Investors Should be Wary of "Happiness Letters"

Friday, January 9, 2015

As the Wall Street Journal's Jason Zweig recently cautioned, "If you get a 'happiness letter' from your brokerage firm . . . be worried." 

What is a happiness letter?  A letter from a broker-dealer intended to elicit an acknowledgement from an investor that all is well with account activity and related transactions.  Also called "CYA" letters these letters are a risk-mitigation tactic employed by the industry to inoculate themselves against legal claims by investors.   Of course, they are also an opportunity for investors to take stock of their account positions and raise their hands if things are out of order.  And it is not unreasonable for broker-dealers to want investors to tell them if something is amiss earlier rather than later.

What should you do if you receive such a letter?  The following makes sense for starters:
There is nothing in applicable rules or regulations giving such letters legal effect and they in fact do not have any binding legal effect -- and certainly do not absolve broker-dealers of applicable requirements, including suitability.  But investors who ignore such letters and complain later about  will have a bit of explaining to do, just as investors who jump on any disclosures contained in such letters will be in good position to get their account in order and pursue appropriate remedies.

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