Registered brokers and financial advisors
Market transactions processed every day
Violators pay fines and face suspension or termination of their registration when violations occur.
In 2017, FINRA reports the United States had:
FINRA requires brokerage firms to provide customers with written notifications of trade confirmations during or prior to the transactions. Brokerages also must provide account statements so that clients can review transactions and ensure they authorized each one.
With so many registered brokerages processing billions of dollars in daily transactions, which FINRA refers to as “market events,” there is ample room for brokerage fraud to occur. In 2017, FINRA reports it referred for prosecution 855 cases of fraud and insider trading. FINRA says it barred 492 brokers from further trading, and suspended 733 others. Also, FINRA expelled 20 firms and suspended 29 others for brokerage fraud and similar violations.
Those receiving FINRA’s wrath for violating the nation’s laws governing broker and brokerage fraud paid $64.9 million in fines. FINRA ordered another $66.8 million in restitution. Restitution offsets the money defrauded from investors, but often does not get paid in full.
In many cases, more than one firm services an individual investor’s account. For example, one firm may deal directly with investors, provide advice, and take trade orders, while another firm will execute those trades on the market.
Each step in a financial transaction is an opportunity for someone to commit fraud. Unscrupulous firms can collude together to steal investors’ money, or they can act alone. But they all depend on concealing their actions.
The diligent investor is the enemy of the fraudulent broker. Careful recordkeeping is the best protection against fraud. Investors should obtain statements from all firms that service their accounts and read them carefully. FINRA advises that statements may have subtle telltale signs that they have been doctored to conceal fraud.
FINRA’s Investor Complaint Center receives complaints across the nation from investors concerned about broker fraud or other problems with their investment brokerages. FINRA investigates investor complaints to determine whether or not likely violations of the nation’s securities laws and financial regulations might have occurred. FINRA reports the most common investor brokerage fraud problems arise from four sources.
Misrepresentation is the most common form of securities fraud and occurs when a brokerage firm or Financial Advisor makes material misstatements or fails to disclose material facts in connection with the purchase or sale of securities. Common examples of misrepresentation include the failure to accurately disclose risks or conflicts of interest and making false promises or assurances regarding investment performance.
High-pressure sales tactics occur when brokerage firms or Financial Advisors aggressively push prospective and existing clients to purchase securities and/or deposit assets to be managed by the Financial Advisor. Most frequently, high pressure sales tactics are accompanied by false promises regarding investment performance and a misrepresentation regarding the characteristics of the investment. Senior investors and retirees are the most common targets.
Unsuitable investment recommendations refer to the purchase or sale of securities that are inconsistent with the client’s investment objectives and risk tolerance. The recommendation of “aggressive” securities in the account of a “conservative” investor or the recommendation of illiquid securities in the account of an investor who requires access to his/her capital are common examples of unsuitable investments.
Unauthorized trades occur when a brokerage firm or Financial Advisor purchases or sells securities in a customer’s account without first obtaining authorization. Most often, a Financial Advisor who engages in unauthorized trading does so for the purpose of generating additional commissions.
Investment fraud, including brokerage fraud, costs Americans between $10 billion and $40 billion every year, the Securities Investor Protection Corp. says. The amount varies greatly, because many victims do not report a large portion of investment schemes, including broker fraud. The reason many do not report them is because they are embarrassed and do not want to draw attention to the fact they became victims of fraud.
For many fraud victims, the stigma attached to being duped is too embarrassing to file a complaint and make the matter public. Many victims also lose all hope of recovering any of the lost investment money, and try to put the matter in the past. The problem is, for many victims of investment fraud, putting the matter in the past is nearly impossible. That is because the effects often last the remainder of the victim’s lifetime.
The elderly are among the most vulnerable to investment and broker fraud.
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