All of the regulators, FINRA, SEC and the states securities commissioners advocate checking out your broker or advisor prior to doing any business or investments with him or her. However, if your broker or advisor changes firms and calls you up to sign a transfer form to move your account over to the new brokerage firm, you may want to check him or her out prior to doing so. Although the broker/advisor may give some reasonable reason for changing there could be another reason he or she is not telling. That reason may be on the broker/advisor’s Form U5, which is the industry’s standard form for recording the termination of a broker from a brokerage firm, but more importantly it states the nature of the termination (i.e., if the termination was not voluntary then the form will state why the broker was terminated and possibly give more details). A brokerage firm has 30 days to file the Form U5 after the date of termination. FINRA’s Broker Check may not show terminations for cause (i.e., adverse) for at least another 15 days after filing. Also through Broker Check is the ability to check out if your broker is also registered as an investment adviser representative (i.e., an advisor that gets paid an asset based fee instead of transactional commissions). You can also check out investment adviser representatives on the SEC website. Lastly, you can also request your broker’s complete registration records from your state securities commissioner. NASAA, the North American Securities Administrators Association, provides a map to help you find your state securities regulator. So, the bottom line is that just because your broker asks you to move your account with him or her doesn’t mean you have to. You can stay at the current brokerage and ask to be assigned to another broker, transfer your account to another brokerage firm, or follow your broker. But, if doing the latter, you should do some due diligence first, to see why he or she is moving.
In today’s low interest rate environment retirees and soon-to-be retirees, on fixed income, often try to get more interest and yield in their retirement nest eggs. These investors should be wary when asking their broker or financial advisor to find investments that have higher interest or dividend rates. The compliant broker may look for suitable investments and disclose the risks associated with these recommendations, or even recommend no action however, the unscrupulous broker may easily find higher yielding investments that come with greater risk and volatility which will earn the broker a nice commission. For example, an investor with a decent portfolio of individual bonds may ask his broker for more income. If the broker is nefarious he may recommend a high yielding bond mutual fund, high yield bonds, a real estate investment trust, investment CDs (i.e., structured products — will address in another blog entry), or perhaps an unauthorized private investment opportunity. This broker will seek to earn a nice commission on the purchase, as well as, on the sale of the bond portfolio.
Investments that state “high yield” may also be “junk,” or in other words, less than investment grade (i.e., less than BBB rating. These can be BB, B, CCC or even securities in default). Junk bonds may not be suitable for an investor not willing to accept increased risk or volatility to their retirement nest egg. Another interesting caveat is that while the individual high investment-grade bonds, if held to maturity, will return your face value investment, a bond mutual fund does not mature. A bond mutual may often “turn-over” the underlying individual bonds in it’s portfolio, which is also known as being actively managed. This could affect the net asset value since the bonds in the mutual fund’s portfolio will be bought and sold through out the year.
If a broker is recommending investing into real estate as a replacement to that bond portfolio be wary of the risks associated with that real estate investment. Often these investments can be illiquid and subject to various risks to your original investment, to include a risk of complete loss of your money.
Investors looking to exchange their bond portfolio should be extremely wary if approached by their broker recommending an investment in a security that is accompanied with a prospectus. If a security is sold with a prospectus, it may indicate that the security is new and maybe sold under an exemption of the 1933 Securities Act (i.e., an exempt and unregistered security offering). Such a replacement investment may not be suitable for the retiree investor seeking safety in principal and low risk.
The securities industry has tough rules when it comes to brokers soliciting the purchase of “penny stocks.” Typically a stock is considered a “penny stock” when it trades for less than $5 a share and it does not trade on a major exchange (e.g., New York Stock Exchange or NASDAQ). Penny stocks normally trade on the OTC Bulletin Board (OTCBB) or Pink Sheets. Aside from the requirements, among others, that soliciting brokers have to supply investors with a document disclosing the risks associated with penny stocks and wait, in some cases, 2 days after providing the disclosure document before placing your first order (i.e., “speed bump”), there are actual disclosure ratings assigned to each penny stock. A market center called OTC Markets places penny stocks into different disclosure categories based on things from whether or not the company is current on its financial reporting to whether the stock is the subject of fraud or stock promotion. Your broker and his brokerage firm and clearing firm have access to this information and so do you. There are over 13,000 stocks having either the label of “Caveat Emptor,” “Grey Market,” or “Pink Sheets No Information.” Have you bought a penny stock recommended by a stock broker that has one of those labels? Did your broker disclose that to you?
If approached by your broker (or financial advisor or insurance agent) to purchase an indexed annuity there are some things an investor should consider. First, an indexed annuity (also known as, equity-indexed annuity or fixed indexed annuity) is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are often linked to an equity or stock market index. In 2008, the National Association of Insurance Commissioners (NAIC), an association of state insurance regulatory officials, issued a buyers guide to indexed annuities, which provides educational information on indexed annuties. Did your broker provide you with one? The Financial Industry Regulatory Authority (FINRA) also published an investor alert on indexed annuities.
Unscrupulous brokers take advantage of naïve, unsuspecting investors, especially seniors, and heavily pitch purchases into indexed annuities. Often they will tout indexed annuities as being better than bank CDs and will convince investors to liquidate their CDs to buy an indexed annuity. Investors with variable annuities are often approached by a broker to buy indexed annuities, touting them as being safer than then variable annuity, which has investment choices whose principal can be subject to market volatility. Did the broker recommend you to consider moving money into the fixed account of the variable annuity? If not, the broker is probably only motivated to earn a commission which can be as high as 5%. Another fraudulent tactic is to entice an investor with an “upfront bonus” to buy an indexed annuity but what a devious broker may not tell you is that often you would have to annuitize the annuity in order to take advantage of the bonus benefit – it’s not free money, there’s a cost to every benefit in an annuity. Other brokers may convince you that the annuity they sold you earlier is now out-of-date and try to sell you another annuity claiming to have “better and more features.”
In our earlier press release, we stated that the Financial Industry Regulatory Authority (FINRA) reminded all brokers and broker-dealers, in a regulatory notice, of their requirements prior to recommending the purchase of a leveraged or inverse exchange-traded fund (ETF). See FINRA Regulatory Notice 09-31 . These requirements are more than what is required prior to recommending the purchase of an ordinary stock. Among these standards include the broker-dealer determining if leveraged and inverse ETFs are suitable for any client then determining if they’re suitable for the client in question prior to recommendation. The suitability determination includes considering the client’s financial background, investment objectives and risk tolerance. Brokers are also required to complete specific training on leveraged and inverse ETFs. Lastly, the broker-dealer has to document all of their supervisory obligations concerning these requirements. According to FINRA, holding a leveraged or inverse ETF more than one day for a retail investor may be considered unsuitable. The broker and broker-dealer may be liable for losses if an investor was unsuitable for the leveraged or inverse ETF or failed to perform their regulatory requirements concerning the recommendation to purchase.
Leveraged and inverse ETFs can be volatile and investors may have realized or unrealized losses in the following ETFs year to date, including but not limited to:
|DRV down 63% (NYSEArca: DRV);|
|TMV down 46% (NYSEArca: TMV);|
|VXX down 44% (NYSEArca: VXX);|
|SRS down 43% (NYSEArca: SRS);|
|ZSL down 42% (NYSEArca: ZSL);|
|GAZ down 38% (NYSEArca: GAZ);|
|TZA down 36% (NYSEArca: TZA);|
|UNG down 35% (NYSEArca: UNG);|
|TBT down 34% (NYSEArca: TBT);|
|FAZ down 29% (NYSEArca: FAZ); and|
|UCO down 28% (NYSEArca: UCO).|
For a free case evaluation or to discuss any other investment losses, please contact the Securities Arbitration Firm of Menzer & Hill, P.A., at 888-923-9223, or visit us on the web at www.suemyadvisor.com.
On August 30, 2010 the Securities Law Firm of Menzer & Hill, P.A. submitted comments to the U.S. Securities and Exchange Commission’s congressionally mandated study of implementing a fiduciary duty standard for brokers.
COMMENTS SUBMITTED TO SEC:
Michael Hill, Esq., CFP
Managing Partner of Securities Law Firm of Menzer Hill, P.A.
Boca Raton, Florida
The Securities Law Firm of Menzer Hill, P.A. supports the Study Regarding Obligations of Brokers, Dealers, and Investment Advisers pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As an attorney, and former chief compliance officer for about 10 years, it is time that the Commission simplifies and codifies the roles of brokers and investment advisers.
Public investors are confused between the two roles and cannot discern whether a financial advisor is operating as a broker or as an investment adviser when dispensing advice. Many times industry persons are dually-registered and even retain customers having both a brokerage account and an investment advisory account. The Commission should enact standards of conduct for the dually-registered person so that the investor is treated fairly and consistently.
The Commission should enact fiduciary duty standards when a broker solicits or recommends the purchase or sale of a security. It should not be whether the broker is handling an investment advisory account (i.e., fee-based account) or commission-based account but whether the investor is entrusting him or herself to the professional advice, guidance, and disclosure by the broker.
Investors should also be afforded the ability to seek private recourse should the broker/investment adviser breach his or her fiduciary duty and not be left solely to the investigatory efforts of regulators.
The Securities Law Firm of Menzer Hill, P.A. primarily represents investors and practices in the areas of securities arbitration and litigation annuities and insurance arbitration and litigation investment adviser arbitration and litigation hedge fund and alternative investment arbitration and broker representation.
Menzer Hill, P.A.
7777 Glades Road
Boca Raton, FL 33434
BOCA RATON, Fla., Aug. 26, 2010 (GLOBE NEWSWIRE) — The Securities Law Firm of Menzer & Hill, P.A., www.suemyadvisor.com or www.menzerhill.com, announced today an investigation into the 1861 Capital Management municipal arbitrage funds sold by UBS (NYSE:UBS) and other broker dealers. The funds we are currently investigating include: 1861 Capital Municipal Enterprise Domestic Fund, LP, 1861 Capital Municipal Enterprise Offshore Fund, Ltd., 1861 Capital Discovery Domestic Fund, LP, and 1861 Capital Discovery Offshore Fund, Ltd. In marketing 1861 to investors, UBS targeted high net worth individual investors who were generally risk averse, took a conservative approach to investing and were interested in the safety and security offered by tax free municipal bonds. The firms that used municipal arbitrage attempted to take advantage of differences between municipal bonds and other types of debt, including Treasury securities and corporate bonds. This was the strategy of the 1861 Municipal Arbitrage Fund. Unfortunately, many of these types of strategies are highly leveraged. The leverage, often downplayed in marketing material, caused massive losses with the collapse of the market in 2008 and 2009. Based on our analysis, there was lack of disclosure and/or misrepresentations concerning the risks of these products, and investors who were looking to preserve their capital sustained substantial losses.
Investors who purchased 1861 Capital Management municipal arbitrage funds are urged to explore their legal rights and options. The attorneys at the Securities Law Firm of Menzer & Hill, P.A. are dedicated to pursuing claims on behalf of investors who have suffered investment losses.
For a free case evaluation or to discuss any other investment losses, please contact the Securities Law Firm of Menzer & Hill, P.A., at 888-923-9223, or visit us on the web at www.suemyadvisor.com or www.menzerhill.com.
CONTACT: Securities Law Firm of Menzer & Hill, P.A. 888-923-9223
Menzer & Hill, P.A., is a nationally known securities law firm headquartered in Boca Raton, Florida. The primary focus of the Firm is representing investors nationwide that have lost money due to the negligence of their brokers/financial advisors and the failure to supervise by their broker-dealers. Menzer & Hill, having formerly held Corporate Counsel and Chief Compliance Officer Positions for a publicly traded broker-dealer, bring a truly unique perspective and understanding of how broker-dealers defend against arbitration claims as well as the knowledge of the insurance coverage these firms carry.