Investors Capital Corp. Censured, Fined $250,000, and Ordered to Pay Restitution of $841,000

According to its Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA, Investors Capital Corporation assented to censorship, a $250,000 fine, and ordered to pay restitution in excess of $841,000.  Per AWC 2013035035901, Investors Capital Corporation recommended unsuitable investments in Unit Investment Trusts and Steepener Notes for seventy-four customers.  These...

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Former New England Securities and MetLife Securities broker, Robert Lappin, Suspended for 3-Months, Fined, and Ordered to Pay Restitution

According to his Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA, Robert Lappin agreed to a 3-month suspension from the securities industry, a fine of $5,000, and was ordered to pay restitution in excess of $26,000.  From October 2012 to April 2014, Lappin effected twenty-two separate Unit Investment Trust...

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Glossary Of Terms

  • Accredited Investor

    An accredited investor is an individual whose income exceeded $200,000 in each of the two prior years (or $300,000 together with a spouse), and whose income is expected to be the same for the current year. An accredited investor may also include a person with a net worth over $1 million, either individually or with a spouse, and this excludes the value of the individual’s primary residence. Investors must qualify as “accredited investors” to purchase certain securities offerings that are exempt from registration with the SEC, which typically includes private placements and other non-publically traded offerings.

  • Alternative Investment

    An alternative investment is an investment that is not a stock, a bond or cash. AIs may include real estate investments, promissory note programs, hedge funds, derivatives contracts and the like. AIs are generally privately traded products that should only be purchased by institutional investors or individual investors who have a high net worth. AIs are subject to less regulatory oversight and often generate higher fees for brokers. Also, AIs are generally illiquid, which means clients cannot easily sell the AI on the open market if they need to generate cash for an emergency.

  • Breach of Fiduciary Duty

    Those who have a “fiduciary duty” owe a duty of care and a duty of loyalty to their clients, and are charged with acting in the client’s best interests at all times. Because of the level of trust and confidence between an investor and a broker/financial advisor, and also because the investor pays the broker/financial advisor for financial guidance, the broker/financial advisor owes the client a fiduciary duty in most cases. This duty can be breached when the broker puts his own interests above his client’s.

  • Churning

    Churning is excessive trading in a customer’s investment account in order to generate additional commissions for the broker.

  • Consolidated report

    A “consolidated report” is a document provided by a registered representative, such as a broker or investment adviser, to a customer that combines account information regarding most or all of a customer’s assets.

  • Direct Participation Programs

    A direct participation program or DPP is a program that allows investors to participate in the cash flow and tax benefits of an underlying investment, such as oil and gas programs, real estate programs, equipment leasing programs, agricultural programs, cattle programs, condominium securities, and others.

  • Fiduciary Duty

    A broker who owes a “fiduciary duty” to his client has a duty to act in the “best interests” of his customer at all times.  He has a duty to disclose any conflicts of interest between himself and his customer and to act with the highest degree of loyalty and honesty in all dealings with his customer.

  • FINRA

    FINRA is the Financial Industry Regulatory Authority, a self-regulatory organization charged with regulating the securities industry.  It is the successor to the National Association of Securities Dealers, Inc. (NASD).  All firms dealing in securities that are not regulated by another self-regulatory organization are required to be member firms of FINRA. FINRA disciplines its members for failure to follow federal regulatory guidelines as well as FINRA’s own code of conduct. FINRA also administers arbitrations between investors and their financial advisors.

  • Letter of Acceptance, Waiver and Consent (“AWC”)

    A Letter of Acceptance, Waiver and Consent or AWC is a consent agreement between FINRA and one of its members or associated persons, such as a registered broker, relating to a violation of FINRA rules. As stated in FINRA Rule 9216, “if the Department of Enforcement or the Department of Market Regulation has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Department of Enforcement or the Department of Market Regulation may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member’s or associated person’s right to a hearing.” Sanctions can include suspension from the industry (either permanent or temporary), censures, and fines.

     

  • Leveraged Exchange Traded Funds

    Leveraged Exchange Traded Funds (“ETFs”) are investments that seek to deliver multiples of the performance of the index or benchmark they track.  Examples are ProShares’ Ultra S&P500, which aims to produce 200% of the return of the S&P, or the Ultra Dow30, which aims to produce 200% of the return of the Dow Jones Industrial Average Index.  Typically the funds achieve these results with a range of investment strategies, which may include swaps, futures contracts and other derivative instruments.  FINRA has warned that because most leveraged ETFs strive to achieve their stated objectives on a daily basis, over longer periods of time their performance can differ significantly from their benchmarks due to the effects of compounding.  Because of the complexity of these leveraged ETFs, it is important that firms selling these funds present a fair and balanced picture of both the risks and benefits of an investment in leveraged ETFs.

  • Master Limited Partnership

    A master limited partnership, which is sometimes referred to as a publicly traded partnership, is a limited partnership that is publicly traded on an exchange.  It seeks to combine the tax benefits of a limited partnership with the liquidity of a publicly traded security.  As a partnership, MLPs do not pay entity-level income taxes and instead pass all income, gains, deductions, losses, and credits through to its investors.  Because they are publicly traded on an exchange, MLPs are available to any investor with a brokerage account and can be bought and sold throughout the trading day.

  • Overconcentration

    Overconcentration can occur when your investment portfolio contains a large portion of the same type of investment, asset class, or market sector. Typically, a diversified portfolio helps investors weather the unexpected ups and downs of the market, especially when one sector – such as real estate or the stock market – experiences a downturn.

  • Ponzi Scheme or Pyramid Scheme

    A Ponzi scheme is a fraudulent investment scheme wherein the operator uses the investment funds from a new investor to pay returns to investors already in the scheme. Ponzi schemes usually generate high returns, as long as the operator can continue to attract new investors and the economy stays generally stable. The most widely known recent Ponzi schemes include the Bernie Madoff scandal and the scheme involving Allen Stanford and the Stanford Financial Group. A pyramid scheme is similar to a Ponzi scheme, but it relies on investors to directly bring in new investors. Obviously, it is also heavily dependent on a continual stream of new investors to stay afloat.

  • Private Placement

    A private placement is a group of securities not sold through a public offering. The private offering is only offered to a small group of investors, rather than a sale on the open market. In order to issue securities privately, the issuer typically must release a Private Placement Memorandum (“PPM”) that details the product offered as required by SEC regulations.

  • Real Estate Investment Trust

    A REIT, or real estate investment trust, is a company that invests in real estate ventures, such as shopping malls, apartment and office buildings, and hotels, and then packages interest in the real estate properties to sell as a security. REITs provide revenue to investors through the rental and/or mortgage payments made on the properties and sales of the properties. Many REITS are private placements and are not traded on the open market, meaning they bear a high level of risk and illiquidity.

  • Securities Fraud

    Securities fraud is broad term that encompasses broker fraud and investment fraud. It occurs when a broker or financial advisor misrepresents or omits information that an investor needed to make an informed decision about an investment strategy, and can range from a Ponzi or pyramid scheme to a broker making unauthorized trades or excessive trades.

  • Securities Fraud Class Action

    A securities fraud class action is a lawsuit filed by a group of investors who bought a particular product during a specific time period who suffered damages as a result of violations of securities laws.

  • Selling Away

    Selling away occurs when a broker or financial advisor sells a customer a product that is not held or offered by the broker’s own brokerage firm. Typically, these investments are private placements or other non-publically traded products that can pose additional risks for clients. Because these products are not on the brokerage firm’s “approved products” lists, they have not been thoroughly vetted through the firm’s due diligence process.

  • Structured Products

    Structured products are securities derived from or based on a reference asset, such as a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency.  Examples include Structured Notes, which combine a bond and a derivative, and Equity-linked notes, which are notes with a payout tied to a listed stock.  Some structured products offer full principal protection, but many offer limited or no principal protection.  Typically, structured products limit the upside participation of the investor in any appreciation of the referenced asset, and structured products are often very thinly traded, thus potentially limiting an investor’s ability to sell prior to maturity.  Because of the complexity of structured products, it is important that firms balance the promotion of these products with a fair disclosure of the risks, including potential loss of principal or that at expiration the investor will own the reference asset at a depressed price.

  • Suitability

    A broker or financial advisor is required to “know its customer” and to deal fairly with customers. A crucial element of this relationship is understanding the investor’s needs and providing the customer with financial products that are suitable for the investor. Factors that a broker should take into account when determining the suitability of an investment include knowing the investor’s age, financial situation and needs, long-term goals, income, education, investment sophistication, other investment portfolio, liquidity needs, and risk tolerance.

  • Unauthorized Trading

    When a broker purchases or sells an investment without the client’s knowledge and permission, this constitutes unauthorized trading. Brokers generate commission by executing trades, and often a broker will buy or sell an investment without the investor’s knowledge in order to generate additional commission or to place the investor into a product that the client would not approve because it is riskier than the investor’s wishes.

  • Unit Investment Trust

    A unit investment trust (“UIT”) is a type of Investment Company that issues securities, typically called “units,” representing undivided interests in a relatively fixed portfolio of securities.  UITs are generally issued by a sponsor that assembles the UIT’s portfolio of securities, deposits the securities in a trust, and sells units of the UIT in a public offering.  UIT units are redeemable securities that are issued for a specific term, and entitle an investor to receive his or her proportionate share of the UIT’s net assets on redemption or at termination.

    UIT sponsors offer investors a variety of ways to reduce the sales fee charged on a UIT purchase.  The two most common methods to reduce the fee are “breakpoints,” which allow investors to reduce the sales fee by increasing the size of their UIT investments, and discounts on “rollovers” and “exchanges.”

  • Variable Annuity

    A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.  The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

    Variable annuities can be confusing, and it may be difficult for an investor to understand all of their terms and conditions.  Brokers, who earn high commissions for sales of variable annuities, tend to sell variable annuities by touting supposed benefits, including insurance features or “death benefits” and tax-deferment benefits.  Many times, the promotion of these benefits is misleading and the benefits may not even apply to an investor’s given situation.

    Investors should be particularly wary of any advice to invest in a variable annuity within an IRA account (mainly because the tax benefits may be redundant) or switching from one annuity to another (because the fees associated with such switches may outweigh any supposed benefit of the new annuity).