NASDR Files Related Performance Information Proposal, February 1998

Washington, DC, February 17, 1998 - NASD Regulation, Inc. recently filed with the Securities and Exchange Commission a proposal to permit certain types of related performance information ("RPI") in investment company and variable annuity sales material. This proposal follows up NASDR's request for comment in August 1997 on whether the NASD should permit RPI to be included in mutual fund advertising and sales literature (Notice to Members 97-47). The SEC staff will now have an opportunity to review the filing and request changes prior to publishing the proposal for comment. NASDR has asked the SEC to provide the public with at least 45 days in which to comment once the proposal is published in the Federal Register. It is unclear when the proposal will be published for comment.

The proposal would allow three types of RPI to appear in fund sales material, subject to certain conditions: (1) "clone" performance (performance of a registered investment company that has the same investment policies and objectives, investment adviser, and sub-adviser as the advertised fund); (2) "predecessor" performance (performance of the advertised fund that includes the performance of an insurance company separate account, common trust fund, or private investment company that had been converted into the advertised fund and had substantially similar investment policies and objectives as the advertised fund); and (3) "comparison portfolio" performance (the performance of all portfolios managed by the investment adviser-or where appropriate, the sub-investment adviser-with substantially similar investment objectives to the advertised fund). Performance of another mutual fund previously managed by the advertised fund's portfolio manager would not be allowed in fund sales material.

The proposal provides that all RPI presented in fund sales material must be current to the most recent calendar quarter-end and must be accompanied by RPI for one, five, and ten-year periods (or since-inception performance if RPI is available for less than one, five, or ten years). The proposal provides that any fund sales material that presents RPI, among other things, must:

identify the length and the last day of the period used to compute the RPI;
provide the total return of the advertised fund (excluding the performance of any predecessor portfolio) in a more prominent manner than the RPI if the advertised fund has been in existence for at least one year;
when applicable, prominently disclose that the advertised fund has been in existence for less than one year;
include certain other specified disclosures cautioning against over-reliance on RPI as a substitute for the advertised fund's performance, and disclosing all material differences between the portfolios on which the RPI is based and the advertised fund;
not refer to the RPI in a headline or other prominent statement, or contain any ranking based on RPI; and
accompany any graph or illustration concerning RPI with a more prominent graph or illustration concerning the performance of the advertised fund if the advertised fund has been in existence for at least one year.

Under the proposal, no sales material for a money market fund may present RPI. Advertised funds that include predecessor performance as part of their track records would be required to calculate the combined performance in accordance with Item 22 of Form N-1A and adjust the predecessor performance to reflect all current fees and expenses of the advertised fund.

The proposal would require sales material that includes comparison portfolio performance to be based on a composite that consists of all fee-paying discretionary portfolios (including the advertised fund itself) managed by the investment adviser or sub-adviser that have substantially similar investment objectives and policies as the advertised fund and whose gross performance has been adjusted to reflect all current fees and expenses of the advertised fund. The investment adviser (or sub-adviser) would have to obtain independent third-party verification that the creation and maintenance of the composite complies with the rule's requirements, and proof of the verification, current as of the adviser's (or sub-adviser's) most recently ended fiscal year, would have to be filed with NASDR. The advertised fund's registration statement also would be required to include an explanation of the methods used to select the portfolios for the composite and to calculate the composite's performance.