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Examples of Instances in Which the NASDR Requires Suitability Information in Addition to that Required by Rule of Conduct 2310
Pursuant to SEC Rule 15g-9, it is unlawful to sell a penny stocks governed by this Rule unless the broker-dealer: (1) obtains from the customer information concerning the person’s financial situation, investment experience, and investment objectives; (2) determines that the transaction is suitable for the customer and that the customer has sufficient knowledge and experience in financial matters such that the person reasonably may be expected to be capable of evaluating the risks of transactions in penny stocks; and (3) obtains from the customer an executed copy of a written statement setting forth the basis on which the broker-dealer made the determination required by (2).
Speculative Low-Priced Securities
In addition to the general suitability standard of NASDR Rule of Conduct 2310, NASDR Rule of Conduct IM-2310-2(b)(1) requires broker-dealer recommending speculative low-priced securities "to obtain information concerning the customers’ other securities holdings, their financial situation and other necessary data." As noted by the NASDR in this Rule, "The principle here is that [recommending speculative low-priced securities], by its very nature, involves a high probability that the recommendation will not be suitable for at least some of the persons solicited. This has particular application to high pressure telephone sales campaigns."
NASDR Rule of Conduct IM-2860-2(a) requires broker-dealers recommending options transactions to customers who are natural persons to obtain the following information at a minimum: (1) investment objectives (e.g., safety of principal, income, growth, trading profits, speculation); (2) employment status (name of employer, self-employed or retired); (3) estimated annual income from all sources; (4) estimated net worth (exclusive of family residence); (5) estimated liquid net worth (cash, securities, other); (6) marital status; (7) number of dependents; (8) age; and (9) investment experience and knowledge (e.g., number or years, size, frequency and type of transactions) of options, stocks and bonds, commodities, and other investments. In addition, the NASDR’s rule prohibits any person recommending to a customer an opening transaction in any option contract unless the person making the recommendation "has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract."