More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Next week, the North American Securities Administrators Association (NASAA) will release its annual list of the top traps facing investors. You’ll have to wait for the details, but I can give you a look at the common themes running throughout this year’s list.
The behavior of the stock markets over the past couple of weeks show that investors are facing increased volatility while trying to recover from the worst financial crisis in generations. Combined with a steady drumbeat of negative economic news, nervous investors are looking for financial security.
This is prime time for unscrupulous salesmen to pitch their promises of steady guaranteed returns through a variety of investment schemes.
Several of the products and practices in this year’s list of top investor traps are backed by cases from the files of state securities regulators illustrating just how powerful the lure of guaranteed returns is to investors. Many of these cases involve elderly investors and most of the examples we will cite include promises of returns between 8 % and 12%. Low risk and safety are other common tools in the bag of tricks of today’s con artists.
Everyone wants solid returns with little or no risk. But that’s not how the real world works. Legitimate investment advisors know this and explain the risk/reward ratio to their clients as a matter of course. But the fly-by-night con artists who are preying on investors today don’t play by these rules. As a result, they are taking money out of your pockets every time they launch a slick scheme on unsuspecting investors.
You can do something about this by listening to your clients, recognizing some of the warning signs of fraud and contacting your state securities regulator for help. By working together, we can catch fraud before it happens.
Consider this cautionary example. Earlier this week, an investigator at a bank contacted the Maine Office of Securities seeking help for one of the bank’s elderly customers.
The customer had recently sold his house for a significant amount of money. After the sale, he began
The investigator became suspicious and contacted state securities regulators for any information that might help dissuade the customer from transferring money to what appeared to be a foreign exchange (forex) trading scheme.
After receiving the call from the bank’s investigator, the state regulator sent an urgent message to NASAA members for advice. Help came within minutes.
Regulators recognized other red flags that indicated that this offering was little more than snake oil. First, there was the demand for an immediate response from the investor. Second, the guaranteed return of 85% is pie in the sky and very unlikely to materialize. Then there was the request for the wire transfers. “If the gentleman wires his money out, he will never see it again,” one regulator responded. “Just the word ‘forex’ should be a warning sign,” said another.
Another state regulator suggested the bank investigator ask the customer to explain the investment, how the money will be handled, what assurances they are given and to provide a copy of the offering materials. “When they can’t [deliver those], it may give [the investor] pause,” the regulator said.
The bank investigator was able to delay the customer from making the immediate transactions by having him come in to the bank to sign some paperwork. Unfortunately, despite hearing the warnings signs, the customer completed his paperwork and went ahead with the wire transfers.
Hopefully, the investment will not turn out to be a scam. Based on my experience as a securities regulator, I’ve found that when the word “hopefully” is used in connection with an investment, the results generally are not positive.
Watch for our list of traps next week and listen for them when your clients come to you for advice. This year’s top traps list will be posted on the NASAA website (www.nasaa.org) along with the warning signs of investment fraud and the contact information for all state and provincial securities regulators.