NASD Reminds Members of Obligations When Selling Hedge Funds
Washington, DC — NASD advised in a Notice to Members that it is concerned about the sales practices of some of its members, who sell direct interests in hedge funds and indirect interests through funds of hedge funds, especially given the recent surge in the popularity of the funds. The notice is available at http://www.nasdr.com/pdf-text/0308ntm.pdf.
"Brokerage firms must fulfill their investor protection obligations when selling hedge funds, including suitability and disclosure. Although we are not charged with regulating hedge funds, we will scrutinize carefully the activities of broker-dealers when they sell those products; those actions directly affect the investing public," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight.
A hedge fund can be described generally as a private and unregistered investment pool that accepts investors' money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets. Hedge funds vary in size and trading strategies, including categories such as: relative value hedge funds, event driven hedge funds, equity hedge funds, global asset allocator hedge funds, short selling hedge funds, sectoral hedge funds, and market neutral hedge funds.
As a result of a recent review of members that sell hedge funds and registered products (closed-end funds) that invest in hedge funds, NASD has become concerned that some members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers. Obligations of members when selling hedge funds and funds of hedge funds, include:
- Providing balanced disclosure in promotional efforts;
- Performing a reasonable-basis suitability determination;
- Performing a customer-specific suitability determination;
- Supervising associated persons selling hedge funds and funds of hedge funds; and
- Training associated persons regarding the features, risks, and suitability of hedge funds.
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 our Web Site at www.nasd.com.