State Securities Regulators Offer Tips to Help Investors Avoid Dishonest Investment Professionals

WASHINGTON, D.C. (December 16, 2008) – The North American Securities Administrators Association (NASAA) today offered investors a series of tips to avoid dishonest investment services providers in the wake of the unfolding scandal in which scores of investors lost upward of $50 billion after a New York money management firm tumbled like a house of cards last week.

“While the vast majority of investment services providers are honest professionals, the potential for fraud should concern us all,” said NASAA President and Colorado Securities Commissioner Fred Joseph.

With more people in charge of their own investment portfolios than ever before, state securities officials are warning investors of the increasing sophistication of investment professionals who steal money from unsuspecting clients. “Anyone, regardless of income, education, or profession, can become a victim when unscrupulous individuals use the growing field of financial advice to line their own pockets,” Joseph said. “The risk of fraud is magnified as investors seek higher returns in today’s troubled markets.”

Joseph noted that the title “investment adviser” is a legal term that describes a wide range of people who provide advice about securities. These individuals also are referred to as wealth managers, investment counsel, and asset or portfolio managers. Joseph recommended investors consider the following five tips to help protect themselves from dishonest advisers:

  • Investigate the investment adviser and salesperson thoroughly.
  • Make sure the investment opportunity is registered for sale in the state in which you live.
  • Always stay in charge of your money.
  • Insist on a full explanation of investment recommendations and don’t invest in something you don’t understand.
  • Keep notes about conversations and meetings.

Detailed information on each tip is available on the NASAA website here.

Of the 25,857 investment adviser firms in the United States as of December 1, 2008, 14,500 were registered with and regulated by the states, 11,162 with the SEC and 195 both by the SEC and the states. There are approximately 260,350 investment adviser representatives. Adviser firms with less than $25 million of assets under management generally are regulated by state securities regulators while firms with more than $30 million under management or that do business in 30 states or more states must register with the SEC. Firms with assets between $25 and $30 million are allowed to register with either the SEC or applicable states at their discretion.

Most states require investment adviser representatives to pass an examination, undergo background checks, renew their registration annually and report changes in their businesses or addresses promptly. States also review an applicant’s disciplinary history and financial stability prior to allowing the investment adviser to conduct business in a given jurisdiction. More than 30 states require that investment adviser representatives be licensed – the SEC does not.

States also protect investors by actively pursuing a program of on-site examinations – some unannounced – of small investment advisers and careful screening of promotional materials. A 2007 nationwide series of coordinated examinations of investment advisers by 43 state and provincial securities examiners revealed a significant number of problem areas. These exams revealed 2,135 deficiencies in 13 compliance areas. The top five categories with the greatest number of deficiencies identified in the examinations involved registration, unethical business practices, books and records, supervisory/compliance, and privacy.

NASAA’s membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900

2008 Headlines, Newsroom