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Financial Planning > Behavioral Finance

CFTC Promotes SmartCheck Week to Fight Financial Fraud

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When the Commodity Futures Trading Commission surveyed several focus groups before it developed its anti-fraud SmartCheck website, it found that few people conducted background checks on the people they wanted to invest with. They would do an Internet search for the person or firm, talk to past clients, review performance history, even a personal interview before they did a background check.  

Only 19% of investors reported they had confirmed an advisor’s certifications and only 17% reported they checked for past violations, according to the CFTC. Yet about 80% of the fraud that the agency has uncovered are committed by people who aren’t registered investment professionals, according to Michael Herndon, the CFTC’s consumer outreach officer.

Checking the background of someone who is selling financial products “is the biggest line of defense,” Herndon said at Thursday’s Securities and Exchange Commission Investment Advisory Committee meeting.

He was promoting CFTC’s SmartCheck Week to urge investors to check the backgrounds of the people they invest with by visiting the CFTC’s SmartCheck website, which launched in November. At the site  investors can check if someone is registered with the CFTC, National Futures Association, Financial Industry Regulatory Authority, SEC or major financial exchange  as well as their  disciplinary history at the CFTC. There are also links to other federal and state financial regulators, news items about financial fraud, a confidential tip line to the CFTC and even an interactive video showing a potential investor and sleazy salesman pitching his financial product. The website visitor can then choose to buy the pitch or dismiss it. “We want people to understand they’re being pitched,” said Herndon. “We want to help people avoid fraud, Ponzi schemes… This is a campaign to change behavior.”

Herndon said pre-retirement investors, ages 50 to 65, are the most likely victims of fraud and men are more likely to be defrauded than women.

The CFTC wants investors to do an annual check of the person they invest with and system whereby investors can automatically be informed when there’s a problem with that person or there’s an update to their registration, said Herndon.

He hopes that eventually there’s a single website whereby investors can access the registrations and disciplinary reports from different regulators, like travelers can now access multiple sites using Kayak.

Herndon said investors have lost a minimum of $1 billion to fraud, according to his tally of losses reported in CFTC press releases. The Financial Fraud Research Center, a joint project of the Stanford Center on Longevity and the FINRA Investor Education Foundation, estimate financial fraud costs investors $40 to $50 billion annually.

— Check out SEC Chief: Fiduciary, Third-Party Audit Rules to Advance This Year on ThinkAdvisor.


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