

[Federal Register: July 12, 2006 (Volume 71, Number 133)]
[Notices]               
[Page 39379-39382]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jy06-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54103; File No. SR-NASD-2004-043]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving a Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 4 to 
the Proposed Rule Change Relating to Disclosure of Fees and Expenses in 
Mutual Fund Performance Sales Material

July 5, 2006.
    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 December 12, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') Amendment No. 4 to the proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared by NASD. This order notices, and solicits comments from 
interested persons on, Amendment No. 4 to the proposal and approves the 
proposal as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 2210 and 2211 to require 
member communications with the public, other than institutional sales 
material and public appearances, that present mutual fund performance 
information (``performance sales material'') to disclose the fund's 
fees, expenses and standardized performance. The text of the proposed 
rule change is available on NASD's Web site (http://www.nasd.com), at 

NASD's principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change 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.

Purpose

    On March 10, 2004, NASD filed with the Commission a proposal to 
amend NASD Rules 2210 and 2211 to require that mutual fund 
communications with the public that provide performance data disclosure 
the fund's fees, expenses and standardized performance. NASD believes 
these new requirements would improve investor awareness of the costs of 
buying and owning a mutual fund, facilitate comparison of funds and 
make the presentation of standardized performance more prominent. The 
Commission published the proposed rule change and Amendment No. 1 
thereto for comment in the Federal Register on August 27, 2004.\3\ The 
Initial Proposal would have required that:
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    \3\ Exchange Act Release No. 50226 (Aug. 20, 2004), 69 FR 52738 
(Aug. 27, 2004) (``Initial Proposal''). Amendment No. 2, which 
changed the proposal in response to industry comments, was filed on 
May 2, 2005. Amendment Nos. 3 and 4, which altered the proposed rule 
change to harmonize it with the requirements of Rule 482 and Rule 
34b-1, were filed on July 27, 2005, and December 13, 2005, 
respectively. Amendment No. 4 replaced Amendment Nos. 2 and 3 in 
their entirety.

 Performance sales material disclose:
     The standardized performance information mandated by Rule 
482 under the Securities Act of 1933 \4\ (``Rule 482'') and Rule 34b-1 
under the Investment Company Act of 1940 \5\ (``Rule 34b-1'');
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    \4\ 17 CFR 230.482.
    \5\ 17 CFR 270.34b-1.
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     To the extent applicable, the maximum front-end and 
deferred sales charges stated in the fund's current prospectus; and
     The fund's total annual operating expense ratio, as stated 
in the investment company's current prospectus.
 All required performance information and fee disclosure be set 
forth:
     Clearly and prominently, and standardized performance 
information be in a type size at least as large as that used for any 
non-standardized performance information;
     With respect to any radio, television or video 
advertisements, with equal prominence to that given to any non-
standardized performance information; and
     In any advertisement, other than radio, television or 
video advertisements, in a prominent text box that contains only the 
required information.

Comments Received on the Initial Proposal and NASD's Response

    The Commission received five comment letters on the Initial 
Proposal.\6\ Commenters' concerns fell into three principal categories. 
First, commenters either opposed the text box requirement in its 
entirety or believed that, to be workable, NASD needed to modify the 
proposal to allow greater flexibility for electronic media such as Web 
sites. Second, some commenters stated that ongoing fees should be 
calculated net of fee waivers and expense reimbursements. Finally, 
commenters urged NASD to provide members with ample time to comply with 
any new rule and to allow the use of templates when filing revised 
sales material. A summary of the comment letters and NASD's response is 
set forth below.
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    \6\ Letters to Jonathan G. Katz, Secretary, Commission, from 
Colon Brown, President, Brown & Brown Securities, Inc. (Sept. 10, 
2004) (``Brown Letter''); Alexander G. Gavis, Vice President and 
Associate General Counsel, Fidelity Investments (Oct. 12, 2004) 
(``Fidelity Letter''); Frances M. Stadler, Deputy Senior Counsel, 
Investment Company Institute (Sept. 17, 2004) (``ICI Letter''); 
Stuart R. Strachan, Chairman, Investment Company Committee of the 
Securities Industry Association (Sept. 17, 2004) (``SIA Letter''); 
Heidi Stam, Principal, Securities Regulation, Vanguard Group, Inc. 
(Sept. 17, 2004) (``Vanguard Letter''). In addition, NASD received a 
letter from Forrest R. Foss, Associate Counsel, T. Rowe Price 
Associates, Inc. (Dec. 6, 2004) (``T. Rowe Price Letter''). We have 
included NASD's responses to the concerns expressed in the T. Rowe 
Price Letter in the discussion below.
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Text Box Requirement
    Three commenters objected that the proposed text box requirement 
would be unduly restrictive and would make it difficult to advertise 
the performance of multiple funds.\7\ These commenters also

[[Page 39380]]

stated that the prohibition against including non-required information 
in the text box could result in poorly designed and repetitive fund 
advertisements. Two of the commenters recommended as an alternative to 
the text box a requirement that a fund's expense ratio be disclosed in 
the same manner in which a fund's maximum sales charge is required to 
be disclosed under Rule 482, which includes prominence requirements for 
certain required disclosures (e.g., for sales charges).\8\
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    \7\ Fidelity Letter, ICI Letter, T. Rowe Price Letter. Two of 
the commenters opined that an advertisement that compares a fund's 
performance against a benchmark index could not include the index 
performance in the text box, and thus might have to show the fund's 
performance again outside the text box in order to make an effective 
comparison.
    \8\ Fidelity Letter, ICI Letter.
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    Finally, three commenters objected to applying the text box 
requirement to Web sites, arguing that the requirement does not take 
into consideration how individuals typically read and navigate Web 
sites and retrieve information (such as through the use of 
hyperlinks).\9\ These commenters also urged NASD to modify the proposal 
to allow the use of hyperlinks to link from non-standardized 
performance information to the required standardized information.
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    \9\ Fidelity Letter, ICI Letter, Vanguard Letter.
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    NASD's response to comments: In response to commenters' concerns, 
NASD amended the prominence requirements of proposed NASD Rule 
2210(d)(3)(B) to: (1) Eliminate language that might be deemed 
inconsistent with the prominence requirements of Rule 482 and Rule 34b-
1; (2) apply the text box rule only to print advertisements; and (3) 
permit the inclusion of other pertinent comparative data and 
disclosures required by Rule 482 and Rule 34b-1 in the text box.\10\
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    \10\ Amendment No. 4.
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    As a result of this amendment, Web sites and other electronic 
advertisements would not have to present the required performance and 
fee information within a text box. And in those print advertisements 
where the text box still would be required, members would be allowed to 
present comparative performance and fee data (e.g., non-standardized 
fund performance, the performance of a relevant benchmark index, or a 
comparison of the fund's expense ratio to the average expense ratio for 
similar funds) and disclosures required by rule 482 and Rule 34b-1.
    The information required by proposed NASD Rule 2210(d)(3)(A) (i.e., 
the standardized performance information, maximum sales charge, and 
total annual fund operating expenses) would have to be set forth 
prominently. NASD members could meet this prominence requirement by 
presenting this information in accordance with the prominence and 
proximity requirements of Rule 482 and Rule 34b-1.\11\ Additionally, 
members would be required to present a fund's total annual operating 
expenses in a manner that meets the prominence and proximity 
requirements under Rule 482 for disclosure of a fund's maximum sales 
charge. Thus, for example, the quotations of the standardized average 
annual total returns for one, five and ten-year periods would have to 
be set forth with equal prominence, and any quotations of non-
standardized performance could not be set forth in greater prominence 
than the standardized performance.\12\ Similarly, the disclosures of a 
fund's maximum sales load and total annual operating expenses generally 
would have to be presented in print advertisements ``in a type size at 
least as large as and of a style different from, but at least as 
prominent as, that used in the major portion of the advertisement * * 
*.'' \13\
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    \11\ See Securities Act Rules 482(b) and 482(d).
    \12\ See Securities Act Rules 482(d)(3)(iii) and 482(d)(5)(iv).
    \13\ See Securities Act Rule 482(b)(5). Rule 482(b)(5) also 
provides that when performance data is presented in a print 
advertisement in a type size smaller than that of the major portion 
of the advertisement, the maximum sales load may appear in a type 
size no smaller than that of the performance data.
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    NASD also has reconsidered the use of hyperlinks to show 
standardized performance information. Given that NASD no longer would 
require Web sites to present required disclosures in a text box, NASD 
stated that it also would be appropriate for members to present 
standardized performance and other required disclosures through the use 
of a hyperlink, provided that the required disclosures are prominent 
and consistent with the standards of Rule 482.\14\
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    \14\ Amendment No. 4.
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Calculation of Expense Ratio
    The Initial Proposal would have required performance sales material 
to show a fund's annual operating expenses as derived from the fund's 
most recent prospectus.\15\ Two commenters stated that the proposal 
should be modified to allow member firms to disclose a fund's current 
expense ratio net of fee waivers and reimbursements, as long as the 
fact of the subsidization is disclosed.\16\
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    \15\ Proposed NASD Rule 2210(d)(3)(A)(ii)(b).
    \16\ Fidelity Letter, ICI Letter.
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    One commenter stated that expense ratios should be calculated in 
accordance with Item 3 of Form N-1A, without taking into account fee 
waivers and reimbursements because, in the commenter's opinion, 
prospective investors should base their decisions on the long-term 
costs of a fund rather than its current costs (which may include 
subsidization).\17\
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    \17\ Vanguard Letter.
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    NASD's response to comments: In response to commenters' concerns, 
NASD stated that since fund advertisements, like prospectuses, are 
directed to prospective investors, any required expense ratio 
disclosure should not reflect fee waivers or reimbursements.\18\ 
According to NASD, the proposal would not preclude performance sales 
material from also presenting a fund's expense ratio net of fee waivers 
and reimbursements, as long as the sales material also presents the 
unsubsidized expense ratio, and the member presents the subsidized 
expense ratio in a fair and balanced manner in accordance with the 
standards of Rule 2210. NASD stated that it would expect that, if a 
subsidized expense ratio were presented, the sales material would 
disclose whether the fee waivers or expense ratios were voluntary or 
mandated by contract, and the time period during which the fee waiver 
or expense reimbursement obligation, if any, remains in effect.\19\
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    \18\ Amendment No. 4.
    \19\ In addition, one commenter opined that the Original 
Proposal was limited to disclosure of quantitative statistics rather 
than more qualitative information. Brown Letter. The commenter 
believed that the more important information involves the 
credentials and experience of mutual funds' advisors, the investment 
disciplines they follow and the ethical standards they employ 
regarding the distribution of their shares. The commenter 
recommended that such information be made available to investors in 
reasonably large print and understandable language. In response, 
NASD stated that the commenter's recommendation is beyond the scope 
of the proposal.
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Compliance Lead Time and the Use of Templates
    The Initial Proposal indicated that NASD would publish a Notice to 
Members announcing Commission approval of the proposed rule change 
within 60 days after such approval, and that the new requirements would 
become effective 30 days after publication of the Notice to Members. 
Three commenters requested that NASD provide additional time for 
members to comply with the proposal's new requirements.\20\
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    \20\ Fidelity Letter, ICI Letter, Vanguard Letter. Two of the 
commenters also recommended that compliance with the proposal not be 
required until after the end of the second full calendar quarter 
following Commission approval of the proposed rule change. Fidelity 
Letter, ICI Letter. One of the commenters recommended that firms be 
given at least six months, and preferably nine to twelve months, to 
comply with the rule change. Vanguard Letter.

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[[Page 39381]]

    Two commenters requested that NASD allow member firms to file 
templates to show how substantially similar performance sales material 
would be revised to comply with the new standards.\21\ These commenters 
believe that allowing templates to be filed would reduce compliance and 
filing costs for member firms while allowing NASD staff to identify and 
address any concerns with the format and content of performance sales 
material.
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    \21\ Fidelity Letter, ICI Letter.
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    NASD's response to comments: In response to commenters' concerns, 
NASD amended the proposed effective date as follows: Should the 
Commission approve the proposal, NASD will publish a Notice to Members 
announcing Commission approval within 60 days thereafter. The proposal 
would become effective six months following the calendar quarter ended 
after publication of the Notice.
    In Amendment No. 4, NASD also agreed to permit the filing of 
templates on a case-by-case basis to show compliance with the new rule 
requirements.\22\
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    \22\ To the extent that NASD permits members to file templates 
of sales material to show compliance with the new requirements of 
proposed NASD Rule 2210(d)(3) or for any other purpose, all such 
sales material covered by the template would be deemed filed with 
NASD. Pursuant to Rule 24b-3 under the Investment Company Act of 
1940 (``Investment Company Act''), sales material filed with NASD is 
deemed filed with the Commission for purposes of Section 24(b) of 
the Investment Company Act.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 4, including whether the amendment 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2004-043 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2004-043. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NASD-2004-
043 and should be submitted on or before August 2, 2006.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to NASD.\23\ Specifically, the Commission 
believes that the proposal is consistent with Section 15A(b)(6) of the 
Act \24\ in that it is 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. The 
Commission believes that the proposed rule change is designed to 
accomplish these ends by requiring additional disclosures in mutual 
fund performance sales materials that should enable investors to 
compare the performance of various mutual funds and to make informed 
comparisons regarding the actual cost of buying and owning various 
mutual funds.
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    \23\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \24\ 15 U.S.C. 78o-3(b)(6).
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    NASD has requested that the Commission approve Amendment No. 4 to 
the proposed rules change on an accelerated basis.\25\ The Commission 
finds good cause for approving Amendment No. 4 to the proposed rule 
change prior to the 30th day after the date of publication of notice of 
filing thereof in the Federal Register.\26\ NASD amended the rule 
proposal in response to commenters and to harmonize the rule proposal 
with current regulatory disclosure requirements. Amendment No. 4 allows 
more flexibility in the way in which required disclosures are presented 
while retaining the content and prominence requirements for those 
disclosures, thereby easing compliance burdens without sacrificing the 
investor-protection goals of the proposal.
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    \25\ Telephone conference between Joseph Savage, Associate Vice 
President, Investment Companies Regulation, NASD, and David W. 
Blass, Branch Chief, Division of Market Regulation, Commission, on 
July 5, 2006.
    \26\ The Commission further notes that both the rule filing SR-
NASD-2004-043 and the amendments thereto have been available since 
their respective filing dates on NASD's Web site http://www.nasd.com
.

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    Specifically, in response to commenters, NASD amended the proposal 
to require text boxes for print advertisements only. Web sites and 
other electronic advertisements would not have to present the required 
performance and fee information within a text box. NASD also expanded 
the categories of information that would be allowed within the text 
box. Members would be allowed to include within the text box 
comparative performance and fee data (e.g., non-standardized fund 
performance, the performance of a relevant benchmark index, or a 
comparison of the fund's expense ratio to the average expense ratio for 
similar funds) and the disclosures required by Rule 482 and Rule 34b-
1.\27\
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    \27\ NASD Rule 2210(d)(3)(B).
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    Amendment No. 4 also harmonizes the proposed disclosure standards 
with those that are already required under Rule 482 and Rule 34b-1 to 
ensure that member firms are able to comply simultaneously with both 
NASD and SEC rules. NASD also provided firms with guidance regarding 
the amount of time members will have to comply with the new 
requirements. NASD also agreed that the filing of templates may be 
appropriate to show how similar performance sales material will be 
revised to comply with the new standards. Use of templates should help 
firms obtain useful guidance from NASD staff to ensure that the 
required disclosures comport with the new provisions.
    The Commission believes that NASD's proposed changes in Amendment 
No. 4 strengthen and

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clarify the proposed rule change in direct response to issues raised by 
commenters and raise no new regulatory issues. Accordingly, the 
Commission believes that the accelerated approval of Amendment No. 4 is 
appropriate.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change, as amended, (SR-NASD-2004-043) 
is approved, and that Amendment No. 4 to the proposed rule change be, 
and hereby is, approved on an associated basis.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-6137 Filed 7-11-06; 8:45 am]

BILLING CODE 8010-01-M
