Municipalities Want Tougher Securities Rules

Proposed rules requiring brokers and dealers to sell only suitable securities to investors should be further tightened, the Government Finance Officers Assn. said.

The GFOA, which represents thousands of state and local officials who invest in securities, made its request to the National Assn. of Securities Dealers, the self-regulatory agency for the Nasdaq Stock Market.

The request comes after municipalities, including Orange County, sued securities firms, saying they were sold improperly risky investments that caused massive losses.

The NASD properly toughened its “suitability” rule on proper securities to sell to institutional investors, the GFOA said.

At the same time, the GFOA said further protections are needed. The organization objects to what it calls the rule’s “failure to require the suitability determination to be made on the basis of specific factors and the lack of requirements for any affirmative duties on the part of broker-dealers.”

Broker-dealers should be required to ask customers, such as government investment officers, about their investment objectives and the amount of risk they wish to incur, the GFOA said.

Another change the NASD should make would require broker-dealers to disclose “material information” to investors, the GFOA said. That would include facts on the riskiness of specific investments sold to governments.

The group also objects to the NASD rule’s definition of large investors as those with portfolios of $10 million or more, with the assumption being that large investors are more sophisticated, while those with smaller portfolios require greater protection under the suitability rule.

Congress desired no distinction among various investors based on the size of their portfolios in setting suitability rules, the GFOA said.