SEC Approves Bond Fund Volatility Rating Proposal
Washington, DC, January 18, 2006 - The SEC recently approved a proposed NASD rule change that permits NASD members and their associated persons to include bond fund volatility ratings in sales literature. The rules also set forth filing requirements and review procedures applicable to sales literature containing bond mutual fund volatility ratings.
In February 2000, the SEC approved a pilot program that permitted the use of bond fund volatility ratings in supplemental sales literature (mutual fund sales material that is accompanied or preceded by a fund prospectus) if certain conditions were met, including:
- the word "risk" may not be used to describe the rating;
- the rating must be the most recent available and be current to the most recent calendar quarter ended prior to use;
- the rating must be based exclusively on objective, quantifiable factors;
- the entity issuing the rating must provide to investors through a toll-free telephone number or web site (or both) a detailed disclosure on its rating methodology; and
- a disclosure statement containing all of the information required by the rule must accompany the rating.
The pilot program was scheduled to expire on December 29, 2005, but NASD proposed to make the program permanent.
In a December comment letter, the Institute stated that the use of volatility ratings in fund sales literature raises serious investor protection concerns, in particular increasing 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 and instead look to a single symbol, number, or letter to make this crucial decision. The SEC’s decision notes the concerns expressed by the Institute, but also states that making the NASD rules effective on a permanent basis will permit NASD members to provide investors with useful information in a manner designed to prevent dissemination of inappropriate or misleading information.
Additional information about mutual fund disclosure is available on this website.