NASD Alerts Firms on Liquefied Home Equity

Citing the risks of using home equity to make investments, the National Association of Securities Dealers has reminded regulated firms of "their obligation to perform a careful suitability analysis" before recommending such a strategy.The NASD's Notice to Members 04-89: Liquefied Home Equity follows an Investor Alert on the subject in March and a related alert in May on the risks of pledging securities in lieu of a mortgage downpayment. Noting that a growing number of homeowners are tapping their home equity to buy securities, NASD vice chairman Mary L. Schapiro warned that the practice isn't appropriate for many investors. "That strategy poses significant and unique risks, and failure to understand those risks could cost them their biggest asset -- their home," she said. In addition, the NASD told member firms that investors may not recognize potential conflicts of interest, such as a securities broker's interest in generating commissions or fees on investments from cash derived from home equity. The NASD can be found on the Web at http://www.nasd.com.