2315. Recommendations to Customers in OTC Equity Securities
This rule is no longer applicable. NASD Rule 2315 has been superseded by FINRA Rule 2114. Please consult the appropriate FINRA Rule.
Preliminary Note: The requirements of this Rule are in addition to other existing member obligations under NASD rules and the federal securities laws, including obligations to determine suitability of particular securities transactions with customers and to have a reasonable basis for any recommendation made to a customer. This Rule is not intended to act or operate as a presumption or as a safe harbor for purposes of determining suitability or for any other legal obligation or requirement imposed under NASD rules or the federal securities laws.
(a) Review Requirement
No member or person associated with a member shall recommend that a customer purchase or sell short any equity security that is published or quoted in a quotation medium and that either (1) is not listed on Nasdaq or on a national securities exchange or (2) is listed on a regional securities exchange and does not qualify for dissemination of transaction reports via the Consolidated Tape, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.
(b) Definitions
(1) For purposes of this Rule, the term "current financial statements" shall include:
(A) For issuers that are not foreign private issuers,
(i) a balance sheet as of a date less than 15 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 6 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 6 months before the date of the recommendation;
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, bank and insurance regulators; and
(v) all publicly available financial information filed with the Commission during the 12 months preceding the date of the recommendation contained in registration statements or Regulation A filings.
(B) For foreign private issuers,
(i) a balance sheet as of a date less than 18 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 9 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 9 months before the date of the recommendation, if any such statements have been prepared by the issuer; and
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, bank and insurance regulators.
(2) For purposes of this Rule, the term "quotation medium" shall mean any:
(A) System of general circulation to brokers or dealers that regularly disseminates quotations or indications of interest of identified brokers or dealers; or
(B) Publication, alternative trading system or other device that is used by brokers or dealers to disseminate quotations or indications of interest to others.
(c) Compliance Requirements
(1) A member shall designate a registered person to conduct the review required by this Rule. In making such designation, the member must ensure that:
(A) Either the person is registered as a Series 24 principal, or the person's conduct in complying with the provisions of this Rule is appropriately supervised by a Series 24 principal; and
(B) Such designated person has the requisite skills, background and knowledge to conduct the review required under this Rule.
(2) The member shall document the information reviewed, the date of the review, and the name of the person performing the review of the required information.
(d) Additional Review Requirement for Delinquent Filers
If an issuer has not made current filings required by the issuer's principal financial or securities regulatory authority in its home jurisdiction, including the Commission, foreign regulatory authorities, or bank and insurance regulators, such review must include an inquiry into the circumstances concerning the failure to make current filings, and a determination, based on all the facts and circumstances, that the recommendation is appropriate under the circumstances. Such a determination must be made in writing and maintained by the member.
(e) Exemptions
(1) The requirements of this Rule shall not apply to:
(A) Transactions that meet the requirements of Rule 504 of Regulation D under the Securities Act of 1933 ("Securities Act") and transactions with an issuer not involving any public offering pursuant to Section 4(2) of the Securities Act;
(B) Transactions with or for an account that qualifies as an "institutional account" under Rule 3110(c)(4) or with a customer that is a "qualified institutional buyer" under Rule 144A promulgated under the Securities Act or "qualified purchaser" under Section 2(a)(51) of the Investment Company Act of 1940;
(C) Transactions in an issuer's securities if the issuer has at least $50 million in total assets and $10 million in shareholder's equity as stated in the issuer's most recent audited current financial statements, as defined in this Rule;
(D) Transactions in securities of a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934 and/or insurance company subject to regulation by a state or federal bank or insurance regulatory authority;
(E) A security with a worldwide average daily trading volume value of at least $100,000 during each month of the six full calendar months immediately before the date of the recommendation;
(F) A convertible security, if the underlying security meets the requirement of Section (e)(1)(E) of this Rule;
(G) A security that has a bid price, as published in a quotation medium, of at least $50 per share. If the security is a unit composed of one or more securities, the bid price of the unit divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be at least $50; or
(2) Pursuant to the Rule 9600 Series, NASD, for good cause shown after taking into consideration all relevant factors, may exempt any person, security or transaction, or any class or classes of persons, securities or transactions, either unconditionally or on specified terms, from any or all of the requirements of this Rule if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.
| Adopted by SR-NASD-99-04 eff. Oct. 30, 2002. Selected Notice: 02-66. |