RCA - September 1997 - Member Firms Seek Guidance On Public Appearances

The popularity of on-line chat rooms, call-in format broadcasts, and seminar presentations have lead to an increase in requests by NASD member firms for guidance on public appearances by their associated persons. Public appearances include both scripted and extemporaneous discussions.

Overall Standards
The standards of Rule 2210, Communications with the Public, apply to all public appearances regardless of whether the presentation has been scripted or consists of unrehearsed remarks in response to a question. Overall, these standards require a full and fair description of any securities product or service including material information such as risks or costs. For example, in response to a caller's question during a radio broadcast, a representative recommends a specific stock of local interest that is trading in the secondary market. This recommendation is permitted, provided the representative satisfies the disclosure requirements of Rule 2210. Thus, the representative is required to disclose certain material relationships between his firm and the security, such as that his firm makes a market in the stock. In addition, he must provide the current price of the stock and mention if there are any special risks associated with the security, e.g., that the local company issuing the stock is risky because it is still in its start-up phase.

The rule also prohibits exaggerated, unwarranted, or misleading statements or claims, including promises of specific future returns or projections of investment performance. Thus, using the example above, the representative would be prohibited from giving assurances about the level of return the caller could expect from an investment in the recommended stock.

In addition, the rule calls for clear and prominent disclosure of the name of the member firm through which any securities products or services under discussion would be offered. If a non-member entity, such as a registered person's insurance agency is named in the presentation, then the presentation must be clear that the securities products or services under discussion are offered by the NASD member firm.

Common Content Problems
Member firms and associated persons have little control over the audience for a radio or television broadcast or an on-line chat room. In preparing and supervising these mass media appearances, members must limit the message to one appropriate for a broad, general audience. One cannot assume a specific level of audience knowledge, experience, or suitability. For example, high risk securities may not be appropriate for discussion in a broadcast format where any listener or viewer may tune in at any time. Similarly, it is generally inappropriate to discuss securities subject to prospectus delivery in the mass media as the SEC strictly limits what can be said about these products prior to delivery of the prospectus.

Overly complex messages can also create problems. For example, a chart presented in a 30-second television commercial simultaneously with graphics, narration, and music may actually obscure rather than illustrate a particular point. The viewer may be unable to absorb the meaning of the chart unless the presentation is simplified. In this case, the member could omit the chart and/or modify the narration to describe and explain the chart.

Disclosure in any type of media must be clear and understandable, and in mass media this requirement is critical. Fine print disclaimers are inappropriate for television as they cannot appear on screen long enough to be read; similarly, radio disclosures must be articulated slowly enough for the listener to understand.

Technical terminology or jargon may also mislead or fail to enhance the audience's understanding of the product. While a financial professional may understand that the phrase, "Subject to market fluctuation," means the investment can lose money, a first-time investor may not.