NASD Notice to Members 01-23 - April 2001

Suitability Rule and Online Communications

Executive Summary

In light of the dramatic increase in the use of the Internet for communication between broker/dealers and their customers, NASD Regulation, Inc. (NASD Regulation) is issuing a Policy Statement to provide members with guidance concerning their obligations under the National Association of Securities Dealers, Inc. (NASD®) general suitability rule, Rule 2310, in this electronic environment. NASD Regulation filed this Policy Statement on March 19, 2001, with the Securities and Exchange Commission (SEC). Pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934 and SEC Rule 19b-4(f)(1), the Policy Statement became immediately effective upon filing.

 

The Policy Statement briefly discusses some of the issues created by the intersection of online activity and the suitability rule. The Policy Statement then provides examples of electronic communications that NASD Regulation considers to be either within or outside the definition of "recommendation" for purposes of the suitability rule. In addition, the Policy Statement sets forth guidelines to assist members in evaluating whether a particular communication could be viewed as a "recommendation," thereby triggering application of the suitability rule.

 

NASD Regulation emphasizes, however, that this current Policy Statement does not (1) alter member obligations under the suitability rule or (2) establish a "bright line" test for determining whether a communication does or does not constitute a "recommendation" for purposes of the suitability rule. No single factor discussed below, standing alone, necessarily dictates the outcome of the analysis.

 

NASD Regulation recognizes that brokerage firms are using technology to offer many new beneficial services to customers, and it supports the continued development and use of technology to enhance investor education and access to information. These technological advances may have regulatory implications in the context of rules other than the suitability rule, and, therefore, we expect to issue future statements or guidance on the subject of online activities in the securities industry. NASD Regulation is aware, however, that technology is developing rapidly, and we want to avoid impeding the growth of new technological services for investors.

 

Questions or comments concerning the information contained in this Policy Statement may be directed to either Nancy C. Libin, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8835 or by email, or James S. Wrona, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8270 or by email.