Notice To Members 85-69

Request for Comments on Proposed Amendment to Article III, Section 35 of the NASD's Rules of Fair Practice Concerning Advertising and Sales Literature for Direct Participation Programs

Published Date:

October 21, 1985

TO: All NASD Members and Other Interested Persons

ATTN: Direct Participation Programs Department

LAST DATE FOR COMMENT: NOVEMBER 21, 1985

The NASD's Direct Participation Programs and Real Estate Committees are concerned that abuses exist in the content of advertising and sales literature used for public direct participation programs. The Committees and the NASD's Board of Governors have approved a proposed amendment to Article III, Section 35 of the Rules of Fair Practice that would require advertising and sales literature concerning publicly offered direct participation programs to be filed with and reviewed by the NASD's Advertising Department within 10 days of first use or publication by an NASD member.

The NASD requests comments on the proposed amendment prior to final consideration by the Board of Governors. The text of the proposed amendment is attached.

Background and Explanation of Proposed Amendment

Article III, Section 35 of the Rules of Fair Practice regulates members' communications with the public. It requires that all such communications be based on principles of fair dealing and good faith, and that they provide a sound basis for evaluating the facts regarding any securities offered by members. Material facts and qualifications may not be omitted if, in the context of the material presented, the omission would make the advertising or sales literature misleading. Exaggerated or misleading statements are prohibited, and members may not publish or distribute any public communication that the member knows or has reason to know contains any untrue statements of material facts or is otherwise false or misleading.

Article III, Section 35 currently requires a member to file all advertisements with the Advertising Department for review prior to use for one year commencing with the member's initial advertisement. In addition, an NASD District Business Conduct Committee may, under certain circumstances, require a member to file advertising and/or sales literature with the Advertising Department at least 10 days prior to use. All members are also subject to routine spot-checks of their advertising and sales literature.

The NASD believes that abuses exist in the content of advertising and sales literature used in connection with public direct participation programs. The abuses involve misleading illustrations of past performance, the inclusion of information on projected performance, and the unbalanced presentation of programs by not including a statement of significant risks. The NASD considered whether specific guidelines should be developed and applied to sales literature and advertising used in connection with public direct participation program offerings but concluded that current guidelines contained in Article III, Section 35 are adequate to regulate the content of member communications with the public. However, the NASD preliminarily believes that a filing requirement for public direct participation program advertising and sales literature is necessary.

Therefore, the proposed amendment would require that advertising and sales literature utilized in connection with public direct participation programs be filed with the NASD's Advertising Department within 10 days of first use or publication by an NASD member. The responsibility of members to comply with the filing requirement would apply regardless of whether the advertising and sales literature is prepared by a sponsor, general partner or member. However, the member need not file advertising and/or sales literature that was previously filed by the sponsor, general partner or underwriter.

Request for Comments

All comments on the proposed amendment received by November 21, 1985 will be reviewed by the Direct Participation Programs and Real Estate Committees and the Board of Governors. If the Board of Governors approves the proposal, or an amended version resulting from comments received, it must be filed with and approved by the Securities and Exchange Commission. All comments received will be available for public inspection.

Written comments should be addressed to:

James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D. C. 20006

Questions regarding this notice should be directed to R. Clark Hooper, NASD Advertising Department, at (202) 728-8330, or Richard J. Fortwengler, NASD Corporate Financing Department, at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

PROPOSED AMENDMENT TO ARTICLE III, SECTION 35 OF THE NASD RULES OF FAIR PRACTICE

New language underscored.

Section 35. Communications with the Public

(3)* Advertisements and sales literature concerning public direct participation programs as defined in Article III, Section 34 of the Rules of Fair Practice shall be filed with the Association's Advertising Department for review within 10 days of first use or publication. Filing in advance of use is optional. Members need not file for review advertising and sales literature which has been filed by the sponsor, general partner or underwriter of the program.

* Current subsections (3) through (7) will be renumbered as (4) through (8), respectively.