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Does Your Brokerage Firm Follow The Law?

The brokerage industry is said to be the mostmaterial's audience - i.e. publication in
highly regulated business field in the Unitedperiodicals, radio or television broadcast,
States.prerecorded telemarketing messages,
billboards, phonebook ads, etc. - is
Brokerage firms must register with variousconsidered advertising. The audience for
governmental and private regulators, complyadvertising  is  the  general  public.
with arduous paperwork and record keeping
requirements, and wade through multipleBy contrast, sales literature is targeted to
layers of red tape to gain the regulatoryspecific individuals or subsets of the
approval necessary just to make some of thegeneral  populace.
most  basic  business  decisions.
This distinction is important because there
But despite all of this, brokerage firmsare different rules for each. All advertising
occasionally run afoul of the law. As anmaterials must be filed with and approved by
individual investor, it is important to havethe  NASD.
a basic understanding of what is required of
brokerage  firms.The only exception to this rule is for
prospectuses and other such materials
Brokerages that take short cuts and cutapproved by the SEC (preliminary
corners in terms of regulatory compliance areprospectuses, offering circulars, tombstones,
much more likely to be guilty of otheretc.) Since advertising is, by definition,
transgressions - the type of transgressionsmade available to broad audiences, it is
that  can  cost  you  money.difficult for brokerages to skirt the NASD's
filing  requirements.
The National Association of Securities
DealersAfter all, regulators are just as likely to
see the unregistered ads as anyone, so any
The National Association of Securitiesunapproved broadcasts or publications are
Dealers (NASD) is a brokerage regulatorydealt  with  behind  the  scenes by the NASD.
agency second only to the governmental
Securities and Exchange Commission (SEC) inSales literature is targeted marketing, and
terms  of  importance.individual investors need to be much more
wary of all such correspondence than
The NASD is known as a self-regulatorycommercials  they  may  see  on  TV.
organization (SRO) in that it is not
affiliated with the government in any way,Firstly, all sales literature must identify
but  it  operates  under  SEC  oversight.its source - the brokerage firm's name, the
person who prepared the materials, and the
The NASD regulates all investment banking anddate  it  was  created.
securities underwriting activity. It also
regulates trading in the OTC (over theSecondly, if the sales literature recommends
counter) market of mostly small cap stocks,the purchase of a stock, it must identify the
and  the NASDAQ, which is named for the NASD.stock's most current price, and the price
range at which the stock is a recommended
It is this authority of the NASDAQ that makesbuy. The brokerage must also disclose the
it virtually impossible to conduct businessmarket's general direction, any buy/sell/hold
as a brokerage firm without membership to therecommendations made for similar securities
NASD.in the past 12 months, and data revealing all
recommendations (winners and losers) made in
Brokerage  Firms'  Use  of  the  NASD  Namethe  past  year.
In order for the employees of brokerage firmsAdditional  Sales  Literature  Requirements
to sell financial products or give financial
advice, they must be approved by the NASD.Mutual funds are a favorite financial product
Brokerage firms must also be registeredfor brokerage firms to market. When
members of the NASD, and while thisrecommending mutual funds in sales
affiliation does carry with it some promiseliterature, brokerages should use 10-year
of honesty and professionalism, it is illegalcharts to show the fund's performance in
for a brokerage firm use the NASD's name invarying market conditions. If charts are
any manner that would suggest that the NASDused, the source of the data must be
has  endorsed  it.identified.
Brokerages may use the phrase, "member of theThe fund's highest sales charge possible must
NASD," but they may not put undue emphasis onbe revealed, and the brokerage firm may not
it. If your brokerage firm or any of itscompare the fund being marketed to any other
brokers try to imply that they are endorsedinvestment product in terms of safety or
by the NASD, it is a near surefire sign thatperformance.
they lack other, legitimate credentials and
references.Finally, the most obvious violation of all is
for a brokerage firm to guarantee performance
Brokerage  Firms'  Sales  Literatureof an investment product in any way. Any
brokerage firm that attempts to masquerade
Probably the most common manner in whichopinions as facts is in willful violation of
brokerage firms violate NASD rules is throughNASD regulations, not to mention standard
their noncompliance with sales literatureprofessional  ethics.
requirements.
Any company that would be so careless in its
It is important to note that there is aregulatory compliance is likely to be
distinction made between advertising andcareless with your investment capital, and
sales literature. Anything in which theshould be avoided without exceptions.
brokerage firm has no control over the



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