SEC May Pack More Heat Soon

A bipartisan effort in Congress is underway to give the SEC more sting when it comes to securities law violators. All we can say is: it's about time! Lawmakers are pushing hard to increase the limits of the fines the SEC is allowed to slap broker dealers and brokerages with to up to $1 million per violation for individual brokers and up to $10 million per offense for firms. Basically, the bill's backers in Congress want the SEC to be able to inflict enough financial pain on brokerages to change the culture. Right now, most firms tend to view the SEC fines as a nuisance--the cost of doing business. If, however, the bill that was written by Senator Jack Reed, a Democrat from Rhode Island and Chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment; and Senator Charles Grassley, a Republican from Iowa and ranking member of the Senate Judiciary Committee gets passed in Congress, the SEC will be getting some serious new regulatory firepower.

Ultimately, what lawmakers hope is that steeper penalties and more pain will result in fewer repeat offenders along with heightened self-regulation on the part of brokerages, who will be forced to beef up or wake up their compliance departments and come down much harder on rogue brokers. Under the new law, not only would broker dealers be more likely to increase vigilance around compliance issues, they would also be much less tolerant of individual broker misconduct. Since heftier fines means broker dealers are more exposed by any bad brokers they sponsor, they'd be foolish not to crack down on rule breakers and/or terminate those who cannot toe the regulatory line. 

Some critics of the bill say that rather than raising its punitive powers lawmakers should be looking to strengthen the SEC's enforcement abilities by granting the commission more funding for personnel and financial expertise. But just last year, the SEC set a record for enforcement actions and fines. Still others say the SEC is most effective on moral terms: they insist that suffering an SEC action is usually a career-ending event. Still, the larger fines written into the bill seem directed more at the brokerages than the individual brokers. By setting their sights on crooked firms, lawmakers have made it clear they want not just to punish offenders and inflict pain, but instigate real change.

It's hard to predict how far the bill will get in Congress before the current session ends in December. But we at The Green Firm hope change comes sooner rather than later.

As always, if you or anyone you know has been the victim of broker misconduct, please contact us for a free consultation.

Brokers Are Not Just "Order-Takers"

The financial world has been undergoing several years of reform, to varying degrees of success. But the more circumscribed world of financial advisers has lagged behind--until now. If you’re an investor or even just a casual reader of the Business or Financial pages of the newspaper, get ready to hear a lot more about “fiduciary standard” in the next few years.

According to several recent articles, the SEC is gearing up its campaign to raise the standard for financial advisers who often claim, especially when they’re being sued for misconduct or negligence, that they’re only “order-takers” when it comes to important investment decisions. Yeah, right. Then why all the fees? And why call themselves “advisers” at all?

The truth is, at the moment, financial advisers are held to a somewhat lower standard of fiduciary obligation known as “suitability.” This standard involves a suitable match between a customer’s stated investment objectives and risk-tolerance and the financial products a financial advisor places them in. The SEC’s new standard would raise the bar. Brokers would not simply be asked to ensure that investments comply with suitability, but that brokers uphold the interests of their clients absolutely. As an article on CNBC mentions, “The current regulatory system means that brokers are legally permitted to recommend a higher-priced mutual fund to investors even if they know a low-cost one with better returns exists. Many brokers are compensated partly by commissions from mutual funds.”

With the SEC’s help, the world of investment just may become a little safer and more friendly to the interests of investors whose money is at stake in the first place. After all, shouldn’t financial advisors who are responsible for the life-savings of many of their customers, be held to professional standards that resemble the standards of lawyers, doctors, and CPAs? Of course they should. Right now, brokers are having it both ways. They take significant fees for their expertise, but they deny responsibility when that “expertise” fails them and damages customers.

Is This Investment REIT Or Wrong For You?

xtended periods of uncertainty in the stock market along with low interest rates can drive investors seeking higher returns into the arms of products that they may not fully understand or that may not be appropriate for their financial situation or risk tolerance. Take non-exchange traded real estate investment trusts (REITs), usually referred to as "non-traded REITs." A particularly egregious case we're currently handling reminded us that we needed to get the word out once again about the danger of buying into non-traded REITs if you don't fully grasp how they work. Of course, it's not the customer who would generally consider purchasing such sophisticated financial products; rather, brokers are pitched on such products by REIT representatives; and, seduced by promises of low-risk and high-return, the brokers in turn pitch their clients on them. 

(Very quickly, if you're not familiar with the concept of a "REIT:" a REIT is a trust or company that pools individual investments to purchase large portfolios of income-producing real estate. A very large percentage of the income from these properties is then disbursed annually to shareholders in the form of their distribution or return.)

Before you agree to the purchase of a non-traded REIT at your broker's suggestion (if it's not too late already), bear in mind three very important things:

1. hares of non-traded REITs by definition do not trade on any national securities exchange
2. arly redemptions of the shares you own in a non-traded REIT are strictly limited and in any case come with high fees that cut deep into your potential return
3. Unlike in publicly traded companies, the distributions or returns ou get from non-traded REITs often come from borrowed funds or investor principal

1) The first item means that it can very difficult to determine the value of your investment in the REIT, especially if it starts to go bad. Since the REIT is not part of any actual market or exchange, its valuation is assigned internally and can often be inaccurate or manipulated by those running the fund. Moreover, until the shares are actually sold, the valuation of those shares is pure speculation. It's like a company going public for the first time: the value of its shares can fluctuate wildly in the initial offering and more often than not fails to correspond to projections, even by the experts.

2) Non-traded REITs are an illiquid investment. Be prepared to have your money locked up in a REIT for at least 8 years, possibly longer. In the meantime, if your financial situation changes, and you need to get out of the REIT, you face steep fees and losses. 

3) A unique feature of non-traded REITs is that he distributions or returns you get from them do not come out of earnings or profit, but rather from heavily subsidized debt or initial investor principal. When things go bad, and a non-traded REIT starts losing money, this can look a lot like a Ponzi scheme in that new investors are paid distributions from early investor principal. In some cases, a failing REIT will suspend distributions entirely, n which case not only will an investor be stuck in an illiquid product but it's an illiquid product that provides them with no return whatsoever. 

In investing, as in much else, knowledge is power. Know what you're getting into if you agree to purchase shares in a non-traded REIT. And if you don't know what you're getting into, ask your broker to explain everything to you--along with why he or she thinks this financial product is good for you. For more on non-traded REITS, consult FINRA's tip sheet here.

f you or anyone you know has been the victim of broker misconduct related to the purchase of non-traded REITs or any other financial product, please contact us for a free consultation.

Brokers May Have Been Broken by Financial Crisis

Did post-traumatic stress disorder lead huge numbers of brokers to make bad investment decisions on behalf of customers in the aftermath of the 2008 financial crisis? According to a recently published study from an academic journal called, "The Journal of Financial Therapy" (who knew such a thing existed!), it seems entirely likely they did. The study is based on a survey of financial advisers across the industry, “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Post-Traumatic Stress," and according to an article in MarketWatch the survey found that 93% of financial advisers and planners admitted they'd wrestled with PTSD following the crisis. That's not all, though. Shockingly, fully 40% of respondents to the survey said they had suffered severe PTSD symptoms. The respondent pool was responsible for anywhere between $20-$40 million in assets.

In order to qualify for a clinical diagnosis of PTSD, one must exhibit symptoms including sleep disturbance, high stress levels, anxiety, difficulty concentrating, and self-doubt for a period of more than one month. Many of the financial advisers who took part in the survey claimed that their symptoms continued for far longer than that--in some cases, for years afterward. Moreover, the study shows a correlation between the brokers' PTSD symptoms and a widespread shift in investment strategy over a period of a few years.

Although we sympathize with brokers who suffered personally during one of the worst financial crises in history, we tend to sympathize more with the customers whose life-savings simply vanished during that very same crisis, and who, we're quite sure, experienced their own form of PTSD or worse.

One psychologist quoted in the article mentions that PTSD sufferers tend to engage in very risky behavior like "substance-abuse, aggression, and thrill-seeking." Indeed, at The Green Firm it has been our experience that a surprising number of brokers reeling from the financial crisis have demonstrated such erratic behavior in its aftermath, often at the expense of customers who had already suffered losses due to the market's collapse. No matter how much sympathy we accord to brokers suffering from PTSD, they are still professional investors, still responsible for our money, and they still have supervisors who should be monitoring them for symptoms associated with PTSD as with any other condition that causes them to be unable to do their job. 

If you or anyone you know has been the victim of broker misconduct or any other form of investment fraud or negligence, please contact us immediately for a free consultation.