SEC Requests Comment on NASD's Proposal for Bond Fund Volatility Ratings

Washington, DC, November 12, 1998 - The Securities and Exchange Commission recently published for comment a rule proposal from the National Association of Securities Dealers, Inc. (NASD) that would permit, on an interim 18-month basis, brokerage firms to use bond fund volatility ratings in supplemental sales literature. Comments on the proposal are due to the SEC no later than Monday, November 30, 1998. (The proposed rule reflects revisions to the original proposal approved by NASDR a year ago.)

As proposed, a bond fund volatility rating would be allowed in supplemental sales literature only if:

  • the rating does not describe the volatility by use of a single symbol, number, or letter, and the rating is not described as a "risk" rating;
  • the sales literature incorporates the most recently available rating that is at least current to the most recent calendar quarter end;
  • the criteria and methodology used to determine the rating are based on objective, quantifiable factors;
  • the sales literature conforms to certain disclosure requirements (discussed below); and
  • the entity issuing the rating provides detailed disclosure of its rating methodology through use of a toll-free telephone number, a website, or both.

The proposal would require sales literature containing a bond fund volatility rating to disclose certain information, including: the name of the entity issuing the rating; the most current rating and date of the current rating, with an explanation of any change in the current rating from the most recent prior rating; and a description of the rating in narrative form. The description would have to include:

  • a statement that there is no standard method for assigning ratings;
  • a description of the criteria and methodologies used to determine the rating;
  • a statement that not all bond funds have volatility ratings;
  • whether consideration was paid in connection with the issuance of the rating;
  • a description of the types of risks that the rating measures;
  • a statement that the fund's portfolio may have changed since the rating's date; and
  • a statement that there is no guarantee that the fund will continue to have the same rating or perform in the future as rated.

The disclosure statement could also contain any additional information that is relevant to an investor's understanding of the rating.

The proposal would require sales literature containing volatility ratings to be filed with the NASD for review at least 10 days prior to use. If the NASD were to comment on or disapprove the use of a sales piece containing a rating, the sales piece could not be used until any specified changes had been made or the NASD had approved the piece after refiling.

  

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