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SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators

April 2, 2012

Wolves in Sheep’s Clothing

The SEC has issued an update of a previous alert warning investors of scammers posing as SEC employees soliciting personal and financial information.  In the warning, the SEC reminds the public that it does not allow financial solicitation offers, offer assistance in the sale or purchase of securities, or endorse money transfers; nor is the SEC linked to any drawings, sweepstakes, lotteries, or anything involving prizes, winnings, or cash windfalls.

The SEC has seen a rise in schemes where a scammer posing as an SEC employee calls potential victims and allegedly offers the victim a large sum of money (in some cases as much as $450,000) in return for dumping a small amount of cash (like $1,500) into an unspecified account.  These scams can appear legitimate. In fact, the fraudster may use a real company name and refer victims to an operating website.

According to the SEC, people should watch out for anyone claiming to be associated with the SEC who tries to gain personal and financial information throught statements like:

Wanting to help with a fund transfer

Wanting to send an investment offer

Offering advice on securities or financial assistance for an upfront fee

Claiming that you are eligible to receive money from a class action settlement or claim fund.

If you receive such unsolicited communication, always verify the caller’s identity using the SEC’s personnel locator (202) 551-6000 or call the SEC general information line at (800) SEC-0330.  Additionally, the SEC urges victims to submit a complaint form or report the incident to the FBI at www.ic3.gov.

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2011 in Review: FINRA’s Top 5 Enforcement Issues

March 22, 2012

FINRA enforcement statistics experience hike in 2011 compared to 2010

An annual survey of FINRA sanctions revealed that 2011 was quite busier than 2010.  In addition to banning more reps, FINRA fines jumped 51% from $48 million in 2010 to $68 million in 2011.

The information is located in the annual FINRA Sanctions Survey, recently released by law firm Sutherland Asbill & Brennan.  The Sutherland attorneys who conducted the survey, Brian Rubin, Deborah Helitzer, and Andrew McCormick, said, “While the $68 million reported in 2011 is still a far cry from the $184 million and $111 million that FINRA fined firms and representatives in 2005 and 2006, respectively, it may signal continued enforcement efforts for the near future.”

FINRA also increased the number of disciplinary actions and reps barred.  In 2011, 1,488 disciplinary actions were filed as opposed to 1,310 filings in 2010.  FINRA barred 329 reps last year, a 14% increase from 288 in 2010.

Compliments of Sutherland’s survey, here are FINRA’s top 5 enforcement issues in 2011 (organized in order of total fines).

1) Advertising sanctions jumped from $4.75 million in 2010 (when it was also ranked first on Sutherland’s Top Enforcement Issues list) to $21.1 million in 2011.  The number of cases involving alleged advertising violations doubled in number to 45 in 2011.  As in 2009 and 2010, a significant amount of the 2011 advertising fines ($9.5 million) related to the sale of auction rate securities.  In addition, nearly $8 million in fines stemmed from nine cases involving the use of allegedly misleading advertising materials on firm websites available to investors.  This included advertisements for complex products, such as Auction Rate Securities, and for more traditional investments like annuities.

2) Short selling cases were the second biggest enforcement issue reported by FINRA in 2011, generating $16.8 million in fines. In contrast, short selling was fifth on Sutherland’s 2010 Top Enforcement Issues list.  The 2011 fines for short selling represent a more than fourfold increase compared with the fines reported in 2010.  This substantial increase was largely driven by a single $12 million fine imposed on a firm that allegedly violated Regulation SHO by failing to properly supervise millions of short sale orders that were mismarked and placed to the market without reasonable grounds to believe that the securities could be borrowed.

3) Auction Rate Securities (ARS) continued to be an important focus for FINRA in 2011, as seven ARS cases resulted in nearly $10 million in fines.  This was a substantial increase from 2010 when two ARS cases were reported that resulted in $1.75 million in total fines.  Most of the 2011 cases concerned the alleged failure to disclose material facts to investors, often in advertising materials.

4) Suitability cases resulted in $7.7 million in reported fines in 2011.  The 106 cases that involved suitability allegations in 2011 doubled the 53 cases reported in both 2009 and 2010.  Similarly, the fines reported in suitability cases jumped from $3.75 million in 2010 to $7.7 million in 2011, a 105% increase.  Suitability has repeatedly landed on Sutherland’s Top Enforcement Issues list, placing fourth in 2010 and 2011 and second in 2008 and 2009.

5) Improper Form U4, U5, and Rule 3070 filings resulted in 91 FINRA disciplinary actions and more than $6.6 million in reported fines in 2011 (compared to 67 cases and fines of $1.45 million in 2010).  Although allegations concerning isolated problems with these regulatory filings often led to fines of $5,000 to $10,000, there were four 2011 cases where each firm was fined more than $600,000 for failing to report material information on Forms U4 and U5, including SEC investigations and customer settlements.

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SEC Tightens Rule on Investment Advisor Performance Fees

February 23, 2012

On February 15, 2012, the Securities and Exchange Commission (SEC) announced that it is strengthening its rule on investment advisory performance fees. It is raising the net worth requirement for investors who pay performance fees and excluding the value of the investor’s home from the net worth calculation.

Current SEC rules allow RIAs (Registered Investment Advisors) to charge clients performance fees as long as the net worth the RIA is managing on behalf of the client meets specific dollar ceilings.  Those investors who possess the dollar threshold required are considered “qualified clients”, meaning they are capable of shouldering the risks that come with performance fee arrangements.

What are the New Requirements?

  1. Under the SEC’s tightened rules, “qualified clients” will now be required to have a minimum of $1 million in assets managed by the advisor, as opposed to the previous monetary requirement of $750,000.  The net worth requirement also increased from $1.5 to $2 million. These changes are compliments of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which prompted a Commission in July 2011 to issue an order increasing the dollar thresholds as per the requirements of the Act.
  2. Additionally, the stricter rules will exclude the worth of the client’s primary residence and property-related debts in the calculation of net worth.  This specific change was not required by Dodd-Frank, but is analogous to the December 2011 changes the Commission approved to net worth calculation meant to determine who is an “accredited investor”.  As such, an “accredited investor” qualifies to invest in specific unregistered securities offerings.
  3. Finally, the stricter set of rules requires the Commission to issue an order making inflation adjustments to the dollar thresholds utilized to ascertain if a client is qualified.  As required by the Dodd-Frank Act, the Commission is required to issue such an order every five years.

Some Client Performance Fees Grandfathered In

There is a new grandfather provision to the performance fee rule that will allow registered investment advisors to continue charging performance fees, provided the clients were regarded as “qualified clients” prior to the rule changes.  The provision will also allow newly registering investment advisors to continue charging performance fees if they were already doing so.

All rule amendments are scheduled to take effect 90 days after they are published in the Federal Register.

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FINRA Issues Watch List Focused on ‘Yield Chasing’

February 16, 2012

Investors are hungry for results, and they want them higher and faster than ever before.  Last Tuesday, the Financial Industry Regulatory Authority (FINRA) issued a watch list announcing a crackdown on ‘yield chasing’ (risky or nontraded REITs, VAs and private placements).  As the primary regulator of brokers, FINRA is warning them to be cautious of [...]

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UBS Fuels the Wall Street Fire

November 7, 2011

As the “occupy Wall Street” movement continues, UBS AG gives protestors more fuel for the fire.  On October 25, 2011, the Financial Industry Regulatory Authority fined the Swiss banking giant $12 million for its continuous failure to properly supervise millions of short-sale orders. Specifically, the case is against UBS Securities, the American branch of the [...]

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FINRA Warns Investors About Non-Traded REITs

October 25, 2011

Amid a recent swarm of fraud investigations and significant investment losses, FINRA issued an investor warning about non-traded REITs (real estate investment trusts).  The warning encouraged investors to examine and consider the risks of non-traded REITs before jumping on the trend. Non-traded REITs have experienced an unusual rise during a time of economic downturn, going [...]

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Federal Appeals Court Rules That FINRA Cannot Enforce Disciplinary Actions Through the Court

October 25, 2011

The United States Court of Appeals for the Second Circuit has ruled that FINRA does not have the authority to enforce disciplinary actions on its members through the court system. The ruling comes as a result of a legal skirmish FINRA has been involved with for years concerning Fiero Brothers, a penny stock brokerage firm, [...]

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FINRA Fines Merrill Lynch $1 Million For Ponzi Scam Operated by Former Registered Representative

October 25, 2011

Two years ago, former Merrill Lynch employee Bruce Hammonds, was sent to prison for securities fraud; now FINRA is fining Merrill Lynch for not properly supervising Hammonds. FINRA alleges that Merrill Lynch’s lack of monitoring allowed Hammonds to conduct a $1.4 million Ponzi scam that roped in 11 victims.  Hammonds operated the scam under the [...]

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House Will Discuss Sro For Advisors On September 13

September 27, 2011

On September 13, the House of Representatives Financial Services Committee’s capital markets subcommittee will hold a hearing to discuss potential solutions for the regulation of investment advisors and broker/dealers.  The discussion will also include the hotly debated topic of implementing a fiduciary standard for broker/dealers who issue investment advice tailored to specific clients. The recent [...]

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FINRA Issues Warning About Gold Scams

September 27, 2011

On August 24, 2011, FINRA issued an investor alert titled “Gold Stocks—Some Investments Mine Your Pocketbook”.  The alert addresses the current frenzy to invest in gold due to record-high prices of gold bullion.  While it is true that there are legitimate gold investments, FINRA is worried that investors are being mislead to invest in scams [...]

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