April 14, 1997
TO: SEC RULES COMMITTEE No. 38-97
STATE LIAISON COMMITTEE No. 7-97
RE: INSTITUTE COMMENTS ON NASAA PROPOSAL RELATING TO SALES
PRACTICES
______________________________________________________________________________
On March 11, 1997, the NASAA Sales Practices Committee published for comment
proposed rules that would define dishonest or unethical practices in connection with the offer
or sale of investment company securities. A copy of the NASAA proposal is attached. (As you
may recall, while the National Securities Markets Improvement Act of 1996 preempts state
registration of investment company shares, it expressly preserves the authority of states to
investigate and bring enforcement actions "with respect to fraud or deceit" in connection with
the offer of sale of such shares.)
The Institute has filed the attached comment letter with the Committee. While the
Institute’s letter expresses our overall support for the Committee’s proposal (which is, in large
part, consistent with the requirements of NASDR), we recommend changes to various
provisions in the proposal to ensure its conformity with the NASDR’s requirements. As noted
in our letter, it is critical that conduct that is acceptable in one jurisdiction or to one regulatory
body not be found by another to be deficient or unacceptable. Towards this end, the Institute’s
letter recommends that the Committee revise its proposal to:
Limit the applicability of the proposal to situations in which there is a
recommendation or solicitation made to purchase or sell a mutual fund (or other
investment company product);
Clarify that mutual funds with a 12b-1 fee may be referred to as "no load" if such fee
does not exceed 25 basis points (Section A(2));
Only require the disclosure of breakpoints or sales charge discounts if relevant to the
transaction (Section A(3));
Delete the provision that seems to discourage diversification of funds and that
would make the determination of suitability contingent upon whether an investor
owns one or more than one fund (Section (B));
Limit the prohibition about sharing with investors information in dealer-use-only
material to instances in which the only source of such information is the dealer-use-
only material (Section C(5)); and
Delete the Prospectus portion of the proposal as contrary to the existing securities
laws and precedents, or, alternatively, substantially revise it to carefully tailor it to
the specific concern discussed by the Committee in its accompanying Analysis --
instances in which there is a material discrepancy between the oral representations
made to an investor and those contained in the prospectus (Section D).
Each of these recommendations is discussed in detail in the Institute’s letter.
Tamara Cain Reed
Associate Counsel
Attachments (in .pdf format)
Note: Not all recipients of this memo will receive an attachment. If you wish to obtain a copy
of the attachment referred to in this memo, please call the Institute's Information Resource
Center at (202)326-8304, and ask for this memo's attachment number: 8798.