NFA Investor Newsletter
July 31, 2012
|In this Issue:||Spotting Investment Scams
||Social Media for Seniors
||Understanding Seasonal Trends
||Examining Exchange-traded Notes
||Recent Enforcement Actions|
The Financial Industry Regulatory Authority (FINRA) has created a short video to help people learn how to recognize investment scam techniques. Created specifically to educate servicemen and women about the red flags of investment fraud and how to check the legitimacy of an investment product or professional, the video is applicable to any potential investor.
FINRA suggests the following six steps to spot scams:
In addition to the video, FINRA recently unveiled an interactive tutorial, "Avoiding Consumer Scams and Rip-offs" to further help educate people about popular types of fraud.
NFA also has an investor fraud guide, "Scams and Swindles: An Educational Guide to Avoiding Investment Fraud." Click here to download the PDF.
The Securities and Exchange Commission's (SEC) Office of Investor Education and Advocacy recently released an investor bulletin intended to educate senior citizens when using social media as part of their investment process. The bulletin, "Social Media and Investing-Tips for Seniors," provides safety tips for older investors who use social media and highlights commons types of investment fraud.
One of the most rapidly growing segments of social media users, seniors frequently use social media these days to research stocks, find background information on financial professionals, get market news and engage with friends, family and other investors. But while social media offers a wealth of information, it's also a burgeoning forum for fraudsters to prey on seniors who are relatively new to navigating online networks.
The SEC offers five tips for seniors to avoid online securities fraud:
To check out registered brokers, use the Financial Industry Regulatory Authority's BrokerCheck website. You can investigate registered investment advisers on the SEC's Investment Adviser Public Disclosure website.
And if you're contemplating opening a futures account or already are an NFA Member pondering a new business relationship, visit NFA's BASIC (Background Affiliation Status Information Center). BASIC contains Commodity Futures Trading Commission (CFTC) registration and NFA membership information and futures-related regulatory and non-regulatory actions contributed by NFA, the CFTC and U.S. futures exchanges.
One of the most common types of investment fraud perpetuated by brokers focuses on seasonal trading in certain markets, especially with relation to heating oil and unleaded gasoline. Nefarious brokers will sometimes claim that seasonal tendencies, such as people needing oil to heat their homes in the winter or driving more often in the summer, offers the potential for big bucks. But unlike Homer Simpson's pumpkin futures investment that went bust after he failed to sell before Halloween, most markets already have factored for any seasonal demands.
To wit, be wary of anyone talking up the U.S. Energy Information Administration's (EIA) Annual Energy Outlook 2012, released in June, which predicts modest growth in demand for energy over the next 25 years, but increased domestic crude oil and natural gas production. The EIA says this increase in oil and gas production largely is being driven by rising production from tight oil and shale resources.
Because of this, EIA expects the following trends:
Conversely, there are still occasional exceptions when seasonal trends can affect the market. Take, for instance, the severe drought that's afflicted the Midwest in June and July and predictions from the National Weather Service calling for continued high temperatures and low rainfall to continue from August through October.
As a result of these adverse conditions, CME Group warns commodities investors to watch out for fluctuating prices, since farmers and traders likely will be forced to navigate the weather market for a protracted period—possibly until harvest time.
CME adds that the drought also will affect cattle farmers due to rising corn and soybean prices and the stress of the arid conditions on the animals. However, the group suggests that farmers seeking to hedge 2013 production or traders looking to put on longer-dated trades hold off and see how things play out.
To learn more about seasonal trading and common types of investor fraud, read NFA's guide, "Scams and Swindles: An Educational Guide to Avoiding Investment Fraud."
Understanding the risks and complexity associated with exchange-traded notes (ETN) is crucial for investors before they spend their hard-earned money, according to a July investor alert from the Financial Industry Regulatory Authority (FINRA).
The alert, "Exchange-Traded Notes—Avoid Unpleasant Surprises," seeks to inform investors about the differences between ETNs and exchange-traded funds (ETF), suggest questions to ask when considering ETNs and provides a step-by-step checklist to help investors determine if an ETN is right for them.
An ETN is a type of debt security that trades on exchanges and promises a return linked to a market index or other benchmark, and can offer investors cost-effective exposure to everything from emerging markets to commodities.
But FINRA warns that ETNs can be tricky and are fraught with potential perils, including the risk that the issuer will default on the note or take other actions that may impact the ETN's price.
"ETNs are complex products and can carry a raft of risks," Gerri Walsh, FINRA's Vice President for Investor Education, said in a release. "Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks."
Dissimilar to ETFs, ETNs don't buy or hold assets to replicate or approximate the performance of the underlying index. The return on an ETN frequently hinges upon price changes if the ETN is sold prior to maturity (as with stocks or ETFs)—or on the payment, if any, of a distribution if the ETN is held to maturity (similar to other structured products).
FINRA explains that ETNs are listed on an exchange and can be bought and sold at market prices, like other exchange-traded investments. ETNs' market prices may fluctuate due to movements in the indices they track, ETN issuances or redemption activity.
ETNs can be tricky because their closing indicative value, as well as their intraday indicative value, is different from its market price, which is the price at which an ETN trades in the secondary market. In theory, an ETN’s market price should closely track its closing and intraday indicative values. However, an ETN’s market price can deviate, sometimes significantly, from its indicative value.
In addition to explaining the specifics, FINRA also lists a number of specific risks associated with ETNs:
For more information on ETNs, visit FINRA's website.
In the second quarter of 2012, NFA's Business Conduct Committee issued Decisions, Member Responsibility Actions, Final Orders in Registration Cases and Complaints against the following NFA Member firms and individuals.
Click on the name for more detailed information.
You can check the registration status and disciplinary history of any futures firm or individual.
You can file a complaint online. Be sure to include as much information as you can.
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