FinTech, Blockchain, and Investing in Innovation: Is it the right investment for you?

By Y. Tatiana Clavijo

Technology disrupts the status quo. Through innovations, the standards are challenged, and new possibilities arise. Every sector of our lives is being impacted, disrupted, and constantly altered by innovations, and our finances are no exception. FinTech, or financial technology, is the new and exciting area of innovation for financial services changing how we manage our money, how we invest, and how we interact with financial firms. FINRA has been monitoring closely these developments which include pioneering products and creating new client-centric business models among others. The innovations rely on digital banking, the internet, and Blockchain technology. Consequently, private capital is pouring into innovation through investors across the board. Although the regulatory framework is not robust yet, supportive laws may lead to a balanced environment such that could foster innovation while protecting investors too – investors who often face the risk of losing the entirety of their investments.

FinTech and Blockchain innovations are shaking the financial markets to the core. FinTech’s developments have the potential to transform investment banking, wealth management, trading, research through artificial intelligence, machine learning, Blockchain, and many others. Meanwhile, Blockchain allows and supports much of the innovations. BlockChain is a digital ledger that maintains and stores complex databases and records of transactions. Facing this technological revolution, regulators face a split in their path to policy. Some regulators welcome development while others resist change.

Several initiatives grant the financial advancements room to grow, or the very least provide some legal framework to invite certainty without failing to protect investors. From a macro level, financial regulation is primarily intended to achieve market efficiency and integrity while insuring consumer and investor protection to ensure all market participants are safe from fraud, discrimination, manipulation, theft or other exploitative or abusive practices. Innovation drives change and economic growth. Therefore, the interest of FINRA to be an active participant in recent developments is well founded. FINRA’s Office of Emerging Regulatory Issues and a cross-departmental team created the Innovation Outreach Initiative, an initiative in support of Fintech innovation to “foster an ongoing dialogue with the securities industry” around Fintech that requests commentary from the business side on potential measures.

But, is investing in innovation something that suits your goals and appetite for risk? Most new innovations fail. As a result, most of the investments in innovation will fail. Prior to committing to a highly risky investment, obtain professional advice to prevent losing all your funds as Fintech becomes more complex thanks to technology.

FINRA’s Opportunity to Regulate Bad Apples

By Blayne Justus Yudis

Picture this: You just found out your broker was fired from a larger firm only two months ago for numerous violations of company policies and regulatory rules. Now he services your needs at the local firm down the street. A Boca Raton firm exemplifies this industry-wide practice, and it is a cause for concern. The Boca Raton firm hired a broker after a larger firm discharged him for violating various firm policies while under heightened supervision—which occurred only two months prior to his hire at the Boca Raton firm. The broker’s conduct was not unique. His BrokerCheck report cites 15 more incidents over the course of his career, including customer disputes, regulatory issuances, and a criminal charge.

Unfortunately, the Boca Raton firm has a history of employing bad apples: one former broker at the firm pled guilty to securities fraud as part of a $131 million market-manipulation scheme and, in 2010, the SEC temporarily barred one of the firm’s owner because he failed to reasonably supervise a trader at the firm. Even the firm itself has over 30 disclosures on it’s BrokerCheck since its registration was approved in 2000.

FINRA spokeswoman Nancy Condon stated that “[w]hile FINRA monitors and tracks problem brokers and will examine high-risk firms more frequently, FINRA cannot forbid a firm from hiring someone.” However, change may be impending.

At FINRA’s Board of Governors meeting earlier this year, the Board approved moving forward with proposed rules related to firms that have a disproportionately high number of regulatory disclosure events by the firm and/or its registered representatives. This decision follows pressure on FINRA to more closely regulate the hiring practices of brokerage firms. Although FINRA has made past efforts, regulatory guidance issued in April 2018 did not provide specifics about what constitutes a risky broker hire and how many risky brokers must be hired before a firm incurs liability.

FINRA understands the vital role firms play in protecting consumers from harm. In its April 2018 regulatory guidance, FINRA states that “[m]ember firms often serve as the first line of defense against customer harm through establishing and maintaining effective supervisory systems, particularly with regard to associated persons who may pose higher risks of causing customer harm. As such, FINRA would be wise to impose heightened liability on firms that assume the risk of hiring rogue brokers in order to caution firms against doing so. Heightened liability will incentive firms to sufficiently invest in their supervisory and employment processes. In doing so, investors will ultimately be better protected from rogue investors that can move across the industry as permitted under existing law. The opportunity for FINRA to more closely target bad apples is here.

As a next step in the rule making process, FINRA will soon publish a Regulatory Notice seeking comment on the proposed rules.

Shortened Deadlines for a Better Life

By Kevin Warger

Though seen by many as the speedy and efficient dispute forum, timely resolution of FINRA arbitration claims can be a life or death matter for some. When senior or ill claimants have lost large sums of money due to misconduct by their brokers, they can be left destitute and in dire need of a reward to help pay for medical bills. Where urgent health matters require immediate attention, the need to reach an investment dispute resolution becomes great, and lengthy deadlines could become very costly. The length of these deadlines, however, has been under review in recent years and may be undergoing some drastic changes. In recent weeks, FINRA Office of Dispute Resolution director Richard Berry stated that his office is currently preparing a draft rule to expedite the process for those over the age of 75. Under this rule, the deadlines for procedures like selecting arbitrators, preparing an answer, and producing discovery documents would be significantly shortened.

The idea is not a new one: In 2004, FINRA implemented an expedited arbitration process, still in effect, for those with serious illness or that are 65 years or older. That process, however, is an option rather than a requirement and has not been as widely used as anticipated. The 2004 process only applies to the way that FINRA facilitates arbitration proceedings—it does not require the parties themselves to move things along more quickly. Almost 10 years ago, a supervising attorney for the Investor Justice Clinic at the University of San Francisco said that the time to arbitrate a FINRA case takes 1.25 years, and that those who chose the shorter route per the 2004 option resolved their cases 31 percent sooner. However, sick and elderly claimants seeking investment remedies are often unsophisticated laypeople and simply would not know about the expedited option. The new rule, on the other hand, would trigger the expedited process automatically.

Though this new proposal isn’t the only measure meant to protect senior investors (for example, FINRA Rule 2165 attempts to curtail the exploitation of elderly or incapacitated investors), it is a step toward resolving some of the disputes common to the intersection of old age and financial investment.

Major Differences Between Traditional and Roth IRAs

By Cesar Mejia-Duenas

The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” (Proverbs 21:5)

It is not surprising that saving and investment decisions have always been a part of our lives. For this reason, we are called to learn about the different investment vehicles we might use to maximize our savings for retirement. In this article, we explain some of the differences between traditional IRAs and Roth IRAs.


The term IRA stands for Individual Retirement Account. Financial institutions provide for IRAs that allow you to make tax-advantaged contributions to save for retirement.

There are several types of IRAs. However, the most common are the traditional IRA and the Roth IRA.  It is essential to understand the differences between these accounts because selecting the type of account might have significant consequences on your retirement funds.

Major Differences

Some of the major differences between the traditional and Roth IRAs are: (i) the moment when contributions are taxed, and (ii) the withdrawal rules.

First, for the traditional IRA, contributions are not taxed up front. Furthermore, these contributions can be fully or partially deductible from your income, depending on your circumstances. On the other hand, in a Roth IRA, contributions are taxed upfront at the moment they are made. Thus, the amount in the account grows tax-free. However, the contributions made to the Roth IRA are not deductible.

Second, both traditional and Roth IRAs have different withdrawals rules.  For the traditional IRA, the account holder is required to make annual withdrawals from the account at age 70 ½. This rule can be an important decision for senior investors who are seeking to make their retirement grow or to conserve their capital. To the contrary, Roth IRAs don’t require any withdrawals during the owner’s lifetime. Thus, if the owner does not need the income from the Roth IRA, the account can continue to grow tax-free even after the owner reaches the age of 70 ½.

It is important to point out that for the traditional IRA, withdrawals are penalty-free beginning at age 59 ½. For the Roth IRA, the withdrawal rules vary. Contributions can be withdrawn at any time tax-free because the taxes were paid in advance. However, the earnings can be withdrawn penalty-free only after the account has been open for five years, and the person has reached the age of 59 ½.

Finally, we recommend that you visit your accountant to evaluate what account would be best for your particular situation. Also, remember that the number one factor in determining how much you will have at retirement is the consistency in which you make contributions to your account.  Plan in advance, and plan for abundance.

Fyre Festival: Financial Crimes Lawsuits are Heating Up

By Caitlyn Cullen

In January 2019, competing documentaries on Fyre Festival were released. The “Greatest Party That Never Happened” cast a new, darker light on the power of viral marketing as social media influencers lured to a tropical island by promises of luxury villas and a Coachella-style music festival, scrambled in the rain to claim one of the few hurricane tents on the otherwise-barren site. The documentaries portrayed a millennial catastrophe ripe for mocking, but also highlighted the consumers, stakeholders, and investors that were left as victims in the wake of high price tags and material misrepresentations.

In a legal setting, these misrepresentations go by another name: Fraud. After the festival, William “Billy” McFarland, the founder and CEO of Fyre Festival, found himself under the microscope of the SEC and U.S. Attorney’s Office facing allegations of civil and criminal fraud, respectively. Civil fraud claims can be filed by individuals or by government entities like the SEC, which regulates financial markets to protect investors from securities violations. Only the government can file criminal charges.

The SEC filed a civil complaint against McFarland for making false statements and material misrepresentations to fraudulently induce investments. The complaint alleged violations of the Exchange Act under § 10b (15 U.S.C. § 78j) and Rule 10b-5 (17 C.F.R. §240.10b-5) and of the Securities Act under § 17(a) (15 U.S.C. § 77q). While both provisions prohibit making false or misleading statements to defraud investors, 10b-5 claims require a showing of intent to defraud, but 17(a) claims require only a showing of negligence. In this way, the complaint captured McFarland’s conduct under the umbrella of fraud regardless of whether he purposely mislead investors at the time he solicited their investment or negligently allowed them to believe the concert would be successful, despite his catastrophic lack of planning.  In civil cases brought by the SEC, courts may grant injunctions and may impose civil penalties. McFarland and the SEC settled their claims with both an injunction and a fine. McFarland will be permanently banned from serving as an officer or director of a company and has agreed to a disgorgement of the $27.4 million his scheme raised from investors.

In contrast, the consequences of criminal proceedings can include imprisonment, restitution, and criminal fines. In the criminal case filed by the U.S. Attorney’s Office in the Southern District of New York, McFarland pled guilty to three counts of wire fraud, one count of bank fraud, and one count of making false statements to a federal agent. For these offenses, McFarland was sentenced to six years in prison and ordered to forfeit $26 million dollars.

Though the remedies for each case are distinct, the relief each may provide for victims is related, as the imprisonment will prevent McFarland from engaging in further deceptive practices, at least while in prison, the SEC settlement will bar him from similar activities after prison, and criminal forfeiture will be used to pay the disgorgement in the SEC settlement, which, in turn, may flow through as a payment for the victim-investors.

Investing in Non-Traded REITs: Liquidity Concerns and Lack of Oversight Highlight Major Risks for Investors

By Franco Piccinini

Non-traded REITs offer unique investment opportunities for highly sophisticated, well capitalized investors, but they can present significant risks for average investors. In order to mitigate losses, investors should understand those risks before investing in a non-traded REIT.

What is a REIT?

So, you want to invest in real estate, but you lack the capital and expertise required to purchase and manage a rental property of your own: what can you do? You might consider investing in a REIT. A REIT—or real estate investment trust—can provide an accessible vehicle for everyday investors to place their capital in real estate. In short, a REIT is a company that owns, and often manages, real estate assets on behalf of a group of investors. REITs fund the purchase of real estate by pooling investor capital into one fund and then using that capital to target certain classes of real estate.

Often, REITs focus on specific asset classes. There are residential REITs, office REITs, industrial REITs, and hospitality REITs, to name a few. REITs offer attractive investment opportunities because they allow ordinary people to invest in real estate without having to wade into the complexities of construction, financing, or managing of real estate.

Publicly Traded REITs vs. Non-Traded REITs: Distinguishing Characteristics

Yet, not all REITs are created equal. Generally, REITs fall into two distinct categories: publicly traded REITs and non-traded REITs. Notably, publicly traded REITs list their shares on a public stock exchange, allowing for a secondary trading market. This feature means that shares of publicly traded REITs are often liquid, and most investors purchase them with the hope that the value of their shares will appreciate over time. Even publicly traded REITs have risks. On the other hand, non-traded REITs do not list their shares on a public stock exchange, so they possess a very limited secondary trading market. This limited market makes shares of non-traded REITs highly illiquid, meaning that investors cannot easily sell their investment. As opposed to capital appreciation, investors often purchase non-traded REITs to earn income from dividends. But dividends from non-traded REITs are typically funded from new share purchases or debt, meaning that even the dividends initially offered may dry up over time.

Notable Risks and FINRA Warnings & Tips

In addition to the lack of liquidity and precarious source of distributions, non-traded REITs often charge high fees upfront—sometimes as much as 15% of the offering price—which significantly lowers the return of investment. Moreover, as opposed to publicly traded REITs, it is not uncommon for non-traded REITs to solicit new investments before actually purchasing any real estate. This means that investors often cannot accurately assess the risks of any given non-traded REIT, since the risk profile for any given class of real estate may vary. To make matters worse, neither FINRA nor the SEC monitor the selection of assets by non-traded REITs. Instead, those entities police the brokers who sell non-traded REITs and rely on investors to read the mandatory disclosures.

In response to these risks, FINRA has published several tips for investors considering investing in non-traded REITs: (1) understand the source of funding for the REIT’s distributions, (2) understand that your shares will likely be illiquid, (3) expect high fees, and (4) read the prospectus to understand the REIT’s borrowing policy and to determine whether the REIT has yet to purchase any real estate.

In short, investors should exercise caution and conduct significant due diligence before investing in non-traded REITs.

No News is Good News

By Dominique Paul

When there has been activity in your investment account, your brokerage firm is required to send you a letter. The purpose of this letter is to confirm that you approved the activity that took place. The letter is meant to give you a chance to tell your brokerage firm that there is something wrong with the activity.

The letter you receive is called a negative consent or response letter. In the letter, the brokerage firm is telling you to contact them about the activity ONLY IF you did not approve the activity in your account. The brokerage firm would assume that you approved the activity on your account if you did not contact them because they think no news is good news. Not contacting the brokerage firm about unapproved activity could have consequences that are both expensive and unable to be reversed.

Here is an example of what you are supposed to do when you receive the negative response letter.

At dinner, you order coconut shrimp with orange-pineapple dipping sauce. However, your waiter brought you coconut chicken without any dipping sauce. The waiter would expect you to say the order is wrong. If you DID NOT say anything, the waiter would assume your order is correct. If you did not correct the waiter, when your bill arrives, you would have to pay for the wrong order because you did not correct it earlier.

Often, when there is a complaint about unapproved activity, it is a result of the customer not contacting the firm. There a couple of ways this happens. First, the customer did not know what the letter stated because they never opened the letter. Second, the customer opened the letter but only cared whether they made or lost money, never reading the entire letter. Third, the customer read the entire letter, but called their broker instead of the number provided in the letter. The third scenario is a problem because the broker is the person who is doing the activity and the letter is how the brokerage firm tries to make sure the broker is doing things correctly.

The best way to avoid this type of problem is to open and read the letters from the brokerage firm, every time. If there is something you do not understand, or you think is wrong, call the number in the letter. The brokerage firm can explain and help you correct the activity.

Hopefully, you always get what you order. If you do not, always contact the firm and correct it.