Internet Guide for NASD Registered Person: GEORGE AXXEL KNUTSON CRD Number: 272778
| Introduction | General Compliance Requirements |
Use of E-Mail | Group E-Mail | Electronic Chat Rooms |
Bulletin Boards | Internet Home Pages |
NASD Regulation, Inc., has developed this Web Page to make registered representatives (RRs) aware of the compliance requirements and potential liabilities when using the Internet and electronic communications.
This Web Page provides some General Compliance Requirements that apply to electronic communications. It discusses specific considerations relating to the use of e-mail, group e-mail, chat rooms, bulletin boards, and Web sites. We have based the information on published rules, interpretations, and notices. Wherever possible, the Page provides links to the actual text of the rule, interpretation, or notice.
An RR's compliance responsibilities when communicating via the Internet are the same as they are in face-to-face discussions or in written communications with the public. In addition, RRs must be aware of internal firm policies that may limit, prohibit, or restrict the use of electronic communications. The information contained on this Web Page does not sanction the use of electronic communications beyond what is specifically allowed by the RR's member firm.
Electronic communications may be considered either correspondence, public forums, advertisements, or sales literature. These methods of communication are covered under the NASD Conduct Rules.
Publicly available Web sites are considered advertisements.
"All
communications
with the public
are subject to
compliance with the
NASD Conduct Rules."
Bulletin board postings are considered advertisements.
Group e-mail is considered sales literature.
Password-protected Web sites are considered sales literature.
Individual e-mail is considered correspondence.
Chat room discussions are considered public forums.
All communications with the public are subject to compliance with the NASD Conduct Rules. The rules require communications to be accurate and not misleading. Listed below are highlights of certain Conduct Rules that apply to all forms of electronic communication. Rules that apply specifically to e-mail, group e-mail, bulletin boards, chat rooms, and Web sites may be found in their respective sections. RRs are urged to view the actual rules using the links provided:
NASD Conduct Rule 2110 - Standards of Commercial Honor and Principles of Trade
NASD Conduct Rule 2120 - Use of Manipulative, Deceptive or Other Fraudulent Devices
NASD Conduct Rule 2210 - Communications With the Public
NASD Conduct Rule 2310 - Recommendations to Customers (Suitability)
NASD Conduct Rule 3010 - Supervision
Highlights of NASD Conduct Rules that Apply to Internet Usage
Communications with the public must:
be based on principles of fair dealing and not omit material information, including risk disclosure;
The NASD would
likely question the
motivation of an RR
who personally buys
shares of a thinly
traded stock and then
publicly makes a buy
recommendation,
or promotes
the stock in a
chat room."
not make exaggerated, unwarranted, or misleading claims;
give the investor a sound basis for making an investment decision; and
not contain predictions or projections of investment results.
Suitability - RRs must have reasonable grounds for believing that each recommendation to a customer is suitable on the basis of the information provided by the customer.
Conflicts of Interest - RRs must avoid any conflicts of interest in transactions with customers. For instance, the NASD would likely question the motivation of an RR who personally buys shares of a thinly traded stock and then publicly makes a buy recommendation, or promotes the stock in a chat room.
Use of Current Information - Representatives who communicate electronically must understand the importance of using current information. Outdated information runs a high risk of being inaccurate and misleading investors.
Supervision - NASD Conduct Rule 3010 requires member firms to supervise the activities of each RR. The supervisory responsibility of the member firm covers the use of e-mail, group e-mail, bulletin boards, chat rooms, and Web sites when it relates to the firm's business.
State Registration Requirements Apply - Each state has separate registration requirements for individuals doing business in that state. Use of e-mail, group e-mail, bulletin boards, chat rooms, and Web sites may be a solicitation of business. Generally, the solicitation of business in a state triggers the requirement for registration. RRs are advised to rely on their individual firms for guidance regarding state registration issues.
Whether from the office or home, e-mail with the public falls under NASD jurisdiction.
Frequently, RRs mistakenly believe that if they correspond with clients from home the correspondence is not under the purview of their firm or regulators. The use of e-mail to communicate with individual clients is considered correspondence and is subject to the NASD Conduct Rules.
Member firms are required to supervise and review investment-related e-mail sent by RRs, whether from home or the office.
NASD Conduct Rule 3010 - Supervision -- This NASD Rule addresses the review of an RR's correspondence by the member firm. RRs must know their firm's supervisory and review policies and comply with them, even if they are more restrictive than what is allowed under NASD rules. Many firms restrict the use of e-mail communications with customers because of the difficulties of supervision and review. Failure to follow the firm's supervisory and review procedures and regulations in general may subject an RR to either internal and/or regulatory disciplinary action.
NASD Rule 3010 requires member firms to supervise RRs' electronic correspondence with the public. If the firm's procedures do not require all correspondence to be reviewed prior to use, then the firm must provide additional, specific training about the use of correspondence by all associated persons.
"E-mail
to the public
from the office
or home
falls under
NASD jurisdiction."
Notice to Members 99-03 provides a full discussion of how the Rule applies to electronic communication.
NASD Conduct Rule 3110 - Books and Records -- This NASD Rule requires that correspondence with public customers, both written and electronic, be maintained in compliance with NASD rules and with SEC Rules 17a-3 and 17a-4. This means that an RR's e-mail correspondence with the public relating to the firm's business, generated both at the office and at home, is subject to these provisions. RRs should know and comply with their firm's policies in this area.
Whether from the office or home, the use of group e-mail falls under NASD jurisdiction.
Prior written approval is required for all group e-mail.
Group e-mail is an identical electronic message sent to multiple individuals. The use of group e-mail is considered sales literature under NASD Conduct Rule 2210. The Rule requires prior written approval by a registered principal. Depending upon the content, sales literature may also require filing with NASD Regulation's Advertising/Investment Companies Regulation Department. RRs are required to work within their firm's policies and procedures to avoid compliance problems and the resulting liability.
"Group e-mail
must be approved
prior to use
by a
registered principal
of the member firm."
NASD Regulation has provided interpretive relief regarding institutional group e-mail in certain circumstances.
NASD Conduct Rule 2210(b) - Approval and Recordkeeping -- This Rule requires that sales literature, both written and electronic, be maintained as part of the firm's records. Therefore group e-mail with the public relating to the firm's business is subject to these provisions. RRs must know what their firm's policies and procedures are in order to comply with these rules.
Chat room participation by RRs is subject to the same guidelines as public appearances.
Chat room discussions are considered public forums. RRs must follow the same requirements for participating in a chat room that they would if they were speaking in person before a group of investors. There are no filing requirements, but RRs are accountable under NASD Conduct Rules and the federal securities laws for what they say regarding securities or services. Also, member firms are responsible for supervising the investment-related activities of RRs including chat room participation. Remember, these rules apply regardless of whether an RR is in the office or at home. Refer to the General Compliance Requirements for information on applicable rules.
Because chat rooms contain live, unprepared communications, RRs are not required to get their comments approved in advance, unless their firm requires them to do so. In addition, chat room communications are not subject to the filing requirements of NASD Conduct Rule 2210 (c). However, the content standards under Rule 2210 (d) do apply. RRs must check their firm's policy to see if they are allowed to participate in investment-related chat rooms and to seek permission from their firms to participate prior to doing so.
The participation by RRs in investment-related chat rooms, without identifying themselves as being associated with a member firm, is not necessarily a violation of NASD rules. However, the fact that an individual is registered subjects him/her to a higher standard than members of the general public. Given the fast-paced environment of chat rooms, casual or off-handed statements have the potential of crossing the line between being a reasonable opinion and an exaggerated or unwarranted claim. Because of the difficulties of supervision and the potential liabilities from participating in chat rooms, many firms limit or prohibit participation altogether.
"The content standards
of Rule 2210 (d)
do apply to public
appearances, including
chat room participation."
Bulletin board postings are subject to NASD Conduct Rule 2210 - Communications With The Public, NASD Conduct Rule 3010 - Supervision, and Conduct Rule 3110 - Books and Records.
Member firms must supervise the investment-related activities of RRs including bulletin board activities. RRs must be aware of their firm's supervisory and review policies and comply with them, even if they are more restrictive than what is allowed under the NASD rules. Remember, these rules apply regardless of whether an RR is in the office or at home. Failure to follow the firm's supervisory and review procedures and any relevant securities regulations may subject the RR to disciplinary action from the firm and/or from regulatory agencies. Many firms limit or prohibit participation on bulletin boards because of supervision difficulties.
Personal Messages vs. "Doing Business"
The participation by RRs in investment-related bulletin boards, without identifying themselves as an associated person of a member firm, is not necessarily a violation of NASD rules. However, the fact that an individual is registered subjects him/her to a higher standard than members of the general public. All supervision, recordkeeping, and conduct rules apply to RRs' activity on a bulletin board regardless of whether they identify themselves as RRs or not. RRs are accountable under NASD Conduct Rules and the federal securities laws for what they say regarding securities or services. Casual or off-handed statements on bulletin boards have the potential of crossing the line between being a reasonable opinion and an exaggerated or unwarranted claim.
A registered principal is required to review contents prior to electronic posting.
When RRs use a bulletin board to solicit business, their postings are considered advertisements. As with all advertisements, a registered principal must review and approve the postings before use. Depending on the content and nature of a posting, it may be subject to filing with the NASD.
"RRs must
be aware of
and comply with
their firm's policies,
even if they are
more restrictive
than NASD
rules."
Web sites are advertisements and are subject to all requirements of NASD Conduct Rule 2210.
There are no separate rules or guidelines for use in preparing advertising material for the Internet. Web sites are subject to the same standards as other forms of advertisements. All Web sites used in connection with a securities business must be approved prior to use by a registered principal and must comply with Rule 2210.
Following are two examples of Web site usage by RRs:
Personal Web sites (not securities/investment related) may contain a short biography or profile describing the individual as being an RR, provided securities or investment activities are not the focus of the information on the site. Such sites are not considered advertisements under NASD rules.
An RR's personal profile on a member firm's Web site is subject to NASD rules. In this case, the RR would be responsible for having such pages approved internally by a registered principal. These pages may be individually designed, or use the firm's pre-approved templates. Some firms provide templates for RRs to use, while others allow for more customization of the information.
Points to remember:
Member firm name required - Web sites must clearly and prominently include the name of their firm so that investors know with whom they are doing business.
State registration may be required - Since Web sites can be viewed from anywhere, state registration/licensing requirements may apply. Be sure to check with your firm to ensure compliance with such requirements.
"Web
sites
are
advertisements"
Research reports require approval - Research reports require approval, in writing, by a registered principal before they are posted on a Web site.
Use current information - Outdated information runs a high risk of being inaccurate and may mislead investors.
Disclose risk factors - Both the content of the risk disclosure and its location are important. Risk disclosure should clearly and accurately describe the risks involved. Disclosures should be included in several locations within the Web site and in close proximity to the related material. This is important because visitors may jump from one Web page to another, or come to the site from different entry points. Investors should see the disclosures regardless of their entry point into the site.
Day Trading Rules - Effective on October 16, 2000, NASD Rules 2360 and 2361 will apply to member firms that promote day-trading strategies. Firms will be required to furnish a risk disclosure statement to a non-institutional customer prior to opening an account for the customer. In addition, the firm will either have to (1) approve the customer's account for a day-trading strategy, or (2) obtain from the customer a written agreement that the customer does not intend to use the account for day-trading purposes. As part of the account approval process, the firm will be required to make a threshold determination that day trading is appropriate for the customer. The NASD recently published Notice to Members 00-62, which provides more information on these day trading rules.
Speed & Reliability Claims - Communications that refer to the speed and reliability of a firm's electronic trading systems must not exaggerate the firm's capabilities. Notice to Members 99-11 provides guidance about disclosures that firms provide to customers to educate them about the effects of market volatility and volume.
Issues in linking to other Web sites
Linking to other sites is an issue because other sites may contain misleading or incorrect information. An RR's Web site should not have a link to a site that he/she knows or has reason to know contains false or misleading information about products or services. RRs should exercise the same care in choosing links as they would in referring customers to any outside source of information.
NASD Regulation has provided interpretive relief concerning member use of hyperlinks.
Linking to the NASD Regulation and NASD Web Sites. A Web site may link to the NASD and the NASD Regulation Web Sites provided:
the link must be a text-only link clearly marked "NASD Regulation" or "NASD", depending on the site to which the RR's site is linking;
the appearance, position, and other aspects of the link may not be such as to damage or dilute the goodwill associated with the NASD's or NASD Regulation's name and trademarks;
the appearance, position, and other aspects of the link may not create the false appearance that an entity is associated with or sponsored by the NASD or NASD Regulation;
the link, when activated by a user, must display these Sites full-screen and not within a "frame" on the linked Web site; and
NASD Regulation and the NASD reserve the right to revoke their consent to the link at any time at their sole discretion. |
