Investment Fraud and Abuse

Background

Consumers lose billions of dollars each year to financial fraud, including investment fraud. Older adults are targets because they often have sizable assets. Even when the investment is not outright fraudulent, investors may be unfairly manipulated or their money seriously mismanaged.

Federal and state governments have the authority to protect investors against fraud and abuse. The internet gives perpetrators of investment fraud new ways to contact potential victims directly. Moreover, the global nature of the internet raises jurisdictional issues for enforcing consumer and investor protections. Yet the Securities and Exchange Commission and state enforcement agencies do not have the resources to respond adequately to internet fraud.

Investors are required to use pre-dispute mandatory binding arbitration procedures established by the Financial Industry Regulatory Authority to obtain redress. Businesses typically proclaim that arbitration is less costly and faster than pursuing legal action. But arbitration has many drawbacks for consumers, which is why businesses often require customers to use it rather than simply giving them the option of doing so (see also Chapter 12, Personal and Legal Rights - Pre-dispute Mandatory Binding Arbitration).

INVESTMENT FRAUD AND ABUSE: Policy

Eliminating fraud

In this policy: FederalState

Regulators should work to eliminate fraudulent, deceptive, or unfair practices with respect to investment sales, accounting methods, disclosures, and market structure.

State enforcement agencies and the Securities and Exchange Commission should have adequate resources to address securities fraud, including internet fraud.

Fraud

In this policy: FederalState

Brokers and other financial professionals who commit fraud currently face civil sanctions. Policymakers should consider adding criminal penalties to this.

Government agencies should perform thorough investigations into investment fraud and abuse cases. They should pursue robust enforcement. They should also pursue regulations and initiate rulemakings to protect consumers against investment scam artists.

Telemarketing practices regarding investment opportunities should not pressure, mislead, deceive, or defraud consumers. Violations should be prosecuted.