December 10, 1991
TO: SUBCOMMITTEE ON ADVERTISING NO. 7-91
1990s AD HOC COMMITTEE
RE: LIABILITY FOR RULE 482 ADVERTISEMENTS
__________________________________________________________
In September 1991, the Institute submitted a letter to the
Investment Companies Committee of the NASD asking for their
support for changes to the rules under the Securities Act
governing mutual fund advertising. Specifically, the Institute
recommended that the current dichotomy between Rule 134 tombstone
advertisements and Rule 482 advertisements (which can include
performance data) be abandoned. The Institute's letter suggested
two means of accomplishing this: by dropping the content
limitations of Rule 134 or by dropping the requirement that Rule
482 advertisements only include information the "substance of
which" appears in the fund's statutory prospectus.
In a letter dated November 7, 1991, the NASD stated that
the Investment Companies Committee would support the second
alternative -- to eliminate the "substance of which" requirement
-- provided that the liability attached to Rule 482
advertisements "would be appropriate". It is our understanding
that the Committee believes that prospectus liability (the
current standard) is the appropriate one for such advertisements.
The November 7 letter requested that the Institute provide a
formal statement of its position on this issue.
The Institute's original comment letter on the SEC's
release on investment company reform recommended that mutual fund
advertisements generally not be subject to prospectus liability.
However, it appears to be the case that the NASD (and, possibly,
the SEC) will endorse the Institute's other proposed changes to
Rule 482 only if the liability standard remains the same.
Accordingly, attached is a draft letter to the NASD that
states that the Institute does not believe that it is necessary
to change the liability standard applicable to Rule 482
advertisements in connection with the removal of the "substance
of which" requirement. (At the same time, the letter states that
Rule 134 advertisements should remain not subject to prospectus
liability.)
If you have any comments on the draft letter, especially
with respect to the proposed change in the Institute's position
on liability, please call the undersigned no later than Thursday,
December 19.
Craig S. Tyle
Deputy General Counsel
Attachment