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NASDR Issues Guidance on Suitability Rule for Online Communications
Washington, DC, March 27, 2001 - NASD Regulation, Inc. (NASDR) recently published a policy statement on the application of the general suitability rule (Rule 2310) to online communications. The statement clarifies the types of electronic communications that may be considered "recommendations" for purposes of the suitability rule.
As discussed in the statement, "[w]hether a particular transaction is in fact recommended depends on an analysis of all the relevant facts and circumstances" and "the test for determining whether any communications (electronic or traditional) constitutes a ‘recommendation’ remains a ‘facts and circumstances’ inquiry to be conducted on a case-by-case basis." In general, however, the more individually tailored the communication is to a targeted group or individual, the more likely it may be viewed as a recommendation.
The NASDR statement provides examples of communications that generally fall within the definition of "recommendation," including:
- an electronic communication to a targeted customer or group of customers encouraging the purchase of a security;
- providing a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information (e.g., age, financial condition, and tolerance) and, in response thereto, the member provides the customer a list of securities to consider based on the customer’s profile; or
- the use of data-mining technology to analyze a customer’s financial or online activity—whether or not known to the customer—and then, based upon such information, sending specific investment suggestions to the customer.
In addition to these specific examples, the statement sets forth some general guidelines for evaluating a member’s suitability obligations.