National Association of Securities Dealers Unveils New Guidelines To Protect Investors

Mike Godfrey, Tax-news.com, New York

23 March 2001

The National Association of Securities Dealers (NASD), the US securities watchdog, has unveiled new rules clarifying how brokers must communicate with customers regarding their stocks by stipulating that the same rules that apply to voice or written letter communications also apply to all online communications.

Mary Schapiro, the NASD's president of its regulations branch, told the media 'there has been much debate within the industry about whether, or to what extent, the suitability rule applies at all to online brokerage activities. It should be clear that the suitability rule applies to all recommendations made by members to customers, including those made by electronic means.'

The 'suitability rule' dictates that a broker must make recommendations to customers that are consistent with the investors' objectives. NASD chief executive, Robert Glauber, said: 'We believe that the policy articulated in this notice to members strikes the right balance between investor protection and the free flow of information and investor autonomy that the Internet has made possible.'

Ms Schapiro added: 'We recognize that some forms of electronic communications defy easy characterization. So we have set forth some specific examples and also offers guiding principles for firms to use in reviewing their communications and ascertaining whether they have a suitability obligation.' NASD states that the rule is directed at brokers and dealers who exchange securities traded on the NASDAQ and AMEX and involves any Internet contact including:

• 'Sending a customer-specific electronic communication ... to a targeted customer or targeted group of customers encouraging the particular customer(s) to purchase a security.'
• 'Sending an e-mail stating that customers should be invested in stocks from a particular sector (such as technology) and (urging) customers to purchase one or more stocks from a list with 'buy' recommendations.'
• Providing a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information, such as age, financial condition, and risk tolerance. The (broker) then sends - or displays - to the customer a list of specific securities the customer could buy or sell to meet the investment goal the customer has indicated.'
• 'Using data-mining technology to analyze a customer's financial or online activity - whether or not known by the customer - and then, based on those observations, (sending) specific investment suggestions that the customer purchase or sell a security.'

More information is available on the NASD Regulation Web site via its Notice to Members in PDF format at: http://www.nasdr.com/pdf-text/0123ntm.pdf

Recommended