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NASD Issues Notice Regarding Bond Fund Volatility Ratings
Washington, DC, April 14, 2000 - The National Association of Securities Dealers recently issued a Notice to Members to inform its members of the Securities and Exchange Commission’s approval of a new NASD rule permitting the use of bond mutual fund volatility ratings in supplemental sales literature for an 18-month trial period. The pilot program is effective immediately and expires on August 31, 2001, unless extended or permanently approved by the NASD on or before that date.
The Notice explains that new Rule IM-2210-5 permits the use of bond fund volatility ratings in supplemental sales literature subject to certain conditions and disclosure requirements. Additionally, the Notice states that existing NASD Rule 2210 regarding communications with the public was amended to require supplemental sales literature containing bond mutual fund volatility ratings to be filed for review and approval at least 10 days prior to use. The Notice also explains that new Rule 2210-5 was amended several times prior to approval by the SEC, in particular to remove the prohibition against using "a single symbol, number or letter" to describe a volatility rating.
The Notice explains that during the pilot program NASDR staff will consider, among other things, whether:
- the rule has facilitated the dissemination of useful, understandable information to investors;
- the rule has prevented the dissemination of inappropriate or misleading information;
- the rule should apply to in-house ratings;
- the rule should apply to all investment companies, not just open-end investment companies; and
- whether additional standards or guidance are needed to prevent investor confusion or minimize excessive variability among ratings of similar portfolios.
In addition, the Notice states that the staff will consider whether the use of "a single symbol, number, or letter describing a volatility rating, particularly those that are similar to or the same as credit ratings, might confuse investors." At the conclusion of its evaluation of the pilot program, NASDR will determine whether to continue to permit the use of the ratings, permit their use with modifications to the rule, or prohibit their use.
The Institute recently filed a comment letter opposing the use of a single symbol, number, or letter to describe a volatility rating.