[13724]
July 12, 2001
TO: SEC RULES COMMITTEE No. 56-01
ADVERTISING COMPLIANCE ADVISORY COMMITTEE No. 10-01
INVESTMENT ADVISERS COMMITTEE No. 17-01
RE: NASDR PROPOSAL ON REQUIRED DISCLOSURES FOR SECURITIES
RECOMMENDATIONS
NASD Regulation (“NASDR”) has issued a Notice to Members1 requesting comment on
a proposed amendment to NASD Rule 2210, Communications with the Public, that would
increase the disclosures required when an NASD member recommends a security in written
advertisements and sales literature and that would require similar disclosures for
recommendations made by an associated person during a “public appearance.” A copy of the
Notice to Members is attached and the most significant aspects of the proposal are summarized
below.
Disclosures In Advertisements And Sales Literature
Currently, Rule 2210 does not require an NASD member firm to disclose ownership
interest in a recommended equity security. Instead, the rule only requires a member to disclose
if an officer, partner or the member firm itself owns options, rights or warrants to purchase any
of the recommended issuer's securities. The proposed amendments, however, would require,
among other things, that the NASD member disclose that the person or persons responsible for
a recommendation, or any discretionary account managed by such person or persons, has a
financial interest in any security of the recommended issuer, and the nature of the financial
interest. The proposal specifically notes that this aspect of the proposed rule would apply to
portfolio managers of investment companies and other discretionary accounts, however, only in
those instances where those managers are also associated persons of an NASD member.
In addition, the proposal would require NASD member firms to disclose if they own
five percent or more of the total outstanding shares of any class of securities of the
recommended issuer. The proposal notes that the five percent threshold is consistent with
Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 and that since those filings are
public, the information should be readily available to associated persons who must disclose this
1 NASD Notice to Members 01-45 (July 2001).
2information during public appearances. The Notice to Members requests comments as to
whether a lower threshold, or no threshold at all, would be more appropriate.
Disclosures During Public Appearances
The proposed amendment would require associated persons to provide disclosures
similar to those in advertisements and sales literature when a security is recommended during a
“public appearance.”2 In particular, the amendment would require associated persons who
make recommendations during public appearances to disclose (1) that the associated person, or
any discretionary account managed by such person, has a financial interest in any security of
the recommended issuer, and the nature of the financial interest, (2) that the NASD member
owns five percent or more of the total outstanding shares of any class of equity securities of the
recommended issuer, and (3) that the recommended issuer is a client of the NASD member with
which the person is associated. The Notice to Members specifically seeks comment on whether
disclosures in a public appearance should be broader or should include more of the disclosures
required for advertisements and sales literature.
Comments on the proposal are due to the NASDR by August 15, 2001. If you have
any comments that you would like the Institute to include in its letter on the proposal, please
contact the undersigned by phone at 202-371-5408, by fax at 202-326-5839, or by e-mail at
aburstein@ici.org no later than July 24.
Ari Burstein
Associate Counsel
Attachment
Attachment (in .pdf format)
2 The proposal defines public appearance as "participation in a seminar, forum (including an interactive electronic
forum), radio or television interview, or other public appearance or public speaking activity."