Interpretive Letter to Craig S. Tyle, Investment Company Institute

November 11, 1997

Craig S. Tyle
General Counsel
Investment Company Institute
1401 H Street, N.W.
Suite 1200
Washington, D.C. 20005-2148

Re: Recommendations of the Investment Company Institute Concerning Hyperlinks

Dear Mr. Tyle

I am writing in response to the recommendations of the Investment Company Institute concerning the application of NASD rules to third-party material that is "hyperlinked" from a member's Internet site.¹ The Institute presented three circumstances in which, in the Institute’s view, an NASD member should not be responsible for the content and filing of material to which the member’s Internet site has been linked.

1. Ongoing Hyperlinks to Internet Sites

The first situation arises when a member provides an "on-going hyperlink" to an Internet site of a third party. The Institute's letter describes an "on-going hyperlink" as follows:

• the hyperlink is continuously available to investors who visit the member’s site;
• the member has no discretion to alter the information on the third-party site;
• investors have access to the hyperlinked site whether or not it contains favorable material about the member; and
• the linked site could be updated or changed by the third party and investors would nonetheless be able to use the hyperlink.

When a member’s Internet site contains such an ongoing hyperlink to another Internet site of an independent third party, the staff would not hold the member responsible for the content or filing of information contained in the site.² Nevertheless, as your letter indicates, the member may not establish a hyperlink to a site that the member knows or has reason to know contains false or misleading information about the member’s products or services. Moreover, if the third-party site has been produced by another member, then that member would be responsible for the contents of its site.

The Institute’s letter also states that the member should be allowed "to suspend or terminate the hyperlink due to mechanical or technical difficulties or similar problems." The staff believes that a member’s ability to suspend or terminate the hyperlink due to mechanical or technical difficulties would not, by itself, demonstrate that the member is responsible for information contained in the third-party site. Nevertheless, if a member suspends or terminates a hyperlink, the member must be prepared to demonstrate that the suspension or termination was due to mechanical or technical difficulties, and not the presentation of unfavorable information (or the absence of favorable information) about the member’s products and services.³

2. Hyperlinks to Educational Material

The Institute recommends that if a member provides a hyperlink to information in an Internet site that is intended for use by the public for "general reference and education purposes," and the information does not refer to the member, the member should not be responsible for the content of the linked site. If a member hyperlinks to any independent third-party site that does not refer to the member or any of its affiliates and that is meant to educate investors about principles of investing or economic, tax, or financial issues, then the staff would not hold the member responsible for the content or filing of the independent third-party site. Of course, if the third-party site has been produced by another member, then that member would be responsible for the contents of its site.

3. Hyperlinks to a Home Page

The Institute recommends that if a member provides a hyperlink to the home page of a third-party’s Internet site that does not meet the conditions of the first or second situation discussed above, the member should not be responsible for the content or filing of the entire linked site. The Institute’s letter states that investors accessing a home page usually have the option of hyperlinking to other parts of the Internet site.

The staff disagrees with the Institute’s conclusion concerning hyperlinks to a home page. Under the Institute’s recommendation a member could hyperlink to the home page of an investment newsletter that contains a misleading article about the member’s mutual fund. The fact that an investor could instead hyperlink to other articles in the newsletter would not discharge the member from responsibility for the misleading one. Nor does the fact that the investor must click a mouse or otherwise undertake a simple additional step to reach the misleading article from the home page, create such a barrier between the home page and the misleading article as to justify the Institute’s recommendation.

* * *

I hope that this letter has helped to clarify the issues that you have raised. Please feel free to contact me with any further questions you might have about these issues.

Sincerely,

Thomas Selman

1 The Institute submitted its recommendations in a letter to Clark Hooper dated October 15, 1996. The Institute’s letter also recommended that the NASD permit members to file Internet sites in an electronic rather than a paper form and that the NASD revise its filing fees to reflect the filing of electronic communications. The staff is considering possible enhancements to our filing process and fee structure, and we will consider the issues raised in the Institute’s letter as part of that review.

2 By "independent third party," we mean any entity that is independent of the member and its affiliates, and whose services are not procured by the member or any of its affiliates to develop or provide information on the third-party site.

3 For purposes of this letter, we are not commenting on a member's possible responsibility to suspend or terminate a hyperlink when it has come to the member's attention that the hyperlinked site contains false or misleading information.