In the late 1990s, a broker at a major wirehouse posted a Web site providing general market information. The broker’s site was being visited by 1,000 potential customers a day. His firm’s reaction? They shut him down out of fear of the new technology, not because there was anything inappropriate in what he said or did. Another popular Web site by a broker at another major wirehouse was also shut down by his firm.
One year later, the wirehouses had their own Web sites, and have apparently spent significant sums of money in their creation.
For financial professionals, using the Internet for business is daunting, given the host of regulations that may apply to communications.
These regulations are an important concern for the industry. Firms and compliance officers across the country, as well as the regulators themselves, are attempting to develop guidelines for the use of the Internet by firms, customers, and brokers.
It is perceived that there is no “law of the Internet,” no regulations governing the use of the Net, and no rules to follow. But this is an incorrect perception. The Internet is nothing more than another means of communication, as far as the law and securities regulations are concerned. And while regulations need to be clarified to address specific applications of the new technology, a simple premise should keep most brokers in compliance with the rules: If you can’t do it over the telephone, and if you can’t do it by mail, you can’t do it over the Net.
Sending an e-mail message should not become a major regulatory concern. While the courts have been struggling with the concept of whether an e-mail message is a written or spoken message, the distinction is not as important in this industry. If your e-mail contains information that could be communicated by telephone or in writing, it should certainly be within the regulations.
The difference, and problem, comes in when one considers that virtually every state requires a broker and their firm to be registered in that state before making any kind of solicitation for the purchase or sale of a security to a resident of the state. With traditional communications, compliance with the state blue sky laws is a relatively simple matter brokers do not call or send mail into states where they are not registered. Compliance makes sure that the brokers know where they can and cannot call, and checks the outgoing mail.
However, the scope of the Internet makes these boundaries less certain. If you take an introductory letter, which many states consider a solicitation, and post it on the World Wide Web, it is available to anyone with a computer, regardless of where they live. Brokers could post a message to a newsgroup about a particular security or send e-mail to a group of individuals. When an investor in Texas downloads the letter and reads it, did the broker just solicit a transaction? Unfortunately, depending on the content of the letter, the traditional answer is yes. If the letter had been sent by mail, it would be deemed a solicitation.
There are perhaps finer distinctions that can be made between Web sites and e-mail or newsgroup postings. Nothing is “sent” in the Web situation, but there is a “sending” component in the e-mail and newsgroup scenarios. Is the solution to prohibit Web sites, e-mail and newsgroup postings by brokers and brokerage firms? Of course not. Tombstone ads run in 50 states, as do print advertisements. Restrictive legends, carefully crafted, should be designed to permit the use of Web pages until the regulations catch up with the technology.
With e-mail, as incredible as it seems, many brokerage firms are preventing their registered representatives from accessing e-mail. That is like preventing a broker from receiving mail or telephone calls “Sorry, John, we cannot control who you talk to with Mr. Bell’s newfangled thing, so you cannot use it.” The justification for the practice is, “We can’t monitor the e-mail, and have no control over the broker.” Nonsense firms can easily queue the office’s e-mail. E-mail can then be reviewed by compliance for the office before it is delivered to the mail host, just as regular mail is reviewed by compliance before it is delivered to the post office.
The truly amazing part in all of this is that the government is taking the lead here, and is actually giving the industry clues as to how it is thinking. The regulators are being progressive. The National Association of Securities Dealers (NASD), in an unpublished statement, said that electronic communications should be treated the same as traditional communications. The SEC has gone even farther, and published its approval of electronic delivery of prospectuses. (That release is available on the Web). A few states have changed their solicitation regulations to make it clear that Web use is not prohibited. Pennsylvania, in its “Internet Order,” made that clear in August, 1995.
This new technology means new opportunities for brokers and investors, better communications between the two, and a better and faster flow of information to investors. This can only lead to a more educated investor, and hopefully a more successful investor but only if the new technology is not denied or ignored by the brokerage industry.
Mark J. Astarita represents financial professionals in a wide variety of matters from his office in New York City. He is also the sponsor of the Securities Law Home page on the World Wide Web. This article originally appeared in the May, 1996 issue of Research Magazine.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.