A Risk Letter Helps Protect Investors

Investment firms that are members of the New York

Stock Exchange (NYSE) are governed by many stringent

regulations that may not apply to other investment

firms.

For example, NYSE rule 405, the "know your

customer" rule, requires registered representatives of

NYSE-member firms to obtain pertinent facts about every

customer's security holdings, financial condition and

investment objectives.  This information helps identify

potential investments that may or may not be compatible

with the customer's needs.

If an investor wishes to purchase a security that

the investment representative believes is incompatible

with the customer's stated objectives and risk

tolerance, the investment representative is likely to

ask the investor to read and acknowledge a "risk

letter" prior to purchase.

Risk letters give investors an opportunity to

seriously consider their positions before making

investments.  A risk letter is typically a standard

form that the investment representative and client

complete together.  The form includes the amount and

description of the purchase and a brief statement

explaining why the customer wants to buy the security.

If the security is sold by prospectus only, the

investor also must acknowledge in the risk letter that

he or she has received the prospectus and has been

informed of any fee, commission or surrender charge

that may apply to the transaction.

The risk letter also emphasizes potential risks,

such as market fluctuation or over concentration in one

industry or sector.  If, after reading the letter, the

investor still wants to make the purchase, he or she

and the investment representative sign the risk letter,

and it becomes part of the investor's file.

Many investors question the need to sign risk

letters when they can make other investments without

question.  Risk letters are required by most brokerages

whenever a proposed investment is not consistent with

the customer's stated objectives or with his or her

normal investments.

Risk letters are designed to ensure customers

understand the risk of certain investments and are

willing to accept that risk before an investment is

made.