Brokers Say No Need to Tell Derivative Risk : Securities: Industry guidelines put onus on investors and could absolve firms of liability in debacles such as Orange County’s.

Investment firms do not have to spell out the risks of derivatives unless expressly asked to by investors in the complex securities, according to voluntary industry guidelines released Thursday.

The guidelines could absolve brokers in the future of responsibility for a debacle such as Orange County’s ill-fated foray into the risky investments. Derivatives--contracts with values tied to the price of some other asset or index, such as gold or interest rates--prompted the financial collapse of the county, which filed for bankruptcy protection on Dec. 6 with $1.7 billion in losses. Derivatives have also caused financial losses at major companies such as Procter & Gamble Co.

Merrill Lynch & Co., the brokerage that sold Orange County many of its derivative investments, claims county leaders understood the risks of purchasing derivatives, while the county claims it was sold “unsuitable,” risky securities.

Orange County has since sued the brokerage. Merrill Lynch officials could not be reached for comment on the new guidelines.

The latest voluntary guidelines, drafted by six Wall Street industry groups with the help of the Federal Reserve Bank of New York, contrast sharply with rules by banks and industry regulators that put the onus on derivative dealers to decide whether transactions are appropriate for customers and whether customers understand the risks.

The voluntary guidelines assume that regular investors in derivative securities know whether they are sophisticated enough to take on risk. Unless parties in transactions agree in writing beforehand that the securities dealer is acting as an investment adviser, investors are responsible for their own investment decisions.

Some complained that the guidelines unfairly shift responsibility to investors who may have less information and knowledge than dealers in such securities. This is especially true in municipal finance, some say, where government officials might have even less financial know-how that corporate executives.

“This is just a marketing ploy by these investment firms that want to keep selling derivatives to local governments,” said Zane Mann, publisher of the California Municipal Bond Advisor newsletter.

Another top-ranking investment regulator was even more direct: “With a lot of derivatives, how does the investor know the risk?” he asked.

“The only way the investor can find the risk is to ask the dealer. And what has happened is that the dealers have lied,” he said.

The trade groups that prepared the guidelines are the International Swaps & Derivatives Assn., the Foreign Exchange Committee, the Emerging Markets Traders Assn., the New York Clearing House Assn., the Public Securities Assn. and the Securities Industry Assn.