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Institute Comments on NASDR Securities Recommendations Proposal
Washington, DC, August 15, 2001 - The Institute has filed a comment letter with NASD Regulation regarding its proposed amendments to NASD Rule 2210, Communications with the Public. In particular, the proposed amendments would increase the disclosures required when an NASD member recommends a security in written advertisements and sales literature, and would require similar disclosures for recommendations made by an associated person during a "public appearance."
Application of Proposal to Investment Advisory Personnel
The Institute strongly opposes the application of the proposed rule change to investment advisory personnel. First, as a general matter, the Institute believes the proper context for any new requirements on such persons is rulemaking by the Securities and Exchange Commission under the Investment Advisers Act of 1940 and/or the Investment Company Act of 1940.
In addition, the Institute believes that the proposal does not consider the differences in the potential conflicts of interest presented by "sell-side" analyst recommendations and statements made by investment advisory personnel and, as such, the proposal fails to recognize that, at least in the great majority of cases, any potential conflicts of interest for such persons would be greatly attenuated. The Institute also notes that the proposal does not take into account that advisory firms already have stringent procedures to address potential conflicts relating to the personal investment activities of investment advisory personnel.
Scope and Use of the Term "Recommendation"
The Institute also makes several comments regarding the scope and use of the term "recommendation." In particular, the comment letter notes that although the disclosure requirements under the proposal would be triggered whenever there is a "recommendation," NASDR has not defined this term for these purposes.
The letter also states that if the final rule does apply to portfolio managers, NASDR should clarify its application in the case of mutual funds or other discretionary accounts with more than one portfolio manager. Specifically, in the case of a multi-manager fund, the letter states that a portfolio manager should only be required to disclose information pertaining to that portion of the fund over which he has discretion.
In addition, the Institute recommends that the proposal be modified to expressly clarify that ownership of a recommended security through a mutual fund (or other investment company) by an individual covered by the rule does not constitute a "financial interest" in a security that would have to be disclosed under the rule. The letter states that requiring NASD members and associated persons to look through a mutual fund to determine if the fund holds a recommended security would result in significant difficulties in complying with the rule.