FINRA to Investors: Beware of "Regulator" Impostor Scams

The Financial Industry Regulatory Authority (FINRA) recently issued an Investor Alert, warning investors to beware of financial scammers posing as regulators.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education warns, “Financial fraudsters go to great lengths to appear legitimate, making it difficult for investors to recognize their ruses.” “That’s why we are telling investors flat out that FINRA does not guarantee investments, and our officers play no role in facilitating investment opportunities. We want people to know that and to understand how they can verify who the real FINRA is.” 

Financial fraudsters have gone so far in recent times as to use FINRA’s name and logo in correspondence—and a fake signature from FINRA President and Chief Executive Officer Robert W. Cook—to create the impression that FINRA provided guarantees related to an investment opportunity that was, in fact, an advance-fee scam. 

One common fraudulent scheme involves luring investors into sending money to cover administrative or regulatory charges associated with a buyback of shares of stock that are generally worthless or underperforming. Once investors send the money, they never see it—or any money promised from the stock buyback—again. Sometimes, the con artists will ask for additional money or simply disappear. 

On other occasions, fraudsters send e-mails to unsuspecting individuals, purporting to originate from FINRA’s CEO, notifying potential victims that “approval has been granted for the release and payment of your outstanding inheritance fund.” The victim would be asked to fly to another country—outside of the jurisdiction of any U.S. regulator or law enforcement officer—to claim the “inheritance.” The victim is asked to provide personal information, including a copy of their passport—a common tactic used in phishing scams. 

To avoid losing money in these types of scams, FINRA advises investors to hang up on suspected fraudulent callers and delete e-mails from these individuals. Walsh adds, “If you’re unsure whether an investment solicitation is legitimate, do your own independent search for the official number for the government agency, office, or employee, and call to confirm its authenticity.” 

If an investor is suspicious about an offer or thinks the claims might be exaggerated or misleading, FINRA offers a Scam Meter tool to help investors assess whether an opportunity is too good to be true. FINRA also developed a Risk Meter, which determines if an investor shares characteristics and behavior traits that have been shown to make some individuals particularly vulnerable to investment fraud.

FINRA Proposes Special Procedure for Simplified Cases

The Financial Industry Regulatory Authority (FINRA) proposes to amend the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to include a Special Proceeding for Simplified Arbitration. FINRA claims involving $50,000 or less would benefit by having an additional, intermediate form of adjudication that would provide the chance to argue cases before an arbitrator in a shorter, limited telephone hearing format. The Special Proceeding would be limited to two hearing sessions. 

The highlights: 

• A Special Proceeding would be held by telephone unless the parties agree to another method of appearance 
• The claimants, collectively, would be limited to two hours to present their case and 1⁄2 hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions 
• The respondents, collectively, would be limited to two hours to present their case and 1⁄2 hour for any rebuttal and closing statement, exclusive of questions from the arbitrator and responses to such questions 
• Notwithstanding the above-mentioned conditions, the arbitrator would have the discretion to cede his or her allotted time to the parties; in no event could a Special Proceeding exceed two hearing sessions, exclusive of prehearing conferences 
• The parties would not be permitted to question the opposing parties’witnesses 
• A customer could not call an opposing party, a current or former associated person of a member party, or a current or former employee of a member party as a witness, and members and associated persons could not call a customer of a member party as a witness 

FINRA believes the proposed rule change would provide parties with claims of $50,000 or less with an additional, cost-effective hearing option for resolving disputes and limit the potential costs of a hearing and provide parties with the opportunity to present their case without cross-examination from their opponents.

The ability to present their case without cross-examination may benefit those who would otherwise be intimidated by a direct confrontation. FINRA believes that the broader role of arbitrators for a Special Proceeding in asking questions of the parties would serve a similar function to cross-examination, effectively charging the arbitrator with clarifying issues, and asking questions necessary to assess witness credibility.

FINRA 2018 Regulatory and Exam Priorities Released

The Financial Industry Regulatory Authority (FINRA) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”), highlighting topics FINRA will focus on in 2018.

FINRA regulates brokerage firms doing business with the public in the United States. FINRA writes rules; examines for and enforces compliance with FINRA rules and federal securities laws; registers broker-dealer personnel and offers them education and training; and informs the investing public. FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. 

Some of the key topics identified in the Priorities Letter as areas of focus in 2018 are fraud, high-risk firms and brokers, operational and financial risks—including technology governance and cybersecurity—and market regulation. Other areas of priority in 2018 include: 

 

• Sales practice risks, including recommendations of complex products to unsophisticated, vulnerable investors 
• Protection of customer assets and the accuracy of firms’ financial data 
• Market integrity, including best execution, manipulation across markets and products, and fixed income data integrity 

In the Priorities Letter, FINRA CEO Robert Cook wrote, “The coming year will bring both continuity and change in FINRA’s programs. . . . The continuity comes, first and foremost, in our unwavering commitment to our mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets. Change will come in how we accomplish that mission.” 

FINRA flags the following significant new rules that are currently scheduled to become applicable in 2018. 

• Financial Exploitation of Specified Adults – FINRA Rule 2165 will become effective February 5, 2018. The rule permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. 
• Amendments to FINRA Rule 4512 (Customer Account Information) – An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment will become effective February 5, 2018. 
• Amendments to FINRA Rule 2232 (Customer Confirmations) – The amended FINRA Rule 2232 requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes offsetting principal trades in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: (1) a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded, and (2) the execution time of the transaction, expressed to the second. These amendments are scheduled to become effective on May 14, 2018. 
• Margin Requirements for Covered Agency Transactions (Amendments to FINRA Rule 4210) – FINRA’s new margin requirements for Covered Agency Transactions are slated to become effective June 25, 2018. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions; (2) Specified Pool Transactions; and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates. Members are reminded that the risk limit determination requirements under the amendments to Rule 4210 became effective on December 15, 2016.