SEC Investor Alert: Red Flags of Investment Fraud

By: Darius Wood, Fall 2015 Intern

This summer the Securities and Exchange Commission (SEC) released an investment alert warning seniors of five tactics that may signal they are victims of investment fraud. These five signs are: 1) promises of high returns with little or no risk, 2) unregistered persons, 3) red flags in the financial professional’s background, 4) pressure to buy quickly, and 5) free meals. Each of these should alert you that you may be susceptible to investment fraud.

The first sign, a promises of high returns with little or no risk, should immediately put you on guard. All investments carry some level of risk. Even the safest investments, like a U.S. Treasury bond carry some risk. Also note that generally, there is a direct correlation between a higher rate of return and the risk of the investment.

Second, people and companies who sell investments must be registered either as a broker or an investment adviser. Therefore, it is best practice that before you decide to work with a particular individual or company you research them to look for possible red flags. Brokers are regulated by FINRA, the Financial Industry Regulatory Authority. FINRA maintains a database on all of their registered and formerly registered brokers for the public to access called BrokerCheck. Similarly, Investment Adviser firms and individuals are required to register with the SEC who maintains a public Investor Adviser Search.

The SEC lists 8 red flags that you should be on the lookout for in the financial professional’s background when you do your research on BrokerCheck and the Investor Adviser Search:

1) employment at firms that have been expelled from the securities industry;

2) personal bankruptcy;

3) termination;

4) being subject to internal review by an employer;

5) a high number of customer complaints;

6) failed industry qualification examinations;

7) federal tax liens; and

8) repeatedly moving firms.

If an investment professional ever pressures you to buy quickly, you should be extra cautious. Very few legitimate investment opportunities have a very limited time frame such that you would be unable to do some advance research on the investment before making a decision. Since all investments carry risk, it is vital that you fully understand those risks before entering into the investment.

Lastly, the SEC says that you should beware of “free lunch” seminars. Most of these events are designed to advertise and sell new investment products, not to educate persons on various types of investments. It is not uncommon to experience high pressure sales pitches and hard sales at these events, thus it is best to avoid them all together so that you don’t unwillingly enter into an investment that is not right for you.