The NASD has sent letters to several large players including Merrill Lynch & Co., Citigroup and UBS AG requesting data on fund customers who bought lower end hedge fund products - of the under $50,000 variety. At issue is how thoroughly the brokers vetted these individual customers' ability to withstand potential losses. No charges have been filed, but one can imagine that the relatively (ok, lets just call them discrete) hedge fund world, where many are already reeling from the new SEC reporting requirements, is enjoying this scrutinization of their business practices none to much.

Via Bloomberg:

NASD Steps Up Hedge Fund Sales Probe, Seeks Data on Customers

February 2, 2006
Bloomberg
By Otis Bilodeau

`You worry about small investors getting involved through the back door in investments that aren't suitable for them because they're too risky or the fees are too high,'' said David Becker, a former chief counsel at the U.S. Securities and Exchange Commission. ``NASD requires brokers to have a reasonable basis for recommending an investment, as a counterforce to the overwhelming economic incentives for salesmen to sell."...

..."We don't comment on ongoing investigations,'' said Herb Perone, a spokesman for the NASD. Spokespeople for Merrill, Citigroup and UBS declined to comment...

...The NASD started examining hedge fund sales practices in June, asking as many as 10 firms how they promoted products to individuals. The regulator, which polices about 5,200 brokerages, broadened its probe in December after finding evidence some firms allowed less-affluent customers to invest in the funds, one person said.

Merrill, Citigroup and UBS sell so-called funds of funds, which buy stakes in multiple hedge funds rather than in individual securities. The minimum investment in funds of funds marketed by the firms can be less than $50,000, SEC filings show.

The regulator hasn't accused any firm of wrongdoing. NASD said the probe ``shouldn't be construed'' as a sign it has concluded that securities laws were broken...

More info here in the full article.

-- MDT