NASD Wants to OK Use of Predictive Tools by Brokers

You can't keep investors from getting hammered in a bear market. But you can at least offer them some guidance about the long-term implications of different portfolio choices and economic scenarios by using predictive analytical tools, long a staple of independent advisors. Now, NASD member firms want to revise the association's Rule 2210 to make sure that they, too, can use these tools, including

You can't keep investors from getting hammered in a bear market. But you can at least offer them some guidance about the long-term implications of different portfolio choices and economic scenarios by using predictive analytical tools, long a staple of independent advisors.

Now, NASD member firms want to revise the association's Rule 2210 to make sure that they, too, can use these tools, including Monte Carlo simulations, to help clients make investment decisions. Up to now, that rule has been interpreted as a ban on “technological tools that produce simulations and statistical analyses.”

Don Phillips, Morningstar managing director, thinks the NASD is making the right move. “As our knowledge about markets gets better, it's important that reps have the ability to access these tools,” he says, while acknowledging that, in the wrong hands, they can be misused.

Meanwhile, SIA officials suggest that before any revisions are made, the term “investment analysis tool” must be clearly defined. In a letter commenting on the proposed rule change, the industry group said it believes that certain types of forward-looking analyses, including hypothetical outcomes based on mathematical principles, already are allowed.

The SIA also wants to eliminate a proposed revision to the rule that would require firms to register the tools with the NASD, to limit the range of necessary disclosures and to clarify what responsibility a firm has for a client using such tools.

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