By The Book: MFDA warns on leverage claims

(May 12, 2008) The Mutual Fund Dealers Association has issued a notice to members, over concerns that inappropriate communications are being sent to clients regarding the suitability of investment loans.

The MFDA initially warned members against forwarding materials from loan providers to clients without first assessing suitability, back in August 2005. Since then, the practice has continued.

It is considered inappropriate, for example, to suggest that leveraged investments are suitable for all clients, or to claim that leverage presents “no additional risk.” Members are also cautioned against using unrealistic assumptions or “overly optimistic examples” when explaining the use of leverage. Promises to make clients’ mortgage tax deductible are also cause for concern, the MFDA says.

Not only are advisors warned to avoid forwarding such communications, but they should also be sure to inform clients of the associated risks if they discover the client has received such communications from an outside party.

(05/12/08)

Staff

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