RCA - Spring 2000 - Improper Advertising Regarding Electronic and Day-Trading Services Result in Formal Disciplinary Actions

NASD Regulation has issued notices reminding members that advertisements and sales literature about electronic and day-trading services must comply with all advertising rules.1 Recently, NASDR sanctioned three firms and issued a formal complaint against a fourth firm for, among other things, failing to comply with advertising requirements in this area.2

These cases involve findings, and in one case allegations, of advertising rule violations in areas that NASDR has previously identified as those in which members need to exercise greater care with respect to their communications with the public. In these four cases, NASDR issued findings and allegations that publications on Web sites, radio and newspaper advertisements, press releases, and promotional circulars failed to provide a sound basis for evaluating the services provided by the firms and included exaggerated and unwarranted statements that were potentially misleading in the following areas:

  • Access to markets: Statements that exaggerated customers' ability to access the markets;

  • Immediate Executions: References to fast and reliable executions or instantaneous executions, without disclosing that market volatility and volume may delay system access and trade execution;

  • Disclosures Regarding Risks: References to the success of trading, without an adequate discussion of the risks and costs associated with an investment strategy that involves a high volume of trades;

  • Costs of Trading: Statements that gave an incomplete comparison of the costs of day trading through the respondent firm and the costs associated with other forms of securities trading at other firms;

  • Customer Status: Statements implying that a "stock trader" or "day trader" serves as an employee of the firm, as opposed to a customer of the firm; and

  • Filing Requirements: Failure to follow requirements to file advertisements with NASDR.

These cases demonstrate member firms' responsibilities to ensure that their communications with the public are accurate and provide the reader with a sound basis to evaluate any service or product discussed. Specific claims regarding the future profitability of a service or strategy run a high risk of misleading the reader and cannot be cured by the addition of disclosure or hedge clauses. NASD Conduct Rule 2210 prohibits promises of specific future results and/or projections of investment returns to customers.

Similarly, members should not state or imply that day trading is a simple strategy or that little or no experience is necessary to become a day trader. All discussions of day trading must be balanced with a fair and accurate presentation of the associated risks and costs. Firms must be able to substantiate claims they make regarding the speed and capacity of their trade execution services. These claims must be balanced with prominent disclosure that market volatility and volume may delay system access and trade execution.

We also remind members that a registered principal must approve advertisements and sales literature in writing prior to use with the public. Under NASD rules, Internet Web sites that are accessible by the public and not password protected are considered advertisements. Further, advertisements for electronic and day-trading services may be subject to filing with the Advertising Regulation Department (Department) of NASDR if the member firm has never before filed with the Department. If this is the case, the firm must file all advertisements 10 days prior to first use for a period of one year, beginning with the date the first filing is received in the Department.

Questions regarding the cases may be directed to Kathy Malfa, Department of Enforcement, at (202) 974-2853, or Amy Sochard, Advertising Regulation Department, at (202) 728-8812.


1 See "Electronic Trading Advertisements Raise Investor Protection Concerns," Regulatory & Compliance Alert (March 1999); see also NASD Regulation Issues Guidance Regarding Stock Volatility, Notice to Members 99-11 (January, 1999).

2 In each settled matter, the respondent firm does not admit or deny the allegations, but consents to the entry of findings. The issuance of a formal complaint represents the initiation of a formal proceeding by NASDR in which findings as to the allegations have not been made and does not represent a decision as to any of the allegations made in the complaint.