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NASD Looks To Approve Broker, Brokerage Firm Use of Investment Analysis

The NASD is looking to approve a proposal that would allow brokers and brokerage firms to provide clients with interactive investment analysis tools.

The NASD is looking to approve a proposal that would allow brokers and brokerage firms to provide clients with interactive investment analysis tools.

The investment analysis tools process is a range of information supplied by investors, such as their age, financial situation and investment objectives, and statistically develop outcomes, such as meeting a financial goal, based on that information.

The tool is designed in part to enhance the broker-client relationship, the NASD says.

"It enhances the relationship and in particular the type of investment analysis that clients can engage in with their broker," says Tom Selman, a senior vice president with the NASD. "It allows the customer to put in key financial information and then look at a range of probabilities concerning each investment recommendation by the broker."

NASD-member brokerage firms are currently prohibited from providing customers direct access to such tools, but non NASD-member financial advisors and institutions have offered public access to similar automated tools for some time.

With appropriate disclosures, the NASD says it believes the tools will assist broker and clients in making judgments about how an investment strategy might perform.

The NASD it is soliciting comment on, among other matters, whether and to what extent members should be permitted to provide these tools directly to their customers. NASD is proposing requirements for firms' use of the tools with their customers, including: disclosure of the entire range of possible outcomes, giving both downside risk and upside gain; disclosure of the universe of investments considered and a statement that other investments not considered might have characteristics similar to those that the tools analyze; explanation of all material assumptions in a clear and understandable manner; disclosure of whether the tools search, analyze or in any way favor certain securities and the reasons for such selectivity.

The NASD would review the tools prior to their use by a brokerage firm.

The NASD claims it is not endorsing any particular product or service that brokers currently use or are able to use. "What we're doing is making a statement about a type of interactive tool that generates probability," Selman says.

When asked about Web-based programs like the Monte Carlo system that some brokers utilize, Selman said, "Monte Carlo is one of many systems for generating and setting up mathematic probabilities. What were doing is not meant to endorse any product, service or system. What we're doing is proposing a rule that allows members to use an interactive technological tool with the protection listed in the proposed rules that we're seeking comment on. We do not define a service or product provider."

When asked what services are currently available to brokers that adhere to the NASD's proposed rules, Selman said he did not know. However, he did say, "If there is a service out there [that doesn't have the proposed rules already in place], I'm sure we'll hear from them during the comment period."

NASD has approved publication of comment for the proposal and is requesting public comment on it. The proposal can be viewed in a Notice to Members on Deadline for comment is September 13.

Approval by the SEC is required before any proposal becomes final.

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