NASD Regulation issues policy statement over brokerage online communications

NASD Regulation issues policy statement over brokerage online communications

National Association of Securities Dealers (NASD) Regulation, Inc. has issued a policy statement in a Notice to Members (NtM) regarding the application of the NASD’s suitability rule to online communications.

The body developed the policy statement in response to the dramatic increase in the use of the Internet for communication between NASD member brokerage firms and their customers. NASD Regulation has made clear that certain online communications can constitute "recommendations" for purposes of the suitability rule and members will have suitability obligations with respect to those communications.

Robert Glauber, NASD CEO and president, says: "Investors trading online through member firms are still protected by the suitability rule. But we need to clarify when it applies."

Mary L. Schapiro, president of NASD Regulation, says: "It should be clear that the suitability rule applies to all recommendations made by members to customers, including those made by electronic means. We recognise that some forms of electronic communications defy easy characterisation. So we have set forth some specific examples and also offered guiding principles for firms to use in reviewing their communications and ascertaining whether they have a suitability obligation."

The organisation expects to issue additional guidance over time as technology changes the ways in which investors interact with their brokers and the markets.

The NASD’s suitability rule requires that in recommending to a customer the purchase, sale, or exchange of a security, a broker/dealer must have reasonable grounds for believing that such recommendation is suitable for such customer, given the customer’s investment goals, financial situation and needs.

In addition to providing examples of online communications that NASD Regulation generally would view as falling within or outside the definition of recommendation, NASD Regulation also articulated several broad principles that will govern the determination:
* a determination of whether an online communication is a "recommendation" will require an analysis of the content, context and presentation of the communication;
* the member firm should consider whether a person reasonably would view the communication as a "call to action";
* the more individually tailored the communication is to a specific customer or group of customers about a particular security or group of securities, the more likely the communication will be viewed as a recommendation.

NASD Regulation has worked closely with the Securities and Exchange Commission, the National Association of State Securities Administrators, NASD Regulation’s e-Brokerage Committee and other organisations when assimilating the information necessary to formulate this policy statement.

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