NASD Board Approves Proposed Rule for Opening Day-Trading Accounts
Nancy A. Condon
Washington, D.C.—The National Association of Securities Dealers, Inc. (NASD®) Board of Governors today approved a rule that would require firms that promote day-trading strategies to disclose to customers, prior to opening accounts, the risks associated with that type of trading. In addition, those firms would have to make a threshold determination that day trading is appropriate for the customer. The rule will not become effective until approved by the Securities and Exchange Commission, after public comment.
As Internet trading has become more popular, more brokerage firms have begun to promote day-trading activities for individual investors. The growth of day-trading activities raises unique investor protection issues and concerns. Day trading requires not only sufficient capital, but also a sophisticated understanding of the markets and market dynamics, and sophistication in identifying securities to trade and in accurately timing buys and sells.
In response to these issues and concerns, the Board agreed that firms promoting day-trading strategies must:
- Disclose Risk – A firm promoting day trading will be required to deliver a disclosure statement to the customer discussing the unique risks posed by day trading. The disclosure will include several points for customers to consider before engaging in day trading, including that they should be prepared to lose all of the funds used for day trading and that day trading on margin may result in losses beyond their initial investment. Firms will be permitted to develop an alternative disclosure statement as long as it is substantially similar to the mandated statement and is approved by NASD Regulation’s Advertising Department prior to use.
- Approve the Account for Day Trading – To approve an account for day trading, the firm must have reasonable grounds for believing that a day-trading strategy is appropriate for a customer by gathering the essential facts relative to the customer. A firm need not make this determination if it obtains from the customer a written agreement that the customer does not intend to use the account for day-trading purposes. If a firm later discovers that a customer who provided this written agreement is using the account for day trading, the firm will be required to approve the account for day trading within 10 days of the date of discovery.
"It is important for a firm that is actively promoting a day-trading strategy to be responsible for assessing whether the strategy is appropriate for an individual who opens a day-trading account at the firm. Today’s action by the Board of Governors will go a long way to better protect investors in an increasingly more sophisticated technological environment," said Mary L. Schapiro, President of NASD Regulation, Inc.
Individuals seeking to establish day-trading accounts at these types of firms would be covered by the proposed rule, regardless of whether they engage in day-trading activities in their own names or under partnership or corporate names. The rule would apply only to accounts that are opened after the effective date of the rule.
The National Association of Securities Dealers, Inc. (NASD®), is the largest securities-industry, self-regulatory organization in the United States. It is the parent organization of The Nasdaq-Amex Market Group, Inc., and NASD Regulation, Inc. Through its regulatory subsidiary, the NASD develops rules and regulations, provides a dispute resolution forum, and conducts regulatory reviews of member activities for the protection and benefit of investors. The NASD oversees the nation’s 5,600 brokerage firms and more than 600,000 registered brokers.