‘XYZ

Variable Life Insurance Policy,’’ it is not

necessary to include a statement

indicating that the security is a variable

life insurance policy. Considering the

significant differences between mutual

funds and variable products, the

presentation must not represent or

imply that the product being offered or

its underlying account is a mutual fund.

(2) Liquidity

Considering that variable life

insurance and variable annuities

frequently involve substantial charges

and/or tax penalties for early

withdrawals, there must be no

representation or implication that these

are short-term, liquid investments.

Presentations regarding liquidity or ease

of access to investment values must be

balanced by clear language describing

the negative impact of early

redemptions. Examples of this negative

impact may be the payment of

contingent deferred sales loads and tax

penalties, and the fact that the investor

may receive less than the original

invested amount. With respect to

variable life insurance, discussions of

loans and withdrawals must explain

their impact on cash values and death

benefits.

(3) Claims About Guarantees

Insurance companies issuing variable

life insurance and variable annuities

provide a number of specific guarantees.

For example, an insurance company

may guarantee a minimum death benefit

for a variable life insurance policy or the

company may guarantee a schedule of

payments to a variable annuity owner.

Variable life insurance policies and

variable annuities may also offer a fixed

investment account which is guaranteed

by the insurance company. The relative

safety resulting from such a guarantee

must not be overemphasized or

exaggerated as it depends on the claimspaying ability of the issuing insurance

company. There must be no

representation or implication that a

guarantee applies to the investment

return or principal value of the separate

account. Similarly, it must not be

represented or implied that an

insurance company’s financial ratings

apply to the separate account.

(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

inclusion 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

purposes 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.

(2) Product Comparisons

A comparison of investment products

may be used provided the comparison

complies with applicable requirements

set forth under Rule 2210. Particular

attention must be paid to the specific

standards regarding ‘‘comparisons’’ set

forth in [Rule 2210(d)(2)(M)] Rule

2210(d)(2)(B).

(3) Use of Rankings

A ranking which reflects the relative

performance of the separate account or

the underlying investment option may

be included in advertisements and sales

literature provided its use is consistent

with the standards contained in IM–

2210–3.

(4) Discussions Regarding Insurance and

Investment Features of Variable Life

Insurance

Communications on behalf of single

premium variable life insurance may

emphasize the investment features of

the product provided an adequate

explanation of the life insurance

features is given. Sales material for other

types of variable life insurance must

provide a balanced discussion of these

features.

(5) Hypothetical Illustrations of Rates of

Return in Variable Life Insurance Sales

Literature and Personalized Illustrations

(A) (i) Hypothetical illustrations using

assumed rates of return may be used to

demonstrate the way a variable life

insurance policy operates. The

illustrations show how the performance

of the underlying investment accounts

could affect the policy cash value and

death benefit. These illustrations may

not be used to project or predict

investment results as such forecasts are

strictly prohibited by the Rules. The

methodology and format of hypothetical

illustrations must be modeled after the

required illustrations in the prospectus.

(ii) An illustration may use any

combination of assumed investment

returns up to and including a gross rate

of 12%, provided that one of the returns

is a 0% gross rate. Although the

maximum assumed rate of 12% may be

acceptable, members are urged to assure

that the maximum rate illustrated is

reasonable considering market

conditions and the available investment

options. The purpose of the required 0%

rate of return is to demonstrate how a

lack of growth in the underlying

investment accounts may affect policy

values and to reinforce the hypothetical

nature of the illustration.

(iii) The illustrations must reflect the

maximum (guaranteed) mortality and

expense charges associated with the

policy for each assumed rate of return.

Current charges may be illustrated in

addition to the maximum charges.

(iv) Preceding any illustration there

must be a prominent explanation that

the purpose of the illustration is to show

how the performance of the underlying

investment accounts could affect the

policy cash value and death benefit. The

explanation must also state that the

illustration is hypothetical and may not

be used to project or predict investment

results.

(B) In sales literature which includes

hypothetical illustrations, member firms

may provide a personalized illustration

which reflects factors relating to the

individual customer’s circumstances. A

personalized illustration may not

contain a rate of return greater than 12%

and must follow all of the standards set

forth in subparagraph (A), above.

(C) In general, it is inappropriate to

compare a variable life insurance policy

with another product based on

hypothetical performance as this type of

presentation goes beyond the singular

purpose of illustrating how the

performance of the underlying

investment accounts could affect the

policy cash value and death benefit. It

is permissible, however, to use a

67596 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

hypothetical illustration in order to

compare a variable life insurance policy

to a term policy with the difference in

cost invested in a side product. The sole

purpose of this type of illustration

would be to demonstrate the concept of

tax-deferred growth as a result of

investing in the variable product. The

following conditions must be met in

order to make this type of comparison

balanced and complete:

(i) the comparative illustration must

be accompanied by an illustration

which reflects the standards outlined in

subparagraph (A), above;

(ii) the rate of return used in the

comparative illustration must be no

greater than 12%;

(iii) the rate of return assumed for the

side product and the variable life policy

must be the same;

(iv) the same fees deducted from the

required prospectus illustration must be

deducted from the comparative

illustration;

(v) the side product must be

illustrated using gross values which do

not reflect the deduction of any fees;

and,

(vi) the side product must not be

identified or characterized as any

specific investment or investment type.

IM–2210–3. Use of Rankings in

Investment Companies Advertisements

and Sales Literature

(a) Definition of ‘‘Ranking Entity’’

For purposes of the following

guidelines, the term ‘‘Ranking Entity’’

refers to 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.

(b) General Prohibition

Members [shall] may not use [in]

investment company rankings in any

advertisement[s,] or item of sales

literature [or general promotional

material any investment company

rankings] other than [those developed

and produced by entities that meet the

definition of ‘‘Ranking Entity,’’ and

which conform to the requirements of

the guidelines herein] (1) rankings

created and published by Ranking

Entities or (2) rankings created by an

investment company or an investment

company affiliate but based on the

performance measurements of a

Ranking Entity. Rankings in

advertisements and sales literature also

must conform to the following

requirements.

(c) Required Disclosures

(1) Headlines/Prominent Statements

[(A)] A headline or other prominent

statement must not state or imply that

an investment company or investment

company family is the best performer in

a category unless it is actually ranked

first in the category.

[(B) Prominent disclosure of the

investment company’s ranking, the total

number of investment companies in the

category, the name of the category, and

the period on which the ranking is

based (i.e., the length of the period and

the ending date; or, the first day of the

period and the ending date), must

appear in close proximity to any

headline or other prominent statement

that refers to a ranking.]

(2) Required Prominent Disclosure

All advertisements and sales literature

containing an investment company

ranking must disclose prominently[,

with respect to the ranking]:

(A) the name of the category (e.g.,

growth);

(B) the number of investment

companies or, if applicable, investment

company families, in the category;

(C) the name of the Ranking Entity

and, if applicable, the fact that the

investment company or an affiliate

created the category or subcategory;

(D) the length of the period [and the

ending date,] (or[,] the first day of the

period) and [the] its ending date; and

(E) criteria on which the ranking is

based (e.g., total return, risk-adjusted

performance).[;]

(3) Other Required Disclosure

All advertisements and sales

literature containing an investment

company ranking also must disclose:

(A) the fact that past performance is

no guarantee of future results;

[(F)] (B) for investment companies

[which] that assess front-end sales

loads, whether the ranking takes those

loads into account [sales charges];

[(G)] (C) if the ranking is based on

total return or the current SEC

standardized yield, and fees have been

waived or expenses advanced during

the period on which the ranking is

based and the waiver or advancement

had a material effect on the total return

or yield for that period, a statement to

that effect; [and]

(D) the publisher of the ranking data

(e.g., ‘‘ABC Magazine, June 1999

[1993]’’)[. The disclosure required by

subparagraph (A) through (D) above,

must be set forth prominently in the

body of the advertisement or sales

literature.]; and

[(3)] (E) [If] if the [investment

company] ranking consists of a symbol

(e.g., a star system) rather than a

number, [the advertisement or sales

literature also must disclose] the

meaning of the symbol (e.g., a four-star

ranking indicates that the fund is in the

top 30% of all investment companies).

[(4) All advertisements and sales

literature containing an investment

company ranking must disclose that

past performance is no guarantee of

future results.]

(d) Time Periods

(1) Current Rankings

Any investment company ranking

included [set forth] in an [advertisement

or] item of sales literature must be, at a

minimum, current to the most recent

calendar quarter ended prior to use. Any

investment company ranking included

in [, in the case of] an advertisement

must be, at minimum, current to the

most recent calendar quarter ended

prior to the submission for publication[,

or, in the case of sales literature, prior

to use]. If no ranking that meets this

requirement is available from the

Ranking Entity, then a member may

only use the most current ranking

available from the Ranking Entity unless

use of the most current ranking would

be misleading, in which case no ranking

from the Ranking Entity may be used.

(2) Rankings Time Periods; Use of Yield

Rankings

Except for money market mutual

funds:

(A) advertisements and sales literature

[must not use any rankings other than

rankings based on yield, based on a

period of less than one year] may not

present any ranking that covers a period

of less than one year, unless the ranking

is based on yield;

(B) an investment company ranking

based on total return must be

accompanied by rankings based on total

return for a one year period for

investment companies in existence for

at least one year; one and five year

periods for investment companies in

existence for at least five years, and one,

five and ten year periods for investment

companies in existence for at least ten

years supplied by the same Ranking

Entity, relating to the same investment

category, and based on the same time

period; provided that, if rankings for

such one, five and ten year time periods

are not published by the Ranking Entity,

then rankings representing short,

medium and long term performance

must be provided in place of rankings

for the required time periods; and

(C) an investment company ranking

based on yield may be based only on the

current SEC standardized yield and

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67597

must be accompanied by total return

rankings for the time periods specified

in paragraph (d)(2)(B). [An investment

company ranking based on the current

SEC standardized yield must be

accompanied by rankings based on total

return for a one year period for

investment companies in existence for

at least one year; one and five year

periods for investment companies in

existence for at least five years; and one,

five and ten year periods for investment

companies in existence for at least ten

years supplied by the same Ranking

Entity, relating to the same investment

category, and based on the same time

period; provided that, if rankings for

such, one, five and ten year time periods

are not published by the Ranking Entity,

then rankings representing short,

medium and long term performance

must be provided in place of rankings

for the required time periods.]

(e) Categories

(1) The choice of category (including

a subcategory of a broader category) on

which the investment company ranking

is based must be one that provides a

sound basis for evaluating the

performance of the investment

company.

(2) [Subject to the standards below,

an] An investment company ranking

must be based only on (A) a category or

subcategory created and published by a

Ranking Entity or (B) a category or

subcategory created by an investment

company or an investment company

affiliate but based on the performance

measurements of a Ranking Entity.

[(3) When the investment company

ranking is based on a subcategory, the

advertisement or sales literature must

disclose the name of the full category

and the investment company’s ranking

and the number of investment

companies in the full category. This

requirement does not apply if the

subcategory is (A) based solely on the

investment objectives of the investment

companies included and (B) created by

a Ranking Entity. This disclosure could

be included in a footnote.]

[(4) The] (3) An advertisement or sales

literature may not use any category or

subcategory that is based upon the

[investment company’s] asset size of an

investment company or investment

company family, [(]whether or not it has

been created by a Ranking Entity[)].

[(5) If an advertisement uses a

category created by the investment

company or an investment company

affiliate, including a ‘‘subcategory’’ of a

category established by a Ranking

Entity, the advertisement must

prominently disclose:]

[(A) the fact that the investment

company or its affiliate has created the

ranking category;]

[(B) the number of investment

companies in the category;]

[(C) the basis for selecting the

category; and]

[(D) the Ranking Entity that developed

the research on which the ranking is

based.]

[(6) An advertisement or sales

literature containing a headline or other

prominent statement that proclaims an

investment company ranking created by

an investment company or its affiliate

must indicate, in close proximity to the

headline or statement, that the

investment company ranking is based

upon a category created by the

investment company or its affiliate.]

(f) Multiple Class/Two-Tier Funds

Investment company rankings for

more than one class of investment

company with the same portfolio must

be accompanied by prominent

disclosure of the fact that the

investment companies or classes have a

common portfolio.

(g) Investment Company Families

Advertisements and sales literature

may contain rankings of investment

company families, provided that these

rankings comply with the guidelines

above, and further provided that no

advertisement or sales literature for an

individual investment company may

provide a ranking of an investment

company family unless it also

prominently discloses the various

rankings for the individual investment

company supplied by the same Ranking

Entity, as described in paragraph

(d)(2)(B). For purposes of this IM–2210–

3, the term ‘‘investment company

family’’ means any two or more

registered investment companies or

series thereof that hold themselves out

to investors as related companies for

purposes of investment and investor

services.

IM–2210–4. Limitations on Use of

Association’s Name

(a) Statements of Membership [Use of

Association Name]

Members may indicate membership in

the Association in conformity with

Article XV, Section 2 of the NASD ByLaws in the following ways:

[(1) A member may indicate

membership in the Association in

recognized trade directories or other

similar types of business listings.]

[(2) A member may indicate

membership in the Association in the

member’s advertisements and sales

literature if such use is:]

[(A) separate from the regular text of

the advertisement or sales literature;

[(B) in a smaller type size and with

less emphasis than that used for the

member’s name; and]

[(C) carries no direct or implied

indication of Association approval of

any security or service discussed in the

advertisement or sales literature.]

(1) in any communication with the

public, provided that the

communication complies with the

applicable standards of Rule 2210 and

neither states nor implies that the

Association or any other regulatory

organization endorses, indemnifies, or

guarantees the member’s business

practices, selling methods, the class or

type of securities offered, or any specific

security;

[(3) A] (2) in a confirmation statement

[form] for an over-the-counter

transaction that states [may include the

following statement]: ‘‘This transaction

has been executed in conformity with

the Uniform Practice Code of the

National Association of Securities

Dealers, Inc.’’

[(4) A member may indicate

membership in the Association on the

door or entrance way of a member’s

principal office or a registered branch

office in the following manner:

‘‘Member, National Association of

Securities Dealers, Inc.’’ or ‘‘Member of

the National Association of Securities

Dealers, Inc.’’.]

(b) Certification of Membership

Upon request to the Association, a

member [shall] will be entitled to

receive an appropriate certification of

membership, which may be displayed

in the principal office or a registered

branch office of the member. The

certification shall remain the property of

the Association and [shall] must be

returned by the member upon request of

the NASD Board or the Chief Executive

Officer of the Association.

[(c) Fraudulent or Misleading Use

Prohibited]

[A member or person associated with

a member shall not use the name of the

Association in a fraudulent or

misleading manner in connection with

the promotion or sale of any security or

in connection with any other aspect of

the member’s business or imply orally,

visually, or in writing that the

Association endorses, indemnifies, or

guarantees a member’s business

practices, selling methods, or class or

type of securities offered.]

[(d) Violation of Rule 2110]

[An improper, fraudulent, or

misleading use of the Association’s

67598 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

5SR–NASD–98–11 was published for comment in

the Federal Register on November 8, 2000. See

Securities Exchange Act Release No. 43507

(November 2, 2000), 65 FR 67025.

name by a member or person associated

with a member shall be deemed conduct

inconsistent with high standards of

commercial honor and just and

equitable principles of trade in violation

of Rule 2110.]

IM–2210–5 Requirements for the Use

of Bond Mutual Fund Volatility Ratings

(No changes to text.)

IM–2210–6. Presentation of Mutual

Fund Related Performance Information

(Text to reflect final rule changes of

SR–NASD–98–11 if approved by the

Commission.) 5

IM–2210–7 Communications With the

Public About Collateralized Mortgage

Obligations (CMOs)

(a) Definition

For purposes of the following

guidelines, the term ‘‘collateralized

mortgage obligation’’ (CMO) refers to a

multiclass debt instrument backed by a

pool of mortgage pass-through securities

or mortgage loans, including real estate

mortgage investment conduits (REMICs)

as defined in the Tax Reform Act of

1986.

(b) Disclosure Standards and Required

Educational Material

(1) Disclosure Standards

All advertisements, sales literature

and correspondence concerning CMOs:

(A) Must include within the name of

the product the term ‘‘Collateralized

Mortgage Obligation’’;

(B) May not compare CMOs to any

other investment vehicle, including a

bank certificate of deposit;

(C) Must disclose, as applicable, that

a government agency backing applies

only to the face value of the CMO and

not to any premium paid; and

(D) Must disclose that a CMO’s yield

and average life will fluctuate

depending on the actual rate at which

mortgage holders prepay the mortgages

underlying the CMO and changes in

current interest rates.

(2) Required Educational Material

Before the sale of a CMO to any

person other than an institutional

investor, a member must offer to the

customer educational material that

includes the following:

(A) A discussion of:

(i) Characteristics and risks of CMOs

including credit quality, prepayment

rates and average lives, interest rates

(including their effect on value and

prepayment rates), tax considerations,

minimum investments, transaction costs

and liquidity;

(ii) The structure of a CMO, including

the various types of tranches that may

be issued and the rights and risks

pertaining to each (including the fact

that two CMOs with the same

underlying collateral may be prepaid at

different rates and may have different

price volatility); and

(iii) The relationship between

mortgage loans and mortgage securities;

(B) Questions an investor should ask

before investing; and

(C) A glossary of terms.

(c) Promotion of Specific CMOs

In addition to the standards set forth

above, advertisements, sales literature

and correspondence that promote a

specific security or contain yield

information must conform to the

standards set forth below. An example

of a compliant communication appears

at the end of this section.

(1) The advertisement, sales literature

or correspondence must present the

following disclosure sections with equal

prominence. The information in

Sections 1 and 2 must be included. The

information in Section 3 is optional;

therefore, the member may elect to

include any, all or none of this

information. The information in Section

4 may be tailored to the member’s

preferred signature.

Section 1 Title—Collateralized

Mortgage Obligations

Coupon Rate

Anticipated Yield/Average Life

Specific Tranche—Number & Class

Final Maturity Date

Underlying Collateral

Section 2 Disclosure Statement:

‘‘The yield and average life shown

above consider prepayment

assumptions that may or may not be

met. Changes in payments may

significantly affect yield and average

life. Please contact your representative

for information on CMOs and how they

react to different market conditions.’’

Section 3 Product Features

(Optional):

Minimum Denominations

Rating Disclosure

Agency/Government Backing

Income Payment Structure

Generic Description of Tranche (e.g.,

PAC, Companion)

Yield to Maturity of CMOs Offered at

Par

Section 4 Company Information:

Name, Memberships

Address

Telephone Number

Representative’s Name

(2) Additional Conditions

The following conditions must also be

met:

(A) All figures in Section 1 must be in

equal type size.

(B) The disclosure language in Section

2 may not be altered and must be given

equal prominence with the information

in Section 1.

(C) The prepayment assumption used

to determine the yield and average life

must either be obtained from a

nationally recognized service or the

member firm must be able to justify the

assumption used. A copy of either the

service’s listing for the CMO or the

firm’s justification must be attached to

the copy of the communication that is

maintained in the firm’s advertising

files in order to verify that the

prepayment scenario is reasonable.

(D) Any sales charge that the member

intends to impose must be reflected in

the anticipated yield.

(E) The communication must include

language stating that the security is

‘‘offered subject to prior sale and price

change.’’ This language may be

included in any one of the four sections.

(F) If the security is an accrual bond

that does not currently distribute

principal and interest payments, then

Section 1 must include this information.

(3) Radio/Television Advertisements

(A) The following oral disclaimer

must precede any radio or television

advertisement in lieu of the Title

information set forth in Section 1:

‘‘The following is an advertisement for

Collateralized Mortgage Obligations.

Contact your representative for

information on CMOs and how they

react to different market conditions.’’

(B) Radio or television advertisements

must contain the following oral

disclosure statement in lieu of the

legend set forth in Section 2:

‘‘The yield and average life reflect

prepayment assumptions that may or

may not be met. Changes in payments

may significantly affect yield and

average life.’’

(4) Standardized CMO Communication

Example

Collateralized Mortgage Obligations

7.50% Coupon

7.75% Anticipated Yield to 22-Year

Average Life

FNMA 9532X, Final Maturity March

2023

Collateral 100% FNMA 7.50%

The yield and average life shown

above reflect prepayment assumptions

that may or may not be met. Changes in

payments may significantly affect yield

and average life. Please contact your

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67599

representative for information on CMOs

and how they react to different market

conditions.

$5,000 Minimum

Income Paid Monthly

Implied Rating/Volatility Rating

Principal and Interest Payments Backed

by FNMA

PAC Bond

Offered subject to prior sale and price

change.

Call Mary Representative at (800)555–

1234, Your Company Securities, Inc.,

Member SIPC, 123 Main Street,

Anytown, State 12121.

2211. Institutional Sales Material and

Correspondence

(a) Definitions

For purposes of Rule 2210, this Rule,

and any interpretation thereof:

(1) ‘‘Correspondence’’ consists of any

written letter or electronic mail message

distributed by a member to:

(A) one or more of its existing retail

customers; and

(B) fewer than 25 prospective retail

customers within any 30 calendar-day

period.

(2) ‘‘Institutional Sales Material’’

consists of any communication that is

distributed or made available only to

institutional investors.

(3) ‘‘Institutional Investor’’ means

any:

(A) person described in Rule

3110(c)(4), regardless of whether that

person has an account with an

Association member;

(B) governmental entity or subdivision

thereof;

(C) qualified plan, as defined in

Section 3(a)(12)(C) of the Act, that has

at least 100 beneficiaries;

(D) Association member or registered

associated person of such a member;

and

(E) person acting solely on behalf of

any such institutional investor.

No member may treat a

communication as having been

distributed to an institutional investor if

the member has reason to believe that

the communication or any excerpt

thereof will be forwarded or made

available to any person other than an

institutional investor.

(4) ‘‘Existing Retail Customer’’ means

any person for whom the member or a

clearing broker or dealer on behalf of

the member carries an account, or who

has an account with any registered

investment company for which the

member serves as principal underwriter,

and who is not an institutional investor.

‘‘Prospective Retail Customer’’ means

any person who has not opened such an

account and is not an institutional

investor.

(b) Approval and Recordkeeping

(1) Registered Principal Approval

(A) Correspondence. Correspondence

need not be approved by a registered

principal prior to use, but is subject to

the supervision and review requirements

of Rule 3010(d).

(B) Institutional Sales Material. Each

member shall establish written

procedures that are appropriate to its

business, size, structure, and customers

for the review by a registered principal

of institutional sales material used by

the member and its registered

representatives. Such procedures should

be in writing and be designed to

reasonably supervise each registered

representative. Where such procedures

do not require review of all institutional

sales material prior to use or

distribution, they must include

provision for the education and training

of associated persons as to the firm’s

procedures governing institutional sales

material, documentation of such

education and training, and

surveillance and follow-up to ensure

that such procedures are implemented

and adhered to. Evidence that these

supervisory procedures have been

implemented and carried out must be

maintained and made available to the

Association upon request.

(2) Record-Keeping

(A) Members must maintain all

institutional sales material in a file for

a period of three years from the date of

last use. The file must include the name

of the person who prepared each item

of institutional sales material.

(B) Members must maintain in a file

information concerning the source of

any statistical table, chart, graph or

other illustration used by the member in

communications with the public.

(c) Spot-Check Procedures

Each member’s correspondence and

institutional sales literature may be

subject to a spot-check procedure under

Rule 2210. Upon written request from

the Advertising Regulation Department

(the ‘‘Department’’), each member must

submit the material requested in a spotcheck procedure within the time frame

specified by the Department.

(d) Content Standards Applicable to

Institutional Sales Material and

Correspondence

(1) All institutional sales material and

correspondence are subject to the

content standards of Rule 2210(d)(1)

and the applicable Interpretive

Materials under Rule 2210.

(2) All correspondence (which for

purposes of this provision includes

business cards and letterhead) must:

(A) prominently disclose the name of

the member and may also include a

fictional name by which the member is

commonly recognized or which is

required by any state or jurisdiction;

(B) reflect any relationship between

the member and any non-member or

individual who is also named; and

(C) if it includes other names, reflect

which products or services are being

offered by the member.

(3) Members may not use investment

company rankings in any

correspondence other than rankings

based on (A) a category or subcategory

created and published by a Ranking

Entity as defined in IM–2210–3(a) or (B)

a category or subcategory created by an

investment company or an investment

company affiliate but based on the

performance measurements of a

Ranking Entity.

(e) Violation of Other Rules

Any violation by a member of any rule

of the SEC, the Securities Investor

Protection Corporation or the Municipal

Securities Rulemaking Board applicable

to institutional sales material or

correspondence will be deemed a

violation of this Rule and Rule 2210.

[2211] 2212. Telemarketing

(No change to rule text.)

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASD Regulation included statements

concerning the purpose of and basis for

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

a. Background

The proposed rule change would

modernize and clarify the rules

governing member communications

with the public. Among other

provisions, the proposed rule change

would exclude all communications to

institutional investors from member preVerDate 11<MAY>2000 20:14 Dec 28, 2001 Jkt 197001 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 E:\FR\FM\31DEN1.SGM pfrm07 PsN: 31DEN1
67600 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

6NASD member broker/dealers that are dually

registered as investment advisers will remain

subject to the advertising standards of the

Investment Advisers Act of 1940 and Commission

rules thereunder, to the extent that their sales

material promotes advisory products or services.

7The proposed rule change would revise the

content standards to specifically indicate which

type of communication is subject to each standard.

Therefore, standards that apply only to

‘‘advertisements’’ or ‘‘sales literature’’ would not

apply to institutional sales material. For example,

the ranking guidelines in proposed IM–2210–3

would apply only to advertisements and sales

literature and therefore would not apply to

institutional sales material.

use approval and NASD Regulation

filing requirements and from many of

the content standards. Form letters and

group e-mail to existing retail customers

and fewer than 25 prospective retail

customers also would be eligible for

these exclusions, provided that a

member developed appropriate policies

and procedures to supervise and review

such communications. Additionally, the

proposed rule change would exclude

independently prepared reprints from

the filing and many of the content

standards, and would exclude certain

press releases from the filing

requirements. The proposed rule change

would simplify the content standards

applicable to member communications.6

As discussed in greater detail below,

the proposed rule change reflects many

of the comments and suggestions

received by NASD Regulation in

response to Notice to Members 99–79

(‘‘NTM 99–79’’). In NTM 99–79, NASD

Regulation requested comment from

members and other interested parties on

an earlier version of the proposed rule

change (‘‘NTM Version’’). The comment

period on NTM 99–79 closed on

October 29, 1999. NASD Regulation

received 72 comment letters in response

to NTM 99–79. In developing the

proposed rule change, NASD Regulation

also consulted with five of its member

committees, its district committees, and

its National Adjudicatory Council, and

considered comments received to Notice

to Members 98–81, which requested

comment generally on how the NASD

rules and By-Laws could be

modernized.

b. Description

1. Reorganization of Rule 2210

The proposed rule change would

create new Rule 2211, which would

apply to institutional sales material and

correspondence. The creation of a

separate rule for institutional sales

material and correspondence should

facilitate a reader’s ability to determine

how the advertising rules apply to those

communications. In order to further

simplify this process, the proposed rule

change would provide cross-references

between Rule 2210 and Rule 2211 in

appropriate places. Existing Rule 2211,

concerning telemarketing, would be

renumbered as Rule 2212.

2. Definition of ‘‘Public Appearance’’

Existing Rule 2210(d)(1)(C) provides

that members who engage in public

appearances or speaking activities must

follow the content standards of Rule

2210(d) and (f). Consequently, public

appearances already are subject to strict

content requirements.

The proposed rule change would

clarify the application of Rule 2210 to

public appearances by defining ‘‘public

appearance’’ as a type of

communication with the public. Public

appearances would include

participation in a seminar, forum

(including an interactive electronic

forum), radio or television interview, or

other public appearance or public

speaking activity.

The proposed rule change also would

provide members with more flexibility

than they have today, by subjecting

public appearances only to some, but

not all of the content standards of Rule

2210. Several commenters to NTM 99–

79 argued that none of the content

standards should apply to public

appearances. These commenters

asserted that by subjecting public

appearances to any of the content

standards, the proposed rule change

would impose impractical constraints

on television and other public

appearances by members.

NASD Regulation disagrees with the

suggestion that statements made in

public appearances should be excluded

from all of the content standards. While

some accommodation of the practical

concerns raised by commenters may be

necessary, leaving investors virtually

unprotected from public statements that

are misleading, unbalanced or

unwarranted is not an acceptable

solution. Therefore, the proposed rule

change would subject public

appearances to some of the content

standards, while providing members

with more flexibility than they have

today to provide useful information in

their public appearances.

In addition, by defining ‘‘public

appearance’’ to include an interactive

electronic forum, the proposed rule

change would codify the NASD

Regulation staff’s position that Internet

chat rooms constitute public

appearances rather than advertisements

or sales literature for purposes of Rule

2210.

3. Institutional Sales Material

Currently, Rule 2210 does not

distinguish between retail and

institutional sales material. Moreover,

the rule currently defines ‘‘sales

literature’’ to include any ‘‘form letter,’’

which NASD Regulation has interpreted

to mean written communications,

including e-mail messages, sent to at

least two persons. Consequently, any

communication sent to two or more

institutional investors is deemed ‘‘sales

literature,’’ must comply with the

content standards of Rule 2210, must be

pre-approved by a registered principal,

and may have to be filed with the

Advertising/Investment Companies

Regulation Department of NASD

Regulation (the ‘‘Department’’) if it

concerns certain types of products, such

as registered investment companies.

The proposed rule change would

eliminate the pre-use approval and

filing requirements applicable to

communications that are distributed or

made available only to institutional

investors. Institutional sales material

would be subject to new supervision

and review requirements that are

modeled on those in Rule 3010, which

apply to correspondence. Moreover,

institutional sales material would

continue to be subject to the recordkeeping requirements and some, but not

all, of the content standards in Rule

2210.7

Under the proposed rule change, no

member could treat a communication as

having been distributed to an

institutional investor if the member has

reason to believe that the

communication or any excerpt thereof

will be forwarded or made available to

any person other than an institutional

investor. For example, if a member had

reason to believe that such a

communication would be forwarded or

made available to 401(k) plan

participants or other beneficiaries of

institutional accounts, it would be

treated as retail sales material. NASD

Regulation believes that plan

participants and other beneficiaries of

institutional accounts should receive

the same protections under the

advertising rules as other retail

investors. Similarly, an advertisement in

a publication designed for broker/

dealers or other institutional investors

may not be treated as institutional sales

material if the member has reason to

believe that the publication will be

made available to any person other than

an institutional investor.

The proposed rule change would

define ‘‘institutional investor’’ as any:

(1) Person described in Rule

3110(c)(4), regardless of whether that

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67601

8Rule 3110(c)(4), defines ‘‘institutional account’’

to mean the account of a bank, savings and loan,

insurance company, registered investment

company, or registered investment adviser. It also

includes the amount of any other entity or natural

person with total assets of at least $50 million. For

purposes of Rule 2210 and Rule 2211, the term

‘‘institutional investor’’ would include trust

companies organized under state law that come

within the definition of ‘‘bank’’ in Article I(b) of the

NASD By-Laws. In addition, the proposed rule

change is not intended to require a member to

verify that an investment adviser that is required to

register with the SEC or a state has in fact done so,

in order for the member to treat this investment

adviser as an ‘‘institutional investor.’’

9Some commenters expressed concern about the

proposal to include broker/dealer-only material

within the definition of institutional sales material.

These commenters asserted that currently broker/

dealer-only material is excluded from the content

standards of Rule 2210, and that by treating it as

institutional sales material and subjecting it to some

of the content standards, the proposed rule change

would reduce the flexibility that members now

have to place various types of information in

broker/dealer-only material.

This comment reflects an apparent

misunderstanding about the current scope of the

content standards. Today all content standards of

Rule 2210 apply to advertisements and sales

literature sent only to members or their registered

persons. By including this material within the

definition of institutional sales material, and

subjecting it only to those standards applicable to

institutional sales material, the proposed rule

change would provide members with more

flexibility to include various information in broker/

dealer-only material.

10See, e.g., ERISA § 103(a)(3)(A) (auditing

requirements) and 104(a)(2)(A) (annual reporting).

11The proposed rule change would permit

members to treat form letters or group e-mail sent

to a combination of existing customers and fewer

than 25 prospective retail customers within any 30

calendar-day period as correspondence. Of course,

members could not ‘‘sanitize’’ an advertisement or

item of sales literature by enclosing it with Group

Correspondence. For example, an item that a

member has distributed as sales literature would

remain sales literature for purposes of Rule 2210

when the member encloses it in Group

Correspondence.

person has an account with an

Association member;8

(2) governmental entity or subdivision

thereof;

(3) qualified plan, as defined in

Section 3(a)(12)(C) of the Act, that has

at least 100 beneficiaries;

(4) Association member or registered

associated person of such a member,9

and

(5) person acting solely on behalf of

any such institutional investor.

Several elements of this definition

were amended as a result of comments

to NTM 99–79. First, the definition was

amended to include governmental

entities and their subdivisions. Second,

the definition would apply to qualified

plans with at least 100 beneficiaries.

NASD Regulation believes that qualified

plans with at least 100 beneficiaries

generally have the level of

sophistication and expertise to justify

their treatment as institutional investors

under the advertising rules. Various

statutory provisions similarly

distinguish these qualified plans from

smaller ones.10

Third, the proposed rule change

would define ‘‘institutional investor’’ to

include any person acting solely on

behalf of any institutional investor.

Several commenters urged NASD

Regulation to define ‘‘institutional

investor’’ to include pension

consultants and others acting on behalf

of institutional investors. Rather than

establishing a new category based upon

a person’s occupation, NASD Regulation

has determined to include any person

acting on behalf of an institutional

investor.

Fourth, in response to one

commenter, NASD Regulation would

clarify that the term ‘‘institutional

investor’’ includes only associated

persons who are registered with an

NASD member. The ‘‘broker/dealeronly’’ exception, which would become

a part of the institutional investor

definition, recognizes the special

expertise that NASD members have with

respect to brokerage products and

services. While registered persons

should have this expertise, as

demonstrated by their completion of the

qualifications process, there can be no

assurance that other associated persons

would.

Fifth, as previously mentioned, the

definition would clarify that no member

may treat a communication as having

been distributed to an institutional

investor if the member has reason to

believe that the communication or any

excerpt thereof will be forwarded or

made available to any person other than

an institutional investor. Thus, for

example, if a member has reason to

believe the employer sponsor of a

retirement plan will make sales material

available for inspection by the plan

beneficiaries, then the member may not

treat the sales material as having been

distributed only to an institutional

investor.

The definition of ‘‘institutional

investor’’ would include persons

described in Rule 3110(c)(4), which

defines ‘‘institutional account’’ to

include any entity with total assets of at

least $50 million. Several commenters

asserted that this threshold level is too

high in light of the purposes of the

proposed rule change, and

recommended that NASD Regulation

reduce it to a level such as $5 million,

a level used in Regulation D under the

Securities Act of 1933.

NASD Regulation has determined that

the $50 million threshold is appropriate,

particularly in light of the significant

effect that the definition of

‘‘institutional investor’’ would have on

the filing, pre-approval and content

requirements. Moreover, the

amendment to include qualified plans

with at least 100 beneficiaries should

address many of the concerns expressed

by those who proposed a reduction in

the asset size threshold.

4. Form Letters and Group Electronic

Mail

Rule 2210 currently treats any letter

or e-mail sent to more than one person

as ‘‘sales literature’’ subject to the

panoply of content standards applicable

to all other sales literature, and to the

member pre-use approval and NASD

Regulation filing requirements. The use

of group electronic mail has become

commonplace in many firms. For

example, registered representatives may

provide customers with information

concerning their accounts, changes in

market conditions, or current economic

conditions. Given the volume of form

letters and group e-mail that members

and their associated persons may send,

and the speed with which this material

can be dispatched to customers, a preuse approval requirement may be less

practical than supervisory procedures

that are more specifically tailored to

these forms of communication.

The proposed rule change would

define ‘‘correspondence’’ to include

form letters and group e-mail sent to

existing retail customers and to fewer

than 25 prospective retail customers

within any 30 calendar-day period

(‘‘Group Correspondence’’), as well as

written and electronic communications

prepared for delivery to a single retail

customer. The proposed rule change

would subject Group Correspondence to

the strict supervisory procedures in

Rule 3010(d), which governs the

approval and review of correspondence,

and to those content standards that

apply to correspondence. Form letters

and group e-mail sent to 25 or more

prospective retail customers within any

30 calendar-day period would be subject

to the pre-use approval, filing, and

record-keeping requirements of Rule

2210, and to all of the content standards

applicable to sales literature.11

NASD Regulation believes that Rule

3010(d) provides the most effective

means of supervising form letters and

group e-mail sent to existing and a

limited number of prospective retail

customers. Rule 3010(d) requires

members to adopt written procedures

for the review of correspondence by

registered principals. Any member that

does not pre-approve all

correspondence must educate and train

67602 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

associated persons as to NASD rules

governing communications with the

public and the firm’s procedures, must

document this training, and must

monitor adherence to these procedures.

Members must retain all

correspondence of registered

representatives related to the member’s

investment banking or securities

business.

Notice to Members 98–11 provides

guidance to members concerning Rule

3010(d). The Notice makes clear that, at

a minimum, a member must develop

procedures for the review of some of

each registered representative’s

correspondence with the public relating

to the member’s investment banking or

securities business, tailored to its

structure and the nature and size of its

business and customers.

The Notice provides that members

must:

• Specify in writing the firm’s

policies and procedures for reviewing

different types of correspondence;

• Identify what types of

correspondence will be pre-or postreviewed by a registered principal; and

• Periodically re-evaluate the

effectiveness of the firm’s procedures for

reviewing public correspondence and

consider any necessary revisions.

These procedures must be reasonably

designed to ensure that a member’s

correspondence complies with the

content standards of the applicable

advertising rules.

In order to ensure that its review of

Group Correspondence meets these

standards, a member would be expected

to review its procedures to ensure that

they adequately address potential

concerns with the distribution of Group

Correspondence. Members should

consider whether to adopt stricter

procedures that require registered

principal pre-use approval and filing

with NASD Regulation of Group

Correspondence that presents a higher

risk to investors. This determination

should be based upon such factors as

the content, purpose and targeted

audience of the Group Correspondence.

Thus, for example, members may wish

to consider adopting procedures

requiring pre-use principal review and

filing as appropriate with NASD

Regulation of Group Correspondence

that promotes a new investment product

or strategy that is sent to existing retail

customers. In addition, members should

strongly consider requiring pre-use

principal review of Group

Correspondence sent by a registered

representative that has been disciplined

in the past for advertising or sales

practice violations.

The NTM Version would have

applied a 90-day rather than a 30-day

period to the determination of whether

form letters and group e-mail have been

sent to fewer than 25 prospective retail

customers. One commenter questioned

the feasibility of monitoring the

issuance of form letters and group email to prospective customers over a

rolling 90-day period. The proposed

rule change would reduce this period to

30 calendar days, to make the

monitoring responsibility more

manageable.

The term ‘‘existing retail customer’’

has been modified in response to

comments to NTM 99–79. ‘‘Existing

retail customer’’ would be defined as

any person, other than an institutional

investor, for whom the member or a

clearing broker or dealer on behalf of the

member carries an account, or who has

an account with any registered

investment company for which a

member serves as principal underwriter.

The new language would make clear

that a person who has opened an

account with an investment company or

with a transfer agent for such an

investment company could qualify as an

existing retail customer. NASD

Regulation also has amended the

language to make it more consistent

with existing Rule 2211(d).

5. Article Reprints

Rule 2210 currently defines ‘‘sales

literature’’ to include ‘‘reprints or

excerpts of any . . . published article.’’

Article reprints thus may have to be

filed with the Department, depending

upon their content, such as whether

they pertain to registered investment

companies. For some time, NASD

Regulation has received comments that

third-party article reprints should not be

subject to the filing requirements of

Rule 2210. Some have argued that

reprints often are available to the public

through large-circulation periodicals

published by firms that are not NASD

members, and that it makes little sense

to require members to file reprints,

especially when they have no control

over the content of these articles. In

NTM 99–79, NASD Regulation therefore

proposed to exclude article reprints

from the filing requirements. Several

commenters to NTM 99–79 argued that

article reprints also should be exempt

from most of the content standards of

Rule 2210.

In response to these comments, the

proposed rule change would define a

new type of communication with the

public, an ‘‘independently prepared

reprint,’’ and exclude independently

prepared reprints from the filing and

most of the content standards. An

independently prepared reprint would

consist of any article reprint that meets

certain standards that are designed to

ensure that the reprint was issued by an

independent publisher and was not

materially altered by the member. In

response to comments to NTM 99–79,

the proposed rule change would provide

that a member may alter the contents of

an independently prepared reprint in a

manner necessary to make it consistent

with applicable regulatory standards or

to correct factual errors.

An article reprint would qualify as an

‘‘independently prepared reprint’’ under

Rule 2210(a)(6)(A) only if, among other

things, its publisher is not an affiliate of

the member using the reprint or any

underwriter or issuer of the security

mentioned in the reprint. For purposes

of this provision, ‘‘affiliate’’ has the

same meaning as that term is defined in

NASD Rule 2720(b)(1)(A) and (B). The

term ‘‘affiliate’’ as used in Rule

2210(a)(6)(B) (regarding investment

company research reports) also has this

meaning.

Some, but not all, content standards

would apply to independently prepared

reprints. For example, Rule 2210(d)(1)

would impose various content standards

on all communications with the public,

including independently prepared

reprints.

The proposed rule change also would

include certain investment company

research reports within the definition of

independently prepared reprints. Rule

2210 was recently amended to exclude

these research reports from the filing

requirements. Because these research

reports present essentially the same

issues as independently prepared

reprints, the proposed rule change

would subject these research reports to

the same content and other

requirements that apply to

independently prepared reprints.

Independently prepared reprints

would continue to be subject to the preuse approval and record-keeping

requirements of Rule 2210. Moreover,

article reprints and research reports that

do not meet the definition of

‘‘independently prepared reprint’’

would continue to constitute sales

literature that would have to meet all of

the requirements applicable to sales

literature.

6. Press Releases

Rule 2210 defines ‘‘sales literature’’ to

include ‘‘any written or electronic

communication distributed or made

generally available to customers or the

public,’’ which the Department has

interpreted to include press releases.

The proposed rule change would codify

this interpretation by amending the

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67603

12The proposed rule change, unlike the NTM

Version would exclude all press releases made

available only to members of the media, without

limiting the exclusion to press releases concerning

investment companies. Some commenters to NTM

99–79 state that the limitation might create

confusion concerning whether other press releases

that must be filed under existing Rule 2210, such

as those concerning variable products, would be

similarly excluded.

13Proposed Rule 2211 would require members to

maintain all institutional sales material in a file that

includes the name of the person who prepared each

item.

14See, e.g., NASD Regulatory and Compliance

Alert (April 1995) at p. 9.

definition of ‘‘sales literature’’ to

include press releases concerning a

member’s product or service. The

proposed rule change would exclude

from the filing requirements press

releases that are made available only to

members of the media.12 This exclusion

would recognize the time-sensitive

nature of these press releases, and the

fact that press releases generally do not

raise significant concerns in the filing

process.

Some commenters to NTM 99–79

recommended that NASD Regulation

exclude press releases from most of the

content standards, or even exclude press

releases from Rule 2210 entirely. Some

of these commenters asserted that press

releases are not part of a member’s effort

to market its products and services, and

therefore need not be subject to Rule

2210. In fact, press releases often

announce the availability of new

products or services and members

frequently circulate press releases to

their customers with other marketing

material. While NASD Regulation

recognizes that the media may

substantially edit a press release or even

refrain from using the press release at

all, we disagree with the assertion that

press releases concerning a member’s

products or services have little to do

with its marketing efforts. Consequently,

the proposed rule would exempt from

the filing requirements those press

releases that are made available only to

members of the media, but would

subject them to the content, pre-use

approval and record-keeping

requirements of Rule 2210.

7. Television and Video Advertisements

The proposed rule change would

require members that have filed a draft

version or ‘‘story board’’ of a television

or video advertisement pursuant to a

filing requirement also to file the final

filmed version within ten business days

of first use or broadcast. This rule

change would codify an existing

Department policy regarding television

and video sales material. Rule 2210

would impose a filing fee only when the

draft version or story board is filed. No

additional fee would be assessed when

the final filmed version is filed.

8. Approval and Record-Keeping

The proposed rule change would

make three additional modifications to

the pre-use approval and record-keeping

requirements in response to comments

to NTM 99–79. First, it would clarify

that the pre-use approval requirement

could be met with respect to a research

report concerning any debt or equity

security, including non-corporate

securities, by signature or initial of a

supervisory analyst under New York

Stock Exchange Rule 344. Second, the

proposed rule change would clarify that

members must maintain a file with the

name of the registered principal who

approved any advertisement or sales

literature. Members would not be

required to maintain a file with the

name of the person who prepared those

items, however.13 Third, the proposed

rule change would clarify that members

must maintain a file with information

concerning the source, but not

necessarily the data, of any statistical

table, chart, graph or other illustration.

9. Filing Requirements

The proposed rule change would

retain the existing provision concerning

the obligation of a member that has not

filed an advertisement with the

Department, to pre-file its

advertisements for a one-year period.

The NTM Version appeared to cause

some confusion concerning this prefiling obligation. The proposed rule

change would modify the existing

language slightly, to make it more clear

and consistent with standards of plain

English.

Rule 2210 does not require members

who are subject to this pre-filing

requirement to await completion of the

Department’s review of its

advertisements before using them.

Nevertheless, NASD Regulation

encourages these members to do so, in

order to better ensure that their

advertisements reflect the Department’s

comments and that these members do

not incur the expense of revising

advertisements already in use.

The proposed rule change also has

been modified from the NTM Version to

clarify that advertisements and sales

literature for continuously offered

closed-end funds must be filed with the

Department. This clarification codifies a

long-standing position of the

Department.14The proposed rule change

would clarify that members need not

file advertisements and sales literature

that previously have been filed and that

are to be used without material change.

This provision would codify existing

practice, which excludes from the filing

requirement material that has been filed

previously, but in which performance

data is updated or there are other

changes that are not material for

purposes of the filing requirement.

Members are encouraged to file material

that is particularly aged, to ensure that

the material has not fallen out of

compliance due to changes in rules or

other circumstances.

In response to comments received on

NTM 99–79, the proposed rule change

would specifically list institutional sales

material as one type of communication

that need not be filed. The proposed

rule change also would list

correspondence, independently

prepared reprints, and certain press

releases as other types of

communications that need not be filed.

In addition, the proposed rule change

would state that when these items

concern investment companies, then

they will be deemed filed with the

Association for purposes of Section

24(b) of the Investment Companies Act

of 1940 and Rule 24b–3 thereunder.

Based on our conversations with the

SEC staff, we understand that this

provision would eliminate the need to

file this material with the SEC.

The proposed rule change also would

exclude from the filing requirement

announcements as a matter of record

that a member has participated in a

private placement.

Several commenters to NTM 98–81

and NTM 99–79 argued that investment

company annual and semi-annual

reports should be excluded from the

filing requirements. These commenters

note that shareholder reports are already

subject to specific content requirements

under SEC rules and are filed with the

SEC, and argue that these requirements

should address any investor protection

concerns.

Members are not required to file

shareholder reports that only consist of

statistical reporting information such as

financial statements and portfolio

holdings. However, members must file

the management’s discussion of fund

performance (‘‘MDFP’’) portion of a

report (as well as any supplemental

sales material attached to or distributed

with the report) with the Department. In

the Department’s experience, members

frequently use the MDFP or other

supplemental information as marketing

material that goes far beyond the SEC

regulatory requirements for shareholder

reports. While NASD Regulation

carefully considered the comments

67604 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

15The current IM–2210–1 concerning

collateralized mortgage obligations would be

redesignated as IM–2210–7.

suggesting an exemption for shareholder

reports, we have decided not to propose

such an exclusion from the filing

requirement.

Several commenters to NTM 98–81

and NTM 99–79 also requested that

NASD Regulation eliminate the

requirement that members file a copy of

the ranking or comparison used in sales

material that contains rankings. These

comments appear to assume that the

filing is pro forma because the ranking

or comparison information is reflected

in the sales material itself, or that the

ranking or comparison information is

readily available to the Department. In

fact, it is not unusual for the Department

to comment on sales material that

presents a ranking or comparison in a

manner inconsistent with the backup

ranking information. Additionally, sales

material often contains rankings or

comparisons that are not readily

available. Because the Department relies

on the backup filings when reviewing

sales material that contains rankings or

comparisons, elimination of this

requirement could significantly delay

completion of the staff’s review.

Accordingly, while NASD Regulation

carefully considered the comments

suggesting an exclusion for backup

material, the proposed rule change

would not eliminate this filing

requirement.

Several commenters to NTM 98–81

and 99–79 also recommended that

NASD Regulation eliminate the

requirement to file generic mutual fund

advertisements that comply with Rule

135a under the Securities Act of 1933.

Members rarely file generic

advertisements. To the extent the

Department has received generic

advertisements, however, it has found

that members sometimes misunderstand

the content requirements of Rule 135a,

and sometimes misclassify advertising

that falls under other rules as generic

advertisements. We are concerned that

an exclusion for generic advertisements

could lead some members not to file

investment company sales material that

should be filed due to their

misunderstanding of Rule 135a.

Accordingly, NASD Regulation does not

propose to exclude generic fund

advertisements from the filing

requirements.

10. Standards Applicable to Member

Communications

The proposed rule change would

substantially shorten and simplify the

standards applicable to communications

with the public that are contained in

Rule 2210(d). The proposed rule change

would relocate certain standards from

Rule 2210(d) to a new Interpretive

Material 2210–1, Guidelines to Ensure

that Communications Are Not

Misleading.15 New proposed IM–2210–

1 would make clear that members have

the primary responsibility to ensure that

their communications with the public

are not misleading, and would rewrite

many standards to make them more

clear and consistent with the principles

of plain English.

Proposed IM–2210–1 would not

contain certain of the specific standards

currently in Rule 2210. Partially in

response to comments received to NTM

98–81, the proposed rule change would

eliminate the specific standards

regarding non-existent or self-conferred

degrees or designations, offers of free

service, claims for research facilities,

hedge clauses, recruiting advertising,

and periodic investment plans. To the

extent that these provisions prohibit

statements that are misleading,

unbalanced, or inaccurate regarding

particular types of communications, the

rule already prohibits the use of such

statements. Moreover, certain required

disclosures, such as those currently

applicable to statements concerning

periodic investment plans, may not be

necessary depending upon the context

in which they are made.

Proposed IM–2210–1(4) in the NTM

Version has been turned into new

paragraphs (4) and (5) to clarify which

guidelines concerning references to tax

free or tax exempt income apply to all

communications with the public, and

which guidelines apply only to

advertisements or sales literature.

11. Legends and Footnotes

Rule 2210 cautions members

concerning the placement of footnotes,

and in the filing review process the

Department has insisted that members

adopt an appropriate use of footnotes.

The NTM Version would have required

that material information appear in the

main text of a communication and not

be relegated to footnotes. Commenters

expressed concern that the NTM

Version would eliminate much of the

flexibility that members now have

concerning the placement of footnotes

in specific items of sales material.

Moreover, commenters noted that a

requirement to include all ‘‘material’’

information in the text might have

unintended litigation consequences.

The proposed rule change would

attempt to balance these concerns with

the need to ensure that Rule 2210

provides clear direction to members

concerning their responsibility to avoid

inappropriate reliance on legends and

footnotes. Consequently, the proposed

rule change would provide that

information may be placed in a legend

or footnote only in the event that such

placement would not inhibit an

investor’s understanding of the

communication. Thus, for example,

footnotes in especially small type in an

advertisement might be deemed to

inhibit an investor’s understanding of

the advertisement. Similarly, an

advertisement that presents bold claims

that are supposedly ‘‘balanced’’ only

with footnote disclosure might not

comply with this content standard.

12. Hypothetical Illustrations

The NTM Version would have deleted

from Rule 2210 the statement that ‘‘a

hypothetical illustration of

mathematical principles is not

considered a prediction or projection of

performance.’’ Commenters objected to

this change, arguing that this provision

has permitted members to provide

educational information in their sales

material, and that its elimination might

interfere with presentations such as a

mutual fund cost calculator.

In proposed Rule 2210(d)(1)(D),

NASD Regulation would insert language

similar to the existing language. Under

the proposed rule change, a member

could present a hypothetical illustration

of mathematical principles, provided

that the illustration does not predict or

project the performance of an

investment or investment strategy and is

not used in such a manner. The

proposed rule change thus would

permit the use of mutual fund cost

calculators and other hypothetical

illustrations that are permitted by

existing Rule 2210.

13. Testimonials

The NTM Version would have

applied specific standards to

testimonials concerning ‘‘a member’s

products and services.’’ Commenters

indicated that this change would cause

confusion about whether the testimonial

standards would apply even when the

testimonial concerns matters other than

investment performance, such as the

member’s general services. In order to

clarify this matter, the proposed rule

change would apply the testimonial

standards to advertisements or sales

literature concerning the investment

advice or investment performance of a

member or its products.

14. Recommendations

The NTM Version would have

clarified certain aspects of the existing

standards governing recommendations.

Some commenters argued that the

Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices 67605

16The requirement thus would not apply to

institutional sales material.

17The application of this limitation to

correspondence would appear in new Rule

2211(d)(3) rather than in IM–2210–3. 18 15 U.S.C. 78k–1(b)(6).

proposal went too far, and that it would

inhibit legitimate discussion about the

prospects for various investments.

Nevertheless, NASD Regulation

continues to share the concerns of the

SEC staff and others about the need to

provide investors with adequate

disclosure about the financial interests

that research analysts, other associated

persons, or their firms may have in

securities that they recommend. NASD

Regulation has determined to consider

this issue separately, and recently

issued NTM 01–45 seeking comment on

this matter. Pending the separate

resolution of this rulemaking initiative,

the proposed rule change would make

no amendment to the existing standards

governing recommendations.

15. Use and Disclosure of a Member’s

Name

The proposed rule change would

dramatically simplify the provisions

concerning disclosure of member

names. In addition, the proposed rule

change would make clear that the

requirement to disclose the member’s

name applies to advertisements, sales

literature, and correspondence, which

for purposes of this provision would

include business cards and letterhead.16

In response to comments to NTM 99–79,

the provision would clarify that the

advertisement, sales literature or

correspondence must ‘‘reflect’’ (rather

than disclose) any relationship between

the member and the other named person

and the products and services offered by

the member. This change would help

ensure that members do not mislead

investors concerning these relationships

and offerings, but would not mandate

disclosure that may be unnecessary to

achieve this objective.

16. Ranking Guidelines

The proposed rule change would

modify the ranking guidelines in several

respects. First, the proposed rule change

would make clear that no

advertisement, item of sales literature or

correspondence may present a ranking

other than rankings (1) created and

published by a Ranking Entity, which

the ranking guidelines define to include

certain independent entities, or (2)

created by an investment company or an

investment company affiliate but based

on the performance measurements of a

Ranking Entity.17 Second, the proposed

rule change would make clear that the

ranking guidelines in IM–2210–3 apply

only to advertisements and sales

literature.

Third, the proposed rule change

would permit the use of investment

company family rankings even in sales

material that advertises only one

investment company in the family.

Several commenters to NTM 99–79

urged NASD Regulation to permit the

use of investment company family

rankings. These types of rankings are

not currently permitted under the Rule

2210, due to concern that sales material

that presents a family ranking might

confuse investors about the true ranking

of the advertised investment company.

The proposed rule change attempts to

strike a balance between the interest in

presenting some form of family ranking,

and the need to ensure that

presentations of family rankings do not

mislead investors about the ranking of

an individual investment company. The

proposed rule change thus would

permit the presentation of investment

company family rankings, provided that

when a particular investment company

is being advertised, the individual

rankings for that investment company

also must be presented. The definition

of ‘‘investment company family’’ is

substantially similar to the definition of

‘‘group of investment companies’’ in

Section 12(d)(1)(G) of the Investment

Company Act of 1940. Of course, as

with all performance rankings, use of an

investment company family ranking

would have to comply with the other

applicable requirements of Rule 2210.

The proposed rule change would

retain existing language concerning the

required ranking periods. The NTM

Version would have required rankings

only for short, medium and long-term

periods. Commenters to NTM 99–79

suggested that this provision would

allow members to ‘‘cherry pick’’ ranking

periods, to the detriment of investors.

The proposed rule change would retain

the existing language, but with some

modifications to clarify the language

and make it more consistent with

principles of plain English.

The proposed rule change also would

eliminate the requirement that certain

disclosures appear in ‘‘close proximity’’

to any headline or other prominent

statement that refers to a ranking. The

subjective nature of this requirement

has complicated the Department’s

administration of the ranking guidelines

without providing meaningful

additional protection to investors. The

proposed rule change would eliminate

certain disclosure requirements

applicable to investment company

rankings that are based on subcategories

of funds or categories created by an

investment company or its affiliate.

17. Limitations on Use of the

Association’s Name

The proposed rule change would

simplify and shorten the requirements

in IM–2210–4 concerning the use of the

NASD’s name. The proposed rule

change also would delete current Rule

2210(d)(2)(J) concerning references to

regulatory organizations.

18. Communications About

Collateralized Mortgage Obligations

The proposed rule change would

rewrite existing IM–2210–1 (the CMO

Guidelines), which governs

communications about collateralized

mortgage obligations and renumber it as

IM–2210–7. The current CMO

Guidelines may give the impression that

different standards apply to educational

material, advertisements and

‘‘communications.’’ The proposed rule

change would simplify, shorten and

reorganize the CMO Guidelines to

provide a more straightforward and

uniform list of disclosure requirements.

The proposed rule change would

modify the NTM Version in several

respects. First, the proposed rule change

would eliminate prohibitions of certain

statements concerning the safety,

liquidity, potential guarantees, and

simplicity of CMOs. The content

standards of Rule 2210, in their current

form and as they would be amended,

already prohibit a member from making

these statements in any communication

with the public. Second, the proposed

rule change would make clear that

paragraphs (b)(1) and (c) apply only to

advertisements, sales literature and

correspondence. Third, the proposed

rule change would clarify that

paragraph (b)(2) does not apply to the

sale of a CMO to an institutional

investor.

2. Statutory Basis

NASD Regulation 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 the Association’s rules be

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, and, in general, to protect

investors and the public interest.18

NASD Regulation believes that the

proposed rule change will more

appropriately address the issues related

to member communications with the

public, will promote the safety and

soundness of member firms, and will

further investor protection.

67606 Federal Register / Vol. 66, No. 250 / Monday, December 31, 2001 / Notices

19The NASD requested a 45 day comment period

and has consented to the extension of the time for

Commission action on this filing until 30 days after

the end of the comment period. See Section III.

20 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter dated December 10, 2001 from Cindy

Sink, Senior Attorney, Regulatory Policy, PCX, to

Joe Morra, Special Counsel, Division of Market

Regulation, Commission and attachments

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

PCX: (1) Clarified the intent of the rule that after

the proper request has been completed, a transfer

will be automatically permitted when the transfer

satisfies one of the specified categories set forth in

proposed Rule 6.78(d)(1); (2) revised Item 8 to state

that the proposed rule change is based, in part, on

Chicago Board Options Exchange Rule 6.49A; and

(3) made technical changes to the rule text.

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.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 30 days after the expiration of

the comment period following

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 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, NW,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to the file

number in the caption above and should

be submitted by February 14, 2002.19

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–32077 Filed 12–28–01; 8:45 am]

BILLING CODE 8010–01–U

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–45188; File No. SR–PCX–

2001–33]

Self-Regulatory Organizations; Notice

of filing of Proposed Rule Change and

Amendment No. 1 by the Pacific

Exchange, Inc. To Adopt Procedures

for the Transfer of Options Positions

December 21, 2001.

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

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on August

10, 2001, the Pacific Exchange, Inc.

(‘‘PCX’’ or ‘‘Exchange’’) 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

by the PCS. The Exchange amended the

proposed rule change on December 11,

2001.3 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

The PCX proposes to establish

procedures for the transfer of options

positions. The text of the proposed rule

change, as amended, is below. Proposed

new language is italicized.

Rule 6.78 (a)–(c) No change.

Transfer of Positions

(d) Transfer of Positions off the Floor.

‘‘Transfer of positions off the floor’’ is

defined as moving a member’s

ownership interest in securities from its

account to an account of another

member or person in a manner other

than trading on the floor of a securities

exchange.

(1) Transfers off the Floor.

Notwithstanding the prohibition set

forth in subsection (a), an Exchange

member may transfer positions off the

floor if the transfer involves one or more

of the following events: (i) The

dissolution of a joint account in which

the remaining member assumes the

positions of the joint account; (ii) the

dissolution of a corporation or

partnership in which a former nominee

of that corporation or partnership

assumes the positions; (iii) positions

transferred as part of a member’s capital

contribution to a new joint account,

partnership, or corporation; (iv) the

donation of positions to a not-for-profit

corporation; (v) the transfer of positions

to a minor under the Uniform Gifts to

Minors Act; (vi) a merger or acquisition

resulting in a continuity of ownership or

management; or (vii) consolidation of

accounts within a member organization.

(2) Written Request. No member or

member organization may effect a

transfer of positions off the floor in any

security listed on the Exchange without

the prior submission of a completed

written request to the Exchange. This

requirement applies regardless of

whether the transfer is permitted under

subsection (d)(1) or (f).

(e) Transfer of Positions Offered on

the Floor. ‘‘Transfer of positions offered

on the floor’’ is defined as moving a

member’s ownership interest in

securities from its account to an account

of another member or person in

circumstances other than those set forth

in subsection (d)(1).

(1) Transfer Procedure for Positions

Offered on the Floor. A member seeking

a transfer must offer the positions on the

floor in the following manner:

(A) A member or member

organization seeking to transfer

positions on the floor (‘‘Transferor’’)

must specify the securities positions to

be transferred that are traded on the

Exchange or at another securities

exchange (‘‘Transfer Positions’’). In

offering Transfer Positions to the floor,

the Transferor must offer a set of

options or other financial products

being offered by the Transferor as a

package (‘‘Transfer Package’’), to be bid

upon at a net debit or credit for the

entire Transfer Package. A single

Transfer Package must include no more

than one option issue listed on the

Exchange, but may also include stock or

other securities. A Transferor may offer

multiple Transfer Packages on the floor

at the same time or on the same day.

These offers must be made in a form