RCA - Fall 1999 - Ask the Analyst - Recommendations

Q. If a communication to customers is deemed to be a recommendation, what additional procedures or information is required?


A. For advertisements or sales literature, the member firm has several obligations pursuant to NASD Conduct Rule 2210(d)(2)(B) as follows:

  • the registered principal reviewing the communication for compliance must ensure that the firm has a reasonable basis for the recommendation;

  • the communication must provide, or offer to provide upon request, available investment information supporting the recommendation; and,

  • recommendations on behalf of corporate equities must provide the price at the time the recommendation is made.

In addition, the communication must disclose in specific terms several potential conflicts of interest that may exist between the member firm and the issuer of the security. Boiler plate language indicating the member firm "may or may not make a market in these securities" in itself does not fully satisfy the requirements. The potential conflicts requiring disclosure are, as applicable:

  • that the member firm recommending the securities usually makes a market in the securities being recommended, or in the underlying security if the recommended security is an option, or that the firm or its associated persons will sell to or buy from customers on a principal basis;

  • that the firm and/or its officers or partners own options, rights, or warrants to purchase any of the securities of the issuer whose securities are recommended, unless the extent of such ownership is nominal; and,

  • that the firm was manager or co-manager of a public offering of any securities of the recommended issuer within the last three years.