FinancialCounsel

Securities Regulator Provides Guidance As To Managing Investment Risk

FINRA (the Financial Industry Regulatory Authority) recently published, "Managing Investment Risk" as guidance for investors.  It contains helpful advice.  Let's overview the key advice contained in the publication. 

The publication begins with the simple notion that all investors, except those needing short term funds, need to take at least some risk in order to earn a return that will provide some protection against inflation.  With that notion in mind, FINRA proceeds to discuss the types of investment risks that investors face.

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SEC Chairman's Speech Highlights Key Securities Initiatives And Reforms

SEC Chairman Mary Schapiro's recent speech to the securities industry, entitled, "The Road to Investor Confidence," certainly was not designed to win over friends from Wall Street. Prefacing her remarks by blaming Wall Street for the "recent crisis" (it didn't understand or simply ignored the risks) and by blaming the SEC (for being asleep at the wheel), she described how the SEC is going about restoring investor confidence and protection.  Let's review the more important initiatives and reforms.

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Morgan Keegan's Abusive Sales Of Auction Rate Securities Prompt SEC Complaint

Recently, the Securities and Exchange Commission (SEC) filed a federal lawsuit against Morgan Keegan & Company, Inc., alleging widespread sales practices violations in connection with its underwriting, marketing and sale of auction rate securities ("ARS").

The SEC's complaint (available on the SEC's website) contains a treasure trove of alleged facts against Morgan Keegan, which investors, and their lawyers, should find to be fascinating reading.  As background, ARS are bonds (issued primarily by municipalities and student loan entities) or preferred stock (issued by closed-end funds), each of which provide for interest rates or dividend yields that are periodically reset through auctions.  Auctions fail when there are not enough bids at the auction to cover the securities for sale.  If an auction fails, then the issuer (the municipality, student loan entity or closed end fund) must pay a pre-determined maximum rate or yield, but, importantly, the ARS is illiquid at that point in time and until the next, successful auction.

Let's highlight the key allegations of the SEC's complaint.

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Securities Regulator Takes Sweeping Action To Protect Municipal Bond Investors

FINRA (the Financial Industry Regulatory Authority) has launched a "comprehensive initiative" to protect municipal bond investors.  Among other things, FINRA is conducting "sweeps" of financial services firms and has published investor alerts and on-line tools in an effort to inform investors and better protect their interests.  Let's examine FINRA's efforts.

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Securities Regulator Issues Warning Relating To Leveraged And Inverse ETFs

FINRA (the Financial Industry Regulatory Authority) has warned financial services firms that non-traditional exchange-traded funds (ETFs) are unsuitable for retail investors who plan to hold them for more than one day (a trading session), particularly in volatile markets.  Let's examine why FINRA has taken an interest in leveraged and inverse ETFs.

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SEC Chairman Mary Schapiro Outlines Improvements To Investor Protection And Market Integrity

Chairman Mary Schapiro recently testified before the Senate Subcommittee on Financial Services and General Government on the ways in which the Securities and Exchange Commission (SEC) is seeking to restore investor confidence.  Her remarks come at a time when both investor protection and market integrity need substantial improvement.  Let's highlight the key areas that the SEC is focusing upon.

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FINRA Proposes Significant Changes To Suitability And Know-Your-Customer Rules

Recently, securities regulators proposed to revise the Suitability and Know Your Customer obligations.  In Regulatory Notice 09-25, FINRA is proposing to add a great deal more to Suitability and Know Your Customer obligations.

Specifically, under the revised Rules: 

A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the facts known by the member or associated person or disclosed by the customer in response to the member’s or associated person’s reasonable efforts to obtain information concerning the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the member or associated person considers to be reasonable in making recommendations.

Likewise, with respect to the Rule regarding suitability obligations, the FINRA Rule proposes the following:

There are three main suitability obligations under Rule 2111: reasonable-basis suitability, customer-specific suitability and quantitative suitability. The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on adequate due diligence, that the recommendation is suitable for at least some investors. In general, what constitutes adequate due diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the member’s or associated person’s familiarity with the security or investment strategy. The customer-specific obligation requires that a member or associated person have reasonable grounds to believe that the recommendation is suitable for a particular customer based on that customer’s profile, as delineated [above] in Rule 2111(a). Quantitative suitability requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s profile, as delineated [above] in Rule 2111(a). No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.

Additionally, FINRA proposes to add the following:

Customers’ Financial Ability. Rule 2111 prohibits a member or associated person from recommending a transaction or investment strategy involving a security or securities or the continuing purchase of a security or securities or use of an investment strategy involving a security or securities if such recommendation is inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.

Finally, the Know Your Customer Rule is amended as proposed as follows:

Every member shall use due diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.

Likewise, FINRA proposes, for purposes of this Rule facts essential to “knowing the customer” include the customer’s financial profile and the investment objectives or policy.

This Regulatory Notice provides some significant ramifications both to brokers and investors regarding securities obligations.

Source:  FINRA Regulatory Notice 09-25

Texas Instruments Joins Other Institutional Investors In Suing Investment Banks Over Auction-Rate Securities Purchases

Texas Instruments has sued Citigroup, Morgan Stanley and Bank of New York Mellon Corp. for selling it $524 million in auction-rate securities which the company says it cannot liquidate.

The auction-rate securities market, once valued at $330 billion, collapsed in February 2008 when dealers stopped participating in the auctions.

The securities Texas Instruments holds are backed by student loans.  It had $575 million invested in them in February 2008, down from $1 billion in December 2007, according to a February 2008 regulatory filing.

Although Texas Instruments was aware that auctions could fail, the banks told it that previous auctions did so only because of the issuers' credit problems, and that the dealers would prevent failures because the student-loan credits had guarantees from the U.S. government, according to the complaint.

The banks also "omitted the extent to which the entire ARS market depended on continued bidding and purchasing by" the banks, according to Texas Instruments' complaint.

Lawyers at SNSFE continue to investigate and prosecute claims for auction-rate securities recoveries. 

Source: Bloomberg.com

SNSFE Continues To Investigate Oppenheimer Champion Income And High Yield Funds As Class Action Filing Deadline Approaches

Attorneys at SNSFE continue to investigate the Oppenheimer Champion Income Fund as well as the Oppenheimer High Yield Fund.  Already, class actions have been filed, as well as arbitration actions. 

Investors who seek to recover money should note that there is a deadline of April 13, 2009 in which to file for a class action as lead plaintiff.  That class action deals with a period of August 7, 2006 through December 2008. 

 

FINRA's Online "Risk Meter" And "Scam Meter" Tools Are Worthwhile

FINRA (the Financial Industry Regulatory Authority) has a response to what seems to be almost daily revelations of investment fraud and investment scams around the globe.  The response is a set of online tools aptly named the "Risk Meter" and the "Scam Meter."  I've tested the tools and recommend them to investors.  The tools are complemented by a FINRA Investor Alert entitled, "Avoiding Investment Scams." Let's examine the online tools and the investor alert.

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Private Equity Investments Potentially Offer Attractive Returns But With Notable Risks

A recent study by three researchers at the Center for International Securities and Derivatives Markets (CISDM) at the University of Massachusetts Amherst examines the advantages and disadvantages of private equity investing.  In announcing their findings, Mr. Schneeweis, Mr. Gupta and Mr. Szado observe that in North America, investment allocations in private equity among institutional portfolios are expected to grow to more than 7.5 percent of total traditional and alternative asset allocations. That percentage represents a substantial dollar allocation. Let's examine the major findings of the research, as well as its major warnings to prospective investors.

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Tips To Weather Tough Financial Times

FINRA (the Financial Industry Regulatory Authority) has published, "Weathering Tough Financial Times: 9 Tips for 2009."  It is a helpful roadmap for saving, investing, and taking some precautionary measures to weather the tough times.  Let's examine the regulator's tips.

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SEC Details Its Actions To Protect Investors And The Markets During The Credit Crisis

In the midst of the current turmoil in the credit markets, the Securities and Exchange Commission (SEC) has published a lengthy list of accomplishments (with helpful links) to protect investors and the markets.  The SEC divides its accomplishments into three broad categories:  (1) "Aggressively Combating Fraud and Market Manipulation Through Enforcement Actions"; (2) "Taking Swift Action to Stabilize Financial Markets"; and (3) "Enhancing Transparency in Financial Disclosure."  Let's examine the highlights.

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Securities Regulator Issues Timely Guidance Regarding Cash Alternatives And High Yield Securities

Investors have searched for high yield securities as well as "cash equivalents" that will protect their principal.  Financial services firms have responded, but in too many instances have mischaracterized the benefits and the risks of both kinds of investments.  Recently, FINRA (the Financial Industry Regulatory Authority) issued regulatory notices to firms to guide them in how to market and sell such investments.  Let's examine FINRA's guidance.

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UBS' Sale Of Structured Notes Promising Protection Of Principal Falls Far Short; Investors Must Be On Guard

In a market that has witnessed sales of so-called “structured notes” quadruple in the last four years, no firm is closer to the eye of a major storm than UBS.  That's because UBS has sold about $1 billion of these "100 percent principal protected notes" in the United States, only to see their value plummet to 10 to 15 cents on the dollar through secondary market trading.  In response, UBS clients have filed complaints and state securities regulators have formed a task force to investigate UBS' sale of those products.  Let's examine what went wrong at UBS, and how investors - with accounts at any financial services firm and with all types of structured products - can protect themselves.

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Changes To Expungement Rule Seek To Better Protect Customers' And Regulators' Right To Access Complaint Information

Recently, the Securities and Exchange Commission (SEC) approved rule changes that the Financial Industry Regulatory Authority (FINRA) had proposed to better protect customers' and regulators' ability to access complaint records of financial advisers.  Let's examine these important rule changes.

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Investor Protection Priorities Of Securities Regulators Revealed In Continuing Education Topics

The Securities Industry/Regulatory Council on Continuing Education (the “CE Council”) recently published its Firm Element Advisory to “highlight current regulatory and sales practice issues” for financial services firms to consider incorporating into their continuing education programs for financial advisers.  All in all, the CE Council has identified 14 areas for study, and its website (www.cecouncil.com) contains helpful web links and references to fully explore those areas.  Let’s examine the more critical ones for investors to know.  

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Regulator's First Enforcement Action Relating To Mortgage-Backed Securities Is Just The Beginning

The recent enforcement action by FINRA (the Financial Industry Regulatory Authority) against two brokers from a now defunct small brokerage firm normally might have come and gone with little fanfare.  But this action, which FINRA itself headlined, “First Enforcement Action Arising from FINRA’s Ongoing Investigations Into Abuses in Marketing and Sales of Mortgage-Backed Securities” surely promises more to come.  In addition to barring two brokers from the industry and suspending another at SAMCO Financial Services, Inc. -- the opening act – FINRA clearly is unveiling the fruits of its labors associated with a targeted examination request sent to brokerage firms nationwide.  Let's examine what the fuss is -- and will be -- about.

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Any Takers?

Friends,

I want to take more risk in my law practice.  After all, risk is good; the higher the risk, the higher the reward.  But, I fear that I may fail.  That's too bad, because the more risk I take, the more investors I can serve, and the more money I can make.

If there only was a way for me to take on cases that I otherwise would not have taken on; what's an aggressive, capitalistic lawyer to do?

Friends, would you be willing to contribute money to fund my (higher risk-taking) law practice?  In return, I will give myself full indemnity for civil and criminal actions that you or anyone may bring against me.  I also will concede to allowing me to pay myself any "golden parachute" exit packages to which I think I am entitled.  And I also will agree not to burden my contributors with financial or accounting reports to show you how I am spending your money.

Any takers?  Thanks, in advance, for your financial support.

Regulator Provides Guidance For Weathering Tough Financial Times

FINRA (the Financial Industry Regulatory Authority) has issued guidance to Americans who may feel pressured to make poor financial decisions in order to raise cash to meet short-term needs.  Entitled, "Weathering Tough Financial Times - The Long-term Costs of Quick Cash", FINRA discusses the pros and cons of some popular strategies.  Let's examine FINRA's guidance.

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UBS Securities Continues To Face Problems Subsequent To The ARS Settlement Announcement With Attorney General Cuomo

Subsequent to the filing of the New York Attorney General's complaint against UBS Securities, UBS Securities reached a settlement with Attorney General Cuomo. In this settlement, UBS has agreed to return over $11 billion to investors across New York state and the nation.  That said, UBS continues to face problems.  Subsequent to that announcement, New Hampshire securities regulators accused a division of UBS of urging a non-profit student lender to continue issuing auction-rate securities even though the Swiss bank knew that the market for them was on the verge of collapse.

New York Attorney General's Complaint Against UBS Securities Seeking Relief For Auction Rate Securities Purchasers Nationwide

Following on the heels of a similar complaint filed by Massachusetts securities regulators, New York Attorney General Cuomo’s complaint against UBS Securities and UBS Financial Services (“UBS” collectively) alleges that UBS deceived its customers, its own financial advisors and the issuers of auction rate securities (“ARS”).  When UBS decided to stop participating in the ARS market in February 2008, UBS had 50,000 customer accounts holding $37 billion in ARS.  Let’s examine the key allegations of the complaint.

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Special Alert: UBS Agrees To A BuyBack To Settle ARS Claims On The Heels Of Citigroup And Merrill Lynch Settlements

According to news sources, UBS has agreed to a $19.4 billion buyback to settle charges it misled investors to buy risky bonds says the Massachusetts Secretary of State's office.  The agreement has been reached between UBS Financial Services Inc. and the federal Securities and Exchange Commission and regulators in several states.

This comes a day after Citigroup and Merrill Lynch said they would buy back almost $20 billion of such securities between them.  The deal is the latest, and by far the largest, in a string of settlements involving state officials.  News of the UBS deal comes a day after Citigroup Inc. agreed to buy back more than $7 billion in auction-rate securities and pay $100 million in fines.  Also on Thursday, Merrill Lynch agreed to buy back an estimated $12 billion in auction-rate securities from its clients over a one-year period beginning January 15, 2009.

Special Alert to Citigroup Retail Investors Holding Illiquid Auction-Rate Securities

New York Attorney General Cuomo announced today a landmark settlement with Citigroup to recover billions in auction-rate securities for investors nationwide.

According to the press release issued today, Citigroup has agreed to buy back, no later than November 5, 2008, all illiquid auction-rate securities from all retail customers, charities, and small to mid-sized businesses.  Citigroup will:

• fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• consent to a special, public arbitration process to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• undertake to expeditiously provide liquidity solutions to all other institutional investors; and
• reimburse all refinancing fees to any New York State municipal issuer who issued auction rate securities through Citigroup since August 1, 2007.

Read press release.

Securities Regulator Proposes To Improve The Accuracy Of Communications Regarding Variable Insurance Products

FINRA (the Financial Industry Regulatory Authority) has filed Regulatory Notice 08-39 for public comment. Among other things, FINRA proposes to improve the manner in which variable insurance products are advertised, particularly with regard to guarantees and riders, performance illustrations and investment analysis tools. The proposal, if approved, will better protect the public when considering whether or not to purchase these often-confusing products. Let’s examine the more important parts of FINRA’s proposal.

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SEC Proposes Changing The Rules To Better Protect Purchasers Of Equity Indexed Annuities

Recently, The Securities and Exchange Commission (SEC) published for public comment its proposed new rule aimed at protecting investors, especially senior investors, against the abuses associated with the marketing and sale of equity indexed annuities.  Sales of equity indexed annuities have grown dramatically in recent years, with $25 billion sold in 2007, for a total outstanding value of $123 billion of equity indexed annuities held by investors.

Let's examine why the SEC is concerned, what it proposes to do, and how the proposed rule will protect investors.

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Regulator's Complaint Against UBS Securities Exposes Significant Conflicts Of Interest And Omissions In The Sale Of Auction-Rate Securities

On June 26th, Massachusetts securities regulators sued UBS Securities and UBS Financial Services for their role in the auction-rate securities ("ARS") debacle that has plagued not only UBS but several other financial services firms.  In addition to other relief, the 101-page complaint seeks an order requiring UBS to offer to rescind sales of ARS at par (purchase price), or to offer restitution to investors who already sold their ARS below par.

Much like the emails that Eliot Spitzer uncovered to expose Wall Street's widespread, undisclosed conflicts of interest in the research analyst cases, Massachusetts securities regulators have uncovered scores of emails from UBS executives that make UBS' denial of liability border on laughable if not absurd.

Let's examine the more important charges that Massachusetts securities regulators have lodged against UBS.

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Key Guidance On Hedge Fund Investing

On Tuesday, May 13th, I presented Key Guidance On Hedge Fund Investing, a webinar highlighting important information contained in the "Report of the Investors' Committee to the President's Working Group on Financial Markets, Principles and Best Practices for Hedge Fund Investors." 

This report was released last month and is comprised of the material prepared by two committees, the Asset Managers' Committee and the Investors' Committee.  Given the voluminous size of the report, I primarily focused on the key advice noted by the Investors' Committee, including the topics of hedge fund investments and allocations, investment policy, and best practices in due diligence, risk management, legal and regulatory concerns, valuation, fees and expenses, and reporting. 

We recorded the program.  You can replay the presentation or listen to the podcast using the buttons below or by clicking on their links in the left side bar.

 

Investor Angst, Regulatory Probes And Litigation Intensify Over Auction Rate Securities

Investor angst concerning auction rate securities (ARS) continues, and indeed has worsened over the last few months. In May 2008, the New York Times reported that $300 billion worth of investors’ funds were “still locked up” and that 70% of all weekly auctions still were failing.  Additionally, ARS investors, especially those subject to class action filings, must be on guard to protect their rights.  Let’s discuss why.

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Securities Regulator Cautions Investors To Avoid Funds Investing In Catastrophe Bonds Or Other Event-Linked Securities

The Financial Industry Regulatory Authority (FINRA) has issued an Investor Alert warning investors about the risks of speculating on natural disasters with event-linked securities, such as catastrophe bonds or "cat bonds."  Cat bonds offer high yields but can quickly lose most or all of their value if a triggering event, such as a hurricane, earthquake or pandemic, occurs in specified geographical regions.

According to Mary Schapiro, FINRA CEO, "Event-linked securities are complex products that can lose their value if a triggering catastrophe occurs.  While they are typically marketed to institutional investors, retail investors should know that they could be vulnerable by virtue of owning shares in funds that invest in event-linked securities."

FINRA has issued a new Investor Alert entitled, "Catastrophe Bonds and Other Event-Linked Securities."  It describes how event-linked securities work and helps investors determine whether and to what extent the funds they hold invest in these securities.  The Alert explains that prices, yields and ratings of cat bonds rely almost exclusively on complex computer modeling techniques that determine the probabilities and the potential financial damage of natural disasters.  If a  catastrophic or "triggering" event occurs, holders could lose most or all of their principal.

Investors are encouraged to check their funds' prospectuses to see whether any fund is authorized to invest in event-linked securities - including collateralized debt obligations and derivatives.  And investors should make sure that if a fund is invested in event-linked securities, it is diversified in terms of type of risk and geographic location, and event-linked securities comprise only a limited portion of the portfolio.

That's good advice.

Source:  FINRA News Release

Securities Regulator Issues Warning Regarding Investors’ Use of Reverse Mortgages

For many individuals, their largest asset is their home, and it is their most precious source of retirement security.

Unfortunately, over the years financial advisers have convinced homeowners that they should tap into their home equity to purchase investments.  In 2004, the NASD (National Association of Securities Dealers), now known as FINRA (Financial Industry Regulatory Authority) issued an investor alert entitled, “Betting the Ranch: Risking Your Home to Buy Securities.”  That alert addressed the use of new mortgages, refinanced mortgages and lines of credit secured by the home.  The NASD expressed its concern that “investors who must rely on investment returns to make their mortgage payments could end up defaulting on their home loans if their investments decline and they are unable to meet their monthly mortgage payments.”

More recently, homeowners (over the age of 60) have been the target of those who wish to sell them a “reverse mortgage.”  While reverse mortgages may be appropriate in some circumstances (such as when homeowners cannot meet their monthly mortgage payments or cannot pay bills or meet unexpected expenses), FINRA has alerted investors to stay clear of reverse mortgages to finance a lifestyle that they otherwise cannot afford or to pay for investments.  FINRA warns in its recent alert entitled, “Reverse Mortgages: Avoiding a Reversal of Fortune”, that “as more Americans near retirement age, some financial institutions are aggressively marketing reverse mortgages as an easy, cost-free way for retirees to finance lifestyles – or to pay for risky investments – that can jeopardize their financial futures.”  Let’s examine FINRA’s guidance.

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ARS Woes Continue As Companies Join In Lawsuits To Recover Damages And Liquidate Securities

Auction-rate securities continue to be in the news.  To date, most of the suits against broker-dealers that sold ARS have been brought by individual investors.  But two companies, Miami-based Astar Air Cargo and Dallas-based MetroPCS Comunications, have each filed claims against Merrill Lynch. 

Last month, Astar, a privately held cargo airline, filed a Financial Industry Regulatory Authority arbitration claim against Merrill.  The firm said it has $9.125 million in frozen auction-rate preferred securities and is seeking compensatory damages of that amount.  Astar is also seeking $27.375 million in punitive damages. 

In the claim, Astar said it instructed Merrill to invest its cash reserves in products that would provide "complete safety of principal and complete liquidity."  Merrill put the money in ARS.  MetroPCS, the largest pay-as-you-go mobile phone service provider in the U.S., filed suit against Merrill in a Texas state court, charging that the company had invested $134 million in 10 ARS backed by CDOs.

Individual investors have filed ARS lawsuits against brokers including Morgan Stanley, UBS, TD Ameritrade and Wachovia.  However, those actions have been class actions and SNSFE attorneys would advise individual investors, especially those with large claims, to seek independent counsel before committing to a class action where the recovery may not be as great as individual actions.

On a related note, it appears that Goldman Sachs knew about the problems with auction-rate securities as early as 1992.  In 1992, a group of investors had bought auction-rate securities but they failed four times in a row at the auction and they ultimately became illiquid.  The investors filed an arbitation claim with the New York Stock Exchange which awarded the group $2.8 million and it awarded them recission. 

SNSFE continues to investigate ARS cases for their suitability or lack there-of.

Sources:  FinancialWeek, Dow Jones Newswires

Auction Rate Securities Present A "Hotel California" Nightmare For Investors

Investors have discovered Wall Street’s version of the Hotel California: they have “checked in” to an investment that they cannot leave.  Since mid-February, a significant number of auctions (70% according to Thestreet.com) in “auction rate securities” have failed, leaving the $330 billion market in disarray. 

At least one state securities regulator has commenced an investigation, and FINRA (the Financial Industry Regulatory Authority) has issued guidance for investors (“Auction Rate Securities: What Happens When Auctions Fail”).  Additionally, UBS and Goldman Sachs are among the financial services firms which have decided to markdown the value of these securities on client statements, with most markdowns between 3% and 5% but some as high as 20%.  Moreover, one secondary market provider has reported transactions completed recently with 30% discounts!

Let’s examine the problem and explore the recourse that investors may have.

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Exercise Caution In Purchasing Structured Investments, The Latest Hot Product From Wall Street

Two seminars that I recently attended both shared the common element of having a speaker discuss the virtues of "structured investments", or "structured products" as they sometimes are called.  A financial publication recently ran a story entitled, "The Next Big Thing; Structured Products May Be Difficult to Define, Explain and Track - Yet They're Touted As the Next 12 Figure Asset Class."  Indeed, both seminar speakers claimed that, in Europe, structured products are so popular that investors can buy them at the post office!  Hype or reality?  No one can be sure, but we know that for 2007, analysts predict that investors will purchase $100 billion of them.

What are structured products?  According to a website promoting them, structured products "create an investment product that combines some of the best features of equity and fixed income - namely upside potential with downside protection."  As the website recognizes, it is the "mix of investments in the basket" that determines risk and return, and it can vary dramatically.  Indeed, in 2005 the National Association of Securities Dealers (now FINRA), issued a notice to member financial services firms that based upon its review, "NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers."

Let's examine the NASD's notice to members to highlight the characteristics and risks of structured products.

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Brokerage Firms Continue To Run Afoul Of Longstanding Requirements For Fee-Based Accounts

Fee-based accounts have existed for more than a decade as an alternative to paying commissions for buying and selling securities.  They have been popular and profitable, but soon will become subject to more stringent regulatory requirements as a result of a 2007 court decision that effectively makes such accounts investment advisory (fiduciary) accounts instead of (arguable more limited duty) brokerage accounts.  As we wait to see whether brokerage firms will choose to continue to offer fee-based programs in this fiduciary context, we must be mindful of how poorly several brokerage firms have complied with the longstanding regulatory requirements for fee-based accounts.  Let's review what brokerage firms have continued to do wrong, as reflected in several regulatory actions and pronouncements.

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SEC Approves Rule Increasing Protection For Deferred Variable Annuity Investors

The Securities and Exchange Commission (SEC) recently approved a controversial rule proposal that will add significant protections for investors purchasing or exchanging deferred variable annuities.  The rule imposes new requirements on financial services firms in four areas:  suitability; review and approval by a principal of the financial services firm; supervisory and compliance procedures; and training of financial advisers.  Let's highlight the key features of new Rule 2821 as they relate to suitability.

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SEC Details Efforts To Protect Seniors From Investment Fraud

The Chairman for the Securities and Exchange Commission (SEC) is making protection of senior investors one of his "highest priorities."  Recently, Chairman Christopher Cox spoke to the United States Senate Special Committee on Aging.  Let's review how the SEC plans to protect seniors from investment fraud.

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Hedge Fund Due Diligence; A Must Before You Or Your Adviser Invests Your Money

Hedge fund investments are popular, but also can be dangerous.  One study suggests that nearly one-half of all hedge fund failures are caused by such issues as misrepresentation of fund investments, misappropriation of funds, or unauthorized trading.  Investors owe it to themselves to conduct due diligence before investing in hedge funds or funds of funds.  And investors who are paying advisers should expect them to do so in order to comply with their legal obligation -- or else face liability for their failure to do so.

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Securities Regulator Calls For Significant Improvements In The Protection Afforded To Investors Purchasing Municipal Securities

Securities and Exchange Commission (SEC) Chairman Christopher Cox recently delivered an SEC staff "white paper" to Congress that calls for significant improvements in disclosure and accounting in the municipal securities market to better protect investors.

Chairman Cox is not sugar-coating his belief that investors purchasing municipal bonds, notes, and other debt securities suffer from inferior legal protection compared to that afforded to other investors purchasing corporate bonds or equities.  Mr. Cox observed that the disclosure obligations and protection afforded to municipal securities investors is "not even close", despite the fact that investors (as well as analysts, investment advisers and brokerage firms) "deserve the same level" of disclosure and protection.  Let's examine why Chairman Cox is so concerned, and what he has proposed to better protect municipal securities investors.

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Recovering Your Losses From Misguided Real Estate Investments And Recognizing Red Flags Before You Invest

This 25-minute podcast originally was presented as a webinar on 2/21/06.  It covers real estate offerings/investments, typical entity structures, securities law issues, due diligence, duties of loyalty and care, causes of action, remedies, and limitations. 

 

Securities Regulator Issues Warnings Regarding Exchange Traded Funds (ETFs)

The New York Stock Exchange (NYSE) has issued an Informed Investor Publication entitled, What You Should Know About Exchange Traded Funds.  While many ETFs are passive managed funds that track U.S. equity indexes, new ETFs may entail greater risks.  Let's examine the NYSE's caution to investors.

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Seniors Beware: Securities Regulator Details Investment Frauds

The head of the state securities regulators' association, Patty Struck, recently testified before the United States Senate.  Her testimony, entitled,"Protecting Senior Citizens Against Investment Fraud", noted how widespread investment fraud against seniors has become.  With the problem likely to become worse, Ms. Struck cautions seniors to be wary of three disturbing trends.

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"Selling Away" - A Primer For Investors And Their Attorneys

Brokerage firm clients sometimes lose money in investments that have been "sold away" from their brokerage firm.  That is, while the brokerage firm adviser indeed has sold the investment to the client, the brokerage firm has not sold it, has not approved of the sale, and likely does not even know of the sale.  Such "outside" investments often are the most egregious frauds and schemes.

The question arises whether a brokerage firm nonetheless can be held responsible for a client's losses.  Let's examine a brokerage firm's responsibility for what has become known as "selling away."

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A Primer On Alternative Investments And Managed Futures In Particular

"Alternative Investments" is a term used to describe numerous investment alternatives to stocks, bonds and real estate investment trusts (REITS).  Let's explore the characteristics of these new menu items, especially one in particular, managed futures.

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Securities Regulators Issue New Round Of Warnings Regarding Hedge Funds

The New York Stock Exchange (NYSE) recently published, "Hedge Fund Investing -Is It a Suitable Investment For You?"  That publication, available on the NYSE's website, is one of several pronouncements that securities regulators have made regarding hedge funds. 

The concern is that retail investors (as distinguished from "institutional" investors) should not invest in hedge funds.  Indeed, SEC Chairman Christopher Cox recently testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs that hedge funds "are not investments for Mom and Pop."  Chairman Cox opined that they "are generally risky ventures that simply don't make sense for most retail investors."

What makes hedge funds unsuitable for most retail investors?  Let's examine the recent NYSE publication.

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NASD's Hot Topics For Protecting Investors

Periodically, the National Association of Securities Dealers (NASD) publishes its "Examination Priorities" and "Frequently Found Violations" in a document entitled, "Improving Examination Results."  The publication is helpful as a roadmap to determine what NASD believes to be the hot topics for protecting investors.  Let's explore some of those hot topics recently revealed.

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Recent Interviews On First Business Morning News Show

In a televised interview on First Business Morning News, I discussed one of the latest stock scams - putting "China" in a company name hoping to attract investors.

Watch Spotting China Stock Scams.

For the show's Internet audience, I'm featured in another interview discussing the difference between a stock broker and an investment advisor. 

Watch Brokers Vs. Investment Advisors - The Differences You Need To Know!

Beware Of Financial Advisers Changing Firms As Investors May Pay The Price

Many individuals change jobs.  But financial advisers are doing so in growing numbers, and there is a concern that this may drive up costs for some of their clients.  In fact, recently the New York Stock Exchange (NYSE) issued an Informed Investor publication entitled, "If Your Broker Changes Firms, What Do You Do?"

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Court Rules That Stockbrokers Must Register As Investment Advisers When Paid Asset-Based Fees And Not Commissions

Recently the U.S. Court of Appeals for the District of Columbia Circuit issued a decision that represents a landmark victory for registered investment advisers and a defeat for major brokerage firms (such as Merrill Lynch, Smith Barney, Wachovia Securities and Morgan Stanley).  The Financial Planning Association (FPA) filed the lawsuit against the Securities and Exchange Commission (SEC) arguing that the SEC had exceeded its authority in creating an exemption from investment adviser registration under the Investment Advisers Act for stockbrokers who charge asset-based fees for their services.  Let's examine three key questions relating to the court decision in FPA v. SEC striking down the so-called "Merrill Lynch Rule."

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Employees Warned Of Early Retirement Investment Pitches That Promise Too Much

A securities regulator, the National Association of Securities Dealers (NASD), has issued an investor alert to employees contemplating early retirement in reliance upon early retirement investment pitches.  These pitches have been "flawed, even fraudulent", and have caused retirees great financial harm.  Let's examine the NASD's Investor Alert.

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