RCA - April 1996 - Ask The Analyst - About Electronic Communications

During the past year, the NASD has fielded numerous inquiries from member firms regarding communications with the public disseminated through electronic media such as the Internet or commercial on-line services. In addition, the NASD recently included electronic media in the definitions of "advertisement" and "sales literature" which are in its Rules of Fair Practice. (See Notice to Members 95-74, September 1995, and Regulatory & Compliance Alert, October 1995.) As a result of these rule changes, members have submitted an increasing number of electronic communications to the NASD for review. Members that use electronic communications in the course of their securities business must ensure that their supervisory procedures appropriately cover these activities. In a broader context, firms should establish specific policies that address how and under what circumstances their associated persons are permitted to use electronic communications for any business purpose at any time. Members may use the following questions and answers, which address some of the most frequently asked questions about electronic media, in updating their procedures for supervising these communications. Because this is an evolving area of regulation, the questions and answers identify several electronic media issues currently under consideration. The NASD is working with its members, the Securities and Exchange Commission (SEC), and other regulators and industry groups on further interpretations. The NASD intends to address unresolved concerns, as well as other electronic media issues that may arise, in future communications.

Q. My firm intends to create an Internet World Wide Web site. What are the regulatory implications and concerns?

A. An Internet World Wide Web site is generally a form of advertising. The site's content is subject to the general and specific standards for communications with the public in Article III, Section 35 of the NASD Rules of Fair Practice as well as relevant (SEC) and Municipal Securities Rulemaking Board (MSRB) rules. A site on a commercial on-line service such as America Online or Microsoft Network would also generally be considered an advertisement. As with any communication with the public, advertising on the Internet is subject to the approval, recordkeeping, and filing requirements in the Rules of Fair Practice. Since a user can navigate through the Internet and skip from section to section, a member must ensure that all material disclosures and disclaimers in its site are complete and easily recognized. For example, a member may need to repeat risk disclosure in different sections of a site in order to ensure that this information is available to all potential users. If the site can be viewed by anyone, regardless of his or her location, a member firm considering this form of advertising should contact the individual state securities administrator offices for information regarding the need to register in those states.

Q. Does the NASD have separate guidelines for members to use in preparing sales material for the Internet or other on-line services?

A. No. Currently, the NASD does not have separate guidelines for use in preparing advertising material for on-line services. As noted above, these electronic communications are subject to the same standards as other forms of communication with the public. If members have questions about prospectus delivery under the federal securities laws, the NASD encourages them to obtain a copy of the October 6, 1995, SEC Release, Use of Electronic Media for Delivery Purposes (Release No. 33-7233). This Release provides general guidance and a detailed question-and-answer section about prospectus delivery via electronic media. Q. What is the NASD's view regarding the following methods of electronic communication?

Bulletin Boards

A. Communications posted by members or their associated persons on electronic bulletin boards and/or message boards would be considered advertisements because such material can be viewed by anyone with access to these services. A registered principal must review and approve all advertisements before use. In addition, electronic bulletin board or message board advertisements may be subject to filing with the NASD, depending on the content.

Group Electronic Mail

A. An identical electronic message sent to multiple individuals is considered sales literature subject to the prior, written approval of a registered principal. As with written sales literature, group electronic mail (E-mail) may include form letters, brochures, research reports, and market commentary. NASD filing requirements may apply to group E-mail, depending on the content.

Individual E-mail

A. In lieu of written correspondence, registered persons also may use E-mail to send personalized letters to individual clients. When these electronic letters pertain to the solicitation or execution of securities transactions, the rules require their review and endorsement by a registered principal. Unlike advertising or sales literature, this review and endorsement may occur after the correspondence has been sent. In addition, NASD sales literature filing requirements do not apply to individual E-mail transmissions. However, E-mail correspondence relating to securities transactions must comply with the content standards included in Article III, Section 35 of the Rules of Fair Practice, as well as any other applicable rules.

Chat Rooms

A. The NASD considers a chat room to be a public forum using an electronic medium. As interactive, extemporaneous conversations, chat rooms are not generally considered correspondence, sales literature, or advertising. However, as with other oral communications, registered persons and members firms are accountable under the Rules of Fair Practice and the federal securities laws for what they say regarding securities products or services when participating in chat rooms. Obviously, misleading or fraudulent statements are prohibited.

Q. Can "broker/dealer use only" material be publicly posted on the Internet?

A. No. Unless the member can control access to the "broker/dealer use only" material so that only registered persons can receive it, anything transmitted over the Internet or an on-line service to sub-scribers is a public communication and therefore subject to the standards, filing requirements, and approval and recordkeeping requirements in NASD rules.

Q. Is my firm responsible for the content and filing of sites that my site may link to, even if these linked sites were not created by my firm?

A. The NASD is still considering the extent of a member's responsibility for sites to which that member has chosen to link. However, a member must not link to a site that the member knows contains misleading information about the member's products or services. Members must exercise the same care in choosing links as they would in referring customers to any outside source of information. If a member's site must be filed with the NASD and the member's site includes information promoting a link to another site, or urging the user to view a Iinked site, the NASD will likely require that the member provide the linked information for review. Q. How should members file electronic communications with the NASD?

A. Members must file a hard copy of each page in the site or program. Members may provide an Internet address or diskettes to assist in the review of the program. Please assure the submission is complete by identifying all "hyperlinked" screens within a site or program. Members may identify hyperlinks by underlining or highlighting the linked text. The NASD is exploring ways to accept submissions in electronic form as well.

Q. If the NASD has already reviewed a computer program or Web site and the member changes one section. must the member resubmit the entire piece?

A. No. If the changes do not affect other areas of a program or site, only the revised section must be resubmitted. For example, a member may have filed with the NASD and received approval for a site featuring sections for a number of different mutual funds. If the member sponsoring the site revises the growth fund section, only that part of the site must be refiled. To facilitate the review, members are asked to include the Advertising Regulation Department reference number for the original submission in their cover letters.

Q. Is Securities Investor Protection Corporation (SIPC) disclosure required in an Internet or commercial on-line service site?

A. Yes. Because Internet or commercial on-line sites are a form of advertising, SIPC disclosure should be included unless the SIPC By Laws specifically exempt the advertising from including this disclosure.