U.S. self-regulatory organization NASD has advised its members that it is concerned about the sales practices of firms who sell hedge funds, especially given the recent surge in the popularity of the funds.

“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 Schapiro, NASD vice chairman and president of Regulatory Policy and Oversight.

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.

http://www.nasdr.com/news/pr2003/release_03_004.html