Investments Archives

FINRA has some common sense advice for avoiding investment scams

Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way. All investments carry some degree of risk.
Unregistered products: Many investment scams involve unlicensed individuals selling unregistered securities, ranging from stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments, such as prime bank investments.
Overly consistent returns: Any investment that consistently goes up month after month, or that provides remarkably steady returns regardless of market conditions, should raise suspicions, especially during turbulent times. Even the most stable investments can experience hiccups once in a while.
Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success. Legitimate professionals should be able to explain clearly what they are doing. It is critical that you fully understand any investment that you are considering, including what it is, what the risks are and how the investment makes money.
Missing documentation: If someone tries to sell you a security with no documentation, such as a no prospectus in the case of a stock or mutual fund, and no offering circular in the case of a bond, he/she may be selling unregistered securities. The same is true of stocks without stock symbols.
Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error or they could indicate churning or fraud. Keep an eye on account statements to ensure that activity is consistent with your instructions, and know who holds your assets. For instance, is the investment adviser also the custodian? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts.

March 28th, 2014|Categories: Criminal Activity|Tags: FINRA, Fraud, Investments|

13 Things to Know About Investing

The Securities & Exchange Commission (the “SEC”) recently released an educational bulletin to help investors make informed financial decisions and avoid common scams. Its 13 points include:

Check the investment professional’s background.
Details about experience and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck.
Be mindful of fees associated with buying, owning, and selling an investment product.
Expenses vary from product to product, and even small differences in these costs can translate into large differences in earnings over time. An investment with high costs must perform better than a low-cost investment to generate the same returns.
Diversification can help reduce the overall risk of an investment portfolio.
By picking the right mix, you may be able to limit losses and reduce the fluctuations of investment returns without sacrificing too much in potential gains. Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.
Paying off high-interest debt may be the best “investment” strategy.
Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit cards or other loans.
Promises of high returns, with little or no associated risk, are classic warning signs of fraud.
Every investment carries some degree of risk and the potential for greater returns comes with greater risk. Ignore the so-called “can’t miss” investment opportunities or those promising guaranteed returns or, better yet, report them to the SEC.
Any offer or sale of securities must be either registered with the SEC or exempt from registration.
Otherwise, it is illegal. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Do not invest in a company about which little or no information is publicly available.
Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
Investing heavily in shares of any individual stock can be risky.
In particular, think twice before investing heavily in shares of your employer’s stock. If the value declines significantly, or the company goes bankrupt, you may lose money and there’s a chance you might lose your job, too.
Active trading and some other common investing behaviors actually undermine investment performance.
According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state or company, and holding on to losing investments for too long and selling winning investments too soon.
Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims.
Common tactics include phantom riches (dangling the prospect of wealth, enticing with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor) and scarcity (creating a false sense of urgency by claiming limited supply).
Some investments provide tax advantages.
For example, employer-sponsored retirement plans and individual retirement accounts generally provide tax advantages for retirement savings, and 529 college savings plans also offer tax benefits.
Mutual funds, like other investments, are not guaranteed or insured by the FDIC or any other government agency.
This is true even if you buy through a bank and the fund carries the bank’s name.
The key to avoiding investment fraud is using independent information to evaluate financial opportunities.
Many investors may have avoided trouble and losses if they had asked questions from the start and verified the answers with sources outside of their family, community, or group. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information is a significant advantage for investing wisely.

February 13th, 2013|Categories: Commercial Transactions Due Diligence|Tags: FINRA, Fraud, Investments, SEC|

New FINRA rule for reporting requirements

FINRA’s Rule 4530, modeled after NASD Rule 3070 and NYSE Rule 351, went into effect on July 1, 2011. The rule requires all member firms to:

report to FINRA certain specified events and quarterly statistical and summary information regarding written customer complaints, and
file with FINRA documents of certain criminal actions, civil complaints and arbitration claims.

A member firm has 30 calendar days to report to FINRA violations of any securities, insurance, commodities, financial or investment laws, rules, regulations or standards of conduct committed by the firm or its associated persons. The 30-day period begins when the firm has concluded, or reasonably should have concluded, that a violation has occurred. Below is a summary of the provision.

Firms are not required to report every instance of non-compliant conduct, but they must report conduct that has widespread or potential widespread impact to the firm, its customers or the markets, or conduct that arises from a material failure of the firm’s systems, policies or practices involving numerous customers, multiple errors or significant dollar amounts.
Violative conduct by an associated person must be reported only when it has widespread or potential widespread impact to the firm, its customers or the markets; conduct that has a significant monetary result on a member firm(s), customer(s) or market(s); or multiple instances of any violative conduct.
The “reasonably should have concluded” standard is applied on a good faith basis (by the firm) if a reasonable person would have concluded that a violation has occurred; if a reasonable person would not have concluded that a violation occurred, then the matter is not reportable. Firms must establish who, within the firm, is responsible for making such determinations. Stating that a violation was of a nature that did not merit consideration by the responsible person is not a defense to a failure to report such conduct.
The reporting obligation and internal review processes set forth under other rules – eg., FINRA Rule 3130 – are mutually exclusive.
While internal review processes may point to a firm’s determination that a specific violation has occurred, they do not by themselves lead to the conclusion that the matter is reportable – e.g., FINRA would not view a discussion in an internal audit report regarding the need for enhanced controls in a particular area, standing alone, as determinative of a reportable violation. An internal audit finding would serve only as one factor, among others, that a firm should consider in determining whether a reportable violation occurred.
Certain disciplinary actions taken by a firm against an associated person must be reported under a separate provision, rather than under the internal conclusion provision.

In addition to the above “internal conclusions” obligations, the new rules for “other reportable events” as per NASD Rule 3070 and NYSE Rule 351, have been modified somewhat in Rule 4530. For example, more customer disputes may have to be reported, as the new rule will now include attorney’s fees and interest penalties in customer settlements or awards with damages against a broker of $15,000 or more and against a firm of $25,000 or more, thus lowering the calculations threshold for reporting requirements.

August 16th, 2011|Categories: Legislation|Tags: FINRA, Investments, Securities|

SEC issues warning about investing in reverse merger companies

On June 9, 2011, the Securities and Exchange Commission (SEC) issued an Investor Bulletin about investing in companies that enter U.S. markets through the so-called “reverse mergers.” These mergers allow private companies, including those outside the U.S., to access U.S. investors and markets by merging with an existing public shell company. The SEC and U.S. exchanges recently suspended trading in more than a dozen reverse merger companies, citing a lack of current, accurate information about these companies and their finances.

“Given the potential risks, investors should be very careful when considering investing in the stock of reverse merger companies,” said Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy. “As with any investment, investors should thoroughly research the company – including ensuring there is accurate and up-to-date information – before making a decision to invest.”

The SEC’s warning is especially strong regarding Chinese companies, as more than 150 entities have recently put their shares up for grabs to American investors through the backdoor “without any of the vetting from underwriters and investors that companies undergo when they perform a traditional IPO,” as noted by Commissioner Luis Aguilar.

Shareholders already have sued a string of China-based, U.S.-listed companies for fraud, claiming that they lost money when stocks plummeted after the financial scandals. They charge that the companies operated sham businesses, inflated revenue or gave vastly different information to U.S. and Chinese regulators. And they are starting to sue the auditors who signed off on the financial statements. But it will be tough to win these cases in American courts, as Chinese entities often have refused to comply with U.S. court proceedings.

The best hope for investors may be the SEC, which has launched an inquiry into U.S. audit firms with China-based clients. Investors could benefit if the SEC, which can force companies and auditors to cooperate in investigations, sues more auditors or companies.

June 15th, 2011|Categories: Criminal Activity|Tags: Fraud, Investments|

Investment advisers miss deadline for filing new “plain English” ADV Part 2

For most investment advisers, the deadline for preparing and submitting the new Form ADV Part 2 was March 31, 2011, and many missed it, according to industry sources. All investment advisers registered with the SEC are mandated to file the new Form ADV Part 2 or disclosure brochure within 90 days of their fiscal year end. For the majority, the fiscal year ends on December 31, which means that the new form should have been filed by March 31, 2011. Most state securities regulators have ratified similar requirements.

Securities lawyers indicate that investment advisers who missed the filing deadline are likely in violation of several investment advisory rules, and may be subjected to possible actions by the regulators, ranging from warnings and fines to revocation of registration. At a minimum, a failure to submit the new form may flag the adviser as lacking strong compliance controls and requiring heightened scrutiny.

The new form rulings, adopted by the SEC in October 2010, required 18 sections on fees, soft-dollar pay arrangements, investment strategies and disciplinary histories, along with a supplement detailing each adviser’s background. An SEC spokesperson said that the changes “will allow clients access to information about advisers of a wholly different character and quality than was available under the previous regime. It will enable investors to better evaluate their current advisers, or comparison-shop for an adviser that best serves a particular need. Most significantly, this disclosure may result in advisers modifying their business practices and compensation policies which may pose conflicts, in ways that better serve the interests of the clients.” For more information, see http://www.sec.gov/answers/formadv.htm.

April 28th, 2011|Categories: Legislation|Tags: Investments, SEC|