- Fund Regulation
- Retirement Security
- Trading & Markets
- Fund Governance
- ICI Comment Letters
SEC Approves Temporary Bond Fund Volatility Ratings
Washington, DC, March 10, 2000 - The Securities and Exchange Commission recently approved changes to National Association of Securities Dealers, Inc. Rule 2210 to permit 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.
In November 1998, the SEC published for comment proposed changes to NASD Rule 2210 that would permit members and associated persons to include bond fund volatility ratings in supplemental sales literature on an interim 18-month basis, subject to certain conditions. In particular, the proposed pilot program required that volatility ratings must be based on objective factors, must be in narrative form and cannot be designated by the use of a single symbol, number, or letter, must meet timeliness standards, and must be accompanied by clear, comprehensive disclosures. The Institute submitted a comment letter expressing serious reservations about the use of volatility ratings due to their potential to mislead investors, but nonetheless generally supporting the pilot program based on the above proposed restrictions on their use.
Most of the safeguard conditions on the use of volatility ratings, which the Institute supported, remain in the approved pilot program. Additionally, as the Institute supported in earlier versions of the proposed rule change, the volatility ratings may be issued by any independent third party, not just NRSROs. The pilot program, however, does not prohibit the payment for the ratings by the funds being rated, notwithstanding the recommendation of the Institute and other commenters that, due to the inherent conflicts of interest such payment arrangements present, they should not be permitted.
The pilot program approved by the SEC differs in one significant respect from the one proposed. The prohibition against the use of a single symbol, number, or letter to describe the volatility rating has been eliminated. The SEC stated that the requirement to provide a narrative description of the rating along with a number or symbol, together with certain required disclosures "should decrease the likelihood of investor confusion concerning a rating’s meaning." The SEC is soliciting comment on the removal of the prohibition against the use of a single symbol, number, or letter to describe the ratings. Comments are due to the SEC by March 29, 2000.