NASD Advertising Rule Proposal Draws Fire From Member Firms

Douglas Wood
June 5, 2008 — 975 views  

A proposal by the NASD to vastly expand the number and types of securities advertisements that would be subject to review prior to being run or published has drawn fire from member firms.

“We are concerned…that the breadth of the proposal will lead to significant delays in the dissemination of fund advertisements,” stated the Investment Company Institute in comments reflecting the sentiment of many firms.

In April, NASD issued a request for comment on a proposal to require firms to pre-file initial advertisements and sales materials promoting types of securities products being offered for the first time. Ads and marketing pieces would have to be submitted at least 10 days prior to first use or publication.

The industry self-regulatory agency also proposed requiring firms to file all television, video (including Web site video), radio and similar broadcasts of 15 seconds or longer at least 10 days prior to use. While securities firms could submit story boards, they would be required to submit actual recorded commercials within 10 days of first use.

The proposal significantly expands current NASD advertising rules, which only require pre-use filing of ads by new members, as well as ads and sales literature that include fund rankings, bond fund volatility ratings, and information regarding collateralized mortgage obligations and security futures.

The proposed changes drew comments—mostly negative—from many securities firms that are heavy advertisers and household names, such as AIG Advisor Group, Fidelity Investments, Wachovia Securities, AG Edwards & Sons, E*Trade, Oppenheimer Funds, Merrill Lynch and Smith Barney.

Of particular concern is a proposal requiring firms, after submitting broadcast and video ads for approval, to “withhold the use of the advertisement until changes specified by the Department have been made.”

“The impact of this proposal is to preclude a member from placing any television or radio advertisements that are 15 seconds or longer until the Department has first reviewed and approved them,” noted Charles Schwab & Co. in its comments.

The Investment Company Institute reported that member firms typically must wait to receive comments from NASD staff between eight and 12 weeks after filing their ad copy. Requiring securities firms to hold off this long before streaming video onto their Web sites would preclude analysts from commenting on market conditions when such commentary is most relevant, firms noted.

Securities dealers also objected to the requirement that all television, radio and video Web materials be pre-approved, pointing to the vast amount of advertising that would be blocked prior to approval. Commenters suggested that NASD at least consider withholding from its pre-approval requirements brand-building ads that don’t mention specific products.

Firms also called upon NASD to better delineate the new product offerings that would trigger pre-filing requirements.

Industry observers predict that given the industry consensus behind objections to the proposed rules, NASD staff are likely to reconsider and revise the proposal. A spokesperson from the NASD’s press office told that the agency is studying the comments and has taken no action on the proposal.

Why This Matters:  The NASD’s proposed rule changes would severely hamper securities firms’ abilities to reach investors via advertising.  Such restrictions only serve to prevent consumers and investors from learning about investment opportunities.  Any time a regulator has prior approval over what is aired or published, legitimate marketers are hurt with little evidence of a real consumer benefit in protection from those marketers whose purpose is to deceive the public.

Douglas Wood

Reed Smith