Articles Posted in NASAA

NASAA Puts Out Practices and Procedures Guide to Protect Vulnerable Adults

The North American Securities Administrators Association has issued a guide to help investment advisory firms and broker-dealers create procedures and practices to help them identify and tackle suspected incidents of financial exploitation involving vulnerable adult clients, including senior investors and adults with diminished capacity. The guide provides steps that revolve around five key concepts:

  • Identifying who is a vulnerable individual
  • Governmental reporting
  • Third-party reporting
  • Delaying disbursement from the account of a client who is a vulnerable adult
  • Ongoing regulator cooperation when a disbursement is delayed or a report of suspected financial exploitation is made.

It was just recently that NASAA put into effect its Model Act to Protect Vulnerable Adults from Financial Exploitation and this guide is a companion to the act.

If you are an elderly investor or a vulnerable adult who has suffered losses due to fraud, call our senior financial fraud law firm today.

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Former Broker Is Subject of Numerous Securities Claims
If you are an investor who sustained losses after purchased real estate investments trusts with the help of former broker Jerry McCutchen, you may have grounds for a securities claim. According to the Financial Industry Regulatory Authority’s BrokerCheck Report, McCutchen is accused of making unsuitable investment recommendations and he has been the subject of over a dozen broker fraud claims alleging negligence, misrepresentations, and other claims.

In one case, McCutchen, while registered with Berthel Fisher & Company Financial Services, Inc., is accused of placing a couple’s retirement funds in speculative, illiquid, alternative investments that he misrepresented as safe investments in line with the husband and wife’s investment goal to keep their money safe. In reality the Tier REIT, the Icon Leasing Fund Twelve LLC, and others, did not have proper diversity or allocation and were not suitable for the couple.

McCutchen is not registered with any firm at this time nor is he a licensed broker at the moment. He was registered with Berthel Fisher & Co., Bay City Securities, Next Financial Group, First Funds Inc., FSC Securities Corp, Central Brokerage Services, Commonwealth Equity Services, MML Investors, Proequities Inc., and Walnut Street Securities.

NY Hedge Fund Manager Ordered to Pay $18M
Moazzam “Mark” Malik, and his American Bridge Investment Group LLC are facing SEC charges accusing them of bilking 19 clients of over $1M through the sale of limited partnership interests in a fake hedge fund that was run under different names. The SEC said that Malik claimed that the fund held $100M when that amount was never more than about $90,000. Now, the regulator is ordering Malik to pay $18M.
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The North American Securities Administrators Association announced that its Board of Director has approved to release for comment a proposed model act to tackle the problems faced by brokerage firms, investment adviser firms, and their representatives when dealing with signs that older senior investors, or other vulnerable adults, may be suffering from financial exploitation. The proposed model is called “An Act to Protect Vulnerable Adults From Financial Exploitation.”

If approved, the act would mandate that qualified investment advisers and brokerage firm employees notify their securities regulator, as well as Adult Protective Services, if they have reason to believe that a vulnerable adult has been subject to financial exploitation. They would also be able to notify a third party that had been previously designated by that client of their suspicions, as long as that person is not the one suspected of the exploitation. The act would let qualified firm employees provide records related to the attempted/suspected exploitation to the authorities.

Brokerage firms and investment advisers who fulfill the requirements of the act would be granted immunity from civil or administrative liability related to the elder financial fraud. Also, advisers and broker-dealers would be granted the authority to delay account disbursements if they thought that something untoward was happening.

A vulnerable adult in such scenarios would be someone who is age 60 or older or an adult who is vulnerable in other ways that could prevent him/her from being able to self-protect from exploitation. NASAA’s proposal comes soon after the one that was issued by the Financial Industry Regulatory Authority.
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The North American Securities Administrators Association has named what it believes are the financial products that pose the greatest threat to investors. The group said that a lot of these dangers involve new products employed in classic financial scamshttp://www.stockbroker-fraud.com, some propelled by the Internet. Many involve unlicensed agents seeking to sell unregistered products.

The Investments That NASAA Says Pose the Greatest Emergent Threats:

Binary Options: These are securities as options contracts with a payout that is dependent on whether the underlying asset goes up or down in value. These typically have an all-or-nothing payout structure that either gives an investor a pre-determined amount of money if the asset’s value goes up or nothing at all if it goes down. The latter option can place an investor at risk of losing the entire investment. Related risks may include illegal distributions, promotional scams, identity theft, purposely created losing trades, and the use of online trading platforms that do not comply with regulatory requirements.

The North American Securities Administrators Association has issued its yearly list of financial products and practices that it believes pose among the greatest investment danger to investors. The 10 on this year’s list, which was put together by securities regulators in the association’s Enforcement Section are:

1) Gold and precious metals 2) Promissory notes 3) Reg D/Rule 506 private offerings 4) High risk gas and oil drilling programs 5) Real estate investment schemes (REITS)

6) Salesmen without licenses who make recommendations related to liquidation 7) Internet offers involving crowdfunding 8) EB-5 Investment-for-Visa scams 9) Investment advisers engaging in practices and giving advice that is not appropriate for an investor 10) Scammers attempting to hide their fraud schemes using self-directed IRAs

The North American Securities Administrators Association says that broker-dealer compliance programs throughout the country tend to exhibit deficiencies in several key areas:

• Registration and licensing • Sales practices • Operations • Supervisions • Books and records
Failure to follow written procedures and policy for supervision, variable product suitability, and advertising sales literature are considered the three most commonly noted problem areas.

NASAA issued its findings based on the 567 deficiencies in these five areas that were discovered by regulators in 30 states during 290 examinations that took place between January 1 and June 30. NASAA president and North Carolina deputy securities administrator David Massey says that the organization is flagging the deficiencies to assist brokers in reducing the risk of regulatory violations.

To remedy the deficiencies, NASAA is offering 10 best practices, including those that involve broker-dealers:

• Updating and enforcing written supervisory procedures.
• Developing standards and criteria that can effectively determine which investments are suitable for each client.
• Documenting “red flags” and resolving these promptly.
• Establishing a “meaningful” audit plan that includes unannounced visits and a follow-up plan.
• Obtaining regulatory approval of sales literature and ads before using them • Setting up procedures that can prevent and detect unauthorized private securitization transactions.
• Ensuring that registered representatives’ outside business activities are reviewed before they take place.
• Effective monitoring of both hard copy and electronic correspondence.
• Acknowledging receipt of complaints and updating of a registered representative’s Form U-4.
• Conducting a thorough investigation of the allegations.

Investors that have lost money because of securities fraud or broker mistakes may be able to recoup their losses with the help of an experienced stockbroker fraud law firm.

Related Web Resources:
State Securities Regulators Offer Series of Compliance Best Practices, NASAA, October 12, 2010
Securities and Exchange Commission
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The Financial Industry Regulatory Authority, the Securities and Exchange Commission, and the North American Securities Administrators Association have updated their 2008 report regarding financial firms’ best practices when serving elderly investors. The security regulators remain committed to making sure that seniors are given a “fair market” with responsible sales practices and suitable products. The 2008 report, called “Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors,” gave investment firms steps they could take to improve their procedures and policies when working with senior clients.

The 2010 addendum concentrates on several categories, including:
• Effective communication.
• Better employee training regarding issues that specifically affect seniors.
• Establishing internal processes to deal with issues that arise.
• Surveillance, supervision, and compliance reviews that focus on seniors.
• Making sure investments offered to elderly investors are appropriate for them.

The SEC is also tackling regulatory measures related to financial products that target retirees and seniors. Last month, the SEC put out a staff report suggesting that Congress define life settlements as securities to make sure that investors receive protection under federal securities law. Also, in an attempt to enhance target date fund disclosures, the SEC recently proposed rule amendments.

Regulators report that there are nearly 40 million people in the US that belong to the age 65 and older age group. By 2050 that number is expected to hit 89 million.

It is important that the necessary steps are taken protect seniors from elder financial fraud. With their retirement funds, elderly seniors are at risk of becoming the target of securities fraud. As MetLife (MET) Mature Market Institute notes, elder financial abuse “has been called the ‘crime of the 21st century.” She noted for every dollar lost, the victims often suffer related financial losses resulting from health issues and stress.

Related Web Resources:
Protecting the Elderly From Financial Fraud, Minyanville, June 16, 2010
SEC, NASAA, FINRA Update Best Practices for Serving Seniors, Wealth Manager, August 13, 2010
Read the 2008 Report (PDF)
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The North American Securities Administrators Association is criticizing an amendment introduced by Sen. Susan Collins (R-Maine). SA 4009, an amendment to the Senate financial regulatory reform bill (S. 3217), would protect variable annuities sellers from the fiduciary standard. While her amendment imposes a fiduciary standard on broker-dealers that offer investment advice to retail customers, variable contract products and representative-investment companies would not have to adhere to this standard.

The NASAA and other critics say that the amendment proposes a weaker version of the standard that would leave the very victims the standard is supposed to protect in a vulnerable position. NASAA also says that Collins’ proposed standard falls short of the standard in the way that 1940 Investment Advisers Act defines it. In a release issued earlier this month, NASAA says that with seniors and other small investors often having to contend with abusive practices from agents and brokers who end up recommending certain products because they come with higher commissions or revenue sharing payments, NASAA stressed the need for Congress to require that investment advisers and brokers abide by “the fiduciary duty of the Investment Advisers Act.” The Consumer Federation of America agrees with NASAA’s position on the Collins amendment.

NASAA is placing its support behind amendment (SA 3889). Referred to as the “Honest Broker” amendment, the legislation proposes that the Securities and Exchange Commission adopt a rule that would extend the fiduciary duty under the Advisers Act to brokers who offer investment advice. SA 3889 was introduced by Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-N.J.).

Other proposed amendments include SA 3806, by Senator Ted Kaufman (D-Del.) and Sens. Arlen Specter (D-Pa.). Their amendment extends the fiduciary duty under the Advisers Act to broker-dealers. Their amendment also proposes criminal liability for willful violations of the duty. SA 3792, introduced by Sen. Barbara Boxer (D-Calif.), would make each financial services provider subject to a fiduciary duty. The amendment gives Commodity Futures Trading Commission and the SEC the authority to define, enforce, and clarify the duty for regulated enitites under their jurisdictions.

Related Web Resources:
Joint Letter Opposing Collins Amendment (PDF)

S.3217 – Restoring American Financial Stability Act of 2010
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As a result of a widespread multi-state investigation which began in May 2008, Merrill Lynch Pierce, Pierce, Fenner & Smith Inc. has agreed to pay more than $26 million to settle claims that certain client representatives were not properly licensed in states where sales efforts were undertaken. The investigation, coordinated by the North American Securities Administrators Association (NASAA), discovered that 60 percent of the firm’s “client associates” were registered only in their home state, or in only one additional state.

States require that persons at securities firms involved in sales to client or prospective clients must be licensed in the states in which the persons contacted reside – with some de minibus exceptions. Although the Merrill Lynch associates were assisting the firm’s financial advisors, they were undertaking duties which required state licenses.

While states issue licenses based on a single multi-state examination, each also charges an annual fee for each representative of a firm licensed in that state. A financial advisor with a brokerage firm may have clients or prospective clients in a number, or even dozens, of states. If an advisor’s assistant is communicating with those clients or prospects in a sales capacity, he or she must be licensed in and a fee must be paid to each state as well.

The North American Securities Administrators Association has updated its best practices for investment advisers. The best practices were developed after a series of exams revealed several problem areas.

458 state-level investment advisers took part in examinations between January and May 2009. Some 1,887 deficiencies in 13 compliance areas, including the areas of books and records, registration, supervision, unethical business practices, and financials, were found.

NASAA President Denise Voigt Crawford says the best practices should help strengthen internal compliance programs. This will hopefully decrease the chances of regulatory violations (that can lead to securities fraud) while helping investment advisers provide better client services and meet compliance challenges.

NASAA Best Practices Recommendations for Compliance Procedures and Practices:

• Update contracts.
• Revise and update the disclosure brochure and form ADV every year.
• Back up information that is stored electronically.
• Ensure records are protected.
• Prepare and maintain financial records, other mandatory records, and client profiles.
• Develop a manual of relevant, written compliance and supervisory procedures.
• Make sure financials are always accurate.
• Each year, prepare and send out a current privacy policy.
• If necessary, maintain surety bond.
• If applicable, put into place the proper custody safeguards.
• Ensure that all advertisements are accurate.
• Look at disclosures, solicitor agreements, and delivery procedures.

At this time, state regulators are in charge of overseeing investment advisers who manage under $25 million. The Securities and Exchange Commission supervises investment advisers who manage over $25 million. NASAA is seeking to increase state oversight to include investment managers who oversee assets of up to $100 million. The Financial Industry Regulatory Authority also wants to expand its investment adviser authority.

Related Web Resources:
State inspectors find fewer problems among investment advisers, Investment News, September 29, 2009
NASAA Outlines Best Practices For Investment Advisers, NASAA.org Continue reading

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