How sending out promotional materials can affect suitability

Q: I mailed out some in-house promotional material regarding a security that my client asked me about. Even though I didn’t bring this to the client’s attention, my manager says that I need to mark the order as solicited and obtain additional suitability info from the client because I sent out the promotional material. I thought that as long as I didn’t bring the investment to the client’s attention, the order was considered “unsolicited.” Can you please help me understand the rules in this case?

A: I’m afraid the answer to your question isn’t necessarily a clear-cut one.

FINRA’s predecessor NASD, in its Notice to Members 96-60, states in part that:

“[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.”

While that would seem pretty specific, the NASD went and muddied the waters when, in a March 1997 letter the regulator said that, “Notice to Members 96-60 was intended to clarify the existing suitability obligations of NASD members. The quoted language was not meant to describe the content of communications that may result in a recommendation or to suggest that every statement that mentions a security would be considered a recommendation.”

They went on to note that member firms have adopted policies and procedures to address when a registered representative may provide factual responses to questions from clients that won’t rise to the level of a “recommendation” and that Notice to Members 96-60 “should not necessitate a reappraisal of the adequacy of those procedures.” They clarified that a reference to a mutual fund in an advertisement or piece of sales literature “would not by itself constitute a ‘recommendation’ for purposes of Rule 2310.” (Note that NASD Rule 2310 has since been replaced by FINRA Rule 2111).

In 2001, FINRA again addressed this issue in Notice to Members 01-23. This time around, the regulator provided examples of electronic communications they considered to be either within, or outside, the definition of "recommendation” and set forth guidelines to assist members in evaluating whether a particular communication could be viewed as a "recommendation." Some of the guidelines may be especially pertinent to your situation.

Most notably, there’s a comment that says that if a member uses data-mining technology to analyze a customer’s financial activity, and then, based on that information, sends (or “pushes”) specific investment suggestions to the customer, that could be considered a recommendation.

In your case, I would ask the client how he first heard of the investment. It’s possible that your manager was aware that your firm was “pushing” certain “suggestions” to clients based on their online activity and that’s how the client first heard of the investment. His reaching out to you and asking for more information would then have been as a result of that initial suggestion by the firm, thereby making this a “recommendation.”