RIA Compliance Blog
Last year, the Securities and Exchange Commission announced that it was creating a Retail Strategy Task Force as part of the Enforcement Division’s continuing endeavors to shield retail investors. The newly created Task Force has already in 2018 published an Investor Alert relating to Ponzi schemes, as discussed below.
The Enforcement Division has had “a long and successful history of bringing cases involving fraud targeting retail investors.” In recent years, it has seen a substantial number of cases pertaining to fraud that impacted retail investors, such as the sale of structured products that were not suitable to the relevant retail investor and microcap pump-and-dump schemes. The Retail Strategy Task Force will put into practice the education obtained from those cases in order to pinpoint “large-scale misconduct affecting retail investors.”
According to a speech given on October 26, 2017 by SEC Co-Director of Enforcement Stephanie Avakian, the word “retail” includes not just “Ponzi schemes and microcap or offering fraud.” The word also includes any activities that take place between investment professionals and retail investors. Therefore, the Retail Strategy Task Force will have the authority to address and investigate a wide variety of alleged misconduct.
According to Avakian’s speech, some common issues involving retail investors that the Enforcement Division has, and continues to, encounter include the following:
- Investment professionals directing retail investors to mutual fund share classes with greater fees, when the retail investors are able to invest in share classes of the same fund that charge lower fees;
- Misconduct involving wrap-fee accounts, such as not informing investors of the extra costs of trading through unaffiliated brokers, and buying alternative products that include supplemental fees;
- Retail investors purchasing and retaining investments such as inverse exchange-traded funds (“ETFs”) for long-term investment. According to the SEC, these ETFs are high-risk products that include a significant chance of losing their principal if they are held long-term. However, the SEC has found that it is becoming increasingly common for retail investors to retain these products in the long run;
- Issues in the sale of structured products to retail investors, such as not adequately informing retail investors of fees, mark-ups, and other circumstances that can adversely affect returns; and
- Misconduct such as churning and greater than necessary trading that results in greater commissions at the retail investor’s expense.
The Retail Strategy Task Force is responsible for investigating instances where these issues, among others, impact retail investors. It will also be responsible for finding ways to educate investors as a means of shielding them from misconduct carried out by investment professionals. The Enforcement Division will have the Retail Strategy Task Force work with personnel in the SEC’s regional offices and branches such as the Office of Investor Education and Advocacy to pinpoint circumstances “where targeted education and outreach efforts are likely to benefit investors.”
On April 9, 2018, the Retail Strategy Task Force, together with the SEC’s Office of Investor Education and Advocacy (“OIEA”), published an Investor Alert regarding Ponzi schemes in response to a recent SEC case involving two companies and their principals charged with operating a Ponzi scheme. The Investor Alert explains what a Ponzi scheme is, outlines the common warning signs of a Ponzi scheme that investors should look for prior to making an investment, and urges investors to inform the SEC if someone has recommended to them an investment that features any of the warning signs.
The Investor Alert also advises investors to pay attention if they have difficulty receiving payment on their investments, as Ponzi scheme promoters can attempt to stop investors from cashing out by offering higher returns if the investors stay invested. The Investor Alert ends with a brief discussion of two recent cases the SEC brought against defendants alleged to have conducted Ponzi schemes and some additional resources that investors can consult.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.