NASD Warns Members About Hedge Fund Suitability

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The National Association of Securities Dealers, Washington, has issued a notice telling member companies that sell hedge funds to make sure that customers understand what they are doing.

“Although we are not charged with regulating hedge funds, we will scrutinize carefully the activities of broker-dealers when they sell those products,” Mary Schapiro, the NASDs head of regulatory policy and oversight, said in a statement about hedge fund sales. “Brokerage firms must fulfill their investor protection obligations when selling hedge funds, including suitability and disclosure.”

The typical hedge fund is an investment fund that gets around U.S. Securities and Exchange Commission restrictions on mutual funds by making shares available to a small number of sophisticated investors with large amounts of investable assets.

A few life insurance company brokerage units and other financial services organizations have been trying to find ways to make hedge funds available to investors with smaller accounts.

The NASD is worried that member companies may be failing to tell retail customers about all the risks involved or to determine whether hedge funds are suitable investments for specific customers, officials say.

Some companies may also be doing a poor job of training the representatives who sell the hedge funds, NASD says.

But two insurance-based financial advisors interviewed for this article say they are not sure whether the hype about hedge funds has translated into an actual increase in hedge fund marketing activity.

George Brown, owner of Brown Wealth Strategies Inc., Colmar, Pa., who holds the Chartered Life Underwriter designation, says no one has been marketing hedge funds to his firm. “I cant say that I see a lot of people selling them,” Brown says.

Sharon Kayfetz, chief operations officer at Personal Financial Consultants Securities Corp., Dublin, Calif., who also holds the CLU designation, is also skeptical about reports of a boom in hedge funds.

“We think its very specialized,” Kayfetz says. “Weve never sold any.”

Some Personal Financial clients probably have enough assets to invest in hedge funds, but most are far too cautious to actually invest in them, Kayfetz says.

Any advisors who do sell hedge funds should clearly pay at least as much attention to check suitability as they would when selling any other product, according to a spokesman for the Society of Financial Service Professionals, Bryn Mawr, Pa.

At the society, “not only do we think [members] would check suitability, we positively demand it,” the spokesman says.

A copy of the NASD notice is available at http://www.nasdr.com/pdf-text/0308ntm.pdf.


Reproduced from National Underwriter Edition, February 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.