INSTITUTE LETER TO NASDR ON THE USE OF MARKET RISK RATINGS IN FUND SALES LITERATURE

September 10, 1996 TO: BOARD OF GOVERNORS No. 53-96 SEC RULES COMMITTEE No. 99-96 SUBCOMMITTEE ON ADVERTISING No. 27-96 RE: INSTITUTE LETER TO NASDR ON THE USE OF MARKET RISK RATINGS IN FUND SALES LITERATURE ______________________________________________________________________________ Several of the rating agencies recently have developed "market risk ratings" of bond funds. These ratings purport to provide information regarding a fund
s sensitivity to interest rate fluctuations and other market conditions, and whether future fund returns can be expected to be relatively stable or volatile. The National Association of Securities Dealers Regulation, Inc. (NASDR) currently prohibits the use of these ratings in mutual fund sales literature because they are deemed to be predictive of fund performance and to imply a degree of certainty regarding returns, in contravention of NASDR rules. One of the rating agencies has petitioned the NASDR to revise its current prohibition. This petition is scheduled to be considered by the National Business Conduct Committee and the Board of the NASDR this month. The Institute views this matter as one of significant public interest and import, clearly deserving a process open to broad public comment. The Institute recently submitted to the NASDR a memorandum prepared by outside counsel, explaining why we believe that any change to the NASDR
s current prohibition against the use of market risk ratings in mutual fund sales literature would constitute a "rule change" that must first be submitted to the SEC for approval pursuant to Rule 19b-4 under the Securities Exchange Act. This process would require that the SEC formally publish the proposed change, providing an opportunity for public comment. A copy of the Institute
s submission is attached. Paul Schott Stevens Senior Vice President General Counsel Attachment