The National Association of Securities Dealers apparently has laid to rest an issue that has caused confusion and debate for close to a year and a half: what is and is not a stock recommendation in interaction between online securities brokers and their customers.
Guidelines issued by the organization last week clarify an NASD suitability rule requiring that brokers weigh a clients financial circumstances and risk tolerance before making specific stock recommendations.
The guidelines say online-broker actions that constitute a stock recommendation include the use of data-mining technology to determine stocks that a customer may like; pop-up screens touting specific securities; and stock picks suggested in e-mails from brokers.
However, providing tools on a Web site to help investors determine for themselves what types of securities would be appropriate for them is not considered a recommendation.
This has been a hot-button Internet issue since November 1999, when Laura Unger, who is now acting head of the Securities and Exchange Commission, said that the SECs suitability requirement may apply in some cases to online brokers.
Bill Singer, a partner in the New York law firm Singer Frumento LLP, which defends many brokerages in regulatory actions, said: The surprise here for once is that the NASD has taken something of an enlightened approach to regulation. Rather than rules, they are making a policy statement.
Especially gratifying is the NASDs explicit recognition that its rulemaking can hamper innovation, Mr. Singer said. (The guidelines note that the organization wants to regulate without impeding the growth of new technological services for investors.)
I would hope they would make a bronze plaque out of it and put it over their door, he said.
