Bloomberg – The NASD is expanding a probe of the world’s biggest brokerage firms for possible improper sales of hedge funds to individual investors, three people with direct knowledge of the matter said.
The industry regulator sent letters to firms including Merrill Lynch & Co., Citigroup Inc. and UBS AG seeking details on customers who bought “retail hedge fund products” for $50,000 or less, said the people, who declined to be identified because the probe isn’t yet public. The NASD, based in Washington, is asking how the brokers who sold the funds gauged clients’ ability to withstand potential losses.
“You worry about small investors getting involved through the back door in investments that aren’t suitable for them because they’re too risky or the fees are too high,” said David Becker, a former chief counsel at the U.S. Securities and Exchange Commission. “NASD requires brokers to have a reasonable basis for recommending an investment, as a counterforce to the overwhelming economic incentives for salesmen to sell.”
Hedge fund assets swelled more than sixfold to $1.1 trillion during the past decade, as the average fund rose at an annual rate of 11 percent, beating the 7.5 percent advance of the Standard & Poor’s 500 Index. Until about five years ago, hedge funds were limited to investors with more than $1 million. Now, people can invest in the loosely regulated funds with as little as $25,000.
