(March 21 – 08:50 ET) – NASD Regulation Inc. has issued a policy statement regarding the application of the National Association of Securities Dealers’s suitability rule to online communications.

NASDR says it developed the policy statement in response to the dramatic increase in the use of the Internet for communication between NASD-member brokerage firms and their customers. The statement intends to make it clear that certain online communications can constitute “recommendations” for purposes of the suitability rule, and members will have suitability obligations with respect to those communications.

The policy statement provides guidance to member firms to assist them in determining what types of online communications might constitute recommendations for purposes of the suitability rule. The NASD’s suitability rule requires that in recommending a trade, a broker must have reasonable grounds for believing that such recommendation is suitable for such customer, given the customer’s investment goals, financial situation and needs.

The determination of whether an online communication is a “recommendation” will require an analysis of the content, context and presentation of the communication. The firm should consider whether a person reasonably would view the communication as a “call to action”; and the more individually tailored the communication is to a specific customer or group of customers, the more likely it will be viewed as a recommendation.

“Investors trading online through member firms are still protected by the suitability rule. But we need to clarify when it applies,” said Robert Glauber, NASD CEO and president. “Today’s policy statement on the suitability rule and online communications provides member firms with clear guidance without stifling innovation. It allows investors to enjoy the many benefits of online brokerage services, while still affording them necessary protection.”

“There has been much debate within the industry about whether, or to what extent, the suitability rule applies at all to online brokerage activities,” said Mary Schapiro, president of NASDR. “It should be clear that the suitability rule applies to all recommendations made by members to customers, including those made by electronic means. We recognize that some forms of electronic communications defy easy characterization. So we have set forth some specific examples and also offers guiding principles for firms to use in reviewing their communications and ascertaining whether they have a suitability obligation.”

Shapiro said NASDR expects to issue additional guidance to brokers a as technology affects the manner in which investors interact with brokers and markets.