Beware of the Internet

eps doing business on the Internet must be careful. They must comply not only with their firms' policies and procedures but also with securities rules and regulations. The NASD issued a helpful (albeit somewhat confusing) guide for reps (found at www.nasdr.com/4040.asp) addressing these issues. Let's examine (and explain) its major points.

First, the universe of Internet activities includes creating publicly available websites or password protected websites, posting to bulletin boards, sending group email or individual email, and participating in chat room discussions. Firms may prohibit or restrict some or all of these activities. But, even if a firm allows some or all of these activities, reps must appreciate that these activities still are considered, and regulated as, communications with the public. Several NASD conduct rules come into play, such as Rule 2120 (Use of Manipulative, Deceptive, or Other Fraudulent Devices), Rule 2210 (Communications With the Public) and Rule 2310 (Recommendations to Customers). In total, these rules constitute "Content Standards" that require all communications to be accurate and not misleading. Specifically, all communications must:

a) Be based upon principles of fair dealing and not omit material information, including risk disclosure;
b) Not make exaggerated, unwarranted or misleading claims;
c) Give the investor a sound basis for making an investment decision;
d) Not contain predictions or projections of investment results;
e) Not be based upon a conflict of interest (such as when a rep buys a thinly traded stock ahead of his chat room recommendation to buy the same stock); and
f) Be based upon current (not outdated) information.

a) Publicly available websites are considered to be advertisements, and password protected websites are considered to be sales literature;
b) Bulletin board postings are considered to be advertisements, and group email is considered to be sales literature; and
c) Chat rooms are considered to be public forums.

What are the ramifications? Let's start with chat rooms. Many firms restrict or prohibit reps from participating in chat rooms. But, if allowed to participate in chat rooms (whether from home or from work), reps need to abide by the Content Standards detailed above. However, there are no filing requirements (that would be impossible to do in advance) and reps do not necessarily have to identify themselves as associated persons of a member firm (subject to the Content Standards).

Likewise, many firms prohibit or restrict reps from posting messages on bulletin boards. But, if allowed, reps should note that the NASD requires a registered principal to review the contents of a post, and approve it, prior to posting it. That is because these posts are considered to be advertisements and must comply with NASD Rule 2210. As with participating in chat rooms, reps who post pre-approved messages on message boards do not necessarily have to identify themselves as associated persons of a member firm (subject to the Content Standards).

Unlike chat rooms and message boards, many firms allow reps to create websites for business purposes and this trend likely will continue. Apart from personal websites (not securities or investment related), which are not subject to NASD rules, the NASD classifies websites for business purposes as either advertisements or sales literature, depending upon whether they are password protected. As such, the content must be pre-approved by a registered principal of the firm.

The NASD urges reps to prominently include on their websites the firm's name. They also should obtain advance approval for all research reports, use current information and disclose risk factors. Additionally, the NASD identifies issues with respect to linking to other websites. Linking is permitted, unless reps know or have reason to know that the linked website contains false or misleading information about products or services. Creating links to the NASD's and NASD Regulation's websites is permitted, subject to some layout restrictions found in the guide.

One final note. The NASD (NYSE and SEC) is serious about brokers' using the Internet for business. Reps need to be sure to know what is required of them.