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NASDR backs off on risk disclosure

NASD Regulation (NASDR) has dropped plans which would have required some firms to provide more warnings when selling mutual funds, a proposal which the mutual fund industry had opposed.

NASDR last week announced it has withdrawn a proposal which would have required firms that sell both federally-insured bank products and securities products such as mutual funds to explain that the securities products are not insured. The new rule would have provided little additional protection to investors, NASDR said in a notice to members, Jan. 11.

National Association of Securities Dealers (NASD) rules already require that broker/dealers located on bank premises to explain that securities products are not insured. But some broker/dealers that sell insured bank products are not located at bank offices. In such cases, NASDR said that there is "little likelihood" that investors who are buying investment products will think the products are insured against loss.

NASDR already requires those who sell securities to disclose all substantial risks to investors. Indeed, the Investment Company Institute (ICI) argued when the rule proposal was first issued in 1997 that the existing risk disclosure requirements were sufficient for investors.

Barry E. Simmons, an ICI lawyer, argued in a letter dated June 30, 1997 that the added layer of risk disclosure might create more problems than it solved. "Continuous visible and verbal admonitions may actually add to customer confusion by incorrectly implying that it is more dangerous to purchase securities products in a banking environment than in other settings," Simmons wrote.