The securities industry self-regulator, FINRA, has once again warned broker-dealers and investors over its unsuitable sales of leveraged and inverse ETFs. Over the past few years, ever since these sophisticated products rose to prominence, FINRA has repeatedly issued regulatory notices and investor alerts about the perils of investing in leveraged ETFs. The agency has also fined numerous broker-dealers and individual brokers for poor sales practices and supervision of leveraged ETFs.
Over much of last year, heated debate raged within the securities industry and among some politicians about the “best interest” standard and how it should be applied to registered financial advisors and stock brokers alike. Right now, two different standard apply to the industry. Bringing them all under one standard would unify a fractured industry and give greater clarity and increased protection to investors who may be unaware of which standard they are subject to.
What you may not know, however, is that there is a highly sophisticated system of record-keeping for financial industry professionals administered by the Financial Industry Regulatory Authority (FINRA), and those records are freely available to the public.
Leading up to February, all of 2017 had seen volatility and the VIX at near record low levels. All was calm. Then, suddenly, in one day the percent gain in futures swung 96 percent. The huge leap crushed short-VIX ETPs, which lost nearly all of their value. Some of those products shut down entirely.
What can you do, oh unsophisticated investor, to protect yourself against the attacks and traps of some of history's most dastardly fraudsters? For a start you can ask yourself the following 5 questions about investment fraud - and answer them as honestly as possible. Remember, when you're trying to protect yourself from the deception, the last thing you want to do is self-deceive!
Each month, the agency that regulates the financial industry, FINRA (Financial Industry Regulatory Authority), produces a detailed report that runs down all disciplinary actions recently taken against brokerage firms and brokers. We strongly encourage any investor who suspects their broker and/or broker-dealer of having lost them money on dubious terms to at least skim this report to see if you recognize any names, schemes, products, or securities.
FINRA’s fine and demand for restitution, along with Lewis’ long prison sentence, sends a strong message that such failures by broker-dealers will not be tolerated. In today’s climate where protecting seniors has become paramount, we expect to see more and more of such regulatory actions.
FINRA's disciplinary action report from November 2015.
The SEC’s Office of Compliance recently issued a Risk Alert concerning lapses in brokerage supervision and compliance controls on the sale of structured products - especially structured notes - to retail investors. Several months ago the SEC also issued a broader Investor Bulletin concerning structured notes. The Financial Industry Regulatory Authority (FINRA) has also repeatedly urged investors to be careful when considering structured products.
SEC Approves FINRA-Recommended Rule Change to REIT Reporting
The Securities and Exchange Commission (SEC) finally approved a rule change that would give investors far more clarity on the purchasing price of non-traded real estate investment trusts, or REITs. (If you don’t know what a REITs is, click here). This rule change, recommended by securities industry watchdog, the Financial Industry Regulatory Authority (FINRA), has been a long time coming. But now that it’s here, investors should welcome it with open arms.
The REITs Rule Change Adds a Much-Needed Layer of Investor Protection
Until now, it has been common practice among broker-dealers to list non-traded REITs at a per-share price of $10, regardless of what the actual valuation of the shares may be. The new rule however will force broker-dealers to include a per-share estimated value of the shares of any unlisted direct participation program (DPP) or REIT, along with other relevant disclosures, instead of the generic $10 per-share placeholder.
Digging a little deeper, we find that FINRA has proposed two methodologies by which firms may calculate the new per-share estimates: net investment or appraised value. The way these methodologies work would make the average investor’s headspin. But that’s granular information that shouldn’t really concern retail investors interested in REITs anyway. Rather, the key takeaway here is that the rule change offers greater protection to investors who were not historically receiving accurate representations of the value of their investments in REITs.
Broker-Dealers Now Required to Disclose Nature and Risks of REITs
As previously mentioned, the new rule explicitly requires that more information about DPPs and REITs be disclosed to investors, including a provision for specific disclosures stating that DPPs and non-traded REITs are not listed on national securities exchanges, and are generally illiquid investments whose sale value may be less (often far less) than the value of the shares reported on customer statements.
It is worth remarking here that our firm has represented numerous clients whose financial advisors have irresponsibly steered them into REITs without adequately disclosing the nature, risks, and valuation problems associated with these somewhat notorious investments.
If you or anyone you know has been the victim of broker misconduct or investment fraud, or has been unsuitably recommended DPPs or REITs by your financial advisor, please contact our securities attorneys for a free consultation by calling us toll-free at 1-855-462-3330 or via email by clicking here.
For the past couple months, the Financial Industry Regulatory Authority (FINRA) has been taking a bruising from investor advocates who support greater oversight over brokers and broker-dealers. Recently, FINRA’s climb-down on obligatory disclosure of incentives and bonuses by brokers changing firms, followed by revelations in the New York Times over the agency’s murky process for expunging broker complaints, have ignited a new round of criticism of FINRA’s supposed “bias” toward the financial industry it is mandated to preside over. But this week, FINRA released new guidelines for a computerized tracking system that appear to be a big step in the right direction.
The system, Comprehensive Automated Risk Data System or “CARDS,” is an attempt by the financial industry watchdog to leverage the power of big data and computer analytics in order to more carefully monitor balances and transactions in brokerage accounts. CARDS would give FINRA a sweeping and unprecedented peek into the activities of brokers and broker-dealers, and alert the agency to any suspect trading or misconduct. This proposal can only be good news for customers, since it would add a new layer of oversight to how their accounts are being handled. Customers themselves are the first line of defense against broker misconduct. By reviewing their statements for illicit trading or investment fraud, customers may be able to ferret out problems before they get out of hand. But most retail investors are investment novices who have trouble interpreting their financial statements; and even if they noticed something fishy going on in their accounts, they are often too intimidated to confront their brokers directly. CARDS would ameliorate this situation by adding FINRA’s automated monitoring of customer brokerage accounts to the mix. It would also put brokers in the mindset of being watched, thus hopefully discouraging misconduct before it begins. Meanwhile, the SEC has been developing a massive computerized system, called the consolidated audit trail, to follow all trades in U.S. stock and options markets.
Broker-dealers have long utilized the vast power of technology to trade at incredible volumes and speeds. It’s about time the regulators caught up, and used that power to clean up the markets.
If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 1-855-462-3330 or via email by clicking here.
It could be due to the fact that all day long pretty much all we do is speak to ordinary folks about how they lost their hard-earned money due to investment fraud and broker misconduct; write letters and FINRA claims about all kinds of financial scams and negligence; and educate ourselves on the latest trends in everything fishy and devious going on in the world of financial securities. BUT. This week, a couple phone calls we received and a couple articles we read brought home to us with powerful force once again just how many Americans get duped and how easy it would be not to.
See, one poor lady called us up to tell us she and her husband had lost $500,000 of their retirement money because of their broker. There was only problem. Their broker wasn’t a broker. He was an insurance consultant! The phony broker is now up on felony charges. But that doesn’t help the poor couple that called us… The fake broker was broke. And since he didn’t actually work for a sponsoring brokerage firm, well, there was no one to recover damages from.
Another case involved a gentleman who had lost a lot of money because his broker had put him in a bunch of assets that were patently unsuitable for the customer. As we talked, we discovered that the gentleman, in spite of the fact that the broker had lost a sizable chunk of his portfolio, had stayed with this broker and still, believe it or not, had his money invested with him! When we asked why, he said he’d listened to dozens of brokers pitch him on why they were the right broker for him, and they all sounded the same…
Finally, the FINRA Investor Education Survey report “Financial Fraud and Fraud Susceptibility in the United States” came out the other day, with some staggering findings. Some of the highlights (or lowlights, come to think of it) include the fact that:
Over 80% of respondents to the survey had been solicited in potential scams
Over 40% of respondents could not identify classic “red flag” signs of fraud
Around 60% of respondents under-reported fraud
Around 18% of respondents had been asked to purchase an investment that offered a commission for referring other investors.
Clearly, Americans are not nearly prepared enough to recognize and combat financial fraud schemes. As securities attorneys, we are often frustrated by the fact that we can’t help people until after they’ve been bilked out of their life-savings or taken for a ride by a phony broker. And so we wanted to take a moment to remind everyone out there who is or may become an investor that the old saying, “If it sounds too good to be true, it probably is,” is about the surest way to protect yourself against investment scams. We can all be tempted. Who doesn’t want to double their money overnight? Unfortunately, far more people lose all their money thinking that way than ever double it. Do your due diligence. Just because a nice man in a suit says he’s a broker, doesn’t mean he’s a broker. Do a background check on all brokers who solicit or trade for you with FINRA’s comprehensive BrokerCheck. For more tips, tools, and techniques in our collective fight against broker misconduct and fraud, please download our free Self-Defense Guide.
As always, if you or someone you know has the victim of broker misconduct or financial fraud, please contact us immediately for a free consultation.