FINRA on Scams

The people at FINRA have gone to the trouble of putting up tips on their website about “Avoiding Investment Scams”. Here’s the LINK.
It’s quite a good explanation about the different types of common scams and the sales pitches used to sell them. Makes a good “educational” read.

They also have a SCAMMETER that you can run an investment proposal through, to see how many red flags it raises. And to top it off there is a RISKMETER, which is a self-test that measures how vulnerable you may be to a scam.


It’s work that is worth applause and probably about time. BUT, in the end, how useful is it? I ran the Madoff fund and a Stanford Antigua CD through the SCAMMETER and they came out ok. I wasn’t quite sure if Madoff was offering “high returns with low risk”, because it had such a track record, but that was never offered or guaranteed. In the Stanford case, the tough question was if it was actually a “high-yield” investment program, because the yields were good, but not extraordinary. But in any case, since these investments were coming from a licensed broker/dealer they STILL checked out ok on the SCAMMETER (even with the high yield or low risk offer).

Bank of America shares, on the other hand, which were selling at $3.80 when I picked some up on the advice of a blog (now $7.20 yippee!), gave me two red flags. One for being below $5 a share and the other for me not knowing the guy who writes the blog.
But I’m kind of liking that investment right now. (Target = $10).

So the scam meter is only good for the low quality scams (FINRA seems to admit it). The really good and really big scams we have seen lately, like Madoff, Stanford, and Westridge, were all pulled off by FINRA-licensees. So, run your advisor through FINRA to see if he might be part of a small scam (not licensed) or part of a multi-billion dollar one (licensed).

It’s nice that FINRA is trying to educate about fraud, but they shouldn’t try to tie some sort of moral or ethical value to the licenses they sell (and which are their raison d^etre), because they have none. These licenses also have a very relative “insurance” value. Investors do have the right to arbitration against their broker/dealer (if FINRA registered), but I’d hardly characterize FINRA as a “neutral” party to those disputes (guess who pays the bills?). And there is anti-fraud insurance through SIPC, but it’s limited in scope.

Is there some value to those licenses? Well, sure. The applicants normally have to pass a test, which requires some specialized knowledge and may include some ethics questions. But knowing the answers to those questions doesn’t make you ethical. And the questions themselves may not be the right ones. For example, in my recent Series 65 (Investment Advisor) test, I was asked “Under which of these circumstances can you take a loan from a client”. I was looking for “NONE”…but that wasn’t an option. So I guess I got it wrong. (Yes, I passed the test).

And herein lies the problem. The Securities Act of 1933 and the Securities Exchange Act of 1934 govern the US markets and the investment process. As good as these pieces of legislation may have been at the time, they are now celebrating their diamond jubilee. The world has changed a lot since then and version 2.0 is long overdue.

Just don’t make it like Vista…please.