[Federal Register Volume 67, Number 202 (Friday, October 18, 2002)]
[Notices]
[Pages 64431-64435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26514]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46639; File No. SR-MSRB-2002-11]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Regarding the Application of Rule G-19, on Suitability of 
Recommendations, to Online Communications

October 10, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``the Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 25, 2002, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') an interpretive notice regarding 
the application of Rule G-19, on suitability of recommendations, to 
online communications (the ``Online Suitability Notice'') as described 
in Items I, II, and III below, which Items have been prepared by the 
Board. The Online Suitability Notice is effective upon filing pursuant 
to Section 19(b)(3)(A) of the Act and paragraph (f)(1) of Rule 19b-4 
thereunder, in that the Online Suitability Notice is a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule. For the reasons 
discussed below, the Commission is granting accelerated approval of the 
Online Suitability Notice.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is issuing this Online Suitability Notice to remind 
brokers, dealers, and municipal securities dealers (``dealers'') that 
they have suitability obligations when they make recommendations to 
customers online. The text of the Online Suitability Notice is provided 
below.

Notice Regarding Application of Rule G-19, on Suitability of 
Recommendations and Transactions, to Online Communications

Background

    In the municipal securities markets, dealers \3\ typically 
communicate with investors one-on-one, in person, or by telephone. 
These dealer/customer communications are made to provide the investor 
with information concerning the municipal securities the dealer wants 
to sell and to allow the dealer to find out about the customer's 
investment objectives. Over the last few years there has been a 
dramatic increase in the use of the Internet for communication between 
dealers and their customers. Dealers are looking to the Internet as a 
mechanism for offering customers new and improved services and for 
enhancing the efficiency of delivering traditional services to 
customers. For example, dealers have developed online search tools that 
computerize the process by which customers can obtain and compare 
information on the availability of municipal securities of a specific 
type that are offered for sale by a particular dealer.\4\ 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. In consideration of this, 
the MSRB is issuing this notice to provide dealers with guidance 
concerning their obligations under MSRB Rule G-19, relating to 
suitability of recommendations,\5\ in the electronic environment.\6\
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    \3\ The term ``dealer'' is used in this notice as shorthand for 
``broker,'' ``dealer'' or ``municipal securities dealer,'' as those 
terms are defined in the Act. The use of the term in this notice 
does not imply that the entity is necessarily taking a principal 
position in a municipal security.
    \4\ The Bond Market Association's (``TBMA'') 2001 Review of 
Electronic Transaction Systems found that at the end of 2001, there 
were at least 23 systems based in the United States that allow 
dealers or institutional investors to buy or sell municipal 
securities electronically compared to just 3 such systems in 1997. 
While dealers are also developing electronic trading platforms that 
allow retail customers to buy or sell municipal securities online, 
the development of online retail trading systems for municipal 
securities lags far behind that for equities.
    \5\ Rule G-19 provides in pertinent part:
    (c) Suitability of Recommendations. In recommending to a 
customer any municipal security transaction, a [dealer] shall have 
reasonable grounds:
    (i) Based upon information available from the issuer of the 
security or otherwise, and
    (ii) Based upon the facts disclosed by such customer or 
otherwise known about such customer,
    For believing that the recommendation is suitable.
    \6\ Although the focus of this notice 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.
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    Rule G-19 prohibits a dealer from recommending transactions in 
municipal securities to a customer

[[Page 64432]]

unless the dealer makes certain determinations with respect to the 
suitability of the transactions.\7\ Specifically, the dealer must have 
reasonable grounds for believing that the recommendation is suitable 
based upon information available from the issuer of the security or 
otherwise and the facts disclosed by the customer or otherwise known 
about such customer.
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    \7\ This notice focuses on customer-specific suitability under 
Rule G-19. Under Rule G-19, a dealer must also have a reasonable 
basis to believe that the recommendation could be suitable for at 
least some customers. See e.g., Rule G-19 Interpretation--Notice 
Concerning the Application of Suitability Requirements to Investment 
Seminars and Customer Inquiries Made in Response to a Dealer's 
Advertisement, May 7, 1985, MSRB Rule Book (July 1, 2002) at 143; In 
re F.J. Kaufman and Company of Virginia, 50 S.E.C. 164, 168, 1989 
SEC LEXIS 2376, *10 (1989) (the ``reasonable basis'' obligation 
relates only to the particular recommendation, rather than to any 
particular customer). The SEC, in its discussion of municipal 
underwriters' responsibilities in a 1988 Release, noted that ``a 
broker-dealer recommending securities to investors implies by its 
recommendation that it has an adequate basis for the 
recommendation.'' Municipal Securities Disclosure, Release No. 34-
26100 (September 22, 1988) (the ``1988 SEC Release'') at text 
accompanying note 72.
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    As the rule states, a dealer's suitability obligation only applies 
to securities that the dealer recommends to a customer.\8\ A dealer or 
associated person who simply effects a trade initiated by a customer 
without a related recommendation from the dealer or associated person 
is not required to perform a suitability analysis. However, under MSRB 
Rules, even when a dealer does not recommend a municipal security 
transaction to a customer but simply effects or executes the 
transaction, the dealer is obligated to fulfill certain other important 
fair practice obligations. For example, under Rule G-17, when effecting 
a municipal security transaction for a customer, a dealer is required 
to disclose all material facts about a municipal security that are 
known by the dealer and those that are reasonably accessible.\9\ In 
addition, Rule G-18 requires that each dealer, when executing a 
municipal securities transaction for or on behalf of a customer as 
agent, make a reasonable effort to obtain a price for the customer that 
is fair and reasonable in relation to prevailing market conditions. 
Similarly, under Rule G-30, if a dealer engages in principal 
transactions with a customer, the dealer is responsible for ensuring 
that it is charging a fair and reasonable price. The MSRB wishes to 
emphasize the importance of these fair practice obligations even when a 
dealer effects a non-recommended transaction online.\10\
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    \8\ Similarly, the suitability rule does not apply where a 
dealer 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. Dealers should nonetheless remember that 
regardless of any determination of whether the dealer is making a 
recommendation and subject to the suitability requirement, the 
dealer is required to make reasonable efforts to obtain certain 
customer specific information pursuant to rule G-8(a)(xi) so that 
dealers can protect themselves and the integrity of the securities 
markets from customers who do not have the financial means to pay 
for transactions.
    \9\ See Rule G-17 Interpretation--Notice Regarding Rule G-17, on 
Disclosure of Material Facts, March 20, 2002, MSRB Rule Book (July 
1, 2002) at 135.
    \10\ On April 30, 2002, the Commission approved a proposed rule 
change relating to the manner in which dealers fulfill their fair 
practice obligations to certain institutional customers. Release No. 
34-45849 (April 30, 2002), 67 FR 30743. See Rule G-17 
Interpretation--Notice Regarding the Application of MSRB Rules to 
Transactions With Sophisticated Municipal Market Professionals 
(``SMMPs'') (the ``SMMP Notice''), MSRB Rule Book (July 1, 2002) at 
136. The SMMP Notice recognizes the different capabilities of SMMPs 
and retail or non-sophisticated institutional customers and provides 
that dealers may consider the nature of the institutional customer 
when determining what specific actions are necessary to meet the 
dealer's fair practice obligations to such customers. The SMMP 
Notice provides that, while it is difficult to define in advance the 
scope of a dealer's fair practice obligations with respect to a 
particular transaction, by making a reasonable determination that an 
institutional customer is an SMMP, then certain of the dealer's fair 
practice obligations remain applicable but are deemed fulfilled.
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Applicability of the Suitability Rule to Electronic Communications--
General Principles

    There has been much debate about the application of the suitability 
rule to online activities.\11\ Industry commentators and regulators 
have debated two questions: 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. The NASD published NASD Notice to Members 01-23, Online 
Suitability-Suitability Rule and Online Communication (the ``NASD 
Online Suitability Notice'') (April 2001) to provide guidance to its 
members in April 2001.\12\ In answer to the first question, the MSRB, 
like the NASD, believes that the suitability rule applies to all 
recommendations made by dealers to customers--including those made via 
electronic means--to purchase, sell, or exchange a security. Electronic 
communications from dealers to their customers clearly can constitute 
recommendations. The suitability rule, therefore, remains fully 
applicable to online activities in those cases where the dealer 
recommends securities to its customers.
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    \11\ See generally Report of Commissioner Laura S. Unger to the 
SEC, On-Line Brokerage: Keeping Apace of Cyberspace, at n. 64 (Nov. 
1999) (``Unger Report'') (discussing various views espoused by 
online brokerage firms, regulators and academics on the topic of 
online suitability); Developments in the Law--The Law of Cyberspace, 
112 Harv. L. Rev. 1574, 1582-83 (1999) (The article highlights the 
broader debate by academics and judges over whether ``to apply 
conventional models of regulation to the Internet.'').
    \12\ The guidance contained in this notice is intended to be 
consistent with the general statements and guidelines contained in 
the NASD Online Suitability Notice.
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    With regard to the second question, the MSRB does not seek to 
identify in this notice all of the types of electronic communications 
that may constitute recommendations. As the MSRB has often emphasized, 
``[w]hether a particular transaction is in fact recommended depends on 
an analysis of all the relevant facts and circumstances.'' \13\ 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.
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    \13\ See e.g., Rule G-19 Interpretive Letter dated February 17, 
1998, MSRB Rule Book (July 1, 2002) at 144.
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    The MSRB also recognizes that many forms of electronic 
communications defy easy characterization. The MSRB believes this is 
especially true in the online municipal securities market, which is in 
a relatively early stage of development. Nevertheless, the MSRB offers 
as guidance the following general principles for dealers to use in 
determining whether a particular communication could be deemed a 
recommendation.\14\ 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 dealer to a customer reasonably would be viewed as 
a ``call to action,'' or suggestion that the customer engage in a 
securities transaction. Dealers 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

[[Page 64433]]

from the dealer.\15\ Another principle that dealers should keep in mind 
is that, in general, the more individually tailored the communication 
is to a specific customer or a targeted group of customers about a 
security or group of securities, the greater the likelihood is that the 
communication may be viewed as a recommendation.
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    \14\ These general principles were first enunciated in the NASD 
Online Suitability Notice.
    \15\ For example, if a dealer transmitted a rating agency 
research report to a customer at the customer's request, that 
communication may not be subject to the suitability rule; whereas, 
if the same 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.
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Scope of the Term Recommendation

    As noted earlier, the MSRB agrees with and has in this guidance 
adopted the general principles enunciated in the NASD Online 
Suitability Notice as well as the NASD guidelines for evaluating 
suitability obligations discussed below. While the MSRB believes that 
the additional examples of communications that do not constitute 
recommendations provided by the NASD in its Online Suitability Notice 
are useful instruction for dealers who develop equity trading web 
sites, as the examples are based upon communications that exist with 
great regularity in the Nasdaq market, the MSRB believes that the 
examples have limited application to the types of information and 
electronic trading systems that are present in the municipal securities 
market.
    For example, the NASD's third example of a communication that is 
not a recommendation describes a system that permits customer-directed 
searches of a ``wide-universe'' of securities and references all 
exchange-listed or Nasdaq securities, or externally recognized indexes. 
\16\ The NASD example therefore applies to dealer web sites that 
effectively allow customers to request lists of securities that meet 
broad objective criteria from a list of all the securities available on 
an exchange or Nasdaq. These are examples of groups of securities in 
which the dealer does not exercise any discretion as to which 
securities are contained within the group of securities shown to 
customers. This example makes sense in the equity market where there 
are centralized exchanges and where electronic trading platforms 
routinely utilize databases that provide customer access to all of the 
approximately 7,300 listed securities on Nasdaq, the NYSE and Amex. 
However, no dealer in the municipal securities market has the ability 
to offer all of the approximately 1.3 million outstanding municipal 
securities for sale or purchase. The municipal securities market is a 
fragmented dealer market. Municipal securities do not trade through a 
centralized exchange and only a small number of securities 
(approximately 10,000) trade at all on any given day. Therefore, there 
is no comparable central exchange that could serve as a reference point 
for a database that is used in connection with municipal securities 
research engines. The databases used by dealer systems typically are 
limited to the municipal securities that a dealer, or a consortium of 
dealers, holds in inventory. In these types of systems the customer's 
ability to search for desirable securities that meet the broad, 
objective criteria chosen by the customer (e.g., all insured investment 
grade general obligation bonds offered by a particular state) is 
limited. The concept of a wide universe of securities, which is central 
to all of the NASD's examples, is thus difficult to define and has 
extremely limited, or no, application in the municipal securities 
market.
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    \16\ NASD Online Suitability Notice at 3.
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    Given the distinct features of the municipal securities market and 
the existing online trading systems, the MSRB believes it would be 
impractical to attempt to define the features of an electronic trading 
system that would have to be present for the system transactions to not 
be considered the result of a dealer recommendation. The online trading 
systems for municipal securities that are in place today limit customer 
choices to the inventory that the dealer or dealer consortium hold, and 
therefore, the dealer will always have a significant degree of 
discretion over the securities offered to the customer. A system that 
allows this degree of dealer discretion is a dramatic departure from 
the types of no recommendation examples provided by the NASD guidance, 
and thus, these communications must be carefully analyzed to determine 
whether or not a recommendation has been made.
    The MSRB, however, does believe that the examples of communications 
that are recommendations provided in the NASD Online Suitability Notice 
are communications that take place in the municipal securities market. 
Therefore, the MSRB has adopted these examples and generally would view 
the following communications as falling within the definition of 
recommendation:
    [sbull] A dealer sends a customer-specific 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 
municipal security.\17\
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    \17\ Note that there are instances where sending a customer an 
electronic communication that highlights a particular municipal 
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 dealer 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 account 
activity alerts, market alerts, or rating agency changes) or (2) 
research announcements (e.g., sector reports) that are not 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 dealer is suggesting that the customer take 
action in response to the communication.
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    [sbull] A dealer sends its customers an e-mail stating that 
customers should be invested in municipal securities from a particular 
state or municipal securities backed by a particular sector (such as 
higher education) and urges customers to purchase one or more stocks 
from a list with ``buy'' recommendations.
    [sbull] A dealer 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 
dealer in this instance then sends (or displays to) the customer a list 
of specific municipal securities the customer could buy or sell to meet 
the investment goal the customer has indicated.\18\
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    \18\ Note, 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 municipal 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.
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    [sbull] A dealer 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 municipal 
security.

Dealers should keep in mind that these examples are meant only to 
provide guidance and are not an exhaustive list of communications that 
the MSRB does consider to be recommendations. As

[[Page 64434]]

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. Dealers, 
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

    Dealers should consider, at a minimum, the following guidelines 
when evaluating their suitability obligations with respect to municipal 
securities transactions.\19\ None of these guidelines is determinative 
of whether a recommendation exists. However, each should be considered 
in evaluating all of the facts and circumstances surrounding the 
communication and transaction.
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    \19\ These guidelines were originally set forth in the NASD 
Online Suitability Notice.
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    [sbull] A dealer 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.\20\ The MSRB, however, encourages dealers 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.\21\
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    \20\ Although a 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 dealer that sends a customer or group of customers 
information about a security might include a statement that the 
dealer is not providing the information based on the customers' 
particular financial situation or needs. Dealers 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 dealer of particular municipal securities to particular 
customers.
    Dealers, however, should refer to previous guidelines issued by 
the SEC that may be relevant to these 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 dealers. See SEC Guidance on the 
Use of Electronic Media, Release Nos. 34-7856, 34-42728, IC-24426, 
65 FR 25843 at 25848-25849 (April 28, 2000).
    \21\ The MSRB believes that a dealer should, at a minimum, 
clearly explain the limitations of its search engine and the 
decentralized nature of the municipal securities market. The dealer 
should also clearly explain that securities that meet the customer's 
search criteria might be available from other sources.
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    [sbull] Dealers 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.\22\
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    \22\ The MSRB notes that there are circumstances where the act 
of sending a communication to a specific group of customers will not 
necessarily implicate the suitability rule. For instance, a 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, dealers may incur suitability 
obligations when they send a communication to a large group of 
customers urging those customers to invest in a municipal security.
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    [sbull] Dealers should scrutinize any communication to a customer 
that suggests the purchase, sale, or exchange of a municipal 
security'as opposed to simply providing objective data about a 
security'to determine whether a recommendation is being made.\23\
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    \23\ As with the other general guidelines discussed in this 
notice, the presence of this factor alone does not automatically 
mean that a recommendation has been made.
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    [sbull] A dealer's transmission of unrequested information will not 
necessarily constitute a recommendation. However, when a dealer decides 
to send a particular customer unrequested information about a security 
that is not of a generalized or administrative nature (e.g., 
notification of an official communication), the dealer should carefully 
review the circumstances under which the information is being provided, 
the manner in which the information is delivered to the customer, the 
content of the communication, and the original source of the 
information. The dealer should perform this review regardless of 
whether the decision to send the information is made by a 
representative employed by the dealer or by a computer software program 
used by the dealer.
    [sbull] Dealers should be aware that the degree to which the 
communication reasonably would influence an investor to trade a 
particular municipal security or group of municipal 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.
    The MSRB emphasizes that the factors listed above are guidelines 
that may assist dealers 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 dealer 
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 principles and 
guidelines to assist in determining when electronic communications 
constitute recommendations, thereby triggering application of the 
MSRB's suitability rule. The MSRB acknowledges the numerous benefits 
that may be realized by dealers and their customers as a result of the 
Internet and online brokerage services. The MSRB emphasizes that it 
neither takes a position on, nor seeks to influence, any dealer's or 
customer's choice of a particular business model in this electronic 
environment. At the same time, however, the MSRB urges dealers both to 
consider carefully whether suitability requirements are adequately 
being addressed 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, the MSRB will continue 
to work with regulators, members of the industry and the public on 
these and other important issues that arise in the online trading 
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, the Board included statements 
concerning the purpose of and basis for the Online Suitability Notice. 
The text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Section 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

[[Page 64435]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    Dealers are increasingly offering online brokerage services to 
their retail customers. The Internet gives retail customers the tools 
to manage their own accounts and the ability to obtain access to 
investment information. Online trading offers many benefits to dealers 
and retail customers, but dealers must continue to fulfill their 
suitability obligations in the online environment whenever they 
recommend to a customer the purchase, sale or exchange of a municipal 
security.
    The Online Suitability Notice states that the suitability rule 
(MSRB Rule G-19) remains fully applicable to online activities where a 
dealer recommends a municipal securities transaction to its customers. 
The Online Suitability Notice does not expand or create new obligations 
under the suitability rule, nor does it establish a ``bright line'' 
test for determining whether a particular communication constitutes a 
recommendation for purposes of the suitability rule. The MSRB instead 
articulates several broad principles that dealers can use in evaluating 
whether a particular online communication could fall within the 
definition of recommendation for purposes of the suitability rule. The 
Online Suitability Notice also provides guidance to members through the 
use of examples of communications that the MSRB believes fall within 
the definition of recommendation.
(2) Statutory Basis
    The Board believes the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Act, which provides that the Board's rules 
shall:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade * * * 
to remove impediments to and perfect the mechanism of a free and 
open market in municipal securities, and, in general, to protect 
investors and the public interest.

    The Board believes that dealers that make recommendations to 
customers in the online environment have an obligation to determine 
whether recommendations are suitable for such customers. The MSRB 
believes that this Online Suitability Notice is necessary to protect 
investors and the public interest with respect to online trading.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, since it would apply equally to 
all brokers, dealers and municipal securities dealers.

(C) Self-Regulatory Organization's Statement on Comments Received on 
the Proposed Rule Change by 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 Online Suitability Notice is effective upon filing pursuant to 
Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(1) thereunder, in that 
it is a stated policy, practice or interpretation with respect to the 
meaning, administration, or enforcement of an existing rule. At any 
time within 60 days of this filing, 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

    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, NW., Washington, DC 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change 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 the filing will also be 
available for inspection and copying at the Board's principal offices. 
All submissions should refer to File No. SR-MSRB-2002-11 and should be 
submitted by November 8, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26514 Filed 10-17-02; 8:45 am]
BILLING CODE 8010-01-P