HelpFINRA Manual: Contents
FINRA Manual
Corporate Organization Notices
1996
96-86 NASD Regulation Reminds Members And Associated Persons That Sales Of Variable Contracts Are Subject To NASD Suitability Requirements
96-84 NASD Regulation Solicits Comment On The Use Of Bond Mutual Fund Risk Ratings In Supplemental Sales Literature
96-83 NASD Regulation Solicits Comment On Proposed Rule Relating To Prohibition On Members Receiving Any Payment To Publish A Quotation, Make A Market In An Issuer's Securities, Or Submit An Application In Connection Therewith
96-82 NASD Regulation Solicits Comment On Proposed Rules Governing Supervision, Review, And Record Retention Of Correspondence
96-81 SEC Transaction Fees Begin January 1, 1997, On Nasdaq And Other Prompt Last Sale Reported Non-Debt Transactions
96-77 CRD Will Provide Firms With Advisory Messages When Significant Disciplinary Actions Require Reentry Of Individuals Into The Regulatory Element Of The Continuing Education Program
96-76 SEC Approves Amendment To IM-8310-2 Regarding The Availability Of Disciplinary Complaints And Disciplinary Decisions Upon Request
96-70 NASD Reminds Members Of Prohibition Against Commercial Use Of Information Filed Under The Federal Election Campaign Act
96-69 Industry/Regulatory Council On Continuing Education Issues Update On The Status Of The Securities Industry Continuing Education Program
96-68 NASD Solicits Member Comment On Proposed Rules Relating To Prospectus Disclosure Of Cash And Non-Cash Compensation For The Sale Of Investment Company Securities
96-66 SEC Expands Scope Of Conduct Rules And Other NASD Rules To Government Securities; Approves New Suitability Interpretation
96-60 Clarification Of Members' Suitability Responsibilities Under NASD Rules With Special Emphasis On Member Activities In Speculative And Low-Priced Securities
96-59 NASD Solicits Member Comment On Proposed Rule Governing Tape Recording Of Telephone Conversations
96-58 Approval Of Amendments That Require Members To Provide Information To Other Regulators For Regulatory Purposes
96-54 NASD Regulation Reminds Members Of Reporting Obligations Of MSRB Rules G-37 And G-38, And Announces Sanction Guidelines For Failure To Report Form G-37/G-38
96-53 Approval Of Amendments To The Definitions Of Bona Fide Independent Market And Bona Fide Independent Market Maker
96-52 NASD Solicits Member Comments On Proposed Rules Relating To The Sale Of Variable Life Insurance Contracts And Variable Annuity Contracts
96-48 New London Training Center; Registered Representatives In England, Scotland, And Wales Must Comply With Continuing Education Requirements
96-38 Treasury Issues Letter Clarifying Recordkeeping Requirements For Forward Settling Repurchase Agreement Transactions
96-35 Mail Vote — NASD Solicits Member Vote On Amendments To The NASD By-Laws To Make By-Laws Consistent With The "Plan Of Allocation And Delegation Of Functions By NASD To Subsidiaries"
96-27 Significant Disciplinary Actions Prompt Reentry Into The Regulatory Element Of The Continuing Education Program
96-26 SEC Approves Schedule C Changes Regarding Use Of The Modified Series 7 To Qualify Canadian Registrants
96-18 Compliance Desk Will Help Members Report Free-Riding And Withholding Information To NASD; Workshops Scheduled For Late April, Early May
96-15 SEC Approves NASD Proposals to Add Two New Options Position-Limit Tiers and Extend and Expand the NASD's Equity Option Position-Limit Hedge Exemption Pilot Program
96-14 SEC Approves Amendments To Sections 1(a)(v) And 73 Of NASD Uniform Practice Code Relating To The Use Of Standardized Limited Partnership Transfer Forms
96-9 SEC Approves NASD Proposal Relating To Third-Market Trading In IPOs Of Exchange-Listed Securities
96-8 SEC Approves Amendments To Section 59 Of The Uniform Practice Code Clarifying Delivery Deadlines That May Be Specified In Buy-In Notices
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96-60 Clarification Of Members' Suitability Responsibilities Under NASD Rules With Special Emphasis On Member Activities In Speculative And Low-Priced Securities
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Executive Summary
In Notice to Members 96-32, NASD Regulation, Inc. (NASD Regulation) informed the membership of its concerns over unusual and increased trading in speculative or low-priced securities. The Notice was intended, among other things, to remind members of their fair dealing and suitability responsibilities to customers under NASD® rules. NASD Regulation is publishing this Notice to supplement Notice to Members 96-32 and to clarify certain issues addressed in that Notice.
Questions regarding this Notice may be directed to Daniel M. Sibears, Member Regulation, NASD Regulation, at (202) 728-6911; or David Spotts, Office of General Counsel, NASD Regulation, at (202) 728-8014.
Discussion
Notice to Members 96-32, published May 9, 1996, urged members to focus particular attention on certain rules, regulations, and best practices when dealing with customers in speculative or low-priced securities. It focused on NASD Regulation's concern for potential abusive conduct in connection with the sale of such securities, including market manipulation, misrepresentations, high pressure sales tactics, and fraudulent markups. In particular, NASD Regulation emphasized suitability, disclosure, valuations, supervision, and cold calling as areas in which members must take special care in discharging obligations to customers, especially when dealing in speculative or low-priced securities.
The purpose of this Notice is to supplement Notice to Members 96-32, and to clarify members' suitability obligations to customers under NASD rules.
Suitability Obligation
NASD Rule 2310 (formerly Article III, Section 2 of the NASD Rules of Fair Practice) provides 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 upon the basis of facts available, including other security holdings, financial situation, and needs.
The suitability rule was amended in 1990 to require that, for all accounts opened and recommendations made after January 1, 1991, members make reasonable efforts to obtain certain information from each non-institutional customer before executing a recommended transaction (excluding transactions in money market mutual funds) including the customer's financial status, tax status, investment objectives, and other information considered to be reasonable in making recommendations to customers.
In discussing suitability determinations, Notice to Members 96-32 included a statement that the NASD Rules of Fair Practice "requires a careful review of the appropriateness of transactions in low-priced, speculative securities, whether solicited or unsolicited." It is the reference to unsolicited transactions that NASD Regulation wishes to clarify.
A member's suitability obligation under Rule 2310 applies only to securities that have been recommended by the member. It would not apply, therefore, to situations in which a member acts solely as an order-taker for persons who, on their own initiative, effect transactions without a recommendation from the member (See SEC Release No. 34-27160, August 22, 1989). However, a broad range of circumstances may cause a transaction to be considered recommended, and this determination does not depend on the classification of the transaction by a particular member as "solicited" or "unsolicited." In particular, a transaction will be considered to be recommended when the member or its associated person brings a specific security to the attention of the customer through any means, including, but not limited to, direct telephone communication, the delivery of promotional material through the mail, or the transmission of electronic messages.
