State securities regulators in late December released their list of the top five threats facing investors, including the most problematic products, practices and schemes.
The North American Securities Administrators Association also announced in mid-December that because at least a third of state securities regulators’ enforcement actions involve schemes against senior investors, it has launched a website, ServeOurSeniors.org, to provide resources to seniors as well as family caregivers, the securities industry and policymakers.
The senior-focused website offers an interactive map to help users quickly and easily locate contact information for their jurisdiction’s securities regulator, adult protective services agency, and other governmental senior-related service providers.
NASAA as well as the Financial Industry Regulatory Authority (FINRA) both released in 2015 proposed rules to give broker-dealers and advisors the power to place a temporary hold on disbursement of funds or securities from an elderly or mentally/physically handicapped customer’s account if there is a reasonable belief that the person is being financially exploited. The Securities and Exchange Commission’s investor advocate, Rick Fleming, said in early December that he was mulling a similar rule for registered investment advisors (RIAs).
In releasing its list of top investor threats, NASAA urged investors to be wary when approached with unsolicited investments, especially those involving promissory notes, oil and gas deals and real estate investment opportunities, including non-traded real estate investment trusts.
“Investing is serious business,” said Judith Shaw, NASAA president and Maine Securities Administrator, in announcing the top threat list. “Education and information are an investor’s best defense against investment fraud.”
The following were cited most often by state securities regulators as the five most problematic products, practices or schemes.
1. Unregistered products/unlicensed salesmen: The offer of securities by an individual without a valid securities license should be a red alert for investors. Con artists also try to bypass stringent state registration requirements to pitch unregistered investments with a promise of “limited or no risk” and high returns.
2. Promissory Notes: In an environment of low interest rates, the promise of high-interest-bearing promissory notes may be tempting to investors, especially seniors and others living on a fixed income. Promissory notes generally are used by companies to raise capital, and legitimate ones are marketed almost exclusively to sophisticated or corporate investors with the resources to research thoroughly the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal. Average investors should be cautious about offers of promissory notes with a duration of nine months or less, which in some circumstances do not require registration. Short-term notes that appear to be exempt from securities registration have been the source of most – but not all – of the fraudulent activity involving promissory notes identified by regulators.
3. Oil/Gas Investments: Many oil and gas investment opportunities are legitimate in their marketing and responsible in their operations, but as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices. Fraudulent oil and gas deals frequently are structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. As a result, there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for authorities and victims to identify and expose the fraud.
4. Real Estate-related Investments: Troublesome real estate-related investments identified by securities regulators included non-traded real estate investment trusts, timeshare re-sales, and brokered mortgage notes. These types of products often carry higher risk. For example, non-traded REITs are sold directly to investors and are not traded on exchanges (as are conventional REITs). Non-traded REITS can be risky and have limited liquidity, which may make them unsuitable for certain investors.
5. Ponzi Schemes: The premise is simple: pay early investors with money raised from later investors, but the only people certain to make money are the promoters who set the Ponzi in motion.
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