NASD Regulatory & Compliance Release – Summer 2000

Performance Graphs, Non-Cash Compensation, Suitability in Multi-Class Funds, and Suitability for Online Firms

By John M. Baker, Esq.


NASD Regulation posted the Summer 2000 issue of its Regulatory & Compliance Alert. This issue of the Alert includes a discussion of the May enforcement action against Kemper Distributors for violating NASD advertising-related rules and areas of concern in the use of graphic presentations of performance:

Labeling: The axes and baselines of graphs must be labeled clearly so that the reader can understand how the performance data relates to the graph, and the increments on the axes must also aid the reader in understanding the significance of the data. Disclosure: The text accompanying a graph must clearly state its purpose and significance, and graphs illustrating the historic performance of a hypothetical investment must disclose the relevant assumptions, such as the initial investment amount, whether dividends and capital gains were reinvested, whether taxes have been reflected, and whether sales loads or other fees were deducted.

Starting Points or Baselines of Graphs: The starting point of a graph must fairly reflect performance without exaggeration, and if a non-zero starting point is used there must be a reasonable basis for choosing such a point.

Scale: Although no specific scale or format is required, care must be exercised in choosing the appropriate scale.

Comparisons: Graphs may compare an investment in a product with a hypothetical investment in a benchmark index over the same time period, but the comparative index must be appropriate and provide the reader with a sound basis for evaluating the facts with respect to the product.

The Alert also discusses a number of other issues, including the following: Advertising of Bonus Credit Variable Annuities: Although advertisements of “bonus credit” variable annuities may include hypothetical illustrations depicting how the bonus credit will affect the contract’s value, the illustrations must meet several conditions in order to avoid being viewed as projections.

Non-Cash Compensation – Training or Education Meetings: Any training meeting should occupy substantially all of the work day, and reimbursement or payment for golf outings, tours, or other forms of entertainment while at a location for the purpose of training or education would not be permissible. NASD Regulation recommends that offerors use their own internal employee expense reimbursement policies as a guide when planning for training or education meetings.

Suitability Issues for Multi-Class Mutual Funds: The same suitability considerations that apply to the recommendation of a fund also apply to the recommendation of the particular class of a multi-class fund. Registered representatives should ask the investor what are his or her investment goals and objectives, including the investor’s time horizon, and it is suggested that members maintain written records of these discussions in their files.

Online Brokerage Services and the Suitability Rule: Even though the traditional application of the suitability rule may not fit squarely within the new online trading environment, it nonetheless remains both applicable to online trading and necessary to protect customers under certain circumstances. In general, the more individualized and specific the communication about a security or group of securities, the closer the communication gets to crossing the line and becoming a recommendation.

Another consideration may be whether the firm unilaterally decides to provide the information to the customer or whether the firm provides the information at the customer’s request. An Electronic Brokerage Committee was formed this year to participate in the development of balanced regulatory approaches that will fully protect investors without unnecessary restrictive regulation.

The Summer 2000 issue of the NASD Regulatory & Compliance Alert is available online at


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, To subscribe to FundLaw, send a blank e-mail to

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.  

You may also be interested in:

  • Can I Take My Client Information When I Leave My Firm? When changing firms, and moving between two firms that are part of the Broker Recruiting Protocol, can the broker take client account numbers with her. We get that question a lot. Under the Protocol a broker may take only the client name, address, phone number, email address, and account title of the clients that she serviced ...
  • SEC Subpoenas – Tips for Responding How you respond to an SEC subpoena makes a difference. Tips from an experienced securities attorney.
  • UBS YES Losses? Investors who lost money in UBS’ Yield Enhancement Strategy (YES) may be able to recover their losses
  • Recover GPB Capital Losses After inquiries by the SEC, FINRA and the FBI, GPB Capital has announced significant losses in the value of its investment funds.  Two of its funds, GPB Holdings II and GPB Automotive Portfolio, have reported losses of 25.4% and 39%, respectively according to GPB Capital Holdings is a New York based alternative asset management firm with approximately ...
  • Another SEC Whistleblower Award – Approximately $2 Million. A flurry of whistleblower awards are coming out of the SEC. Yesterday it announced an award of approximately $2 million to a whistleblower who, according to the Commission “provided vital information and assistance that substantially contributed to an ongoing investigation.  The whistleblower’s information would have been difficult for the agency to obtain absent the tip.“ Sallah ...
  • IRS Issues Warning About Coronavirus-Related Scams The IRS and its Criminal Investigation Division have seen a wave of new and evolving phishing schemes against taxpayers. In most cases, the IRS will deposit economic impact payments into the direct deposit account taxpayers previously provided on tax returns. Those taxpayers who have previously filed but not provided direct deposit information to the IRS ...
  • SEC Provides Additional Temporary Regulatory Relief and Assistance to Market Participants Affected by COVID-19 The SEC is providing additional temporary regulatory relief to market participants in response to the effects of the Coronavirus Disease 2019 (COVID-19). The actions announced today involve (1) parties needing to gain access to make filings on the EDGAR system, (2) certain company filing obligations under Regulation A and Regulation Crowdfunding, and (3) a filing ...
  • Digital Asset Scam Alert The Securities and Exchange Commission today announced that it has obtained an asset freeze and other emergency relief to halt an ongoing securities fraud perpetrated by a former state senator and two others who bilked investors in and outside the U.S. The SEC’s complaint alleges that Florida residents Robert Dunlap and Nicole Bowdler worked with ...
  • CHRONOS GROUP INVESTIGATION On March 2, Chronos Group, a global cannabinoid company with international production and distribution announced that it was unable to complete its financial report and statements for fiscal 2019 because its audit committee, outside counsel and forensic accountants are reviewing several bulk resin purchases and sales of products through its wholesale channel and the appropriateness ...