April 22, 1992
TO: SUBCOMMITTEE ON ADVERTISING NO. 6-92
RE: DRAFT LETTER TO NASD ON MATERIALITY OF EXPENSE SUBSIDIES
__________________________________________________________
Attached is a draft letter to the NASD that sets forth a
proposed standard for determining whether an expense absorption
by a fund adviser is material and, therefore, is required to be
disclosed in performance advertising and sales literature. As
was discussed at the last meeting of the Subcommittee, the NASD
has taken the position that it is not necessary for funds that
have had their expenses subsidized to recalculate total return in
order to disclose what the fund's total return would have been
absent the subsidy. (However, if yield is quoted, the sales
literature must disclose what the yield would have been had the
subsidy not been in effect.)
The NASD has stated that, if a fund's expenses have been
subsidized, advertisements or sales literature that contain total
return data must disclose the existence of the subsidy and the
fact that, had it not been in effect, the total return would have
been lower if the effect of the subsidy is material (or in any
event if the subsidy is still in effect). The NASD requested the
Institute's views on how funds could test for materiality without
actually recalculating total return, which would be burdensome
and impractical.
The proposed standard set forth in the attached letter,
which has been reviewed by several Subcommittee members, consists
of taking a simple arithmetic mean of the annual amount of the
subsidy for the period in question and dividing this result by
the fund's average annual total return for the same period.
Quotients of greater than ten percent are considered material.
The standard is intended to provide a reasonable approximation of
the relation between the subsidy and total return without
necessitating actual recomputation of total return.
If you have any comments on the draft, please call me at
202/955-3522 by Monday, May 4.
Craig S. Tyle
Deputy General Counsel
Attachment