Wednesday, April 11, 2018

Regulators Calling Your Clients? Maybe Yes, Maybe No.

Anyone who has been involved in an SEC or FINRA investigation into a sales practice issue has experienced the infuriating problem of the Staff calling the firm's customers as part of their investigation.

While they claim to have every right to do so, the mere existence of the call is a problem for the broker and the firm. Customers quite naturally begin to wonder what is wrong, why is the SEC or FINRA reviewing my account, and a host of other questions, none of which should be occurring. Making matters worse, the Staff will not tell you that they are calling customers, or who they called.

While it is undoubtedly true that the Staff has good intentions, and does not attempt to mislead the customer, many Staff members are inexperienced in the industry, and others are simply uninformed. I was recently involved in an investigation into the sales of syndicate offerings of closed end funds. Like all public offerings there is no commission added to the purchase price. If the shares are offered at $25, the customer pays $25.00, not $25.00 plus a commission. The broker is compensated by the issuer, by way of a sales credit. There is no direct cost to the customer.

Unfortunately, in this investigation, the examiner who was calling the customers, added up the sales credits, and called the customers, asking them "Are you aware that you paid your broker $10,000 in commissions?" Putting aside the obvious issue of an examiner prompting the customer in this manner, the statement is patently false. Given the fact that the customer has been told that there is no commission, and that the broker is paid by the issuer, the customer now believes that he has been lied to, and the broker-customer relationship starts to go down hill.

This is a serious issue and one what we have been dealing with for years, and we continue to fight this fight.

But now there is a new problem. The SEC has issued a press release disclosing that fraudsters are calling investors claiming to be SEC employees in an attempt to trick investors into sending money or revealing sensitive account information.

Actually, this should not be news to the SEC, as there were reports earlier this year of scammers using official looking letters and emails claiming to be from FINRA in order to steal money from investors. In February of this year, FINRA issued a press release on this exact issue - "FINRA Warns Investors of 'Regulator' Imposter Scams." In January of this year, two scammers were accused of calling investors posing as the SEC - U.S. Charges Two Over Fraud Featuring Bogus SEC Employees.

Investors, be careful out there. Scammers are using the SEC, FINRA, the IRS, the FCC and who knows what else to scam money. Be careful when speaking to someone who claims to be from a government agency. If you receive such a call, do not respond. If you are concerned, end the call and call the agency directly. They can confirm whether the call is legitimate.

Mark J. Astarita, Esq. is a securities attorney representing investors and financial professional nationwide in regulatory, litigation and compliance matters. If you have a question or concern regarding these issues, email Mark at