September 26, 2018

Securities and Exchange Commission “Roundtable on Combating Retail Investor Fraud”

Panel One – Types of Fraudulent and Manipulative Schemes Currently Targeting Retail Investors

  • Charu Chandrasekhar, Assistant Director, Division of Enforcement, SEC
  • Cameron Funkhouser, EVP, Office of Fraud Detection & Market Intelligence, FINRA
  • Christopher Gerold, Chief of the New Jersey Bureau of Securities
  • Nicole Iannarone, Associate Clinical Professor, Georgia State University College of Law
  • Jean Setzfand, SVP, AARP Programs, AARP

Panelists discussed a number of issues related to retail investor fraud, including current trends, the most common scams, and the impact to everyday investors. Chandrasekhar noted that retail investor fraud is a broad category, including boiler-room schemes, Ponzi schemes, pump and dumps, and others, explaining how the Securities and Exchange Commission (SEC) works to strategically identify widespread abuses that target retail investors. Chandrasekhar also noted the emerging role the internet is playing in propagating fraud, including in the cryptocurrency space.

Funkhouser discussed the Financial Industry Regulatory Authority’s (FINRA) work to identify fraud through surveillance of the marketplace and human intelligence gathered through consumer tips and complaints and field reports from examiners. He noted that many fraudsters use mass marketing campaigns, such as spam email or mailed flyers, or target on a personal level, infiltrating church groups or senior citizen homes. Funkhouser also noted there are “trusted contact” rules (FINRA Rule 4512) that allow financial professionals to reach out to family members or friends when they suspect fraud. He added that the industry is highly regulated, but many bad actors are unregistered. Gerold addressed his work in New Jersey, noting that local regulators and law enforcement are often the “closest to fraud when it happens.” He added that current trends show that more enforcement actions are currently being brought against non-registrants than registered broker-dealers. Iannarone discussed her work at a legal clinic, representing investors who have been defrauded.

Setzfand discussed AARP’s work to educate and advocate for senior investors, including providing “trusted resources” to help prevent fraud and a dedicated helpline to answer investor questions. Setzfand noted the importance of understanding the profile and psychology of fraud victims, which helps inform who regulators and law enforcement approach them to provide resources. Setzfand also emphasized that senior investors experience greater financial losses than younger fraud victims, they have less time to financially recover, and it also takes a greater emotional toll. Setzfand pointed out that many senior investors feel fraud is “inevitable,” and they brace themselves for fraud rather than protecting themselves. She added that much of the onus of preventing fraud is put on the investor, and it is important to make it as easy as possible for consumers to protect themselves.

Asked what policy areas the SEC should explore to address retail investor fraud, Chandrasekhar replied that the SEC’s proposed Regulation Best Interest will be an “important vehicle” to help investors understand their relationship with their financial professional. Funkhouser, Iannarone, and Setzfand also agreed that a best interest standard would help investors. Setzfand added that more enforcement and greater punitive action against fraudsters would help deter future crimes. 

Panel Two – Enhancing the Ability of Broker-Dealers to Combat Retail Investor Fraud

  • Troy Carlson, SVP & Head of Corporate & Private Client Services, FIG Partners
  • Faith Colish, Counsel, Carter Ledyard & Milburn LLP
  • James Fiebelkorn, VP & Global AML Officer, Ameriprise Financial Services Inc.
  • Christopher Gerold, Chief of the New Jersey Bureau of Securities
  • Sarah Green, Chief Financial Crimes Officer, Vanguard Group Inc.
  • Yvonne Huber, VP, Market Regulation, FINRA
  • Michael Rufino, EVP & Head of Member Regulation – Sales Practice, FINRA
  • Ignacio Sandoval, Partner-Elect, Morgan Lewis
  • Daniel Zinn, General Counsel, OTC Markets

Panelists discussed various ways broker-dealers combat retail investor fraud, including Exchange Act Rule 15c2-11, broker-dealer registration, and suspicious activity reports (SARs). Panelists noted that Rule 15c2-11 requires broker-dealers to review certain issuer information before they initiate quotations for an OTC security. Huber noted that capital formation and investor protection are not mutually exclusive, and that putting forth regulations to ensure markets are fair and investors are protected will help all market participants.

Panelists also discussed SARs and anti-money laundering (AML), noting that all broker-dealers are required to have an AML program. Fiebelkorn said that AML and anti-fraud activities are “two sides of the same coin,” and the way AML and fraud are identified are often similar. He noted the main difference is AML is looking for patterns over time, while anti-fraud is looking for individual transactions in real time. Green noted that it is “critically important” that everyone is trained on retail fraud and that firms must have policies and procedures in place so fraud suspicions are escalated. Fiebelkorn added that it is important for firms to communicate with each other about new risks and trends they are identifying.

Panelists noted a number of issues reported on SARs, including email account compromises, coin offerings, and senior investor fraud. Rufino explained that SARs are “invaluable” to regulators and law enforcement, but are only as useful as the information that is included. Rufino stressed the importance of the narrative, and that reporters should include the underlying rationale of why the reported activity is suspicious.

Panel Three – Additional Ways to Combat Retail Investor Fraud

  • David Becker, General Counsel & Chief Risk & Compliance Officer, Equiniti Trust Company
  • Cromwell Coulson, President & CEO, OTC Markets
  • Robert Franz, Senior Director, Compliance, Broadridge Financial Solutions
  • Christopher Gerold, Chief of the New Jersey Bureau of Securities
  • Mark Harmon, Partner, Hodgson Russ LLP
  • Andrea Manning, Corporate Counsel, Computershare
  • Christy Oeth, Chief Compliance Officer, Virtu Financial
  • Michael Paley, Assistant Regional Director, Division of Enforcement, SEC
  • Chris Stone, VP, Transparency Services, FINRA
  • Gerri Walsh, SVP, Investor Education, FINRA

Panelists discussed other avenues for combating investor fraud, including “restrictive legends” and transfer agents, trading halts issued by FINRA, and investor education. Panelists discussed the various halts FINRA can place, including foreign regulatory halts, derivative halts, and extraordinary event halts, and that deciding when to halt trading is a complex issue. Coulson noted that fraud and manipulation disrupts markets and at times there is a need to intervene, and “eventually the market gets it right.”

Panelists also discussed the importance of investor education in combating fraud. Gerold said it is important to “get creative” to encourage investors to pay attention and noted the importance of beginning investor education at a young age. Walsh added that only 30 percent of people have taxable brokerage accounts, and many are investing through their workplace. She also said it is important to begin investor education at a young age and try to access people in their communities. Walsh added that FINRA’s investor education work focuses on the types, targets, and tactics of fraud, and works to identify who’s at risk, what the problem is, and quantifying the harm.

For more information on this roundtable, click here.