More On Legal & Compliancefrom The Advisor's Professional Library
- Use and Misuse of Social Media Social media is an inexpensive and effective way to communicate with established and prospective clients. Nevertheless, when RIAs utilize social media to promote their advisory practices, they risk compliance problems for their firms.
- 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.
The Securities and Exchange Commission is warning investors that the number of fraud cases related to private securities offerings for oil and gas ventures has spiked over the past few years and that working with an advisor doesn’t guarantee they won’t be scammed.
The SEC’s Office of Investor Education and Advocacy issued an investor alert Thursday, noting that while there were only a few fraud cases related to oil and gas ventures in 2005 and 2006, the number of SEC cases since then has averaged more than 20 per year.
The alert notes that working with a registered broker or advisor that is familiar with the oil and gas industry and not connected to the offering can help an investor analyze the investment and affords investors “certain legal protections,” but it’s not a “seal of approval” that nothing will go wrong.
Oil and gas offerings “present many investment risks,” the SEC alert notes, “and working with a registered individual is not a guarantee that the offering is a sound investment.” Investors should not only ask if the advisor has any prior history of selling oil and gas offerings, but also if those offerings failed, the vetting or due diligence process the advisor used for such offerings, and the risks of the particular investment the investor is considering.
The SEC warns investors to be particularly cautious if the broker or advisor has a relationship with the promoter of the venture, or otherwise has a personal stake in the transaction. “A promoter is the person promoting the offering and is usually the founder of the venture. Ask about any current or prior relationship with the promoter, the extent of their business together, and any personal incentive in the offering. These or similar questions should help alert you to any potential conflicts and biases that may exist in recommending the particular offering to you.”
Investors should also be wary of overinflated or misrepresented prospects and claims, the SEC warns. For instance, one common thread among all fraudulent schemes, including those related to oil and gas, are claims that they are about to “strike it rich, or that it is likely or even guaranteed that the returns will be too good to pass up.”
When investors hear this sales pitch, they should be “very skeptical about high returns with little risk that are just around the corner,” the SEC says. “Higher returns typically mean higher risks of loss.”
The SEC told investors to look for the following common red flags in sales pitches:
- Sales pitches referring to recent news events like high oil or gas prices.
- “Can’t miss” wells and “guaranteed” returns, including claims that major oil and gas companies are drilling nearby.
- Abnormally high rates of return.
- Unsolicited materials.
- Sales tactics that pressure you to decide, like “limited” or once-in-a-lifetime” opportunity.
- Sales pitches touting new technology, especially if it relates to getting higher production out of low-producing wells (sometimes called “stripper” wells).
- Salesperson claims to be an investor.
- Being asked to sign documents acknowledging that the securities laws do not apply to the investment.
Read FINRA: BDs Have a Failure to Communicate on Nontraded REITs on AdvisorOne.