Q: Does NASD Regulation permit the use of interactive calculators in software packages and Internet Web sites? If so, what are the return restrictions?
A: Members may use interactive calculators as part of a financial planning or "needs analysis" discussion in a soft-ware or Web presentation. Since NASD Conduct Rule 2210 prohibits projections or predictions of performance for investments, the calculator should appear separately from the discussion of specific products and the accompanying text must avoid any implication that the calculator can be used to predict future product performance. NASD Conduct Rule 2210 does not specify rates of return for use in these interactive calculators. However, the Rule prohibits exaggerated, unwarranted, or misleading presentations and requires that members' communications reflect the inherent risks of investing. To avoid either exaggerating the potential returns of investments or misguiding an investor about how much he or she needs to invest to reach a financial goal, members should limit the rates of return users can enter into interactive calculators. Many interactive calculators permit the user to see the hypothetical results of compounding an investment at a single rate of return for 10, 20, 30, or more years. Illustrations of specific rates of return for extended time periods may create unreasonable expectations and ultimately mislead investors. Disclosure accompanying the calculator must clearly address this issue by explaining that rates will vary over time, particularly for long-term investments. If a calculator permits the use of high rates of return, the potential to mislead is increased. Interactive calculator presentations generally depict an investment compounding over time without any fluctuation of principal. Nevertheless, investments that achieve high rates of return often carry higher volatility. To avoid misleading the user, if high rates of return are permitted by an interactive calculator, the presentation must clearly explain that investments offering the potential for higher rates of return also involve a higher degree of risk to principal.