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NASD Related Performance Rules

New Rules for Fund Data

By John M. Baker, Esq.


In a series of no-action letters beginning in 1995, the Securities and Exchange Commission’s Division of Investment Management has permitted mutual funds to present a range of related performance information in their prospectuses. The use of such information in advertising and supplemental sales literature, however, is subject to the rules of the National Association of Securities Dealers, and the NASD has refused to allow the use of any related performance information other than predecessor performance information. Instead, the NASD in 1997 issued Notice to Members 97-47, seeking comment on the potential benefits to investors of allowing the presentation of related performance information and on the potential investor protection concerns, and in 1998 the NASD filed a rule proposal with the SEC to allow the use of some related performance information. The proposal has been pending since then.

The NASD on October 16 filed Amendment No. 2 to its rule proposal, File No. SR-NASD-98-11, and the SEC late last week issued a notice of the filing, Release No. 34-43507. The NASD proposal would add a new Interpretive Material 2210-5; an NASD interpretation is in substance a rule.

IM 2210-5 would allow advertising of the following types of related performance information:

  • “clone” performance of other mutual funds with the same investment policies, investment objectives, investment strategies, investment adviser, and sub-investment adviser;
  • “predecessor” performance of an insurance company separate account, common trust fund, or private investment company converted into the advertised mutual fund, with the same investment adviser, etc., and not created in order to establish a performance record; and
  • “comparison portfolio” performance of the total return of a composite of all other similar portfolios (including other funds) managed by the investment adviser or sub-adviser, with verification of the composite by an independent third party.

The related performance portfolio must have no material difference from the advertised mutual fund, except the portfolio may not have been registered under the Investment Company Act of 1940 and therefore may not be subject to the restrictions that the 1940 Act and the Internal Revenue Code impose, and except for differences in fees and expenses. If the advertised mutual fund has been registered for at least one year, its own total return must be presented in a more prominent manner than the related performance information. There are, of course, various disclosure requirements.

The rule filing does not allow the use of “manager” performance information. The SEC staff in the Bramwell Growth Fund no-action letter (Aug. 7, 1996) essentially permitted a mutual fund to include manager performance in its prospectus, subject to certain conditions. The Bramwell letter was probably the most controversial of all the SEC letters in this area, and it was opposed by many in the industry. Despite apparent pressure from the SEC, the NASD Board of Directors concluded that the presentation of manager performance could mislead or confuse investors about the contributions of other personnel of the investment adviser to the fund’s performance.

The notice of the proposed rule filing, soliciting comments from the public, should appear in the Federal Register shortly. Meanwhile, I have posted the NASD rule filing to the eGroups web site, and it can be accessed from http://www.egroups.com/files/fundlaw/


Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  


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