Investment fraud is a billion dollar business. These days, it seems every time you turn around, some scheme is being unearthed. Not surprisingly, many of these are simply variations on fraudulent techniques that have been successful in the past. As they say, everything old is new again.
The battle against investment fraud has been waging for decades. Enforcement organizations have worked very hard to create tools that can help you recognize and avoid fraud. We’ll look at those in a bit. But first, let’s review the things you should watch out for when considering any investment (see “Signs of fraud” ).
You can avoid becoming a victim of such practices by following some simple guidelines (see “Avoid being victimized”).
If you’re thinking about getting involved in the futures market, begin your investigation, whether you’re checking out a broker or a firm, with the Background Affiliation Status Information Center (BASIC), a service offered by National Futures
Association (NFA).
BASIC includes registration and disciplinary information for all current and former Commodity Futures Trading Commission (CFTC) registrants (150,000 individuals and 10,000 firms). It has name, business address and futures registration history, details about disciplinary actions taken by NFA, the CFTC and all of the U.S. futures exchanges, details about NFA arbitration matters, if a case went to hearing and an award was issued after Jan. 1, 1990 and summary data about any cases filed with the CFTC’s reparations program. All of the information is available online.
NFA registration, disciplinary and arbitration information is taken from NFA’s proprietary systems. The exchanges and CFTC submit their respective information to NFA for inclusion in BASIC.
BASIC does not contain information about civil actions, criminal proceedings or actions taken by other federal regulatory agencies or self-regulatory organizations, information about pending arbitration cases or cases without an award, regulatory actions taken by exchanges prior to 1990 or pending exchange complaints that haven’t been adjudicated.
When you search BASIC for individuals, be sure to look at their employment history, as well as the history of the firms they worked for. Likewise, if you’re searching a futures firm, be certain to check out the background of any of the principals listed for the firm, as they may have had a disciplinary issue while employed at a previous firm.
You can search BASIC 24/7 at www.nfa.futures.org/basicnet, or call NFA’s Information Center at (800) 621-3570, Monday through Friday, between 8 a.m. and 5 p.m. CT.
CFTC reparations are mentioned in BASIC. However, details about CFTC Reparations Sanctions in Effect are found under the Customer Protection tab on the CFTC’s Web site at www.cftc.gov. These are sanctions that have been taken against individuals and firms who have not paid awards levied against them in CFTC reparations proceedings. The time period covered is 1984 to present.
These sanctions remain in effect until the individual or firm submits proof that the amount required by the final reparations award, or an alternative agreed upon settlement, has been paid. If an award is unpaid, the registration of the firm or individual is suspended, which means they are prohibited from trading on any contract market.
Available data includes name, CFTC Docket number, NFA ID number, judgment amount, effective date, interest paid, etc. (Reparations Sanctions in Effect for the period 1975-1983 also are available, but only in list form.)
If you need help or have questions about specific Sanctions or Respondents, contact the CFTC Office of Proceedings by e-mail at proceedings@cftc.gov or telephone at (202) 418-5508.
Another CFTC source is the Administrative Sanctions in Effect list. Administrative Sanctions in Effect are registration and trading sanctions in effect as a result of administrative enforcement or statutory disqualification proceedings.
Available data includes name, CFTC Docket number, NFA ID number and a description that contains the effective date of the sanction and a brief explanation of the outcome. The time period covered is from 1975 through the present.
Again, for assistance or questions about specific Sanctions or Respondents, contact the CFTC Office of Proceedings by e-mail or telephone at 202-418-5508.
SECURITIES SIDE
When you’re searching for information about a securities broker or a broker-dealer, go first to the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck program at
www.finra.org.
BrokerCheck provides information on the professional background of approximately 660,000 brokers and some 5,100 securities firms that are currently registered with FINRA. Information is also available on thousands of formerly FINRA-registered firms and brokers.
The information in FINRA BrokerCheck is taken from the Central Registration Depository (CRD), the securities industry’s online registration and licensing database. CRD contains the industry registration/licensing forms brokers, brokerage firms and regulators complete. Information is immediately available online, or you can request a report.
Brokerage firm information includes address, legal status, types of business, direct and indirect owners and officers, felony charges and convictions, investment-related misdemeanor charges and convictions for the past 10 years, disciplinary actions and proceedings initiated by regulators, investment-related civil court actions and proceedings for the past 10 years, bankruptcy proceedings, unsatisfied judgments or liens, summary information on arbitration awards, the date a firm ceased doing business, if applicable, and certain information about funds owed to customers or other firms.
Information about brokers includes current employer, employment history for the past 10 years, other businesses outside of employment with the brokerage firm, approved licenses and registrations and qualification exams passed, criminal felony charges and convictions, investment-related misdemeanor charges and convictions, disciplinary actions and investigations by regulators, investment-related civil court actions and proceedings, consumer complaints that contain allegations of sales practice violations, arbitration proceedings and civil law suits, unsatisfied judgments and liens, bankruptcy proceedings, compromises with creditors and employment terminations following alleged misconduct or failure to supervise subordinates.
For assistance, call the FINRA BrokerCheck Hotline at (800) 289-9999, Monday through Friday, between 8 a.m. and 8 p.m. ET. If you want to request a report, you can write to FINRA BrokerCheck, P.O. Box 9495, Gaithersburg, MD 20898-9495.
The Securities and Exchange Commission (SEC) manages a system that provides background information on many, but not all, of the members of the investment adviser community.
The Investment Adviser Public Disclosure (IAPD) Web site, which you can find at www.adviserinfo.sec.gov, contains information about currently registered SEC-and state-regulated investment adviser firms. (The SEC typically regulates advisers that have in excess of $25 million in assets under management. Investment advisers who don’t meet this threshold are generally regulated by the states.) Both are included in IAPD.
The Web site also includes information about investment advisers that were registered in the previous two years, but are no longer registered. Currently, there is no information about individuals, but this will change.
The information in the IAPD comes from the Investment Adviser Registration Depository (IARD), an electronic system that includes data on more than 260,000 investment advisers.
When you search for an investment adviser firm on the IAPD Web site, you are able to view that firm’s Form ADV, the form investment advisers must file to register with the SEC and/or the states. Form ADV contains information about an investment adviser and its business operations, as well as disclosure about certain disciplinary events involving the adviser and/or its key personnel.
he Web site does not include advisers that have not yet registered through the IARD, have filed for registration but haven’t yet been approved or are exempt from registration by law.
If you can’t locate the firm you’re looking for in IAPD, the best thing to do is call the SEC at (202) 551-6825.
Another potential resource is the North American Securities Administrators Association (NASAA) at www.nasaa.org. State securities regulators license securities firms and investment professionals, register certain securities offerings, review financial offerings of small companies, audit branch office sales practices and record keeping, promote investor education and enforce state securities laws. You can find contact information for your state securities regulator at the Member List on the NASAA Web site.
There is a plethora of resources for you to use to check on an investment or investment advisor you may be thinking of putting money with. A lot of the information provided can help you make more informed decisions. While some regulatory agencies have failed in a couple of high profile cases, a careful look at the facts shows that perhaps they wouldn’t have if they followed some of their own guidelines.
Laura Oatney is a freelance writer with more than 20 years of industry experience. Contact her at loatney@yahoo.com.
