Before you invest, investigate

You May Find This Guide Helpful If…

• you are new at making securities investments.
• you have experience at investing but want to sharpen your skills.
• you have questions about how laws governing securities protect consumers.
• you need help with a complaint or a problem concerning a securities investment or someone who sold you a securities product.

This is not a guide to investing in the stock market, a source of specific investment recommendations, or a guide intended to convey all of your legal rights. You should not use this guide as a substitute for private legal counsel or private rights of action. This guide simply provides an informed, “regulator’s eye view” of investing. The better informed you are, the less likely your chance of becoming a victim of investment fraud and abuse.

You don’t have to become an investment expert to guard against many common dangers. Taking a few simple precautions can help you avoid costly mistakes.

What the Vermont Securities Division Does for Consumers

Federal and state securities laws strive to promote investor protection by regulating the offer and sale of securities. The Vermont Securities Divi­sion, housed in the Department of Financial Regulation, regulates the offer and sale of securities in Vermont.

The Division’s major responsibilities are to:

• enforce the Vermont Uniform Securities Act.
• register securities offerings.
• register broker-dealers and investment adviser firms and their agents/representatives.
• conduct on-site audits of brokerage and investment advisory firms.
• investigate consumer complaints.
• educate consumers and offer assistance.
• encourage and foster the legitimate growth of our capital markets.

The Vermont Securities Division handles many inquiries and complaints from victims of investment fraud and investment abuse each year.

Our staff members are available from 7:45 a.m. to 4:30 p.m. Monday through Friday.

Our Address:

Phone: (802) 828-3420  - Toll-Free in VT: (877) 550-3904 - Fax: (802) 828-2896

Contact us if you would like to:

• find out whether a broker-dealer or investment adviser is legally registered in Vermont, and/or has any disciplinary record of violations or complaints in Vermont or elsewhere.
• request a complaint form or ask for assistance in resolving a problem with a broker-dealer or investment adviser if you have been unable to resolve matters on your own.
• report questionable activities, investment offers, advertisements or dealings of any kind.
• request free investor protection educational publications related to investing for yourself or your organization.

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What Exactly Are Securities?

A security is a contract that has these features:

• a person invests something of value in a common enterprise that is managed by someone other than the investor.
• the investor expects a return in the form of interest, dividends, increased capital, etc.

Common examples of securities include stocks, bonds, mutual funds, money market funds, limited partnership interests, trust certificates, promissory notes, investment contracts, viatical or life settlements, and oil and gas leases. Courts have extended the definition of securities to also cover various investments such as citrus groves, cattle partnerships, carpet cleaning businesses, pay phones, ATM machines, Internet kiosks and other kinds of deals that permit people to invest money in a business they don’t manage themselves.

• Few securities come with any guarantees but some types, such as those issued by the United States Government, are traditionally safer than others.
• Understand the risks, as well as what is insured vs. what is not.
• Securities always involve some degree of risk. You can lose some, or all, of your principal (the original amount of money you invest) and any profits you may have earned.

Bank Deposits vs. Securities

A deposit is money you put in a bank, in a checking or savings account, or in a type of bank deposit known as a certificate of deposit (CD). When you ask the bank for your money on deposit, they must pay you. If the bank cannot pay you for any reason, your money on deposit in a government-regulated bank is generally insured through the Federal Deposit Insurance Corporation (FDIC) up to certain limits.

Please visit the FDIC’s website at www.fdic.gov to find out what those current limits are and to learn more about how the program works.

Some banks now sell mutual funds and other investment products that are securities and are not insured. Mutual funds and other securities products are not deposits. These products are NOT backed by any bank and are NOT insured by the U.S. Government. This is true even when a security is purchased at a bank and carries the bank’s name.

Deposits and investments can have similar names. A “money market fund” sounds similar to a “money market deposit account” but there is a critical difference:

• A “money market fund” is a type of mutual fund investment. It is NOT insured or otherwise guaranteed, and the seller must provide you with a prospectus detailing the investment.
• A “money market deposit account” is a bank deposit that is insured by the US Government through the FDIC.

Making Safer Investment Choices

It’s your money, insist on answers. Many investors think showing any ignorance is a weakness leading others to take advantage, but never be afraid to ask questions. You are far less likely to be taken advantage of if you show persistence in learning about something you don’t understand, so speak up when you don’t understand something. Ask questions. Write down the answers. Take notes. A reputable investment professional will welcome your inquiries and want to make sure you fully understand your investment options.

Ask questions! Report problems! Check the records!

Determine Your Needs

A good investment is one that matches the following:

•  Your budget. Don’t invest money you must count on for basic living expenses.
•  Your defined investment goals. Have a plan. Keep in mind the time you have to reach your goals, or how long you can manage financially without access to the principal. Don’t be swayed by impulse buys or aggressive sales tactics. Stay the course!
•  How much risk you can afford. Remember that a higher yield tends to come with a greater chance of loss.
•  Your experience at investing.
•  When in doubt, seek expert advice.

Questions to Ask About the Person Selling an Investment

• Are you registered with the Vermont Securities Division? Have you ever been disciplined by a regulator or other organization? (You can confirm this information with the Securities Division.)
• Have you ever been the subject of any complaints, arbitrations or lawsuits?
• What training and experience do you have? How long have you been in the business?
• How do you get paid? By commission? According to the amount of assets under your management? By another method? Which method would be most beneficial to me given my circumstances?
• Do I have a choice of how to pay you? Will I pay you by the transaction or is there a flat fee regardless of how many transactions I have?

Questions to Ask About Investment Products

• Is this investment product registered with the Securities and Exchange Commission (SEC) and the Vermont Securities Division?
• How will this investment make money? Specifically, what must happen for this investment to increase in value?
• What are the total fees and commissions to purchase, maintain and sell this investment? After all fees are paid, how much does this investment have to increase in value before I break even?
• How liquid is this investment? How easy would it be to sell if I needed my money right away? Would I be subjected to any additional fees or expenses if I sold this investment?
• What are the specific risks associated with this investment? What is the maximum I could lose?
• How long has the company been in business? Is the company’s management experienced? Has the management been successful in earning money for investors in the past?
• Can I get the latest reports filed by the company with the SEC, a prospectus or offering circular, or the latest annual report and financial statements? (These reports can usually be found on the SEC’s website at www.sec.gov, or contact the Securities Division and we can help you.)

Questions To Ask About Mutual Funds

• What specific risks are associated with this fund?
• What types of securities does the fund hold? How often does the portfolio change? (For example, does the fund focus on the medical sector, hospitality sector, socially responsible investing, etc.?) What are the risks associated with this fund? What are the performance goals?

If your broker changes firms, ask why.

• Does the mutual fund invest in any type of securities that traditionally have a high level of volatility that would cause the value to go up or down rapidly in a short period of time?
• How much will the fund charge me when I buy the shares? Will the fund charge me when I sell the shares? What other ongoing fees are charged?
• How does the fund perform compared to other funds of the same type or to an index of the same type of investment? How has this fund performed over both the short term and the long run?
• Where can I get an independent evaluation of this fund?

Questions To Ask Yourself About The Progress Of Your Investments

• How frequently am I getting account statements? (You should receive a statement from your broker-dealer each month that there has been a transaction in your account. A statement should be sent at least once every three months when there have been no transactions.)
• Did I expressly authorize each transaction that appears on my account statement?
• Are the commission and fees in line with my expectations?
• Is the return on my investment meeting my expectations or goals? Is this investment performing as I was led to believe?

Defend Yourself Against Dishonest And Unethical Investment Sales Practices

The vast majority of investment professionals are never accused of dishonest or unethical conduct. Still, there are some registered broker-dealers and investment advisers who engage in unlawful activity. Always be alert – both for investor abuses and outright fraud.

Abusive Practices Watch List

• Unsuitable investments. Agents must follow what is known as the “know your customer” rule, requiring them to recommend only those types of investments that match your financial goals and the amount of risk advisable for you to take.
• Unauthorized trading. Your broker is required by law to get your permission PRIOR to trading in your account, unless you give your broker written permission to make trades without your consent. Very few firms allow their agents to accept this kind of authority, known as “discretionary authority.” Trades made without your permission are unauthorized, illegal and should not be tolerated.
• Misrepresentations and omissions of material facts. Say that your broker tells you that investing in a new issue of stock is “as safe as a CD.” This is a misrepresentation. Your broker is obligated to be truthful in presenting investment opportunities to you and must provide you with any information that might influence your decision to invest.
• Churning. Most agents earn commissions when they buy and sell investments on behalf of their clients. Excessive trading of a customer’s account by an agent in order to increase commissions is known as “churning.”
• Theft of Funds. One of the most devastating situations an investor can encounter is the actual theft of their funds. Know where your account statements come from and be sure the firm is mailing the statements to you. If you receive statements directly from your agent, something is likely wrong. Contact the broker-dealer’s home office immediately. It also doesn’t hurt to periodically call your broker-dealer’s customer service number and ask to confirm your account holdings, balance and account activity.

Life Happens

Nearing retirement, having a child go to college, or the passing of a spouse or loved one are all life changes that can have a major impact on your investment needs and decisions. If you experience a life change, contact your broker or investment adviser to ensure your investments are still suitable to your new situation. 

General Ways To Protect Yourself

Keep notes of your communications with your investment professional. Notes can be very useful if there is ever a dispute about what was said during a transaction. Whenever possible, put instructions to your broker in writing. If you give your broker instructions by phone or in person, follow up that conversation with written instructions and be sure to keep a copy.

Read and keep your account and confirmation statements. Read statements as soon as you receive them to make sure you gave your permission for each transaction. Check the section of your statement that reflects any charges debited from your account.

Read and keep all letters from your brokerage firm. When broker-dealers detect unusual or possibly troublesome activity in an account, they will often send out what are known as “client comfort letters.” Such letters ask if you have any concerns about your account and may indicate that certain circumstances led the firm to write to you. Write to the firm asking for clarification as to why they sent you the letter. If they remain unclear, contact the Securities Division.

What to do if you suspect a problem?

If you think there may be a problem with the way your investments have been handled, take the following steps to resolve the problem. Act promptly and remember that you can call the Securities Division at any point in the process!

Agent: Talk to your agent and explain the problem. Where is the fault? Were communications clear? Refer to your notes. What did this person tell you? What do your notes say?

Supervisor: If you can’t resolve the problem with your agent, put your complaint in writing and send it to your agent’s supervisor. Keep a copy to document your efforts to resolve the matter. Be sure to keep copies of any responses you receive.

Compliance: If the problem is still not resolved, write to the Compliance Department at the broker-dealer’s main office. Explain your problem in detail and how you want it resolved. Ask the compliance officer to respond to you within 30 days.

Securities Division: If you are still not satisfied, send a copy of your letter along with a completed complaint form (available on the Securities Division’s website or by mail) to the Securities Division. 

Each year, Vermonters lose millions of dollars to investment fraud. Fraud artists prey on people of all ages, occupations and levels of sophistication. They come across as smooth, professional and successful. Their sales pitches are often very convincing and well rehearsed, and they operate in many different ways.

Popular Scams And Schemes

Ponzi Schemes

Long before Bernie Madoff, there was a swindler named Charles Ponzi. In the early 1900s, Ponzi took investors for $10 million by promising 40 percent returns. The premise is simple: promise high returns to investors and use money from new investors to pay previous investors, which is why Ponzi schemes remain a perennial favorite among con artists. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion.

Senior Fraud

Volatile stock markets, low interest rates, rising health care costs and increasing life expectancy combine to create a perfect environment for investment fraud targeting senior investors. Older investors are being targeted with increasingly complex scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlement contracts and Ponzi schemes, all promising inflated returns.

Promissory Notes

These short-term debt instruments are often sold by unwitting, independent insurance agents and issued by little known, or non-existent, companies promising high returns (sometimes as high as 15 percent monthly) with little or no risk. When interest rates are low, investors often are lured by the higher “fixed returns” promissory notes offer. These notes become vehicles for fraud when the issuer of the note has no intention or capability of delivering the returns promised by the sales person.

Unscrupulous Agents

Whether it’s through the sale of unsuitable securities, unregistered investments, unauthorized transactions, high-pressure sales tactics, misrepresentations or omissions of material facts, there are some registered agents who don’t want to play by the rules. This behavior is never acceptable, and investors need to be ever vigilant for these and other suspicious activities.

Affinity Fraud

Con artists know that its only human nature to trust people who are like yourself. Just because you are acquainted with someone shouldn’t stop you from making inquiries before you invest. You could be the victim of fraud by a golfing buddy, your kid’s coach or the new entrepreneur in town who just joined your local business, religious or civic organization.

Unlicensed Securities Sellers

Unlicensed individuals have long been targeted as a sales force by financial predators. They are lured into this activity by high commissions from the sale of fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts, and viatical settlement contracts. The con artist running the scam instructs the independent sales force to promise high returns with little or no risk.

Prime Bank Schemes

Another perennial favorite of con artists is the promise of triple-digit returns through access to the investment portfolios of the world’s elite banks. Negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. Now it is common to refer to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive. Remember, nothing is “risk free”. Generally, the higher the yield, the higher the risk!

Defend Yourself Against Fraud

Internet Fraud

With the Internet now a common part of daily life for an ever-increasing number of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. Many online scams that regulators see today are merely new versions of schemes that have been fleecing investors for years. Investors should ignore e-mail offers from anyone claiming to be in need of help depositing large sums of money into bank accounts, regardless of whether they are overseas or domestic.

Product Abuses

There are numerous abuses that can occur with specific products. For example, Mutual Fund abuses can occur when some investors move large amounts of money in and out of different funds in order to take advantage of pricing discrepancies based upon the performance of overseas markets. When the Fund fails to detect and prevent this type of activity, the rest of the Fund shareholders are harmed by a decrease in the value of their shares. A vastly different type of abuse can occur with annuity products, but they generally occur at the point of sale and are often the result of an agent omitting material facts about the product, such as high surrender charges, the market volatility of sub-accounts, liquidity issues and high internal fees.

If your gut tells you that something isn’t right, don’t ignore it! Call the Securities Division and talk to us about your concerns.

Five Signs You May Be Dealing With Investment Fraud

Filing a Complaint with the Securities Division

If you believe you are the victim of abusive practices or fraud, we encourage you to file a complaint with the Securities Division. You may feel embarrassed that someone took advantage of you or you may be unsure of everything that happened, but don’t let that stop you from contacting us. Seeking help is a smart move, and you should congratulate yourself for your initiative. By alerting regulators to suspicious activity you’ve experienced, you may help others in the same situation. The State may be able to intervene and halt further scams and abuses.

What To Expect From The Complaint Process

Analysis -  An examiner will review your complaint and decide whether to refer it to an enforcement attorney for review. This may take up to 30 days. Staff may decide to interview you and other witnesses. This may take an additional few weeks. Staff may also ask the investment professional or firm to furnish certain documents, look into what allegedly happened and report back to the Securities Division in writing. This may take an additional four to six weeks.

Enforcement - In cases of wrongdoing, the Division may decide to exercise its administrative or civil enforcement powers, such as moving to impose a fine or revoke a license to do business. In cases involving criminal activity, the Division may refer the complaint to another enforcement agency. The Division must determine that a violation of the Vermont Uniform Securities Act occurred in order to take action. Remember that investing inherently involves risk. If you have suffered a loss, the Division cannot usually help unless someone involved in the transaction has violated the law.

Settlement - The Division’s inquiry into a complaint may foster a mutually acceptable agreement between the investor and the subject of the dispute. If the situation warrants, the Division has the legal authority to seek restitution or recovery of funds lost due to unlawful activity. While the Division will do all it can to help, there is no guarantee that you will receive restitution or recovery of your losses.

Legal Representation - The Division cannot act as your attorney, nor should you view the actions taken by the Securities Division as a substitute for acting privately. Federal and state securities laws provide legal remedies if you have suffered a wrongdoing. To take advantage of these laws, you must initiate legal action or arbitration within the prescribed time periods (statues of limitations) or you may lose your right to recover funds. For more information, contact a lawyer who has experience in the area of securities law. The Vermont Bar Association can help with referrals. Visit their website at www.vtbar.org or call them at 802-223- 2020 for more information.

Remember: Securities matters are often complex and can require extensive research and resources to resolve. Complaints vary widely in the time it takes to fully analyze them. The average time is three to four months, but some complaints may take much longer to resolve.