[Federal Register Volume 66, Number 250 (Monday, December 31, 2001)]
[Notices]
[Pages 67586-67606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32077]


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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.

[[Page 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

[[Page 67588]]

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.
    [(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

[[Page 67589]]

securities exchange or other self-regulatory 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 spot-check 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 [and/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 price[;].
    [(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.]

[[Page 67590]]

    [(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

[[Page 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

[[Page 67592]]

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

[[Page 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.]

[[Page 67594]]

    [(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,

[[Page 67595]]

whether printed or made available on-screen.
(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 claims-paying 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

[[Page 67596]]

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

[[Page 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 By-Laws 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

[[Page 67598]]

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\
---------------------------------------------------------------------------

    \5\ SR-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.
---------------------------------------------------------------------------

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

[[Page 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 
spot-check 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 pre-

[[Page 67600]]

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\
---------------------------------------------------------------------------

    \6\ NASD 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.
---------------------------------------------------------------------------

    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 record-keeping requirements and some, but not all, of the content 
standards in Rule 2210.\7\
---------------------------------------------------------------------------

    \7\ The 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.
---------------------------------------------------------------------------

    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

[[Page 67601]]

person has an account with an Association member;\8\
---------------------------------------------------------------------------

    \8\ Rule 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.''
---------------------------------------------------------------------------

    (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
---------------------------------------------------------------------------

    \9\ Some 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.
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \10\ See, e.g., ERISA Sec. 103(a)(3)(A) (auditing requirements) 
and 104(a)(2)(A) (annual reporting).
---------------------------------------------------------------------------

    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/dealer-
only'' 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 pre-
use 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\
---------------------------------------------------------------------------

    \11\ The 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.
---------------------------------------------------------------------------

    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

[[Page 67602]]

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:
    <bullet> Specify in writing the firm's policies and procedures for 
reviewing different types of correspondence;
    <bullet> Identify what types of correspondence will be pre-or post-
reviewed by a registered principal; and
    <bullet> 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 e-mail 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 
pre-use 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

[[Page 67603]]

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.
---------------------------------------------------------------------------

    \12\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \13\ Proposed 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.
---------------------------------------------------------------------------

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 pre-filing 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.\14\The 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.
---------------------------------------------------------------------------

    \14\ See, e.g., NASD Regulatory and Compliance Alert (April 
1995) at p. 9.
---------------------------------------------------------------------------

    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

[[Page 67604]]

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.
---------------------------------------------------------------------------

    \15\ The current IM-2210-1 concerning collateralized mortgage 
obligations would be redesignated as IM-2210-7.
---------------------------------------------------------------------------

    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

[[Page 67605]]

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\ The requirement thus would not apply to institutional sales 
material.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \17\ The application of this limitation to correspondence would 
appear in new Rule 2211(d)(3) rather than in IM-2210-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78k-1(b)(6).

---------------------------------------------------------------------------

[[Page 67606]]

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\
---------------------------------------------------------------------------

    \19\ The 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.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32077 Filed 12-28-01; 8:45 am]
BILLING CODE 8010-01-U