Now that mortgage-backed securities are hot again, so is the issue of who should be buying them.

That issue was highlighted by a recent arbitration case involving Merrill Lynch & Co.

Two sisters, Amanda Carmen Garcia and Asia Garcia Duarte, bought complex types of mortgage securities called collateralized mortgage obligations from a Merrill Lynch broker in Florida.

Collateralized mortgage obligations are created by slicing pools of whole mortgage securities into tranches that respond differently to fluctuating market conditions.

When interest rates rose sharply in 1994 the sisters lost $780,000, according to a case summary by the National Association of Securities Dealers.

Merrill Lynch denied any wrongdoing, maintaining that the sisters had given their blessing to the investment after the risks and the strategy had been clearly explained. But a three-person arbitration panel thought differently, finding in favor of the sisters and awarding them $858,896.

After Merrill Lynch said it would appeal the award, the sisters came to an amicable settlement with the company, said William Rishoi of Snyderbaum, Rishoi & Swann of Lake Mary, Fla., the law firm that represented the sisters.

Mr. Rishoi declined to discuss the settlement terms. Merrill Lynch did not return a phone call for comment.

Observers said the case raised the issue of appropriateness - whether such securities should be sold to people lacking extensive background in finance or the equipment to closely track their investments.

"There are sophisticated investments some people don't need to be buying," said Gary Peters, senior vice president who runs the broker-dealer of LaSalle National Bank out of Boca Raton, Fla. "They don't need any rude surprises."

More complex versions of mortgage-backed securities "are not a good idea" for individuals, Mr. Peters said. "There is no liquidity.'

Indeed, the vast majority of purchasers of sophisticated mortgage securities are institutional investors, such as banks, insurance companies, and pension funds. But Mr. Peters, whose company is owned by ABN Amro Holding of the Netherlands, doesn't completely rule out purchases by individuals.

LaSalle National, which wholesales products to regional brokerages, has what Mr. Peters describes as a "plain vanilla" collateralized mortgage obligation. It is structured to be more stable than other mortgage securities, offering less interest but more safety.

Still, Mr. Peters noted, the payoff is better than on many other investments. "It's a shorter-term investment that offers a nicer yield than expected."

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