Exploring the Benefits of FINRA’s Securities Helpline for Seniors

By Josh Gutter

In late September 2016, the SEC charged a CEO and boiler room operator “with defrauding seniors and others who were pressured to invest in a pair of penny stock companies and promised lucrative profits.”  This crime is just one example of how senior citizens can become the victims of financial fraud.  In an effort to help seniors better understand their investments and brokerage accounts, the Financial Industry Regulatory Authority (FINRA) launched its Securities Helpline for Seniors in April 2015.  In addition to asking questions or raising concerns, seniors can also learn about helpful investor tools such as BrokerCheck.

Historically, FINRA has issued regulatory notices and other literature regarding senior investors.  For example, in 2007, FINRA released guidance reminding firms of their obligations to senior investors and highlighting the best practices to serve them.  But at the end of last year, FINRA published a report detailing the progress of its Helpline and its increasing need to serve the aging population.  The report noted that, “In 2010, the U.S. population over age 65 was approximately 40 million; by 2030 it is projected to grow by 80 percent to 72 million people.  This presents significant investor protection challenges. The effects of aging can diminish an individual’s ability to navigate the complexities of financial services, making seniors a prime target for financial exploitation, fraud and deception.”   Because of this, firms must also be more mindful about how they transact with senior investors.  FINRA and the SEC published a joint report through their National Senior Investor Initiative, and this publication provides useful information on “how firms conduct business with senior investors as they prepare for and enter into retirement.”  Topics include use of senior designations, marketing and communications, account documentation, suitability, disclosures, customer complaints, and supervision.

But with respect to Helpline activity, the average age of callers has been 70 years old, and at the time of FINRA’s December 2015 report, the Helpline had received more than 2,500 calls.  By the Helpline’s one-year anniversary, that number reached 4,200 calls.  Furthermore, the Helpline has also recovered over $1.3 million in voluntary reimbursements from firms since its launch.  Another benefit of having this Helpline is that it has brought attention to other types of financial exploitation of seniors, prompting a regulatory notice last year that proposed more rules for firms to protect senior investors.  In particular, “among these issues is a firm’s ability to quickly and effectively address suspected financial exploitation of seniors and other vulnerable adults” when there is a reasonable belief that such activity is occurring.

Thus, although senior investors can be a vulnerable target, with resources like the Securities Helpline for Seniors, they can take proactive steps to ask their questions and safeguard their accounts, while helping shape future rules to prevent the financial exploitation of their significant and growing demographic.



Keep These Red Flags In Mind and Prevent Yourself From Falling Victim To an Annuity Scam

By Jessica Nowak

For as long as investing has been around, people have been scammed into spending large amounts of their assets on products that are not suitable for their lifestyles. More specifically, charming brokers tend to convince elderly individuals to invest in annuities that end up being more costly than they are beneficial. Occasionally, annuities can be great investments, but they are not meant for everyone. When selling annuities, some brokers have their own best interests in mind, not yours. Brokers generally receive enormous commissions from the purchase of these products and leave out important facts in their description of the annuity, like the severe penalties for cashing out early. Most annuities that people get tricked into are long-term fixed rate or variable annuities, where the investor is required to hold onto the product for at least 10-15 years before the consequences for cashing out subside.

In order to save you from the headache that comes with being conned into an unsuitable investment, here are a few red flags to look out for:

  • Large fees for breaking the annuity earlier than 7 or 8 years from the date of signature.
  • “Today only” deals or the push for you to sign on the spot.
  • Annuities that last more than 7 years, especially if you are age 65 or older.
  • Large commission percentage for the broker.
  • High surrender fees.
  • Little to no interest earnings combined with severe cash out penalties.
  • The agent or broker requests that the check to be made out to his name, not the company’s name.
  • When the verbal terms don’t match the on paper terms of the contract.
  • Large yearly maintenance fees.

As you near retirement, you want to make sure that you invest in products that are suitable for your lifestyle, age, and future goals. Long-term annuities with large hidden fees and little growth are usually not the way to go for those who have retired. Make sure that you have a trusted friend, family member, or financial advisor review the contract before signing it. Brokers may set up shop in your local bank, grocery store, or even community center. Just because you trust the owners of the establishment does not mean you should trust the individual broker. Be aware that you are talking to someone who may not have your best interests in mind. For more tips on how to stay well informed on these types of scams, visit the FINRA website at http://www.finra.org/investors/early-retirement-seminars-101-smart-tips-spotting-retirement-scams.

Online Conveniences Can Lead to Heartbreak

By Gabriela Centofanti

Technology has made it possible for investors to access their brokerage accounts anywhere. These conveniences allow investors to monitor their money and further contemplate their investments outside of their broker’s office while waiting at an airport terminal or sitting on a couch. But lurking in the background are possible email hacks, Wi-Fi threats, and identity scams. Investors should be proactive about keeping their investment accounts safe from these online threats.

Simple steps such as logging out of your sessions every time you view your brokerage accounts online can help avoid possible unauthorized users from accessing your accounts. It is not enough to just close your browser window. It is also recommended to avoid allowing your browser to “remember” your login information for your brokerage accounts. Allowing the browser to remember this information would make accessing your accounts easier and faster, and it could mean that other subsequent users of your computer could access your accounts just as easily. To avoid this from happening in the future, click “Never for This Website” when prompted by your browser to “remember” the login information. It is in your best interest to avoid logging into public computers. You should also change your passwords regularly, and make sure your personal computer has up to date firewall and anti-virus programs. Investors should also consider this advice for their online bank accounts and emails.

Your online brokerage accounts could still be compromised even if you’re being proactive. One major concern is email hacking. You could be a victim of email hacking if your email contacts are receiving spam from you or if your email provider has blocked you from accessing your account. You should alert your brokerage firm and the credit bureaus right way. Hackers can be using your email to communicate with your brokerage firm to make unauthorized account transactions.

Your brokerage firm should also be taking steps to keep secure from online threats. FINRA encourages investors to know what their firm’s cyber security practices and policies are in the event investment accounts are compromised. Customers should ask their brokerage firms whether they have a substantial information technology staff (IT) and what kind of safeguards they have in place. Investors should also know if their firms with reimburse them if their assets are compromised by a cyber-attack.

For more recommendations on how to keep your brokerage accounts safe from online threats please visit the following links.









New FINRA Senior Help Line

By Christopher Palomo

This year FINRA proudly launched its first ever help line for seniors. The helpline is a source of free information and is FINRA’s latest effort in protecting investor rights. The program is designed to address the unique needs of one of the fastest growing communities of investors – senior citizens. With an estimated 10,000 Americans turning 65 every day and the unique concerns associated with this class of investors, such as lack of income, health concerns, and computer illiteracy, the need for action has never been greater. The helpline aims toward addressing these concerns by expediting the attention given to these investors by placing them a phone call away from the help they need. While the hotline is intended for seniors, no callers are turned away, regardless of their age.

The free hotline provides information ranging from:

  • understanding how to review your investment portfolio or account statements;
  • concerns about the handling of a brokerage account; and
  • investor tools and resources from FINRA, including BrokerCheck.

There is no experience level necessary to use the help line. The staff is not only knowledgeable and friendly, but also more than willing to answer any questions; from simple inquiries about the benefits of an IRA, to more complex questions concerning the suitability requirements for brokers.

While FINRA has and continues to make a variety of informational resources available to all investors, the hotline is specificall geared to address the unique needs of the senior community. Accordingly, it provides a means to cut through both the red tape and hundreds of pages of FINRA packets and instead allows seniors to speak to a real person about questions and concerns. Ultimately, the hotline is a gateway to the FINRA arsenal of resources. For instance, after calling, particular callers may be referred to various departments within FINRA, such as dispute resolution, to better serve their needs. However, most questions can be quickly addressed by the hotline staff.

The hotline information is as follows:

Call 844-57-HELPS (844-574-3577)
Monday – Friday
9 a.m. – 5 p.m. Eastern Time

The Investor Rights Clinic Sends FINRA Dispute Resolution Task Force Letter Proposing Changes to Benefit Small Claim Investors

FINRA provides the largest forum for the resolution of disputes between investors and their brokers. Indeed, because nearly all brokerage firms in the U.S. have included a pre-dispute arbitration provision in the agreements with their customers, individuals really have no choice but to pursue their claims in arbitration. In an effort to improve the transparency, impartiality and efficiency of the forum for all participants, FINRA formed a 13-member arbitration Task Force to solicit information and comments from all interested parties with the view towards making recommendations to FINRA’s advisory committee, the National Arbitration and Mediation Committee. [July 17, 2014 FINRA Press Release, at: http://www.finra.org/newsroom/2014/finra-announces-arbitration-task-force ]

Of particular concern to the Investor Rights Clinic (IRC) is the arbitration process governing small claims, specifically, matters with losses under $50,000. Those matters are generally handled under FINRA’s Simplified Arbitration process, which is anything but simple. However, investors with losses in this range frequently cannot find legal representation due to the size of the claim. Unless they have access to one of a handful of law school clinics, such as the IRC, they are faced with the choice of either pursuing their claim in an unknown and complicated forum, or forgoing their claim altogether.

As such, on May 13, 2015, the IRC submitted a detailed, 10-page-letter (FINRA Task Force Letter (2015)) to the Task Force, outlining a number of issues and suggestions regarding the small arbitration claims process. As the IRC explained in its letter, the IRC routinely deals with claims under $50,000, and its clients and callers requesting assistance “regularly share information about the particular difficulties they face in understanding whether they have a claim in the first place and, if so, how to navigate FINRA’s Dispute Resolution process.”

The recommendations the IRC made to the Task Force include, among other things:

• Establishing a short simplified arbitration guide (in English and Spanish) with filing forms that investors can complete, at their option;

• Providing for telephonic hearings for all small claims at the customer’s option (the only choice for investors today is to proceed entirely on paper submissions or ask for a full blown, in-person hearing);

• Establishing a dedicated roster of small claim arbitrators specially trained in dealing with unrepresented investors;

• In larger cases, giving the customer the choice of a hearing where they reside at the time the claim is filed (since many have moved or relocated since the transactions at issue); and

• Recommending additional, sustained funding to the law school clinics that, like the IRC, provide critical assistance to investors at no charge.

The Task Force should complete its work by the end of this year. Even if all of the proposals are not ultimately adopted by FINRA, the IRC appreciated the opportunity to speak on behalf investors with small claims. The IRC student interns who drafted the recommendation are: Thomas Hospod (’15), Alexandra Levenson (’15), Jessica Neer (’16) and David Tanner (’15).

Investing in a Technology-Driven Society

By Andrea Nickerson

On September 29, 2014, the Securities and Exchange Commission (“SEC”) announced the discovery of a probable fraudulent investment scheme in South Florida. Two Miami Beach men allegedly raised more than $5.7 million in capital from a mere 100 investors for a purported startup television network and production company called Vision Broadcast Network.

Like many similar schemes, the men provided investors with false financial statements, and even claimed that Michael Jordan was planning to invest in the company. Between 2007 and 2010, the company’s creators took more than $450,000 for undisclosed commissions, $1.3 million for nonexistent consulting services, and several hundred thousand dollars for personal expenses like luxury car leases and golf equipment.

The Vision Broadcast fraud demonstrates several themes in modern investments frauds. As the title of this blog alludes to, investing “in” today’s technology-driven society connotes more than a single common meaning. First, the phrase highlights the environment in which today’s investors receive most of their information and make their investment decisions. Technology provides investors with numerous resources for researching companies, investment strategies, securities products, and investment professionals. Investors can also easily supervise their investments and market performance in real time via computer, tablet, or mobile phone.

However, technology also provides cost effective and efficient mediums through which fraudulent parties can contact large pools of potential investors. Social media and websites can quickly and inexpensively be used to create a seemingly legitimate company in the matter of a few hours. Messages posted to investor online bulletin boards may also be used to conduct a scam. Investors may uncover these internet-based sources and reasonably think that a company like Vision Broadcast actually exists. Thus, investing “in” a technology-driven society in this sense presents some measure of both security and danger to investors.

Second, the phrase makes reference to the growing public interest in investing in the technology industry itself. The success of technology-based companies like Facebook, Twitter, Google, Apple, and Netflix has led many investors to speculate in hopes of profiting from the next billion dollar idea.

According to Heather Somerville’s article, “Silicon Valley tech companies reap record-level investments”, technology companies in California received more than $4.7 billion in venture capital in the first quarter of 2014 alone. This amount was nearly half the total invested in all industries by venture firms nationwide.

Although some start-up technologies companies are profitable, initial investment is very risky. Aside from the potential for fraud, these firms require high start-up costs and face extreme competition. The SEC warns, “Don’t invest in small, thinly-traded companies unless you’re prepared to lose every penny.”

Recently, the Investor Rights clinic assisted a client who was solicited to invest in a start-up biodiesel energy and aqua-farming company located in California. The company did not provide any financial information, prospectus, or account statements, but promised substantial returns due to the high demand of the industry. Unfortunately, the shares issued by the company were not marketable, and the broker and brokerage firm that solicited the sale could no longer be located.

Because of the increasing occurrence of technology-related scams, investors need to be diligent in researching securities and the people or companies recommending them. In the SEC’s Avoiding Internet Investment Scams: Tips for Investors, the Commission first recommends independently investigating the security and the person selling it to see if they are registered with the SEC, the Financial Industry Regulatory Authority (FINRA), or state authorities. Independent resources can also provide substantial information related to the performance and validity of the investment and related parties.

Second, the Commission warns against investments that sound too good to be true, and promise “guaranteed” or “risk-free” returns. Even the safest investments carry some risk. The Commission also advises investors to be on the lookout for common internet scams, including spam and “pump and dump” schemes.

As is evident, technology can provide both safeguards and pitfalls to investors. Further, the technology industry itself presents unique investment and potentially profitable opportunities. However, investing “in” a technology-driven society requires that, more than ever, investors are skeptical in their analysis of technology-based information and investments.

Are You Being Offered an Opportunity to Invest in a Small Company with Tremendous Growth Potential? Ask Yourself, “Why Me?”

By Craig Tompkins

In 2012, the Jumpstart Our Business Startups (JOBS) Act was passed by Congress with the goal of expanding the potential pool of investors from which small businesses can raise capital. While the final rules governing how this new game will be played are still pending, what is known, is that the average investor is now more likely than ever to be offered investments that were previously only available to the very wealthy.

Private placements are a type of investment that were previously only made available to “accredited investors,” with an exception allowing a small number of non-accredited investors to invest in each particular company offering a private placement investment. The fact that these investments are not registered with the SEC makes private placements very risky. When a company is not registered with the SEC, there is no requirement on that company to file detailed financial reports, making it very difficult to determine how the company is performing.

But lack of transparency is only one of many risks inherent in private placements. These types of investments are frequently used as vehicles for scams, and are often pushed on unwitting investors by stockbrokers hoping to score a big commission.

The sales pitch for private placements usually includes mention that you are being given the opportunity to invest in a quickly growing company before its shares become publicly available, and once the company has its Initial Public Offering (IPO), you’ll be able to sell your shares over a stock exchange for a large profit. However, it is important to know that nobody can guarantee that any business will ever even have an IPO. This means you may have an investment that could be impossible to sell.

The JOBS Act has made two changes to the laws governing private placements that affect the average investor. First, companies are now allowed to advertise their private placement offerings to the public at large. While the law states that firms may only seek accredited investors through mass advertising, there is a risk that many more non-accredited investors will become aware of these investment opportunities. This makes it increasingly likely that an individual will be roped into investing in a private placement that is not a suitable investment given their investing knowledge and goals.

The second major change brought on by the JOBS Act is the legitimization of “crowdfunding” as a means of selling an ownership stake in a business. Crowdfunding allows business to sell small ownership stakes to large amounts of individuals. It’s important to remember that crowdfunding investments carry many of the same risks as private placements. It is difficult to determine the financial health of a crowdfunding investment, it may never become a public company and you may never be able to resell your ownership stake.

Your first line of defense in protecting yourself from being duped into a bad investment in a private company is to ask: Why me? If you can answer the question of “Why me?” with an answer that makes sense, investigate the person who is trying to sell this investment to you. Use FINRA’s BrokerCheck to verify that they are properly licensed to sell securities. FINRA also recommends checking to see if the person offering you investment securities has served time in federal prison. Time served could be a very good indication that you are dealing with a con-artist.

If the person selling you the investment checks out, do some research on the company you would be investing in. Read the offering materials in full and search the web for information about the company.

Finally, never invest more than you can afford to lose. Even legitimate private placement offerings, sold by legitimate dealers, are highly risky investments. You could do everything right, and still lose your entire investment.

Elements of Portfolio Management: Recognizing Potential Unsuitability Claims

By David Newfield

The most common claim customers make against their brokers in FINRA arbitrations are unsuitability claims. Under FINRA Rule 2111, a broker has a duty to make sure any recommended transaction is suitable for the customer. Many factors contribute to an assessment of suitability for a portfolio. FINRA issued guidance on the specifics of Rule 2111 in Regulatory Notice 12-25. The notice explains the three main suitability obligations of the rule. These obligations are reasonable-basis suitability, customer-specific suitability, and quantitative suitability.

Customer-specific suitability requires the broker to consider a specific investment, or investment strategy, in the context of a particular customer. The customer’s age, experience, and risk tolerance are a few of the factors a broker must consider. Many brokers fail to consider customer-specific suitability. Therefore, it is important for a customer to be aware of the basic elements of portfolio management, in order to recognize when his or her broker may have behaved improperly.

Traditional portfolio management theory seeks to find an optimal balance of assets in order to effectively manage risk while still seeking maximum return. Most portfolios are made up of a balance of fixed income and equities. Deciding how to balance these elements will depend on the specific needs of the customer. Three useful factors to look at are age, asset, and allocation.

1)     Age: When investing, the age of an investor is one of the first questions to ask. As people age, their needs and investment goals change. Someone starting to invest for retirement may be interested in growth, and have a higher risk profile; whereas somebody already retired will be interest in safe, income-producing, investments. (Tip: A common trick many people use to calculate an ideal stock-bond balance is to invest the same percentage in bonds as a person’s age. Thus, a 25 year-old should invest 75% of his or her portfolio in stock.)

2)     Asset: Not all stocks and bonds are created equal. Although some stocks or bonds may offer a higher return, this comes along with greater risk. It is important for an investor to consider both the asset class as well as the specific asset. (Tip: When choosing stocks, consider the size, style, and sector of the stocks.)

3)     Allocation: Everybody knows the age-old adage: Don’t put all your eggs in one basket. It is important for every portfolio to be appropriately diversified. An investor should consider if his or her investments appear to be too concentrated. (Tip: Try to invest in a handful of companies that you know, trust, or even use in your day to day life.)

Although this list is not exhaustive, an investor can begin to gain insight in to his or her portfolio by considering age, asset, and allocation. Furthermore, FINRA Rule 2090 requires brokers to “know your customer.” A broker has an obligation, when opening and maintaining an account, to know the essential facts concerning every customer. It should raise a red flag to an investor if he or she feels that his or her broker has not inquired about his or her background and investment goals.

Investing in Technology IPOs: Why You Should Think Twice About Uber-Valuations

By Eli Rodrigues

On Friday, June 6, 2014, Uber Technologies Inc., a car-hailing smartphone application was valued at $18.2 billion, more than quadrupling its previous year’s valuation. Uber has secured more than $1.5 billion, with the most recent billion dollar round of funding coming from Fidelity Investments, Wellington Management and BlackRock Inc. According to Uber’s Founder and CEO Travis Kalanick, Uber is “growing faster this year than last year,” achieving an annual revenue in the hundreds of millions of dollars that is “at least” doubling every six months.

Uber has already left its mark in history by joining elite group billion-dollar startups, finding itself in second place to none other than Facebook Inc. in securing capital from private investors. With all of the publicity surrounding Uber’s latest valuation and funding, heated bidding for pre-IPO shares has begun as the company is preparing itself to go public. Now, the big question crossing many investors’ minds is: “When do I invest?” The answer: not until sufficient research has been performed and the company’s lock-up period has expired.

There is no specific answer for when an investor should add a company to their portfolio. No investment is a sure thing, especially when it comes to technology companies. Most recently, history has provided a much different picture for the technology industry, with IPOs often flopping, leaving heartbroken investors with fractions of their investments. Groupon Inc. is a one of the most recent examples that investors should learn from and hopefully subdue their excitement for Uber and other future technology IPOs.

What should an investor understand before committing any of their assets to a newly public company? As a general rule if the markets are doing well then so will IPOs. Additionally, IPOs have a much higher beta and are therefore much more volatile once they hit the market. If as an investor you are unable to tolerate price fluctuations, then this investment is not for you. Moreover, gathering reliable information about a company going public is very difficult because private companies do not disclose their financial information publicly, and numerous analysts generally evaluate the strength of their operations. It is important to note that IPOs do offer investors a prospectus, but the company, not an unbiased third party, writes that document. Under the rules governed by the Securities and Exchange Commission, insiders of any company going public are typically prohibited from selling their shares for a period of time, typically 180 days. It is very important for investors to find out if a lock-up period exists and when the period expires because the value of the stock can drastically change in anticipation of insider liquidation.

But Uber is different, some say. Its disruptive technology has dominated the transportation industry internationally and is now offered in more that 130 countries around the world. This might be true; however, technology IPOs often follow a different business plan because they are members of a sharing economy, bringing together users with service providers. Uber allows professional and nonprofessional drivers to sell their time and services to users. Uber does not own anything other than an application and its dispatch service. This business model has low barriers to entry and a potential investor should be weary of the ease in replicating the business. Many companies like Uber entered the market, offering an identical service at more competitive pricing. With driver and user loyalty driven on cost and an increasingly strict international regulatory environment, Uber has already been forced to rethink its cost structure, a fact investors should certainly be aware of the before making a decision to invest.

Risks and Benefits of Foreign Investments

by Raymond Nicholas

On May 6th, 2014, Alibaba, a Chinese E-commerce goliath filed its IPO with the United States Securities and Exchange Commission (“SEC”), in what many economists predict could be the largest or one of the largest initial public offerings in United States history. Alibaba currently controls eighty percent of China’s E-commerce market and is worth more than 100 billion dollars.

The Alibaba IPO presents numerous risks investors should consider before investing in foreign equities. According to a report by William Alden of the New York Times, notable risks of foreign equities include: 1) corporate structure; 2) U.S. Securities laws being less stringent on foreign companies; and 3) increased market volatility. Alibaba is also subject to economic downturn in the Chinese market, which would adversely affect its success in the US market. The SEC, U.S. News, and Financial Industry Regulatory Authority (“FINRA”), all warn investors of volatility in foreign markets directly related to political instability.

China has a developed economy; however, the Chinese Government heavily regulates the economy and Internet infrastructure, presenting another risk to investors considering investing in foreign companies. Government regulation varies by country, making it difficult to accurately gauge the success of a foreign company in a U.S. Market. Finally, foreign companies are subject to fewer causes of action in U.S. courts due to complicated jurisdictional issues.

Contrary to the risks of international investment, there are advantages to investing in foreign companies. A report from T. Rowe Price that some international companies are growing faster than their U.S. counterparts. Alibaba appears to be one of them. Many economists, including Rick Ferri of Forbes, state international investments are key to a well-diversified portfolio, and recommend a 70% to 30% ratio of U.S. stocks to foreign stocks. The advantages and disadvantages listed here are by no means all inclusive. Investing in foreign companies requires consideration of factors not relevant in domestic companies. Alibaba’s IPO illustrates the benefits and disadvantages of investing in foreign companies. Most importantly, the Alibaba IPO reaffirms the importance of due diligence and thorough research. It is crucial to sift through the hype surrounding an investment to ensure safe, well thought out investing.