Misrepresentation

Misrepresentation is an untrue statement or omission of material fact that a broker makes purposefully relating to an investment. This may happen with any security, but is more common with low-priced, speculative securities because they are riskier. Investors can avoid this problem by asking brokers to send written information that backs up their representations. Ideally, such representations should be independently verified by your own research.

Cold-Calling or High Pressure Sales Calls

This problem occurs when an investor receives frequent, badgering phone calls or calls that involve a high pressure sales pitch such as an investment only being available for a limited time. Remember that with any sales pitch, claims that seem too good to be true usually are. Investors should never send money to a firm or broker they are hearing from for the first time. You can investigate a broker’s background via FINRA’s BrokerCheck system or by checking the state securities office. Also, callers must limit calls to between 8 a.m. and 9 p.m., and must comply with a request to be placed on their “do-not-call” list.

Unsuitability

Unsuitability can be a problem whenever a broker encourages an investment that does not match the investor’s goals and investing profile. An example would be recommending that an investor with a fixed income invest in a highly speculative security. To keep clear of such issues, investors should always make sure they understand and agree to the nature of any investment. If you don’t understand it, don’t buy it.

Unauthorized Trading

Unauthorized trading occurs whenever securities are bought or sold in customers’ accounts without their prior knowledge and authorization. To prevent this from happening, review account statements carefully, document all conversations with brokers, and take immediate action if you discover an unauthorized trade.

Misrepresentation

Misrepresentation is an untrue statement or omission of material fact that a broker makes purposefully relating to an investment. This may happen with any security, but is more common with low-priced, speculative securities because they are riskier. Investors can avoid this problem by asking brokers to send written information that backs up their representations. Ideally, such representations should be independently verified by your own research.

Cold-Calling or High Pressure Sales Calls

This problem occurs when an investor receives frequent, badgering phone calls or calls that involve a high pressure sales pitch such as an investment only being available for a limited time. Remember that with any sales pitch, claims that seem too good to be true usually are. Investors should never send money to a firm or broker they are hearing from for the first time. You can investigate a broker’s background via FINRA’s BrokerCheck system or by checking the state securities office. Also, callers must limit calls to between 8 a.m. and 9 p.m., and must comply with a request to be placed on their “do-not-call” list.

Unsuitability

Unsuitability can be a problem whenever a broker encourages an investment that does not match the investor’s goals and investing profile. An example would be recommending that an investor with a fixed income invest in a highly speculative security. To keep clear of such issues, investors should always make sure they understand and agree to the nature of any investment. If you don’t understand it, don’t buy it.

Unauthorized Trading

Unauthorized trading occurs whenever securities are bought or sold in customers’ accounts without their prior knowledge and authorization. To prevent this from happening, review account statements carefully, document all conversations with brokers, and take immediate action if you discover an unauthorized trade.

Misrepresentation

Misrepresentation is an untrue statement or omission of material fact that a broker makes purposefully relating to an investment. This may happen with any security, but is more common with low-priced, speculative securities because they are riskier. Investors can avoid this problem by asking brokers to send written information that backs up their representations. Ideally, such representations should be independently verified by your own research.

Cold-Calling or High Pressure Sales Calls

This problem occurs when an investor receives frequent, badgering phone calls or calls that involve a high pressure sales pitch such as an investment only being available for a limited time. Remember that with any sales pitch, claims that seem too good to be true usually are. Investors should never send money to a firm or broker they are hearing from for the first time. You can investigate a broker’s background via FINRA’s BrokerCheck system or by checking the state securities office. Also, callers must limit calls to between 8 a.m. and 9 p.m., and must comply with a request to be placed on their “do-not-call” list.

Unsuitability

Unsuitability can be a problem whenever a broker encourages an investment that does not match the investor’s goals and investing profile. An example would be recommending that an investor with a fixed income invest in a highly speculative security. To keep clear of such issues, investors should always make sure they understand and agree to the nature of any investment. If you don’t understand it, don’t buy it.

Unauthorized Trading

Unauthorized trading occurs whenever securities are bought or sold in customers’ accounts without their prior knowledge and authorization. To prevent this from happening, review account statements carefully, document all conversations with brokers, and take immediate action if you discover an unauthorized trade.

A private placement is an offering of securities by a company that is not offered to the public at large and is not registered with the SEC. Many of these offerings are made pursuant to Regulation D of the Securities Act of 1933. Generally, one must be an “accredited investor” to make an investment in a private placement. Institutions such as banks and insurance companies, and organizations or trusts with assets of $5 million or more, are accredited investors. For an individual to be an accredited investor, the person must have a net worth of $1 million or more, excluding the value of the person’s primary residence, or an income of more than $200,000 in the two most recent years.

Gerri Walsh, a senior executive at FINRA, warned that private placements are often issued by companies that have no requirement to file financial reports, and this can lead to difficulty for investors trying to evaluate the financial health of the company. Because of the issues with liquidity and risk, Walsh said that investors should carefully consider their options before investing in a private placement.

While private placements are not new, FINRA recently uncovered fraud and sales practice abuses related to private placements, including offering documents that contained inaccurate statements.

FINRA said that if an investor is presented with a private placement offering document, it should be reviewed carefully. According to the investor alert, people considering investing in a private placement should find out as much as possible about the company’s business and what the options are for liquidating one’s investment. The organization also said that any such investment should be discussed with one’s broker in detail beforehand.

FINRA warned investor never to reveal personal information to an unsolicited caller and never to authorize a transfer of funds at the direction of an unknown person.

Gerri Walsh, a FINRA senior executive, said that if you are not sure if the person you are talking to is a legitimate representative of a brokerage firm, the best course of action is to quickly end the call and then call the firm’s customer service department.

FINRA said that investors who suspect they have been victims of this type of scam should contact their financial institution immediately to report theft through electronic funds transfer. People who believe their identity may have been stolen should follow the Identity Theft action plan available on the website of the Federal Trade Commission.

The website, located at www.bbb.org/smartinvesting, combines the consumer outreach of BBB with the extensive knowledge of FINRA.

Gerri Walsh, FINRA Foundation President, said that the campaign would help investors protect themselves from fraud.  The website offers resources to help investors detect investment scams.

Investment fraud causes serious harm in North America.  Consumers in the United States and Canada were defrauded of over $1.5 billion by scammers in 2011, according to the Federal Trade Commission (FTC) and the Canadian Anti-Fraud Centre.  FINRA conducted a telephone survey that found that many investors show overconfidence about their ability to detect fraud.  This was especially true of investors in the baby-boomer generation, who are often the target of scams.  The telephone survey found that 92 percent of respondents said they were “somewhat” or “very” confident about their financial management skills, but only 44 percent were able to pass a test of basic financial knowledge.  The BBB Smart Investing website hopes to provide people with that basic financial literacy.

Carrie Hurt of the Council of Better Business Bureaus said that the FINRA Foundation’s message of  “Ask & Check” is what consumers should consider before making decisions about investments.  According to Hurt, scams have become more common as retirees attempt to manage their retirement funds on their own.

FINRA’s Office of Fraud Detection and Market Intelligence (OFDMI) conducts a surveillance program intended to detect fraud and insider trading.  In 2012, the OFDMI referred 692 matters involving potential wrongdoing to the SEC or other law enforcement agencies.  This included 260 referrals involving potential fraud and 347 referrals involving potential insider trading.

FINRA also brought several important disciplinary actions in 2012, and was sometimes the first regulator to address certain cases of ongoing fraud.  The regulator took disciplinary action in 1,541 cases in 2012, a rise of 53 from the previous year.  The actions were taken against firms and registered individuals, and included fines of over $68 million and restitution orders of $34 million to investors that were harmed.  FINRA also barred 294 people from the securities industry, expelled 30 firms and suspended 549 brokers from associating with firms regulated by FINRA.  The disciplinary actions included cases involving exchange-traded funds (ETFs), complex products, incorrect pricing and inadequate disclosure.

The regulator also conducted 1,846 routine examinations, 800 examinations of branch offices and 5,100 examinations for cause in 2012.  Examinations were conducted in response to regulatory tips, investor complaints and terminations for cause.  FINRA also began using new technology to conduct examinations more efficiently.

FINRA is a non-governmental regulatory body for securities firms operating in the United States.  For more information, visit www.finra.org.

The required offering documents must be filed electronically with FINRA through the FINRA Firm Gateway (the “Firm Gateway System”). All broker-dealers have authorized users to this system. FINRA has indicated that it will afford confidential treatment to all documents and information filed pursuant to Rule 5123, and will use the offering materials only for the purpose of determining compliance with FINRA rules or other appropriate regulatory purposes.

The following private placements are exempt from the Rule 5123 filing requirement:

Exemptions Based on the Type of Offerings

• offerings made pursuant to Rule 144A or Regulation S promulgated under the Securities Act of 1933 (the “Securities Act”);
• offerings of debt securities sold under Section 4(2) of the Securities Act, so long the maturity is below 397 days and the minimum denomination is $150,000 (or the equivalent in other currencies);
• offerings of exempted securities, as defined in Section 3(a)(12) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”);
• offerings of exempt securities with short-term maturities under Section 3(a)(3) of the Securities Act (i.e., commercial paper);
• offerings of non-convertible debt or preferred securities by issuers that meet the eligibility criteria for registering primary offerings of non-convertible securities on SEC Forms S-3 and F-3;
• offerings of securities in business combination transactions, such as exchange offers and transactions covered by Rule 145 promulgated under the Securities Act (statutory mergers and consolidations, reclassifications and asset transfers);
• offerings of securities issued in conversions, stock splits and restructuring transactions to existing investors without the need for additional consideration or investments on the part of the investors;
• offerings subject to FINRA filing requirements under its suitability rule (Rule 2310), corporate financing rule (Rule 5110) or conflicts of interest rule (Rule 5121); and
• private placements by members (which are subject to Rule 5122).

Exemptions Based on the Type of Purchaser

• investment companies, as defined in Section 3 of the Investment Company Act of 1940 (the “Investment Company Act”);
• qualified institutional buyers (“QIBs”), as defined in Rule 144A promulgated under the Securities Act (“Rule 144A”), or an entity owned exclusively by QIBs;
• qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
• institutional accounts, as defined in FINRA Rule 4512(c);
• banks, as defined in Section 3(a)(2) of the Securities Act;
• accredited investors, as described in Rule 501(a)(1), (2), (3), or (7) promulgated under the Securities Act; and
• issuer employees and affiliates.

Additionally, FINRA member firms may apply for exemptions from the provisions of the Rule for “good cause.”

Please contact Mitchell C. Littman, Esq. at mlittman@littmankrooks.com or Steven D. Uslaner, Esq. at suslaner@littmankrooks.com if you have questions concerning the Rule.