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:
- Read It: "If you're one of those people who immediately throws away notices from your brokerage firm, you might want to think twice around this time of year."
- Review Your Account Statements: "If you receive such a letter, immediately search your account for signs of activity that seems inappropriate or not in keeping with your instructions to your broker."
- Do Not Sign: "Never sign and return a happiness letter. Nor should you speak to your broker about it. "
- Get More Information. "Call the compliance officer or branch manager who sent the letter and politely insist on seeing the internal data that prompted it. Don’t discuss anything else or answer any questions seeking to establish how satisfied you are with your account’s performance."
- Get a Second Opinion. "Then bring the happiness letter, your account statements and the internal data (if you can get it) to someone who can give you an objective second opinion: an accountant, a registered investment adviser, a securities attorney, even a trusted family member or friend."
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.