NASAA’s Top Investor Threats in 2022: Exercise C-A-U-T-I-O-N

Fraudsters like to follow the money when it comes to targeting unsuspecting investors. It is why cryptocurrency and digital asset fraud topped the North American Securities Administrators Association’s (NASAA) annual list of investor concerns released January 10, 2022. Annual inflows into digital asset investment products have increased 36% over last year, and is likely to continue throughout the cryptocurrency space as the new medium of investing grows in popularity and mainstream acceptance.

NASAA’s Top Investor Threats in 2022:  Exercise C-A-U-T-I-O-N

Widespread stories of Crypto Millionaires prompted many investors to plunge into digital assets for the first time in 2021 without sufficient knowledge of the risks involved. With a new terrain and a growing investor landscape, the lack of education and ongoing discussions on how to regulate Bitcoin and other cryptocurrencies made seniors and other vulnerable investors easy prey for scammers. State securities regulators surveyed by NASAA cited three additional areas of investor concern: (i) fraud offerings related to promissory notes, (ii) money scams offered through social media and internet investment offers, and (iii) financial schemes targeting self-directed Individual Retirement Accounts (IRAs).

As fiduciaries, advisers who recommend to, or invest client assets in digital assets, private placements, and similar fraud-friendly products should ensure  suitability based on a number of factors, including client sophistication,  investment objectives, risk tolerance,  and time horizon for having the assets invested.

When discussing one of NASAA’s top investment threats with a client, consider using the acronym below.

 

Exercising C-A-U-T-I-O-N

C means complex strategies, claims of unreasonably robust returns, confusing language, or complicated jargon. If investors don’t have a full understanding of what they’re investing in, they’re prime targets to scam.

A refers to aggressive sales tactics or account discrepancies. Fraudsters often become pushy and tell investors to act quickly before they miss a big opportunity. Clients should be instructed on how to read their account statements to make certain that scams are not overlooked as honest mistakes.

U stands for unregistered products, unsolicited offers, or unlicensed salespersons. Common investment scams involve unlicensed individuals selling unregistered securities or fictitious instruments. A common mistake is acting on opportunities offered by unsolicited communication. Fraudsters operate worldwide using fake names, false photos, and phony promises.

T is for testimonials fraudulently presented as comments from satisfied customers. In reality,  said testimonials are often feigned by scammers.

I refers to incomplete documentation. Each year, the SEC files enforcement actions  and levies fines on firms that try to sell  securities that are no registered or offered within the parameters of a regulatory exemption.

O is for overly consistent returns fraudulently promised to investors. No investment is immune to risk. If the words “guarantee” or “promise” are mentioned at all, it should immediately raise red flags.

N stands for no-risk investments that falsely promise guaranteed positive returns. Investors should be made aware of investor.gov as a good resource to confirm an unknown individual’s industry licenses and credentials.

 

How Core Compliance Can Help

Regulators continue to focus attention on cryptocurrency and we believe the SEC will again have digital assets listed as one of their top exam priorities.  In last year’s list, the SEC stated that they will continue to look at: (i) whether investments are in the best interests of investors; (ii) portfolio management and trading practices; (iii) safety of client funds and assets; (iv) pricing and valuation; (v) effectiveness of compliance programs and controls; and (vi) supervision of representatives’ outside business activities.

If you are recommending digital assets to clients, now is the time to ensure you have robust compliance protocols surrounding these areas. The experienced team at Core Compliance & Legal Services can help you. For assistance and guidance regarding investor threats, contact us here or at (619) 278-0020.

 

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