NASDR Requests Comment on Presentation of Related Performance

Washington, DC, August 7, 1997 - NASD Regulation, Inc. recently requested comment on issues raised by allowing mutual fund advertising and sales literature to include the presentation of performance information of other substantially similar mutual funds and unregistered funds and accounts managed by the same investment adviser or portfolio manager.

NASDR's notice discusses a series of no-action letters issued by the SEC staff that permit mutual funds to present a range of performance information in their sales material and prospectuses in specific factual situations and subject to certain conditions. These letters can be categorized as allowing the performance of: (1) an unregistered private account or fund which is converted into a registered mutual fund to be included as part of the registered fund's track record; (2) a substantially similar mutual fund managed by the same portfolio manager to be included in a newer, unaffiliated mutual fund's prospectus; and (3) a substantially similar unregistered private account or registered mutual fund to be included in the prospectus and sales material of a mutual fund managed by the same investment adviser. The notice refers to these types of performance information as "related performance information."

Although these no-action letters indicate that the SEC staff will not recommend enforcement action for presentation of related performance information in mutual fund sales material based on the representations contained in those letters, to date, NASDR generally has not permitted related performance information in mutual fund sales material. In light of these letters, as well as the public interest in related performance information, NASDR has commenced a comprehensive examination of the issues related to such presentations. The notice includes a series of questions raised by these issues and requests both general and specific comments on the potential investor benefits and concerns associated with the presentation of related performance information.

With respect to the potential benefits, commenters are asked to address a number of questions, including: (i) whether related performance information provides a "sound basis" for making an investment decision; (ii) whether investors want or need this information; (iii) how mutual funds propose to present this information; (iv) what are the legal and practical limitations on providing this information; (v) what conditions should be imposed on using this type of information (e.g., should it be limited to new funds); and (vi) whether the benefits are so great that NASDR should require the use of this information in mutual fund sales material.

With respect to the potential concerns, NASDR also has requested comment on a number of issues, including: (i) whether NASDR should impose specific disclosure standards on the presentation of related performance information; (ii) whether NASDR should impose standards on the calculation of related performance information; (iii) whether NASDR should impose standards to discourage the "incubation" of private account performance; and (iv) whether NASDR should impose standards to promote the comparability of performance data.

Comments must be received by NASDR by September 29, 1997. Before any rule change becomes effective, it must be adopted by the NASDR Board of Directors, may be reviewed by the NASD Board of Directors, and must be approved by the SEC.