FINRA Investor Alert: What You Need to Know About Creating a Power of Attorney for Your Investments

By: Alexandra Hughes, Spring 2016 Clinic GRA

On March 23, 2016, FINRA issued a FINRA Investor Alert: Power of Attorney and Your Investments—10 Tips. Managing financial affairs and investment accounts is often a battle of competing interests (present v. future needs) for investors. Although it may be easier for an investor to manage his financial affairs taking a “one day at a time” approach, such thinking is too short sighted. It is equally important for investors to plan for their future needs, especially when unfortunate life events, such as sickness and other health issues, are inevitable, and may leave an investor unable to manage his investment accounts and financial affairs.

POA: What is it?

Power of Attorney (POA) is one way an investor can plan for the future. FINRA’s investor alert defines POA as “a legal document you sign to grant someone you trust with authority to make decisions on your behalf. Based on the authority you grant, this attorney-in-fact, or agent, has the legal right to make the decisions you would make if you were able.”

10 Tips for POA: What Every Investor Should Know

 The following are 10 tips FINRA thinks every investor should know about POA:
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Finding Your Footing: Clinic Experience Leads to Growth as Attorney

By Geoff Hafer, Spring 2016 Student Intern

With the semester coming to a close, my time in clinic is nearly over. Wow, it has all been a blur! When I think back to the first couple of weeks in clinic I remember feeling lost and intimidated. This was an entirely new area of law where I had absolutely no experience or knowledge. We were handed cases that were already well developed and were expected to scoop them up and hit the ground running. Reading the statement of claim in our first case I remember thinking to myself, “what have I gotten myself into?” UITs, REITs, FINRA rules and regulations, suitability, etc. I quickly found myself swimming in unfamiliar waters. How could I be expected to learn everything there is to know about the world of brokers and investors in just a single semester?

That was perhaps the biggest struggle I had initially in the clinic, realizing that we, as aspiring lawyers, are not expected to be experts on the ins and outs of investing. Success in the clinic was not contingent upon some superior understanding of investing but rather implementing the basic lawyering skills we have all acquired through our own experiences and understanding the strengths and weaknesses of a particular case and developing an effective argument. That’s what it is all about. I spent an excessive amount of time researching products, terminology and investment strategies initially, losing sight of the bigger picture. Expertise with a particular practice area comes with time and experience, but effective writing is something we all can do now. Leave the more technical arguments to Professor Doss and Professor Iannarone, at least for now.

The clinic process itself took on a similar shape to my experience with law school in general. In the first part of clinic, like the first year of law school, it’s a bit scary, new, and you are introduced to an entirely new and unfamiliar process. But by the second half of clinic, similar to your second year of law school, you have a better understanding of the process and what’s expected of you to succeed. It is a process conducive of individual growth. Those who can grasp early on the importance of feedback and trial and error will benefit the most from the process.

Ultimately, I am proud of my progress and the work that I produced in my time in the clinic. I learned a great deal about myself and my capabilities and can’t thank Professor Iannarone and Professor Doss enough for pushing me to my limits. Clinic was tough, but nothing worth doing is easy. Accept that there is always room for growth as aspiring attorneys and at the end of the process you will find you are better for it.

Beware Financial Fraud: It’s Closer Than You Think

By: Alexandra Hughes, Spring 2016 Clinic GRA

Generally, the IAC focuses on claims of misconduct on the part of investment advisers and broker-dealers. Such claims involve the unsuitability of a recommended investment, or misrepresentations or omissions to the investor. However, what happens when the underlying financial information, which is distributed to investors in a prospectus or quarterly reports, ends up being inaccurate? Such financial inaccuracies would not only deeply affect an investor’s understanding of the business he has invested in, but would be almost impossible for the regular or even prudent investor to detect. The SEC recently issued a press release discussing what happens when investors are so deceived.

On April 19, 2016, the SEC released a press release entitled SEC Announces Financial Fraud Cases, discussing “a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.” The “pair” of companies are: Logitech, a company manufacturing accessories for computers and tablets, and Ener1, a lithium-ion battery manufacturer. The SEC also released orders detailing cease and desist proceedings and penalties against Logitech and Ener1. SEC’s Division of Enforcement Director, Andrew Ceresney, said “In these two cases, we allege deficiencies in Ener1’s failure to properly impair assets on its balance sheet and Logitech’s failure to write down the value of its inventory to avoid the financial consequences of disappointing sales.”

For such accounting failures, Logitech agreed to pay a $7.5 million penalty. The SEC found that in fiscal year 2011, Logitech inflated its financial results, which subsequently caused investors to have an inaccurate and impaired view of the company’s finances. Logitech’s then-controller, Michael Doktorczyk, and then-director of accounting, Sherralyn Bolles, also agreed to pay penalties of $50,000 and $25,0000, respectively, for their part in the accounting related violations. However, Logitech is not out of the woods yet. On April 18, 2016, the SEC filed a complaint against Logitech’s then-CFO, Erik K. Bardman, and then-Acting Controller, Jennifer F. Wolf, seeking injunctive relief and damages for multiple securities act violations.

As for Ener1, the SEC found the company had “materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.” Former executives of the company: Charles L. Gassenheimer, CEO and chairman of the board, Jeffrey A. Seidel, CFO, and Robert R. Kamischke, chief accounting officer, paid penalties of $100,000, $50,000, and $30,000, respectively for the violations. Further, the SEC found Ener1’s auditor, Robert D. Hesselgesser, violated “professional auditing standards when he failed to perform sufficient procedures to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.” As a result, Hesselgesser has been suspended as an accountant.

For more information, see the SEC press release here.

Investor Advocacy Clinic Experience Highlight: Helping Investors

By Michael Williford, Spring 2016 Student Intern

I joined the Investor Advocacy Clinic with an interest in helping elderly clients, and without the first clue how securities arbitration works. I am leaving the first semester of my clinic experience with a much clearer picture of the investing landscape, how FINRA works for investors, and how it does not.

I also feel fully prepared to step into my role as a returning intern. For someone without a background in finance, the learning curve can at times seem daunting, but of all the skills the clinic imparts, perhaps most important is the ability to learn and digest a new area of the law in short order. As new students join us in the clinic in the fall of 2016, I look forward to helping them get their bearings so they can help the clinic assist more underserved investors.

Which brings me to the part of the clinic I enjoyed the most—helping the clients. Our team were able to resolve several cases over the course of the semester. The most satisfying part of each of those cases was meeting, speaking with, and ultimately giving retired investors the opportunity to tell their stories and recover at least a portion of what was unfairly taken from them. They were all grateful to receive legal assistance that would otherwise be out of reach.

Beyond that, though, is the opportunity to function as part of a cohesive team. The clinic is organized as a small firm, and everyone must pull their weight if the firm is to survive and thrive. That kind of real world scenario is invaluable as I transition from student to attorney. It’s a change from the “compete for the A” mentality that normal classes require, and I highly recommend the experience to any students seeking a different perspective on their law school experiences.

As I’ve already suggested, I enjoyed it so much I’ll be returning for my second semester in the fall.

A Closer Look at Alternative Investments: Precious Metals

By Michael Williford, Spring 2016 Student Intern

To wrap up the alternative investment series, today I’ll focus on a subset of commodities that belongs to the larger class of alternative investments referred to as “real assets;” specifically, precious metals.

The volatility in the larger stock market that resulted from the collapse of the derivatives securities focused on the housing market led to a rise in precious metal investments. Precious metals were, and remain appealing to investors because they seem to promise a safe, stable place to invest when the stock market fluctuates. We’ve all seen the commercials, but maybe we haven’t thought as much about the risk.

With the increase in precious metal investments came fraud. In December of 2014, FINRA issued an investor alert concerning the risks associated with investing in precious metals. FINRA identified high pressure sales tactics and outright fraud as two areas of major concern, highlighting federal court decisions punishing one Florida firm for engaging in illegal, off-exchange precious metal transactions, and another firm for engaging in fraud the court called “repeated, callous, and blatant.”

Precious metals investments are not always inappropriate, however. FINRA cautions they can play a “helpful role in building a diversified portfolio” and offers five tips to avoid falling victim to scammers. Specifically, FINRA advises investors to (1) say no to pushy sales people—no reputable firm will ever use high pressure tactics to get you to invest; (2) perform a background check on the salesperson before you invest—you can do that here; (3) Be suspicious any time you hear an investment is “low risk”—storage charges, price fluctuations and the use of loans to investors to purchase precious metals can quickly undo any progress you make; (4) the risk of leverage—those loans used to purchase your investment. Purchases “on margin” ae subject to a “margin call” that can require an investor to contribute additional monies if the value of the investment declines; and (5) Fees, fees, fees—like most investments with a broker, precious metals investments may include account opening fees that can run into the hundreds of dollars, commissions that can run as high as 15% of your investment, and ongoing management and storage fees discussed above. Together, fees can sap the returns an investor earns, leading to a situation where the only person who benefits from your investment is the broker of firm.

As always, do your homework before you invest, and carefully read the offering documents associated with any investment you’re considering.

A Closer Look at Alternative Investments: Commodities

By Michael Williford, Spring 2016 Student Intern

Commodities are a subset of real asset investments, like real estate, which I discussed yesterday, and precious metal investments, which I’ll highlight tomorrow. Commodities include things like oranges, oil, animal products and foreign currency trading, just to name a few. Commodities are usually traded via futures contracts, which are agreements to buy or sell a specific quantity of a commodity at a specified price on a particular date in the future. You can read more at FINRA’s website, but essentially a futures contract is a bet an investor makes that the price of the contract purchased today will be lower than the price for which the commodities can be sold on the date the payment comes due. If that happens, the investor makes money. If the price of the contract is more than the price of the underlying commodities on the date specified in the contract, the investor loses money.

Specifically, commodities futures are regulated by the Commodities Futures Trading Commission (CFTC). Brokers selling commodity futures are required to register with the National Futures Association (NFA), an independent regulator for anyone who trades futures with the public. The NFA offers the public access to a database that allows investors to determine if the broker they are considering is the subject of any disciplinary actions. The system is called Background Affiliation Status Information Center, or BASIC. You can check up on a futures broker by utilizing the system here.

An investor may encounter commodities through a broker who manages a commodity pool. Brokers in charge of commodity pools raise money that is pooled together to trade commodity futures and options. The CFTC has issued warnings about commodity pools that encourage investors to be suspicious of sales pitches that lead investors to believe they can profit from news that’s already known to the public, such as promises the price of oil is going increase as a result of the hurricane you heard about on the news recently; by leading you to believe that other successful investors have already invested, by saying Warren Buffett has invested, for example, or; by promising that the value of a commodity is guaranteed to “double in the next three months!”

The bottom line is that commodities can be appealing to us regular folks, in part, because there is an actual good that is being traded. Unlike the derivatives market, which even the most sophisticated investors did not fully understand at the time of the housing market collapse, commodities are a direct bet on what the price of corn, for example, will be in 90 days. This can seem like an appealing bet the average investor stands a chance of winning. The commodities market, however, is susceptible to frauds perpetrated by unscrupulous bokes or salespeople who are unlicensed altogether. The FBI has even warned of the risks, so protect yourself by using the research tools available through FINRA, the NFA, and the CFTC.

A Closer Look at Alternative Investments: Real Assets

By Michael Williford, Spring 2016 Student Intern

Real assets are a separate class of investments from the more traditional retirement vehicles, financial assets. Real assets is a broad class that includes investment products with which the average investor may already be familiar: real estate, commodities, & precious metals. We’ll spend the remaining posts in this series discussing these products because they are the kinds of alternative investment products most likely to affect regular Americans. Most people are generally familiar with commodities and precious metals from news reports and television ads, and investors may feel more comfortable investing in real assets than they would hedge funds or private equity products. Specifically, the average investor seeking investment income during retirement may be pitched something called a Real Estate Investment Trust, or REIT. We’ve talked about REITs on more than one occasion in the past, both here and here, but he message bears repeating since real estate investments in general, and REITs in particular, because they have been one of the more common schemes we’ve seen in recent years.

Registered broker-dealers are still pitching REITs to their clients, oftentimes without a clear explanation of what a REIT actually is. FINRA explains,

A real estate investment trust, or REIT, is a corporation, trust or association that owns (and might also manage) income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties—from office buildings and shopping centers to hotels and apartments, even timber-producing land—which the typical investor might not otherwise be able to purchase individually.

REITs can offer tax advantages. For instance, qualified REITs that meet Internal Revenue Service requirements can deduct distributions paid to shareholders from corporate taxable income, avoiding double taxation. The REIT must also distribute at least 90 percent of its taxable income to shareholders annually. These distributions are taxable to the extent of any ordinary income and capital gains included in the distribution.

There are two kinds of REITs; those publicly traded on national securities exchanges like the New York Stock Exchange (NYSE) and he NASDAQ, and those that are not publicly traded. These “Non-Traded REITs” have been the subject of FINRA Investor Alerts like this one, and a Securities and Exchange Commission (SEC) Bulletin that can be found here. In a nutshell, both organizations caution investors that Non-Traded REITs can have a lack of liquidity that can make it difficult to get your money back out the investment without significant penalties if you decide to sell the investment, as well as high upfront fees the investor pays to compensate the broker and lower the costs to the offering organization. These fees can be as high as 15%, significantly cutting into the return investors need to supplement their pension or social security income in retirement.

In addition to the high fees, Non-Traded REITs are often difficult to value because they are not actively traded in the market. As a result, an investor can be surprised to learn upon selling the security that the valuations provided by the broker in monthly account statements were simply an estimate, when the actual value upon sale is significantly less. When this happens he investor takes a bath and is frequently left wondering where the money went.

There are other problems that plague Non-Traded REITs, and FINRA has provided a tip sheet of things to consider before investing in this kind of real asset product. You can find it here.

As with any investment, do your research before investing. If you have concerns about an investment you can start your research here, where FINRA offers a number of different educational tools for investors. If you have questions about your broker, check out his or her credentials and utilize BrokerCheck, where you can find out if FINRA has any complaints on record about your broker.