Wall Street Journal (March 21, 2001 11:01 pm) —  The National Association of Securities Dealers rejected arguments that online-brokerage firms should be exempt from the suitability rules that have long governed how Wall Street makes investment recommendations.

In a much-anticipated policy paper issued Tuesday, the NASD clarified its view on certain widespread but questionable practices. For example, an e-mail advising an online customer to purchase a particular stock would qualify as a recommendation and be subject to industry regulations.

But when online-brokerage firms provide third-party research that may include stock recommendations, the industry’s self-policing organization said it generally wouldn’t hold brokerage firms responsible in such cases. In fact, the new guidelines will do little overall to restrict current practices and procedures at online brokerage firms.

Mary Schapiro, president of NASD Regulation, said the policy is not likely to affect pending arbitration cases because it sets no new policies. But it will give online brokers greater guidance as they continue to build their customer base.

“There had been the view that if you weren’t talking directly to your customers face to face or on the phone, suitability issues didn’t arise,” Ms. Schapiro said. “What we’re saying is, regardless of which medium you make a recommendation, there are suitability issues.”

Some advocates for investors said the suitability policy leaves many issues unclear and doesn’t go far enough to shield customers from inappropriate recommendations. “This new policy statement does so little to protect investors,” said Tracy Pride Stoneman, a lawyer in Colorado Springs, Colo., and director of the Public Investors Arbitration Bar Association.

The NASD’s longstanding suitability rule states that in recommending securities for a customer, a broker should have reasonable grounds for believing that the transaction is suitable for a particular customer.

Laura Unger, acting chairwoman of the Securities and Exchange Commission, praised the NASD’s latest policy-statement as “very thoughtful and measured,” and said the SEC is unlikely to seek any major changes before it becomes a final rule for the industry.

Ms. Unger, one of the first to raise the issue of suitability rules for online brokers, acknowledged that some critics say the report lack specifics. “It’s difficult to come up with specific rules concerning suitability because each case is so dependent on the facts and circumstances surrounding it,” she said.

Michael Hogan, general counsel for the online broker CSFBdirect and chairman of the committee that developed the policy, said the guidelines will be helpful to firms as they accelerate their creation a second generation of tools for customers. “We’re still in the early stage of delivery and tools,” Mr. Hogan said.

Marta von Lowenfeldt, a spokeswoman for Charles Schwab Corp., the No. 1 online-brokerage firm, said the San Francisco company is still looking at the policy but was generally pleased. “It endorses several of our principles regarding general information on the Web, e-mail alerts and searching tools,” Ms. von Lowenfeldt said.

Like those of most online brokers, Schwab’s existing online resources for investors seeking information aren’t likely to raise red flags under the new guidelines.

A spokesman for Ameritrade Holding Corp. said the company is careful to provide resources and tools that are consistent with the needs of its customers without giving recommendations, and the firm’s offerings meet the tests for suitability under NASD guidelines.

Marc Beauchamp, executive director of the North American Securities Administrators Association, said the policy came only after tough negotiation between the securities industry and regulators.

“It’s not a comprehensive statement, but it is a beginning,” Mr. Beauchamp said. “You have to understand how difficult it was to get brokerage firms, officials from the SEC, an state securities regulators to agree on what was filed. There is a lot of uncertainty around this issue and I am sure we are just starting on it.”