Institute Comments on NASD Proposal for Bond Fund Volatility Ratings

Washington, DC, March 24, 2000 - The ICI recently filed a comment letter with the Securities and Exchange Commission (SEC) opposing a National Association of Securities Dealers, Inc. (NASD) proposal permitting volatility ratings in fund sales materials.

The SEC 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 a departure from the proposed pilot program, the pilot program approved by the SEC will permit the use of "a single symbol, number or letter" to describe volatility ratings.

The letter explains that the Institute has continually expressed serious reservations about the use of volatility ratings in mutual fund sales material, but nonetheless, in an earlier comment letter, generally supported NASDR's proposal to permit these ratings for a trial period, based on the conditions on their use. The letter further explains that the safeguards proposed by NASDR, including the requirement that volatility ratings must be solely in narrative form, addressed many of the rating's potential hazards. The letter then reiterates the Institute's concern, based on shareholder research, that permitting ratings to be designated by a single symbol, number or letter will increase the likelihood that an individual investor will not evaluate the risk of a bond fund based on his or her investment objectives and risk tolerance, but instead will look to the symbol to make this crucial decision. The letter disagrees with the SEC's rationale for removing the single symbol prohibition, which is "to provide rating agencies with more flexibility in how the ratings are presented," and states that any resulting loss in flexibility is an insignificant inconvenience when weighed against the preservation of such a crucial investor protection.