More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Securities and Exchange Commission’s Office of Investor Education and Advocacy on Thursday issued an Investor Bulletin to provide seniors who use social media with safety tips to help them avoid investment fraud.
Web-based platforms that allow interactive communication, such as Facebook, YouTube, Twitter, LinkedIn, bulletin boards, and chat rooms have become an important investing tool, the SEC said. “While social media can provide many benefits, it also presents opportunities for fraudsters targeting older Americans.” Seniors, the SEC said, need to proceed with caution when using social media as part of their investment process.
The SEC released the following six tips to help seniors avoid securities fraud:
1. Look out for “Red Flags”
Wherever you come across a recommendation for an investment on the Internet, the following “red flags” should cause you to use caution in making an investment decision:
- It sounds too good to be true. Any investment that sounds too good to be true probably is. Be extremely wary of claims on the Internet that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK.” Claims like these are hallmarks of extreme risk or outright fraud.
- The promise of “guaranteed” returns with little or no risk. Every investment entails some level of risk, which is reflected in the rate of return you can expect to receive. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment “can’t miss.” Don’t believe it.
- Offers to invest outside the United States. You should carefully examine any unsolicited offer to invest outside of the United States. Many fraudsters set up operations outside the United States to make it more difficult for regulators to stop their fraudulent activity and recover their victims’ money.
- Pressure to buy RIGHT NOW. Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.” Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities.
2. Be Wary of Unsolicited Offers
Investment fraud criminals look for victims, including seniors, on the Internet. If you see a new post on your wall, a tweet mentioning you, a direct message, an email, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme
3. Look Out for “Affinity Fraud”
An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catering to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, often seniors, religious or ethnic communities, professional groups, or combinations of those groups.
Even if you know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment to your attention. Remember, the person making you the offer may not know that the investment is a scam.
4. Be Thoughtful About Privacy and Security Settings
Seniors who use social media as a tool for investing should be mindful of the various features on these websites that can help protect privacy. Understand that unless you guard personal information, it may be available not only to your friends, but for anyone with access to the Internet – including fraudsters.
For more information on privacy and security settings, as well as other guidance regarding setting up on-line accounts with an eye toward avoiding investment fraud, see our Investor Bulletin Social Media and Investing: Understanding Your Accounts.
5. Ask Questions and Check Out the Answers
Be skeptical. Never judge a person’s integrity, or the merits of an investment, without doing thorough research on both the person selling the investment and the investment itself. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Seniors can check out many investments using the SEC’s EDGAR filing system or through your state’s securities regulator. You can check out registered brokers at the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck website and registered investment advisers at the SEC’s Investment Adviser Public Disclosure website.
6. Be Aware of Common Investment Scams Using Social Media and the Internet
While fraudsters are constantly changing the way they approach victims on the Internet, there are a number of common scams of which you should be aware. Here are a few examples of the types of schemes you should be on the lookout for when using social media:
- “Pump-and-Dumps” and Market Manipulations
“Pump-and-dump” schemes involve the promoting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace, in order to sell the cheaply purchased stock at a higher price. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms.
- Fraud Using “Research Opinions,” Online Investment Newsletters, and Spam Blasts
While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks. To learn more, read our tips for checking out newsletters.
- High Yield Investment Programs
The Internet is awash in so-called “high-yield investment programs” or “HYIPs.” These are unregistered investments typically run by unlicensed individuals – and they are often frauds. The hallmark of an HYIP scam is the promise of incredible returns (30 or 40 percent – or more) at little or no risk to the investor.
- Internet-Based Offerings
Offering frauds come in many different forms. Generally speaking, an offering fraud involves a security of some sort that is offered to the public, where the terms of the offer, such as the likelihood of a return, are materially misrepresented.
Check out other tips on fraud protection: