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FINRA

 

FOR RELEASE:
CONTACT:
Tuesday, November 26, 2002
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304


NASD Board Approves Proposed Interpretive Material Regarding Investment Analysis Tools

Washington, D.C. — NASD's Board of Governors has approved a proposal allowing NASD member firms to provide their customers with interactive "investment analysis tools." Under the proposal, firms would also be able to provide customers with written reports that include the results that the tools produce. In general, these tools express in quantitative terms the likelihood that a specific event – as meeting a financial goal – might occur. The tool will not be permitted to predict that a particular outcome will in fact occur.

 

A customer using an investment analysis tool normally enters information regarding, for example, his or her age, financial situation, and investment objectives to receive personalized investment advice. With appropriate disclosures and other safeguards, customers should be able to use these tools to assist them in making judgments about how an investment or investment strategy might perform.

 

"Now more than ever, investors need information to help them make knowledgeable decisions about their investment strategies, including portfolio diversification," said Mary L. Schapiro, President of NASD Regulatory Policy and Oversight. "With necessary disclosures and oversight, investment analysis tools could enable investors to better understand how an investment strategy might perform. NASD's proposal strikes the proper balance between allowing broker-dealers to provide another investment tool and ensuring investor protection."

 

A firm can offer an investment analysis tool and related written reports only if:

 

  • The tool presents a range of probabilities that various investment outcomes might occur and does not state that a particular investment outcome will, in fact, occur.
  • The tool uses a mathematical process that can be audited and reviewed.
  • The member firm describes the criteria and methodology used, including the tool's limitations and key assumptions.
  • The firm explains that results may vary with each use and over time.
  • The firm describes the universe of investments considered and states that other investments not considered might have characteristics similar or superior to those that the tool analyzes.
  • The firm discloses if the tool searches, analyzes or in any way favors certain securities and, if so, the reasons for such selectivity.

 

Firms also would need to provide NASD with access to the tools (as well as any templates for written reports) for review prior to their use. Finally, to the extent that these tools recommend the purchase or sale of securities, NASD's suitability rule would apply.

 

The Securities and Exchange Commission, following public notice and comment, must approve the proposal before it takes effect.

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business – from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit www.nasd.com.