NASDR Issues Statement on Bond Fund RatingsWashington, DC, November 19, 1997 - Last week, the NASD Regulation, Inc. (NASDR) Board of Directors approved a proposed rule that would establish an 18-month pilot program allowing the use of bond fund "volatility ratings" in supplemental sales material. (NASDR issued a Notice to Members last year soliciting comment on the use of bond fund risk ratings in supplemental sales literature. In particular, NASDR solicited comment on whether it should continue to prohibit the use of these ratings. The Institute submitted comment letters opposing the use of risk ratings as proposed by the rating agencies.) During this trial period, NASDR will collect data from the rating agencies, fund groups, and brokerage firms to assess the program's effect. The proposed rule will be submitted shortly to the NASD Board of Governors for approval. The proposed rule also requires SEC approval. According to the NASDR's statement, "the rule imposes a number of conditions to assure that the broad spectrum of investors that may use these ratings are not misled or confused and that the ratings are not predictive, or otherwise inappropriate." Specifically, the rule would prohibit: - calling the ratings "risk" ratings;
- a single number or symbol being used to describe the volatility; and
- subjective factors being used to make the volatility calculation.
In addition, the proposed rule would require that: - the criteria used to determine the rating be disclosed;
- a disclaimer be included stating that the rating is not a recommendation to buy the fund;
- the fact that consideration was paid in connection with the issuance of the rating be disclosed;
- the rating be current as of the most recent calendar quarter; and
- if a rating is used, all ratings issued on that same fund also be disclosed.
Materials that include the volatility ratings will have to be filed and approved by NASDR prior to use.
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