Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices 20697

statements on Form N–1A would have names

suggesting a focus in a particular country or

geographic region, and that each such investment

company would spend two hours annually to

comply with the prospectus disclosure

requirements of the rule, for a total annual burden

of 404 hours. The Commission also estimates that

26 closed-end management investment companies

filing registration statements on Form N–2 annually

would have names suggesting a focus on a

particular country or geographic region, and that

each such investment company would spend two

hours to comply with the prospectus disclosure

requirements of the rule, for a total annual burden

of 52 hours. See Adopting Release, supra note 1, 66

FR at 8517–8518.

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4

3On March 22, 2001, the NASD Regulation

submitted a technical amendment to designate a file

number for the proposed rule change. See letter

from Jennifer Piorko, Senior Legal Assistant, NASD

Regulation, to Nancy Sanow, Senior Special

Counsel, Division of Market Regulation,

Commission, dated March 21, 2001.

4The text and the footnotes in the Notice to

Members are formatted and numbered in the

manner that they appear in the actual Notice to

Members that was published by NASD Regulation.

1For purposes of this policy Statement, the terms

‘‘member’’ and ‘‘broker/dealer’’ include both firms

and their associated persons.

2NASD Rule 2310 provides in pertinent part:

(a) In recommending to a customer the purchase,

sale or exchange of any security, a member shall

have reasonable grounds for believing that the

recommendation is suitable for such customer upon

the basis of the facts, if any, disclosed by such

customer as to his other security holdings and as

to his financial situation and needs.

(b) Prior to the execution of a transaction

recommended to a non-institutional customer,

* * * a member shall make reasonable efforts to

obtain information concerning: (1) the customer’s

financial status; (2) the customer’s tax status; (3) the

customer’s investment objectives; and (4) such

other information used or considered to be

reasonable by such member * * * in making

recommendations to the customer.

NASD Rule 2310 applies to equity and certain

debt securities, but not to municipal securities.

Municipal securities are covered by Municipal

Securities Rulemaking Board (MSRB) Rule G–19

(‘‘Suitability of Recommendations and

Transactions; Discretionary Accounts’’).

3Although the focus of this Policy Statement is

on the application of the suitability rule to

electronic communications, much of the discussion

is also relevant to more traditional communications,

such as discussions made in-person, over the

telephone, or through postal mail.

4This Policy Statement focuses on ‘‘customerspecific’’ suitability under NASD Conduct Rule

2310. The word ‘‘recommendation’’ appears in

quotation marks whenever it is discussed in the

context of a customer-specific suitability obligation.

A broker/dealer must also have a reasonable basis

‘‘to believe that the recommendation could be

suitable for at least some customers.’’ In re F.J.

Kaufman and Company of Virginia, 50 S.E.C. 164,

168, 1989 SEC LEXIS 2376, *10 (1989) (emphasis

in original). This is called ‘‘reasonable basis’’

suitability, and it ‘‘relates only to the particular

recommendation, rather than to any particular

Continued

On March 13, 2001, OMB approved

the collections of information contained

in rule 35d–1. Rule 35d–1 (OMB Control

No. 3235–0548) was adopted pursuant

to section 35(d) of the Investment

Company Act [15 U.S.C. 80a–34(d)].

Form N–1A (OMB Control No. 3235–

0307) and Form N–2 (OMB Control No.

3235–0026) were adopted pursuant to

section 8 of the Investment Company

Act [15 U.S.C. 80a–8] and sections 5 and

10 of the Securities Act of 1933 [15

U.S.C. 77e and 77j]. An agency may not

conduct or sponsor, and a person is not

required to respond to, a collection of

information unless it displays a

currently valid control number.

Providing prior notice to shareholders

of a change in investment policy is

mandatory if an investment company

that has a descriptive name subject to

the rule has chosen to comply with the

rule by adopting a non-fundamental

80% investment policy and a notice

policy that meets the requirements of

the rule, and the investment company

intends to change its 80% investment

policy and name. There is no mandatory

retention period for the information

disclosed. Notices to shareholders

pursuant to a notice policy under the

rule are not filed with the Commission,

but will not in any event be kept

confidential.

The prospectus disclosure required by

the rule in Form N–1A and Form N–2

is mandatory for an investment

company with a name that suggests that

it focuses its investments in a particular

country or geographic region. There is

no mandatory retention period for the

information disclosed, and responses to

the disclosure requirement will not be

kept confidential.

Dated: April 16, 2001.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–10108 Filed 4–23–01; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44178; File No. SR–NASD–

2001–20]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by National

Association of Securities Dealers, Inc.

Relating to the Suitability Rule and

Online Communications

April 12, 2001.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 19,

2001, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its wholly owned subsidiary,

NASD Regulation, Inc. (‘‘NASD

Regulation’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) a proposed rule change

as described in Items I, II, and III below,

which Items have been prepared by

NASD Regulation.3 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation proposes to issue a

Notice to Members (Notice to Members

01–23) reminding members that they

have suitability obligations when they

make recommendations to customers

online. The text of the Notice to

Members is provided below.4

* * * * *

NASD Notice to Members 01–23

Online Suitability

Suitability Rule And Online

Communications

Suggested Routing

Senior Management

Legal & Compliance

Executive Representative

Key Topics

Suitability

Online Communications

Executive Summary

In light of the dramatic increase in the

use of the Internet for communication

between broker/dealers and their

customers, NASD Regulation, Inc.

(NASD Regulation) is issuing a Policy

Statement to provide members 1 with

guidance concerning their obligations

under the National Association of

Securities Dealers, Inc. (NASD) general

suitability rule, Rule 2310,2 in this

electronic environment.3 NASD

Regulation filed this Policy Statement

on March 19, 2001, with the Securities

and Exchange Commission (SEC).

Pursuant to Section 19(b)(3)(A) of the

Securities Exchange Act of 1934 and

SEC Rule 19b–4(f)(1), the Policy

Statement became immediately effective

upon filing.

The Policy Statement briefly

discusses some of the issues created by

the intersection of online activity and

the suitability rule. The Policy

Statement then provides examples of

electronic communications that NASD

Regulation considers to be either within

or outside the definition of

‘‘recommendation’’ for purposes of the

suitability rule.4 In addition, the Policy

20698 Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices

customer.’’ Id. See also In re Charles E. Marland &

Co., Inc., 45 S.E.C. 632, 636, 1974 SEC LEXIS 2458,

*10 (1974) (recommending mutual fund switching

creates rebuttable presumption of unsuitability); In

re Thomas Arthur Stewart, 20 S.E.C. 196, 207, 1945

SEC LEXIS 318, *25 (1945) (‘‘[T]he lack of

reasonable grounds for recommending [switching

shares of mutual funds]’’ was the basis for finding

broker had violated NASD’s suitability rule based

on a ‘‘reasonable basis’’ theory.).

Although not directly addressed in this Policy

Statement, in certain instances, a suitability

violation also can be based on an inappropriate

frequency of trades, often referred to as excessive

trading or churning. See IM–2310–2, Fair Dealing

With Customers (‘‘Some practices that have resulted

in disciplinary action and that clearly violate this

responsibility for fair dealing are * * * [e]xcessive

activity in a customer’s account.’’). A broker/dealer

could violate the suitability rule, for example,

where it recommended to a customer an excessive

(and, based on the customer’s financial situation

and needs, an inappropriate) number of securities

transactions and the customer routinely followed

the broker/dealer’s recommendations, See, e.g., In

re Harry Gliksman, Exchange Act Rel. No. 42255,

at 4, 1999 SEC LEXIS 2685, at *6 (Dec. 20, 1999)

(‘‘Under [Rule 2310], recommendations may be

unsuitable if the trading is excessive based on the

customer’s objectives and financial situation.’’); In

re Rafael Pinchas, Exchange Act Rel. No. 41816, at

11–12, 1999 SEC LEXIS 1754, at *22 (Sept. 1, 1999)

(‘‘[E]xcessive trading, by itself, can violate NASD

suitability standards by representing an unsuitable

frequency of trading.’’).

5While other NASD rules may cover

circumstances where members are making

recommendations (see, e.g., Rule 2210,

‘‘Communications with the Public’’), this Policy

Statement is limited to a discussion of the

suitability rule.

6See SEC Guidance on the Use of Electronic

Media (‘‘Use of Electronic Media’’), Release Nos.

34–7856, 34–42728, IC–24426, 65 Fed. Reg. 25843,

25843, 2000 SEC LEXIS 847, at *4 (Apr. 28, 2000)

(‘‘By facilitating rapid and widespread information

dissemination, the Internet has had a significant

impact on capital-raising techniques and, more

broadly, on the structure of the securities

industry.’’).

7A member or associated person who simply

effects a trade initiated by a customer without a

related ‘‘recommendation’’ from the member or

associated person is not required to perform a

suitability analysis, although members may elect to

determine whether a security is suitable under such

circumstances for their own business reasons. See

In re Thomas E. Warren, III, 51 S.E.C. 1015, 1019

n.19, 1994 SEC LEXIS 508, *11 n.19 (1994) (‘‘We

do not believe the suitability claims brought against

the Applicant are supported by the record. There

is no evidence that Warren recommended the

transactions that were effected in these accounts.’’),

aff’d, 69 F.3d 549 (10th Cir. 1995) (table format);

SEC Announcement of Final Rule on Sales Practice

Requirements for Certain Low-Priced Securities,

Release No. 34–27160, 54 Fed. Reg. 35468, 1989

SEC LEXIS 1603, at *52 (Aug. 22, 1989) (‘‘[T]he

NASD and other suitability rules have long applied

only to ‘recommended’ transactions.’’); Clarification

of Notice to Members (‘‘NtM’’) 96–60, 1997 NASD

LEXIS 20 (FYI, Mar. 1997) (stating that a member’s

suitability obligation under Rule 2310 applies only

to securities that have been recommended by the

member). Similarly, the suitability rule does not

apply where a member merely gathers information

on a particular customer, but does not make any

‘‘recommendations.’’ This is true even if the

information is the type of information generally

gathered to satisfy a suitability obligation.

Members should nonetheless remember that,

under NASD Rule 2110, they are required to

comply with know-your-customer obligations.

Pursuant to these obligations, members must make

reasonable efforts to obtain certain basic financial

information from customers so that members can

protect themselves and the integrity of the

securities markets from customers who do not have

the financial means to pay for transactions. See NtM

96–32, 1996 NASD LEXIS 51 (May 1996)

(reminding members of their know-your-customer

obligations), supplemented and clarified on

different grounds by NtM 96–60 (Sept. 1996); see

also NtM 99–11, 1999 NASD LEXIS 77 (Feb. 1999)

(‘‘While [this Notice] does not address firms’

suitability obligations in connection with

recommended transactions or their know-yourcustomer obligations, firms are reminded that the

existence of these obligations does not depend upon

whether a trade is executed on-line or otherwise.’’);

NtM 98–66, 1998 NASD LEXIS 81 (Aug. 1998)

(noting that members should provide a description

of ‘‘any internal system protocols designed to fulfill

a member’s ‘know your customer’ obligations’’).

Unlike the suitability rule, the NASD’s know-yourcustomer requirements apply to members regardless

of whether they have made a ‘‘recommendation.’’

8See generally SEC Commissioner Laura Unger,

Online Brokerage: Keeping Apace of Cyberspace

(Nov. 1999) (‘‘Unger Report’’) (discussing various

views espoused by online brokerage firms,

regulators and academics on the topic of online

suitability). The Unger Report can be accessed

through the SEC Web Site at www.sec.gov/news/

spstindx.htm (last modified on May 4, 2000). See

also Developments in the Law—The Law of

Cyberspace, 112 Harv. L. Rev. 1574, 1582–83 (1999)

(The article highlights the broader debate by

Statement sets forth guidelines to assist

members in evaluating whether a

particular communication could be

viewed as a ‘‘recommendation,’’ thereby

triggering application of the suitability

rule.5

NASD Regulation emphasizes,

however, that this current Policy

Statement does not (1) alter member

obligations under the suitability rule or

(2) establish a ‘‘bright line’’ test for

determining whether a communication

does or does not constitute a

‘‘recommendation’’ for purposes of the

suitability rule. No single factor

discussed below, standing alone,

necessarily dictates the outcome of the

analysis.

NASD Regulation recognizes that

brokerage firms are using technology to

offer many new beneficial services to

customers, and it supports the

continued development and use of

technology to enhance investor

education and access to information.

These technological advances may have

regulatory implications in the context of

rules other than the suitability rule, and,

therefore, we expect to issue future

statements or guidance on the subject of

online activities in the securities

industry. NASD Regulation is aware,

however, that technology is developing

rapidly, and we want to avoid impeding

the growth of new technological

services for investors.

Questions/Further Information

Questions or comments concerning

the information contained in this Policy

Statement may be directed to either

Nancy C. Libin, Assistant General

Counsel, Office of General Counsel,

NASD Regulation, Inc., at (202) 728–

8835 or nancy.libin@nasd.com, or James

S. Wrona, Assistant General Counsel,

Office of General Counsel, NASD

Regulation, Inc., at (202) 728–8270 or

jim.wrona@nasd.com.

NASD Regulation Policy Statement

Regarding Application Of The NASD

Suitability Rule To Online

Communications

Background

Technological developments in recent

years have profoundly affected the

securities industry.6 One of the most

dramatic changes is the way in which

brokerage firms use the Internet to

communicate with their customers. In

addition to more traditional channels of

communication such as the telephone

and postal mail, broker/dealers and

customers now transmit information to

each other through broker/dealers’ Web

Sites, e-mail, Web phones, personal

digital assistants, and hand-held pagers.

Broker/dealers also use the Internet to

provide lower-cost, unbundled services

to customers. Among other things,

broker/dealers have used the Internet to

provide investors with new tools to

obtain access to important analytical

information, conduct their own

research, and place their own orders.

Technological advancements have

provided many benefits to investors and

the brokerage industry. These

technological innovations, however,

also have presented new regulatory

challenges, including those arising from

the application of the suitability rule to

online activities.

The NASD’s suitability rule states that

in recommending to a customer the

purchase, sale, or exchange of any

security, a member shall have

reasonable grounds for believing that

the recommendation is suitable for such

customer. As the rule states, a member’s

suitability obligation applies to

securities that the member

‘‘recommends’’ to a customer.7 The

NASD’s suitability rule generally has

been violated when a broker/dealer

‘‘recommends’’ a security to a customer

that might be suitable for some

investors, but is unsuitable for that

particular customer.

Applicability of the Suitability Rule to

Electronic Communications

There has been much debate recently

about the application of the suitability

rule to online activities.8 Two major

Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices 20699

academics and judges over whether ‘‘to apply

conventional models of regulation to the Internet.’’).

9Clarification of NtM 96–60, 1997 NASD LEXIS

20 (FYI, Mar. 1997).

10For example, if a broker/dealer transmitted a

research report to a customer at the customer’s

request, that communication may not be subject to

the suitability rule; whereas, if the same broker/

dealer transmitted the very same research report

with an accompanying message, either oral or

written, that the customer should act on the report,

the suitability analysis would be different.

11See Online Brokerage Services and the

Suitability Rule, NASD Regulatory & Compliance

Alert, at 20 (Summer 2000) (noting that the more

individualized and particular the communication

about a security, the closer the communication is

to being viewed as a ‘‘recommendation’’). The

Regulatory & Compliance Alert article is also

available at www.nasdr.com/rca_summer00.htm.

See also Thomas L. Taylor III & Alan S. Petlak, Q&A

Online: Chat, Research, Compliance Reporter, July

31, 2000, at 11 (stating that a factor to consider

when determining whether a communication is a

‘‘recommendation’’ is the degree to which it is

individualized and specific).

12See supra note 7 and accompanying text.

13Note, however, that hyperlinks conceivably

could create suitability obligations, depending, for

example, on the information provided to and from

the hyperlinked site, the extent to which a member

endorses the content of the hyperlinked site, the

nature of the firm’s relationship to the hyperlinked

site, and other attendant facts and circumstances. It

should also be noted that NASD Regulation has

previously issued guidance regarding the

responsibility of members for the content of

hyperlinked sites. See Letter from Thomas Selman,

Vice President, NASD Regulation, Disclosure and

Investor Protection to Craig Tyle, General Counsel,

Investment Company Institute, Nov. 11, 1997. This

letter can be assessed through NASD Regulation’s

Web Site at www.nasdr.com/2910/2210 01.htm. See

also Use of Electronic Media, supra note 6, at 65

Fed. Reg. at 25848–25849, *32–49 (discussing

responsibility for hyperlinked information). In

addition, NASD Regulation has provided guidance

to firms regarding the use of ‘‘chat rooms’’ and

‘‘bulletin boards.’’ See NtM 96–50, 1996 NASD

LEXIS 60 (July 1996).

questions have arisen: first, whether the

current suitability rule should even

apply to online activities, and second, if

so, what types of online

communications constitute

‘‘recommendations’’ for purposes of the

rule. In answer to the first question,

NASD Regulation believes that the

suitability rule applies to all

‘‘recommendations’’ made by members

to customers—including those made via

electronic means—to purchase, sell, or

exchange a security. Electronic

communications from broker/dealers to

their customers clearly can constitute

‘‘recommendations.’’ The suitability

rule, therefore, remains fully applicable

to online activities in those cases where

the member ‘‘recommends’’ securities to

its customers.

With regard to the second question,

NASD Regulation does not seek to

identify in this Policy Statement all of

the types of electronic communications

that may constitute

‘‘recommendations.’’ As NASD

Regulation has often emphasized,

‘‘[w]hether a particular transaction is in

fact recommended depends on an

analysis of all the relevant facts and

circumstances.’’9 That is, the test for

determining whether any

communication (electronic or

traditional) constitutes a

‘‘recommendation’’ remains a ‘‘facts and

circumstances’’ inquiry to be conducted

on a case-by-case basis.

NASD Regulation also recognizes that

many forms of electronic

communications defy easy

characterization. Nevertheless, we offer

as guidance the following general

principles for member firms to use in

determining whether a particular

communication could be deemed a

‘‘recommendation.’’ As illustrated by

the examples provided below, the ‘‘facts

and circumstances’’ determination of

whether a communication is a

‘‘recommendation’’ requires an analysis

of the content, context, and presentation

of the particular communication or set

of communications. The determination

of whether a ‘‘recommendation’’ has

been made, moreover, is an objective

rather than a subjective inquiry. An

important factor in this regard is

whether—given its content, context, and

manner of presentation—a particular

communication from a broker/dealer to

a customer reasonably would be viewed

as a ‘‘call to action,’’ or suggestion that

the customer engage in a securities

transaction. Members should bear in

mind that an analysis of the content,

context, and manner of presentation of

a communication requires examination

of the underlying substantive

information transmitted to the customer

and consideration of any other facts and

circumstances, such as any

accompanying explanatory message

from the broker/dealer.10 Another

principle that members should keep in

mind is that, in general, the more

individually tailored the

communication to a specific customer

or a targeted group of customers about

a security or group of securities, the

greater likelihood that the

communication may be viewed as a

‘‘recommendation.’’ 11

Scope of the Term ‘‘Recommendation’’:

Examples

In order to provide guidance to

members, NASD Regulation offers some

examples of electronic communications

that could be viewed as within or

outside the definition of

‘‘recommendation.’’ These examples are

intended to show the application of the

above-mentioned general principles.

In addition to when a member acts

merely as an order-taker regarding a

particular transaction,12 NASD

Regulation generally would view the

following activities and

communications as falling outside the

definition of ‘‘recommendation’’:

• A member creates a Web Site that

is available to customers or groups of

customers. The Web Site has research

pages or ‘‘electronic libraries’’ that

contain research reports (which may

include buy/sell recommendations from

the author of the report), news, quotes,

and charts that customers can obtain or

request.

• A member has a search engine on

its Web Site that enables customers to

sort through the data available about the

performance of a broad range of stocks

and mutual funds, company

fundamentals, and industry sectors. The

data is not limited, for instance, to, and

does not favor, securities in which the

member makes a market or has made a

‘‘buy’’ recommendation. Customers use

and direct this tool on their own. Search

results from this tool may rank

securities using any criteria selected by

the customer, and may display current

news, quotes, and links to related

sites.13

• A member provides research tools

on its Web Site that allow customers to

screen through a wide universe of

securities (e.g., all exchange-listed and

Nasdaq securities) or an externally

recognized group of securities (e.g.,

certain indexes) and to request lists of

securities that meet broad, objective

criteria (e.g., all companies in a certain

sector with 25 percent annual earnings

growth). The member does not impose

limits on the manner in which the

research tool searches through a wide

universe of securities, nor does it

control the generation of the list in order

to favor certain securities. For instance,

the member does not limit the universe

of securities to those in which it makes

a market or for which it has made a

‘‘buy’’ recommendation. Similarly, the

algorithms for these tools are not

programmed to produce lists of

securities based on subjective factors

that the member has created or

developed, nor do the algorithms, for

example, produce lists that favor those

securities in which the member makes

a market or for which the member has

made a ‘‘buy’’ recommendation.

• A member allows customers to

subscribe to e-mails or other electronic

communications that alert customers to

news affecting the securities in the

customer’s portfolio or on the

customer’s ‘‘watch list.’’ Such news

might include price changes, notice of

pre-scheduled events (such as an

20700 Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices

14Note that there are instances where sending a

customer an electronic communication that

highlights a particular security (or securities) will

not be viewed as a ‘‘recommendation.’’ For

instance, while each case requires an analysis of the

particular facts and circumstances, a member

generally would not be viewed as making a

‘‘recommendation’’ when, pursuant to a customer’s

request, it sends the customer (1) electronic ‘‘alerts’’

(such as accounting activity alerts, market alerts, or

price, volume, and earnings alerts) or (2) research

announcements (e.g., a firm’s ‘‘stock of the week’’)

that are tailored to the individual customer, as long

as neither—given their content, context, and

manner of presentation—would lead a customer

reasonably to believe that the firm is suggesting that

the customer take action in response to the

communication.

15Note, however, that a portfolio analysis tool

that merely generates a suggested mix of general

classes of financial assets (e.g., 60 percent equities,

20 percent bonds, and 20 percent cash equivalents),

without an accompanying list of securities that the

customer could purchase to achieve that allocation,

would not trigger a suitability obligation. On the

other hand, a series of actions which may not

constitute ‘‘recommendations’’ when considered

individually, may amount to a ‘‘recommendation’’

when considered in the aggregate. For example, a

portfolio allocator’s suggestion that a customer

could alter his or her current mix of investments

followed by provision of a list of securities that

could be purchased or sold to accomplish the

alteration could be a ‘‘recommendation.’’ Again,

however, the determination of whether a portfolio

analysis tool’s communication constitutes a

‘‘recommendation’’ will depend on the content,

context, and presentation of the communication or

series of communications.

16Although, as noted previously, a broker/dealer

cannot disclaim away its suitability obligation,

informing customers that generalized information

provided is not based on the customer’s particular

financial situation or needs may help clarify that

the information provided is not meant to be a

‘‘recommendation’’ to the customer. Whether the

communication is in fact a ‘‘recommendation’’

would still depend on the content, context, and

presentation of the communication. Accordingly, a

member that sends a customer or group of

customers information about a security might

include a statement that the member is not

providing the information based on the customer’s

particular financial situations or needs. Members

may properly disclose to customers that the

opinions or recommendations expressed in research

do not take into account individual investors’

circumstances and are not intended to represent

‘‘recommendations’’ by the member of particular

stocks to particular customers.

Members, however, should refer to previous

guidelines issued by the SEC and NASD that may

be relevant to those and/or related topics. For

instance, the SEC has issued guidelines regarding

whether and under what circumstances third-party

information is attributable to an issuer, and the SEC

noted that the guidance also may be relevant

regarding the responsibilities of broker/dealers. Use

of Electronic Media, supra not 6, at 65 Fed. Reg.

25848–25849, *32–49 (discussing entanglement and

adoption theories). See also supra note 13 and

discussion therein.

17We note that there are circumstances where the

act of sending communication to a specific group

of customers will not necessarily implicate the

suitability rule. For instance, a broker/dealer’s

business decision to provide only certain types of

investment information (e.g., research reports) to a

category of ‘‘premium’’ customers would not,

without more, trigger application of the suitability

rule. Conversely, members may incur suitability

obligations when they send a communication to a

large group of customers urging those customers to

invest in a security.

18As with the other general guidelines discussed

in this Policy Statement, the presence of this factor

alone does not automatically mean that a

‘‘recommendation’’ has been made. For example,

where a customer affirmatively requests to be

alerted (by e-mail or pop-up screen) when a security

reaches a specific price-point, when a company

issues an earnings release, or when an analyst

changes his or her recommendation of a particular

security, the broker/dealer’s decision to send the

customer the requested information, without more,

would not necessarily trigger a suitability

obligation.

imminent bond maturation), or

generalized information. The customer

selects the scope of the information that

the firm will send to him or her.

NASD Regulation generally would

view the following communications as

falling within the definition of

‘‘recommendation’’:

• A member sends a customerspecific electronic communication (e.g.,

an e-mail or pop-up screen) to a targeted

customer or targeted group of customers

encouraging the particular customer(s)

to purchase a security.14

• A member sends its customers an email stating that customers should be

invested in stocks from a particular

sector (such as technology) and urges

customers to purchase one or more

stocks from a list with ‘‘buy’’

recommendations.

• A member provides a portfolio

analysis tool that allows a customer to

indicate an investment goal and input

personalized information such as age,

financial condition, and risk tolerance.

The member in this instance then sends

(or displays to) the customer a list of

specific securities the customer could

buy or sell to meet the investment goal

the customer has indicated.15

• A member uses data-mining

technology (the electronic collection of

information on Web Site users) to

analyze a customer’s financial or online

activity—whether or not known by the

customer—and then, based on those

observations, sends (or ‘‘pushes’’)

specific investment suggestions that the

customer purchase or sell a security.

Members should keep in mind that

these examples are meant only to

provide guidance and are not an

exhaustive list of communications that

NASD Regulation does or does not

consider to be ‘‘recommendations.’’ As

stated earlier, many other types of

electronic communications are not

easily characterized. In addition,

changes to the factual predicates upon

which these examples are based (or the

existence of additional factors) could

alter the determination of whether

similar communications may or may not

be viewed as ‘‘recommendations.’’

Members, therefore, should analyze all

relevant facts and circumstances,

bearing in mind the general principles

noted earlier and discussed below, to

determine whether a communication is

a ‘‘recommendation,’’ and they should

take the necessary steps to fulfill their

suitability obligations. Furthermore,

these examples are based on

technological services that are currently

used in the marketplace. They are not

intended to direct or limit the future

development of delivery methods or

products and services provided online.

Guidelines For Evaluating Suitability

Obligations

NASD Regulation believes that

members should consider, at a

minimum, the following guidelines

when evaluating their suitability

obligations. None of these guidelines is

determinative. Each is but one factor to

be considered in evaluating all of the

facts and circumstances surrounding the

communication.

• A member cannot avoid or

discharge its suitability obligation

through a disclaimer where the

particular communication reasonably

would be viewed as a

‘‘recommendation’’ given its content,

context, and presentation.16 NASD

Regulation, however, encourages

members to include on their Web Sites

(and in other means of communication

with their customers) clear explanations

of the use and limitations of tools

offered on those sites.

• Members should analyze any

communication about a security that

reasonably could be viewed as a ‘‘call to

action’’ and that they direct or appear to

direct to a particular individual or

targeted group of individuals—as

opposed to statements that are generally

made available to all customers or the

public at large—to determine whether a

‘‘recommendation’’ is being made.17

• Members should scrutinize any

communication to a customer that

suggests the purchase, sale, or exchange

of a security—as opposed to simply

providing objective data about a

security—to determine whether a

‘‘recommendation’’ is being made.18

• A member’s transmission of

unrequested information will not

necessarily constitute a

‘‘recommendation.’’ However, when a

member decides to send a particular

customer unrequested information

about a security that is not of a

generalized or administrative nature

(e.g., notification of a stock split or a

dividend), the member should carefully

review the circumstances under which

the information is being provided, the

manner in which the information is

Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices 20701

19 In this regard, NASD Regulation is considering

further discussion of the application of the

suitability rule to electronic communications

involving initial public offerings in future guidance.

5A change to conform the description of the

Notice to Members with the text of the Notice to

Members was made pursuant to a telephone

conversation between Nancy C. Libin, Assistant

General Counsel, Office of the General Counsel,

NASD Regulation, Inc., and Marc McKayle, Special

Counsel, Division of Market Regulation,

Commission, on March 20, 2001.

6 15 U.S.C. 78o–3(b)(6)

7 15 U.S.C. 78s(b)(3)(A).

delivered to the customer, the content of

the communication, and the original

source of the information. The member

should perform this review regardless of

whether the decision to send the

information is made by a representative

employed by the member or by a

computer software program used by the

member.

• Members should be aware that the

degree to which the communication

reasonably would influence an investor

to trade a particular security or group of

securities—either through the context or

manner of presentation or the language

used in the communication—may be

considered in determining whether a

‘‘recommendation’’ is being made to the

customer.

NASD Regulation emphasizes that the

factors listed above are guidelines that

may assist members in complying with

the suitability rule. Again, the presence

or absence of any of these factors does

not by itself control whether a

‘‘recommendation’’ has been made or

whether the member has complied with

the suitability rule. Such determinations

can be made only on a case-by-case

basis taking into account all of the

relevant facts and circumstances.

Conclusion

The foregoing discussion highlights

some suggested guidelines to assist in

determining when electronic

communications constitute

‘‘recommendations,’’ thereby triggering

application of the NASD’s suitability

rule. NASD Regulation acknowledges

the numerous benefits that are enjoyed

by members and their customers as a

result of the Internet and online

brokerage services. NASD Regulation

emphasizes that it neither takes a

position on nor seeks to influence any

firm’s or customer’s choice of a

particular business model in this

electronic environment. At the same

time, however, NASD Regulation urges

members both to consider all

compliance implications when

implementing new services and to

remember that customers’ best interests

must continue to be of paramount

importance in any setting, traditional or

online.

As new technologies and/or services

evolve, NASD Regulation will continue

to provide statements or guidance

regarding the application of the

suitability rule and other rules.19 To

date, NASD Regulation has worked to

resolve various suitability-related issues

with federal and state regulators, NASD

Regulation’s e-Brokerage Committee, the

NASD’s Legal Advisory Board and

Small Firm Advisory Board, NASD

Regulation’s Standing and District

Committees, and the NASD

membership. This open dialogue has

been beneficial, and NASD Regulation

will continue to work with regulators,

members of the industry and the public

on these and other important issues that

arise in the online brokerage

environment.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASD Regulation included statements

concerning the purpose of, and basis for,

the proposed rule change. NASD

Regulation neither solicited nor

received written comments on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below.

NASD Regulation has prepared

summaries, set forth in Sections (A), (B),

and (C) below, of the most significant

aspects of such statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Member firms are increasingly

offering online brokerage services to

their retail customers. The Internet gives

retail customers the tools to manage

their own accounts and conduct their

own trading activity and the ability to

obtain access to an unprecedented

amount of information. Online trading

offers many benefits to member firms

and retail customers, but member firms

must continue to fulfill their suitability

obligations in the online environment

whenever they ‘‘recommend’’ to a

customer the purchase, sale, or

exchange of a security.

The Notice to Members states that the

suitability rule (NASD Rule 2310)

remains fully applicable to online

activities in those cases where a member

‘‘recommends’’ securities transactions to

its customers. The Notice to Members

does not alter member obligations under

the suitability rule,5 nor does it

establish a ‘‘bright line’’ test for

determining whether a particular

communication constitutes a

‘‘recommendation’’ for purposes of the

suitability rule. NASD Regulation

instead provides guidance to members

through the use of examples of

communications that NASD Regulation

believes fall within and outside the

definition of ‘‘recommendation.’’ The

Notice to Members also articulates

several broad principles that member

firms can use in evaluating whether a

particular online communication could

fall within the definition of

‘‘recommendation’’ for purposes of the

suitability rule.

2. Statutory Basis

NASD Regulation believes that the

Notice to Members is consistent with

the provisions of Section 15A(b)(6) of

the Act,6 which requires, among other

things, that the Association’s rules must

be designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, and, in general, to protect

investors and the public interest. NASD

Regulation believes that member firms

that make ‘‘recommendations’’ to

customers in the online environment

have an obligation to determine whether

the ‘‘recommendations’’ are suitable for

such customers. NASD Regulation

believes that this Notice to Members is

necessary to protect investors and the

public interest with respect to online

trading.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation does not believe

that the Notice to Members will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing proposed rule change

constitutes a stated policy, practice, or

interpretation with respect to the

meaning, administration, or

enforcement of an existing rule and,

therefore, has become effective pursuant

to pursuant to Section 19(b)(3)(A) of the

Act 7 and paragraph (f)(1) of Rule 19b–

20702 Federal Register / Vol. 66, No. 79 / Tuesday, April 24, 2001 / Notices

8 17 CFR 240.19b–4(f)(1).

9See F.J. Kaufman, 50 S.E.C. 164, Securities

Exchange Act Release No. 27535 (December 13,

1989) (Recommendation of margined buy-write

strategy found unsuitable for certain customers).

10 17 CFR 200.30–3(a)(12).

4 thereunder.8 At any time within 60

days of the filing of this proposed rule

change, the Commission may summarily

abrogate this proposal if it appears to

the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

The Commission notes that although

NASD Notice to Members 01–23 does

not expressly discuss electronic

communications that recommend

investment strategies, the NASD

suitability rule continues to apply to the

recommendation of investment

strategies, whether that

recommendation is made via electronic

communication or otherwise.9

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the Notice to Members

that are filed with the Commission, and

all written communications relating to

the Notice to Members between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–2001–20 and should be

submitted by May 15, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–10109 Filed 4–23–01; 8:45 am]

BILLING CODE 8010–01–P

SMALL BUSINESS ADMINISTRATION

[Declaration of Disaster #3333]

State of Mississippi

As a result of the President’s major

disaster declaration on April 17, 2001,

I find that Attala, Holmes, and Lee

Counties in the State of Mississippi

constitute a disaster area due to

damages caused by Flooding and Severe

Storms occurring between April 3–5,

2001. Applications for loans for

physical damage as a result of this

disaster may be filed until the close of

business on June 17, 2001 and for

economic injury until the close of

business on January 17, 2002 at the

address listed below or other locally

announced locations: U.S. Small

Business Administration, Disaster Area

2 Office, One Baltimore Place, Suite

300, Atlanta, GA 30308.

In addition, applications for economic

injury loans from small businesses

located in the following contiguous

counties in Mississippi may be filed

until the specified date at the above

location: Carroll, Chickasaw, Choctaw,

Humphreys, Itawamba, Leake, Leflore,

Madison, Monroe, Montgomery,

Neshoba, Pontotoc, Prentiss, Union,

Winston and Yazoo.

The interest rates are:

For Physical Damage: Percent

Homeowners with credit available

elsewhere ....................................... 6.625

Homeowners without credit available elsewhere ............................... 3.312

Businesses with credit available

elsewhere ....................................... 8.000

Businesses and non-profit organizations without credit available

elsewhere ....................................... 4.000

Others (including non-profit organizations) with credit available elsewhere .............................................. 7.125

For Economic Injury:

Businesses and small agricultural

cooperatives without credit available elsewhere ............................... 4.000

The number assigned to this disaster

for physical damage is 333306. For

economic injury the number is 9L4900.

(Catalog of Federal Domestic Assistance

Program Nos. 59002 and 59008).

Dated: April 18, 2001.

Herbert L. Mitchell,

Associate Administrator for Disaster

Assistance.

[FR Doc. 01–10146 Filed 4–23–01; 8:45 am]

BILLING CODE 8025–01–U

SMALL BUSINESS ADMINISTRATION

[License No. 09/09–5279]

Notice of Surrender of License

Notice is hereby given that Asian

American Capital Corporation, located

at 1251 West Tennyson Road, Suite 4,

Hayward, California 94544, has

surrendered its license to operate as a

small business investment company

under the Small Business Investment

Act of 1958, as amended (the Act).

Asian American Capital Corporation

was licensed by the Small Business

Administration on February 23, 1981.

Under the authority vested by the Act

and pursuant to the Regulations

promulgated thereunder, the surrender

was acted on this date, and accordingly,

all rights, privileges and franchises

derived therefrom have been

terminated.

(Catalog of Federal Domestic Assistance

Program No. 59.11, Small Business

Investment Companies)

Dated: April 17, 2001.

Harry E. Haskins,

Acting Associate Administrator for

Investment.

[FR Doc. 01–10097 Filed 4–23–01; 8:45 am]

BILLING CODE 8025–01–P

SOCIAL SECURITY ADMINISTRATION

Statement of Organization, Functions

and Delegations of Authority

This statement amends Part T of the

Statement of the Organization,

Functions and Delegations of Authority

which covers the Social Security

Administration (SSA). Chapter TA

covers the Deputy Commissioner for

Disability and Income Security

Programs. Notice is hereby given that

Subchapter TAH, Office of Hearings and

Appeals, is being amended to reflect a

realignment of functional

responsibilities within the Office of the

Associate Commissioner and

realignment and expansion of functional

responsibilities in the Office of

Management (TAHE). The new material

and changes are as follows:

Section TAH.10 The Office of Hearings

and Appeals—(Organization):

C. The Immediate Office of the

Associate Commissioner for Hearings

and Appeals (TAH).

Establish:

3. The Equal Employment

Opportunity Staff (TAH–3).

H. The Office of Management (TAHE).

Abolish:

1. The Equal Employment

Opportunity Staff (TAHE1).

6. The Division of Management

Analysis and Employee Development

(TAHE6).

Retitle: