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Regulation and Compliance > Federal Regulation > SEC

How to Tell if a Broker Is Selling Unapproved Investments

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How can investors detect if their broker is offering investments that are not approved for sale through the broker’s firm?

The SEC’s Retail Strategy Task Force and Office of Investor Education and Advocacy recently released the following list of red flags that a broker may be running a side business offering investments that are not approved for sale:

  • Your broker asks you to make out a check, or to wire money, to any person or to a different firm;
  • Your broker tries to sell you an investment without any paperwork about the investment;
  • Investments or deposits you made through your broker do not appear on your account statement from the firm; or
  • You receive an account statement that does not appear to be from the firm.

Investors who encounter any of these issues should probe their broker for an explanation and follow up with the firm’s compliance department.

The two agency groups cite SEC v. Pagartanis, in which the SEC charged a former registered rep on May 30 with defrauding some of his long-standing brokerage customers out of $8 million.

The SEC alleges that the rep offered purported investments that he described as “safe” and misrepresented to at least some investors that they were investing in a Canadian land development and home building company whose stock is listed on the Toronto Stock Exchange.

Customers were asked to send the rep checks that were made out to a private company that he owned and that had the same name as the Canadian land development company.

The SEC alleges that the rep “provided some investors with fictitious account statements indicating that they owned stock of the Canadian land development company, and he allegedly transferred investor funds to other entities he controlled, used funds for his personal benefit, and used funds to pay monthly returns to some investors in a Ponzi scheme-like manner.”

The two agency groups urge investors to report a complaint to the SEC or the Financial Industry Regulatory Authority if they suspect their broker is offering investments that may not be approved for sale through the firm.

— Check out FINRA Plan on Outside Business Activities to Spark ‘Much Debate’ on ThinkAdvisor.


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