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EXECUTIVE SUMMARY
On September 13, 1991, the Securities and Exchange Commission (SEC) approved amendments to the NASD's Rules of Fair Practice creating a separate section relating to options communications with the public. The amendments delete all existing subsections of Article III, Section 35 relating to options communications and establishes a new Section 35A1 related exclusively to options communications. Members will be required to comply with new section 35A beginning November 1, 1991. The text of the amendments follows the discussion below.
BACKGROUND
Last year, the SEC examined various self-regulatory organizations' (SROs) regulatory programs relating to the review of member firm communications with the public. Specifically with respect to options communications, the SEC expressed to the NASD its concern that the NASD's options communications rules were not sufficiently consistent with those of other SROs. Since a majority of NASD members conducting options business are also members of other SROs, the SEC believes that the options regulations of the various SROs applicable to such members should be consistent.
Representatives from several SROs — the NASD, New York Stock Exchange (NYSE), American Stock Exchange (Amex), Chicago Board Options Exchange (CBOE), Midwest Stock Exchange (MSE), Philadelphia Stock Exchange (PHLX) and Pacific Stock Exchange (PSE) — worked together in the Options Self-Regulatory Council ("Council") to develop options communications rules for each SRO that are consistent with one another. The Council's efforts resulted in a substantial revision of the Guidelines for Options Communications ("Guidelines"). The Guidelines, first published several years ago, are designed to provide a coordinated explanation of SRO rules and, along with the SEC's examination comments, form the basis for the NASD's proposed options communications rule.
Accordingly, the SEC has now approved the NASD's proposed amendments to Article III of the Association's Rules of Fair Practice, submitted for member vote in Notice to Members 91-1 (January 1991), establishing new Section 35A relating exclusively to options communications, and amending Section 35 of the Rules of Fair Practice, the NASD's general communications rule, to delete all provisions related to options.2 New Section 35A addresses the concerns expressed by the SEC relating to the approval of options communications prior to use, suitability disclosure, educational communications, and communications containing comparisons and recommendations. The new rule also serves to make the NASD's options communications regulations consistent with those of other SROs.
SUMMARY OF AMENDMENTS
New Article III, Section 35A of the Rules of Fair Practice contains four subsections: subsection (a), which defines the terms "advertisement," "educational material," and "sales literature"; subsection (b), which requires advance approval of all options communications by a Compliance Registered Options Principal; subsection (c), which requires advance approval of options advertising and educational material by the Association's Advertising Department, as well as spot-check procedures and special review procedures for members that fail to adhere to the standards for options communications; and subsection (d), which sets forth the Association's standards for options communications with the public. The amendments delete comparable provisions relating to options communications, as well as all references to options communications, from Article III, Section 35 of the Rules of Fair Practice.
Section 35A(a) — Definitions
The new Section 35A(a) defines "advertisements," "educational material," and "sales literature." The definitions of advertising and sales literature in Section 35A(a) are similar to the existing definitions in Section 35; however, they are designed to more clearly reflect the NASD's intent to distinguish between material directed to customers through media of mass communication (advertisements) and material targeted to specific existing or potential customers (sales literature).
Section 35A(a) also includes a definition of educational material not previously included in Section 35. This definition is designed to complement SEC Rule 134A (which defines options material not deemed to be a prospectus) and to capture advertisements and sales literature within its scope, along with other material that does not meet the definitions of advertisements or sales literature.
Section 35A(b) — Approval by Compliance Registered Options Principal and Recordkeeping
The new Section 35A(b) incorporates the requirements currently in Section 35(b) that a Compliance Registered Options Principal approve each item of advertising or sales literature related to options in advance. In addition, the new provision requires that the member retain copies of the material, along with records reflecting the persons who prepared and approved the material and the source of any recommendations contained in the material.
Section 35A(c) — Association Approval Requirements and Review Procedures
The new Section 35A(c) combines current Subsections 35(c)(2), 35(c)(5), 35(c)(6), and 35(c)(8) into a new section on approval and review of options communications. Subsection 35(c)(2) is deleted, and the remaining subsections of Section 35(c) are renumbered.
Subsection 35A(c)(1) requires all options advertising and educational material to be submitted to the Association's Advertising Department for approval at least 10 days prior to use. The section applies only to advertising and educational material permitted to be used prior to the delivery of an options disclosure document (ODD). The section also prohibits the use of any material that has been disapproved or for which changes have been recommended by the NASD's Advertising Department until the material is resubmitted and approved, or changed, as required. The provisions of Subsection 35A(c)(1) represent a change from the requirements of Section 35 in that the NASD may disapprove the use of material submitted or may recommend changes, rather than comment on a filing as in Section 35.
Subsection 35A(c)(2) permits any District Business Conduct Committee (DBCC) to require a member to submit options advertising, educational material, and sales literature to the Advertising Department and/or the DBCC for review at least 10 days prior to use if the DBCC, after reviewing the member's advertising, determines that the member may again depart from the standards of Section 35A. The review requirements in Subsection 35A(c)(2) are not limited to material used prior to the delivery of an ODD, but may include all material coming within the definitions, notwithstanding the timing of their use. Any prior submission requirement imposed under Subsection 35A(c)(2) cannot last more than one year, and a member has the right to ask for a hearing before the DBCC relating to the imposition of any prior submission requirement.
Section 35A(d) — Standards Applicable to Communications With the Public
The new Section 35A(d) replaces Section 35(f), which is deleted. Section 35A(d) sets forth both general and specific standards with respect to options communications, including, but not limited to, specific standards for advertisements, educational materials and sales literature.
The general standards for options communications specified under Subsection 35A(d)(1) prohibit false or misleading statements; promises, claims, opinions, or forecasts that are unwarranted, exaggerated, or for which there is no reasonable basis; hedge clauses that are illegible or inconsistent with the communication, or that attempt to disclaim responsibility for the contents of the communication; or material that would constitute a prospectus unless it meets the requirements of a prospectus under the federal securities laws.
The specific standards for options communications set forth in Subsection 35A(d)(2) comprise a detailed set of requirements and guidelines concerning risk disclosure, the use and content of advertisements, the use and content of educational material, the use and content of sales literature, availability of supporting documents for sales literature, and performance projections and statistics contained in sales literature.
Subsection 35A(d)(2)(A) requires the special risks attendant to options transactions and investment strategies to be disclosed in options communications that discuss the uses or advantages of options. Any disclosure must present a balanced portrayal of opportunities and risks. In addition, statements suggesting that options are suitable for all investors or suggesting the certain availability of a secondary market for options are prohibited.
Subsection 35A(d)(2)(B) requires options advertising to meet the requirements of SEC Rule 134 in that the advertisement must be limited to a general description of the security being offered and the name and address of the person from whom a current ODD can be obtained. In addition, an advertisement may briefly describe the options offered, the operation of any exchanges where the options are traded, and how options prices are determined. Statements required by state law or administrative agencies may be included in an advertisement, as well as designs and devices, provided they are not misleading. Recommendations and past or projected performance figures are not permitted in options advertisements, however.
Subsection 35A(d)(2)(C) requires that options educational material must meet the requirements of SEC Rule 134A. As set forth in Subsection 35A(d)(2)(C), with respect to educational material, Rule 134A(1) requires an explanation of risks; (2) prohibits the use of performance figures, including annualized rates of return; (3) prohibits recommendations; (4) prohibits identifying specific securities, other than a security exempt from registration, an index option, or a foreign currency option; and (5) requires the name and address of the person from whom an ODD can be obtained.
Subsection 35A(d)(2)(D) includes the following specific requirements for options sales literature.
- Sales literature must state that supporting documentation for claims, comparisons, recommendations, statistics, or other technical data will be supplied upon request.
- Projected performance figures, if included, cannot include a suggestion of certainty in future performance and must clearly establish parameters for performance figures, disclose costs, must be plausible, clearly identify all material assumptions, and disclose risks. They also must, for annualized rates of return, not be based on less than 60 days of experience, display any formulas used, and include a statement that returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
- Portrayals of performance or actual transactions must be balanced, and records and statistics must be isolated to a specific period covering at least the most recent 12 months, include detailed information about initial recommendations or transactions, disclose all relevant costs and material assumptions, describe general market conditions and use valid comparisons, state that results cannot be viewed as an indicator of future performance, and be reviewed and initialed by a Registered Options Principal for fair presentation of statistics or recommendations.
- An options program must disclose the cumulative history or unproven nature of the program and its underlying assumptions.
- Standard forms of options worksheets, if adopted, must be uniform within a member organization.
- Communications portraying past performance must be easily accessible to the sales office for the accounts of the customers involved.
While many of the specific provisions of Section 35A(d) are drawn from the current provisions of Section 35(f), the provisions described above will reorganize and clarify the applicable standards. The new provisions will also serve to eliminate any inconsistencies between the NASD's rules and the rules of other SROs, while at the same time respond to the specific concerns and recommendations of the SEC as expressed to the Options Self-Regulatory Council.
Questions concerning this notice may be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330.
ARTICLE III3 OF THE NASD RULES OF FAIR PRACTICE
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Communications With the Public
Sec. 35.
(a) Definitions
* * * * *
(2) Sales Literature — For purposes of this section and any interpretation thereof, "sales literature" means any written communication distributed or made generally available to customers or the public, which communication does not meet the foregoing definition of "advertisement." Sales literature includes, but is not limited to, circulars, research reports, market letters, performance reports or summaries, form letters, [standard forms of options worksheets,] seminar texts, and reprints or excerpts of any other advertisement, sales literature or published article.
(b) Approval and Recordkeeping
(1) Each item of advertising and sales literature shall be approved by signature or initial, prior to use, by a principal (or his designee) or the member. [In the case of advertising or sales literature pertaining to options, the approval must be by the Compliance Registered Options Principal or his designee.]
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(c) Filing Requirements and Review Procedures
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[(2) Advertisements pertaining to options, and other options-related communications to persons who have not received the appropriate current disclosure document(s), shall be submitted to the Association's Advertising Department for review at least ten days prior to use (or shorter period as the Department may allow in exceptional circumstances), unless such advertisement or communication is submitted to and approved by a registered securities exchange or other regulatory body having substantially the same standards with respect to options advertising as set forth in this Section. The Association shall, within the ten-day review period specified herein, in the absence of highly unusual circumstances, either notify the member of its views with respect to the material filed or indicate that its comments are being withheld pending further analysis or the receipt of additional information.]
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Subsections (c)(3), (c)(4), (c)(5) and (c)(6) are renumbered (c)(2), (c)(3), (c)(4) and (c)(5), respectively.
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([7]
6) The following types of material are excluded from the foregoing filing requirements and spot-check procedures:
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(F) Advertisements prepared in accordance with Section 2(10)(b) of the Securities Act of 1933, as amended, or any rule thereunder, such as Rule 134, unless such advertisements are related to [options,] direct participation programs or securities issued by registered investment companies.
([8]7) Material which refers to investment company securities[, options] or direct participation programs solely as part of a listing of products and/or services offered by the member, is excluded from the requirements of paragraphs (c)(1) [,] and (c)(2) [and (c)(3)] of this section.
(d) Standards Applicable to Communications with the Public
(1) General Standards
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(C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of subsections (d) and [(g)] (f) of this Section.
(2) Specific Standards
In addition to the foregoing general standards, the following specific standards apply:
(A) Necessary Data: Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with subsection [(g)] (f) of this Section. Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed. If the information in the material is not current, this fact should be stated.
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[(f) Standards Applicable to Options-Related Communications]
[In addition to the provisions of subsection (d) of this Section, members' public communications concerning options shall conform to the following provisions:]
[(1) As there may be special risks attendant to some options transactions and certain options transactions involve complex investment strategies, these factors should be reflected in any communication which includes any discussion of the uses or advantages of options. Therefore, any statement referring to the opportunities or advantages presented by options should be balanced by a statement of the corresponding risks. The risk statement should reflect the same degree of specificity as the statement of opportunities, and broad generalities should be avoided. Thus, a statement such as, "by purchasing options, an investor has an opportunity to earn profits while limiting his risk of loss," should be balanced by a statement such as, "Of course, an options investor may lose the entire amount committed to options in a relatively short period of time."]
[(2) It should not be suggested that speculative option strategies are suitable for most investors, or for small investors and statements suggesting the certain availability of a secondary market for options should not be made.]
[(3)
(A) Except as provided in subparagraph (B) below, no written material with respect to options issued by The Options Clearing Corporation ("OCC") may be sent to any person unless prior to or at the same time with the written material the appropriate current options disclosure document(s) is (are) sent to such person.]
[(B) Advertisements and other options-related communications may only be used (and copies of the advertisements may only be sent to persons who have not received the appropriate disclosure document) if the material meets the requirements of Rules 134 or 134a under the Securities Act of 1933, as these Rules have been interpreted as applying to OCC options. Under rules 134 and 134a advertisements are limited to general descriptions of the security being offered and of its issuer and to descriptions regarding the general nature of standardized options markets or options strategies. Advertisements under this Rule shall state the name and address of the person from whom (a) current disclosure document(s) may be obtained (this would usually be the member sponsoring the advertisement). Such advertisements might have the following characteristics: (i) The text of the advertisement may contain a brief description of OCC options, including a statement that the issuer of every OCC option is The Options Clearing Corporation. The text may also contain a brief description of the general attributes and method of operation of The Options Clearing Corporation and/or a description of any of the options traded in different markets, including a discussion of how the price of an option is determined; (ii) The advertisement may include any statement or legend required by any state law or administrative authority; (iii) Advertising designs and devices including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.]
[(C) Advertisements and other written communications used prior to delivery of the appropriate disclosure document(s) shall not contain recommendations, or past or projected performance figures, including annualized rates of return.]
[(4) Communications which contain comparisons, recommendations, statistics or other technical data, or claims made on behalf of options programs or the options expertise of sales persons, shall include, or offer to provide upon request, supporting documentation and shall refer to the current disclosure document(s) available upon request.]
[(5) Communications concerning an options program (i.e., an investment plan employing the systematic use of one or more options strategies) shall disclose the cumulative history of the program or its unproven nature, and its underlying assumptions.]
[(6) Standard forms of options worksheets, if adopted by a member for any particular options strategy, must, in addition to compliance with the other applicable provisions of this Section, be uniformly used by such member for that strategy.] [(7) Communications which contain projected performance figures or records of the performance of past recommendations or of actual transactions shall disclose all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) and copies of such communications shall be kept at a place easily accessible to the sales office for the accounts or customers involved.]
[(8) Communications containing projected performance figures must also:]
[(A) be plausible and intended as a source of reference or a comparative device to be used in the development of a recommendation;]
[(B) discuss the risks involved in the proposed transactions and not suggest certainty of future performance;]
[(C) identify all material assumptions made in such calculations (e.g., "assume options exercised", etc.);]
[(D) clearly establish parameters relating to such performance figures (e.g., to indicate exercise price of option, purchase price of the underlying security and its market price, option premium, anticipated dividends, etc.);]
[(E) if related to annualized rates of return, be based upon not less than a sixty-day experience, clearly display any formulas used in making the calculations, and include a statement to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and there is no certainty of doing so.]
[(9) Communications containing records or statistics relating to the performance of past recommendations or of actual transactions shall, in addition to complying with other applicable provisions of this section, state that the results presented should not and cannot be viewed as an indicator of future performance, and shall disclose all material assumptions used in the process of annualization if annualized rates of return are used. A Registered Options Principal shall determine that the record or statistics fairly present the status of the recommendations or transactions reported upon and shall initial the report.]
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[(g)]
(f) Standards Applicable to the Use and Disclosure of the NASD Member's Name
(1) In addition to the provisions of subsection (d) of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of member names. The term "communication" as used herein shall include any item defined as either "advertising" or "sales literature" in subsection (a) of this Section. The term "communication" shall also include, among other things, business cards and letterhead.
(2) General Standards
(A) Any communication used in the promotion of a member's securities business must clearly and prominently set forth the name of the NASD member. This requirement shall not apply to so-called "blind" advertisements used for recruiting personnel or to those communications meeting the provisions of subsection [(g)](f)(3) of this Section.
(B) If a nonmember entity is named in a communication in addition to the member, the relation ship, or lack of relationship, between the member and the entity shall be clear.
(C) If a nonmember entity is named in a communication in addition to the member, and products or services are identified, no confusion shall be created as to which entity is offering which products and services. Securities products and services shall be clearly identified as being offered by the member.
(D) If an individual is named in a communication containing the names of the member and a non-member entity, the nature of the affiliation or relationship of the individual with the member shall be clear.
(E) Communications that refer to individuals may not include, with respect to such individuals, references to nonexistent or self-conferred degrees or designations, nor may such communications make reference to bona fide degrees or designations in a misleading manner.
(F) If a communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named.
(G) The positioning of disclosure can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative) shall not be placed in proximity to the wrong entity.
(H) Any reference to memberships (e.g., NASD, SIPC, etc.) shall be clearly identified as belonging to the entity that is the actual member of the organization.
(3) Specific Standards
The foregoing standards set forth in subsections [(g)](f)(1) and [(g)](f)(2) shall apply to all communications unless at least one of the following special circumstances exists, in which case the standards set forth herein would supersede the standards in subsections [(g)](f)(1) and [(g)](f)(2).
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Options Communications with the Public
Sec. 35A.
(a) Definitions — For purposes of this section and any interpretation thereof,
(1) "Advertisement" shall include any material that reaches a mass audience through public media such as newspapers, periodicals, magazines, radio, television, telephone recording, motion picture, audio or video device, telecommunications device, billboards, signs or through written sales communications to customers or the public that are not required to be accompanied or preceded by one or more current options disclosure documents.
(2) "Educational material" shall include any explanatory material distributed or made generally available to customers or the public that is limited to information describing the general nature of the standardized options markets or one or more strategies.
(3) "Sales literature" shall include any written communication (not defined as an "advertisement" or as "educational material") distributed or made generally available to customers or the public that contains any analysis, performance report, projection or recommendation with respect to options, underlying securities or market conditions, any standard forms of worksheets, or any seminar text which pertains to options and which is communicated to customers or the public at seminars, lectures or similar such events.
(b) Approval by Compliance Registered Options Principal and Recordkeeping
All advertisements, sales literature (except completed worksheets), and educational material issued by a member or member organization pertaining to options shall be approved in advance by the Compliance Registered Options Principal or designee. Copies thereof, together with the names of the persons who prepared the material, the names of the persons who approved the material and, in the case of sales literature, the source of any recommendations contained therein, shall be retained by the member or member organization and be kept at an easily accessible place for examination by the Association for a period of three
(c) Association Approval Requirements and Re-view Procedures
(1) In addition to the approval required by paragraph (b) of this Rule, every advertisement and all educational material of a member or member organization pertaining to options shall be submitted to the Advertising Department of the Association at least ten days prior to use (or such shorter period as the Department may allow in particular instances) for approval and, if changed or expressly disapproved by the Association, shall be withheld from circulation until any changes specified by the Association have been made or, in the event of disapproval, until the advertisement or educational material has been resubmitted for, and has received, Association approval.
(2) Notwithstanding the foregoing provision, any District Business Conduct Committee of the Association, upon review of a member's options advertisements, educational material and/or sales literature, and after determining that the member will again depart from the standards of this section, may require that such member file all options advertisements, educational material and/or sales literature, or the portions of such member's material that is related to any specific types or classes of securities or services, with the Association's Advertising Department and/or the District Committee, at least ten days prior to use.
The Committee shall notify the member in writing of the types of material to be filed and the length of time such requirement is to be in effect. The requirement shall not exceed one year, however, and shall not take effect until 30 days after the member receives the written notice, during which time the member may request a hearing be-fore the District Business Conduct Committee, and any such hearing shall be in reasonable conformity with the hearing and appeal procedures of the Code of Procedure.
(3) In addition to the foregoing requirements, every member's options advertising and sales literature shall be subject to a routine spot-check procedure. Upon written request from the Association's Advertising Department, each member shall promptly submit the material requested. Members will not be required to submit material under this procedure that has been previously submitted pursuant to one of the foregoing requirements.
(4) The requirements of this subsection shall not be applicable to:
(A) advertisements or educational material submitted to another self-regulatory organization having comparable standards pertaining to such advertisements or educational material and
(B) advertisements in which the only reference to options is contained in a listing of the services of a member organization.
(5) Except as otherwise provided in Subsections (d)(2)(B) and (d)(2)(C), no written material respecting options may be disseminated to any person who has not previously or contemporaneously received one or more current options disclosure documents.
(d) Standards Applicable to Communications with the Public
(1) General Standards — No member or member organization or person associated with a member shall utilize any advertisement, educational material, sales literature or other communications to any customer or member of the public concerning options which:
(A) contains any untrue statement or omission of a material fact or is otherwise false or misleading;
(B) contains promises of specific results, exaggerated or unwarranted claims, opinions for which there is no reasonable basis or forecasts of future events which are unwarranted or which are not clearly labeled as forecasts;
(C) contains hedge clauses or disclaimers which are not legible, which attempt to disclaim responsibility for the content of such literature or for opinions expressed therein, or which are otherwise inconsistent with such communication; or
(D) would constitute a prospectus as that term is defined in the Securities Act of 1933, unless it meets the requirements of Section 10 of said Act.
(2) Specific Standards
(A) The special risks attendant to options transactions and the complexities of certain options investment strategies shall be reflected in any advertisement, educational material or sales literature which discusses the uses or advantages of options. Such communications shall include a warning to the effect that options are not suitable for all invest ors. In the preparation of written communications respecting options, the following guidelines shall be observed:
(i) Any statement referring to the potential opportunities or advantages presented by options shall be balanced by a statement of the corresponding risks. The risk statement shall reflect the same degree of specificity as the statement of opportunities, and broad generalities should be avoided. Thus, a statement such as "with options, an investor has an opportunity to earn profits while limiting his risk of loss", should be balanced by a statement such as "of course, an options investor may lose the entire amount committed to options in a relatively short period of time."
(ii) It shall not be suggested that options are suitable for all investors. (iii) Statements suggesting the certain availability of a secondary market for options shall not be made.
(B) Advertisements pertaining to options shall conform to the following standards:
(i) Advertisements may only be used (and copies of the advertisements may be sent to persons who have not received one or more options disclosure documents) if the material meets the requirements of Rule 134 under the Securities Act of 1933, as that Rule has been interpreted as applying to options. Under Rule 134, advertisements must be limited to general descriptions of the security being offered and of its issuer. Advertisements under this Rule shall state the name and address of the person from whom a current options disclosure document(s) may be obtained. Such advertisements may have the following characteristics:
(a) The text of the advertisement may contain a brief description of such options, including a statement that the issuer of every such option is the Options Clearing Corporation. The text may also contain a brief description of the general attributes and method of operation of the exchange or exchanges on which such options are traded and of the Options Clearing Corporation, including a discussion of how the price of an option is determined on the trading floor(s) of such exchange(s);
(b) The advertisement may include any statement required by any state law or administrative authority;
(c) Advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.
(ii) The use of recommendations or of past or projected performance figures, including annualized rates of return, is not permitted in any advertisement pertaining to options.
(C) Educational material, including advertisements, pertaining to options may be used if the material meets the requirements of Rule 134A under the Securities Act of 1933. Those requirements are as follows:
(i) The potential risks related to options trading generally and to each strategy addressed are explained;
(ii) No past or projected performance figures, including annualized rates of return are used;
(iii) No recommendation to purchase or sell any option contract is made;
(iv) No specific security is identified other than
(a) a security which is exempt from registration under the Act, or an option on such exempt security, or
(b) an index option, including the component securities of the index; or
(c) a foreign currency option; and
(v) The material contains the name and address of a person or persons from whom the appropriate current Options Disclosure Document(s), as defined in Rule 9b-1 of the Securities Exchange Act of 1934, may be obtained.
(D) Sales literature pertaining to options shall conform to the following standards:
(i) Sales literature shall state that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparisons, recommendations, statistics or other technical data, will be supplied upon request.
(ii) Such communications may contain projected performance figures (including projected annualized rates of return), provided that:
(a) no suggestion of certainty of future performance is made;
(b) parameters relating to such performance figures are clearly established (e.g., to indicate exercise price of option, purchase price of the underlying stock and its market price, option premium, anticipated dividends, etc.);
(c) all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) are disclosed;
(d) such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation;
(e) all material assumptions made in such calculations are clearly identified (e.g., "assume option expires", "assume option unexercised", "assume option ex
(f) the risks involved in the proposed transactions are also discussed; and
(g) in communications relating to annualized rates of return, that such returns are not based upon any less than a sixty-day experience; any formulas used in making calculations are clearly displayed; and a statement is included to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
(iii) Such communications may feature records and statistics which portray the performance of past recommendations or of actual transactions, provided that:
(a) any such portrayal is done in a balanced manner, and consists of records or statistics that are confined to a specific "universe" that can be fully isolated and circumscribed and that covers at least the most recent 12-month period;
(b) such communications include the date of each initial recommendation or transaction, the price of each such recommendation or transaction as of such date, and the date and price of each recommendation or transaction at the end of the period or when liquidation was suggested or effected, whichever was earlier; provided that if the communications are limited to summarized or averaged records or statistics, in lieu of the complete record there may be included the number of items recommended or transacted, the number that advanced and the number that declined, together with an offer to provide the complete record upon request;
(c) such communications disclose all relevant costs, including commissions and interest charges (if applicable with regard to margin transactions) and, whenever annualized rates of return are used, all material assumptions used in the process of annualization;
(d) an indication is provided of the general market conditions during the period(s) covered, and any comparison made between such records and statistics and the overall market (e.g., comparison to an index) is valid;
(e) such communications state that the results presented should not and cannot be viewed as an indicator of future performance; and
(f) a Registered Options Principal determines that the records or statistics fairly present the status of the recommendations or transactions reported upon and so initials the report.
(iv) In the case of an options program (i.e., an investment plan employing the systematic use of one or more options strategies), the cumulative history or unproven nature of the program and its underlying assumptions shall be disclosed.
(v) Standard forms of options worksheets utilized by member organizations, in addition to complying with the requirements applicable to sales literature, must be uniform within a member organization.
(vi) If a member organization has adopted a standard form of worksheet for a particular options strategy, nonstandard worksheets for that strategy may not be used.
(vii) Communications that portray performance of past recommendations or actual transactions and completed worksheets shall be kept at a place easily accessible to the sales office for the accounts or customers involved.
1 In NASD Notice to Members 89-20 (Feb. 17, 1989), the membership approved new rules and amendments to the Rules of Fair Practice. When the new rules and amendments have been approved by the SEC, this section will be renumbered to conform to the new numbering of the Rules of Fair Practice.
2 NASD Notice to Members 91-26 (May 1991) announced the SEC's approval of amendments to Article III, Section 35 relating to the use and disclosure of member names. Those amendments, among other things, created a new subsection (g) in Section 35. The approval of the amendments set forth in this notice require that the new subsection (g) be renumbered subsection (f). Other nonsubstantive conforming amendments and renumbering to Section 35 are also being announced herein.
3 New text is underlined. Deleted text is in brackets. The current text of Section 35 set forth herein reflects amendments announced in Notice to Members 91-26 (May 1991). See note 2, supra.
