The use of Monte Carlo investment analysis tools in the financial services industry may become more prevalent in the wake of a recent NASD rule change.
   The amendment, approved by the SEC in September, sets down the conditions under which such tools can be used. Previously, NASD regulations restricted use of the tools, although members could seek approval for their use from the NASD.

   The amendment will go into effect February 14, according to a notice the NASD recently sent to its members.
   David Loeper, chairman, CEO and founder of, says the rule change will expand the market for the simulators, which are now a standard feature in most financial analysis software products.
   "There are a lot of compliance officers who, in the absence of NASD having specific rules in the past, defaulted whenever a business unit came to them requesting these tools," he says.

   Like others in the financial service industry, Loeper also has some misgivings about the expanded use of Monte Carlo tools: He feels many advisors are using them improperly.
   At their worst, he says, Monte Carlo tools are used as a "scare tactic" to steer clients into investment strategies that may not be suitable for their goals.
"Most of what I see done with Monte Carlo simulations is nothing short of material misrepresentation to clients," he says.
   Under the amendment, which does not mention specific products by name, advisors can use investment analysis tools that produce "simulations and statistical analyses that present the likelihood of various investment outcomes" under certain conditions.
NASD members may use the tools if:
they describe the criteria and methodology used, including the investment analysis tool's limitations and key assumptions.
they explain that results may vary with each use and over time.
they describe, if applicable, the universe of investments considered in the analysis, explain how the tool determines which securities to select, disclose if the tool favors certain securities and, if so, explain the reason for the selectivity. Members must also note that investments not considered may have characteristics similar or better to those being analyzed.
they provide clients with a disclaimer noting that projections generated by the tool are hypothetical.