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FINRA

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Tuesday, November 11, 2003
Nancy A. Condon 
202-728-8379
Michael Shokouhi 
202-728-8304



 

NASD Reminds Securities Firms of Obligations When Selling Non-Conventional Investments

Washington, DC – NASD today reminded securities firms that where customer investments fall outside the traditional forms of debt and equity securities, firms retain the responsibility to make sure these products are offered and sold according to all NASD sales conduct rules.

 

An NASD review indicates that brokers and investors, particularly retail investors, may be demonstrating an increased interest in products such as asset-backed securities, distressed debt, and derivative products which can be referred to as non-conventional investments (NCIs). NCIs often have complex terms, features and risks that are not easily understood.

 

“Firms should be aware that simply because a product does not fall within a standard investment category - does not in any way mean that their obligations are reduced but in fact, may require increased suitability analysis before a transaction is done,” said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. “Investors should also be extra attentive to the way NCIs are structured due to their inherit complexity.”

 

NCIs can be unusual and complex investment vehicles that may appear increasingly attractive to investors during periods in which traditional equity and fixed income investments come into disfavor. However, the unique and complex features of some NCIs may be difficult to understand and may obscure the risks. Accordingly, NASD reminds firms that they must conduct appropriate due diligence and suitability tests before offering these to the public.

 

Specifically the Notice to Members reminds brokerage firms offering NCIs of their obligations to:

  • Conduct adequate due diligence to understand the features of the product;
  • Perform a reasonable-basis suitability analysis;
  • Perform customer-specific suitability analysis in connection with any recommended transactions;
  • Provide a balanced disclosure of both the risks and rewards associated with the particular product, especially when selling to retail investors;
  • Implement appropriate internal controls; and
  • Train associated persons regarding the features, risks, and suitability of these products.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity 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 our Web site at www.nasd.com.