RCA - December 1997 - Ask The Analyst - Electronic Communications

Q. What is the responsibility of a member firm for the currency of the information it publishes on its Internet Web site? When does the information become stale?

A. While Web communications enable member firms to publish and then maintain large quantities of information, these communications also require adequate allocation of resources for the ongoing maintenance and updating of this information over time. Members must assure that all their communications with the public are accurate and provide the reader with a sound basis for evaluating the facts with respect to the product or service being offered. The NASD does not have a specific time frame after which information is deemed "stale." However, if information on a Web site is no longer accurate or has been supplanted by more recent data, then the member must revise the Web site in order to comply. NASD Conduct Rule 2210 prohibits the use of inaccurate information and requires that members' communications provide the reader with a sound basis for evaluating the facts with respect to any products or services being offered. For example, stock prices must be current and a date provided for such prices to permit the reader to evaluate the information. In addition, there are certain rules that are date sensitive. For example, total return performance data for mutual funds and variable annuities must be current to the most recent calendar quarter as required by SEC Rule 482.

Q. Must a member firm file its "intranet "? This internal Web site is available only to individuals employed by or registered with our firm who have been given password access to it.

A. This type of Web site does not need be filed with the Advertising Regulation Department. Only communications with the public are subject to the filing requirements set forth in NASD Conduct Rule 2210(c).

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 software 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.