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NFA Investor Newsletter

July 29, 2014
In this Issue:
Credit card denied at forex and futures firms Avoid the phantom debt collector menace Get smart about investments Like-worthy tips for staying safe on social media Partnering to educate and protect our veterans Recent enforcement actions


Credit card denied at forex and futures firms

Credit cards can make many things easier and, if used responsibly, they can provide benefits beyond just paying for purchases later. However, allowing investors to use credit cards as a funding source for speculative investments when they may not have the means to repay the balance is a cause for concern. Therefore, to further protect retail investors, National Futures Association recently submitted a rule proposal to the Commodity Futures Trading Commission to ban the use of credit cards to fund retail forex and futures accounts.

"Since our inception, NFA has been committed to protecting investors," says NFA President and CEO Dan Roth. "We believe the forex and futures markets are both high-risk and volatile, and that individuals who wish to participate should use only risk capital to fund their accounts—not credit cards or payment facilitators tied to credit cards. Therefore, we feel that permitting customers to invest in the forex or futures markets using a credit card is inconsistent with our Members' obligation to observe high standards of commercial honor and just and equitable principals of trade."

The proposed Interpretive Notice is the culmination of discussions with industry groups and a thorough analysis of forex dealer members' (FDM) customer accounts at the recommendation of NFA's Compliance and Risk Committee (CRC). The CRC is dedicated to proactively ferreting out issues that may pose compliance and financial risks to NFA's Member firms.

In January 2013, NFA sent a notice to its FDMs requesting their views on the appropriateness of prohibiting Members from permitting customers to fund their accounts via a credit card or payment facilitator. Additionally, after meeting with FDM representatives, as well as a number of NFA's other advisory committees, the CRC directed NFA staff to conduct a detailed analysis of FDMs' credit card funding practices, their customers' income levels and the funding origins of their customer's accounts.

NFA's analysis covered approximately 15,500 customer accounts held at seven FDMs during 2012. On average, trading activity in these accounts occurred for approximately four months regardless of how much money the customer initially deposited to fund the account.

The most recent FDM quarterly results (Fourth Quarter 2013) showed that 72 percent of the accounts analyzed were unprofitable. The results also indicated that about 78 percent of all accounts initially were funded via a credit card, debit card or online payment facilitator. What's more, about 50 percent of all retail forex customers had a net income of less than $50,000.

Concurrent with NFA's analysis of customer accounts at FDMs, staff also conducted a study of futures commission merchants (FCM) electronic payment practices. The results of the study determined that no Member FCMs currently permit customers to fund a futures account with a credit card or via a payment facilitator. NFA also discussed the issue with the Financial Industry Regulatory Authority, which noted that it has not observed securities customers investing directly or indirectly via credit card.

Despite the ban on credit cards or payment facilitators tied to credit cards, NFA's proposed Interpretive Notice still provides for some forms of electronic payment. The Notice allows for customers to use a debit card or electronic payment facilitator that directly tied to their bank account.

"We hope that as a result of this proposal, not only will we help to mitigate risk for our Member firms, but also help to protect customers from substantial risk of loss," Roth says.

Avoid the phantom debt collector menace

Imagine this: The phone rings and a scary voice tells you that your recent loan has come due and that it's time to pay up or face legal action. While this news is frightening in its own right, it's downright terrifying when you haven't even taken out any loans recently.

Thousands of consumers have experienced this scenario in recent years as the "phantom debt collector" scam seems to be on the rise again, according to Fraud.org.

The scam comes in a number of variations, but the common thread in almost all of them is that a consumer owes money on a debt and needs to pay or else face serious consequences. The scam often begins when a consumer inquires about a payday loan or other short-term credit online or over the phone, even when using legitimate lenders.

Regardless of whether they took out a loan, the consumer may receive a call later demanding money be paid. Additionally, because people interested in payday loans often are financially strapped, they may be more susceptible to falling victim to such demands even if they never borrowed money.

In cases where the consumer does have a loan, the scammer often claims the victim owes far more in fees and interest than he or she actually does. When there is no outstanding loan, many of these con artists are threatening and convincing enough to make some consumers wonder whether someone else has taken out loans in their name. Scammers often demand payment immediately via wire transfer, or credit or debit card, and threaten a negative credit report if payment is not made.

The best way to avoid becoming a victim is to be on the lookout for these types of scams. Here are some tips for spotting swindles:

  • If you receive a call from someone claiming to be a debt collector, ask for the person's name, address, the company they represent and the original creditor. If they can't provide all of this information, hang up.
  • If the amount demanded is significantly more than the debt you owe, it's probably a scam.
  • If the debt the caller claims you owe is not listed on your credit report, it's probably a scam.
  • Don’t be intimidated if the debt collector is abusive or threatens legal action or arrest. Request that written notice of the debt be mailed to you and tell them that you do not wish to be contacted again about the debt. Under the Fair Debt Collection Practices Act, a debt collector must respect this request.
  • If you suspect foul play, hang up and call the police, and report the scam to Fraud.org.

For more information on how to spot fraud, download NFA's Scams and Swindles brochure.

Are you able to complete a simple interest rate calculation? Do you know the difference between a stock and a mutual fund? How well do you understand risk diversification? According to a recent study, this type of investing knowledge enhances risk-adjusted returns by at least 1.3 percentage points annually. Over a 30-year investment span, that leads to 25 percent greater wealth. What's more, the researchers believe that conclusion may understate the actual return differential.

To examine the correlation between investment knowledge and returns, researchers with the Pension Research Council at the University of Pennsylvania's Wharton School gained access to the retirement plan of a large financial institution with more than 22,000 employees. The company's 401(k) plan offered 16 funds, including stock funds, bond funds and a real estate investment trust (REIT) index fund.

In addition to examining retirement accounts, employees also were invited to take an online survey to test their investment knowledge with questions like those above. Respondents to the survey invitation (about 16 percent of employees) on average correctly answered about four out of five questions. A question about how much a $100 contribution to retirement savings would reduce take-home pay for someone in the 25 percent tax bracket contributing $100 pretax was answered correctly by just 45 percent of respondents. (Answer: The contribution reduces take-home pay by $75.)

Looking at account returns, a key driver of the return differential was a willingness to invest in stocks. The most knowledgeable investors had a 66 percent allocation to stocks, whereas the least knowledgeable held about 49 percent of their retirement account in stocks. Although the larger stock allocation did lead to more volatility, it also led to higher risk-adjusted performance.

The researchers noted that those who responded to the survey invitation were "somewhat better off, had higher plan balances, and contributed more of their salaries to their retirement accounts" than employees who did not respond. This led the researchers to believe the association between financial knowledge and investment returns they uncovered may be understated.

So what can you do to learn more about investing?

Like-worthy tips for staying safe on social media

Social media sites have transformed the way we stay in touch with people around the world. They've also become one of the hunting grounds for fraudsters on the prowl for personal information.

According to the Securities and Exchange Commission, one of the most common ways fraudsters use social media is to gather enough personal information to begin a convincing phishing scheme. This often begins with an email that appears as if it is from a legitimate source, such as a financial institution. Unbeknownst to the receiver, the email contains a link to a fake website that looks like the real website. These scammers want you to voluntarily hand over your account and password information, which they can then use to access your account.

The best way to avoid becoming a victim of fraud is to make yourself a more difficult target. Below are a number of ways you can protect yourself when using social media.

  • Privacy settings: Always check the default privacy settings when you open an account on a social media website. These default settings often are broad and may permit sharing of information to a vast community. You often can modify these settings so only people you permit are able to see information you share. Additionally, social media websites periodically update their privacy settings. When you receive notice that a website has changed its privacy settings, be sure to find out what has changed and make appropriate changes to your settings.
  • Biographical information: Many social media websites require some biographical information to open an account. You can limit the amount of information other users can view about you by customizing your privacy settings.
  • Account information: Never give account information, Social Security numbers, bank information or other sensitive financial information on a social media website. If you need to contact a financial professional, use a firm's preferred method of communication, such as telephone, firm email or firm-sponsored website.
  • Friends/contacts: Know whom you accept friend or contact requests from and why you want them in your network. Decide beforehand whether it is appropriate to accept a friend or other membership request from a financial services provider.
  • Be security-minded while online: Keep your social media and other information secure by considering security any time you are online. This means doing things like picking strong passwords and changing them frequently, using different passwords for different accounts. You also should be mindful of accessing your accounts over public wireless connections because it's easy for fraudsters to eavesdrop on Internet traffic, and use caution when clicking on links sent to you, even by friends.

Partnering to educate and protect our veterans

In their fight against enemies foreign and domestic, military veterans and their families now have additional information at their fingertips when it comes to making wiser investment decisions and fighting fraud. On July 16, 2014, the second annual Military Consumer Protection Day (MCPD) Information Fair was held in Washington D.C.

MCPD is a joint initiative, led by the Federal Trade Commission and its partners to empower active duty and retired service members, military families, veterans and civilians in the military community.

In addition to the information fair, MCPD regularly updates its website with information on a number of topics, including banking, credit cards, investing, scams and technology, to name a few. The website also contains detailed information about MCPD's partner agencies, which are comprised of government agencies, advocacy organizations and private sector groups from across the nation, and offers resources for people and organizations to get involved in the program.

NFA is proud to participate as a steering committee partner of MCPD.

Recent enforcement actions

In the second quarter of 2014, NFA's Business Conduct Committee issued Decisions and Complaints against the following NFA Member firms and individuals. Click on the name for more detailed information.

Decisions in Disciplinary Cases
Vision Financial Markets LLC
Steven M. Silver
Bruce Newman
Ace Investment Strategists LLC
Yu-Dee Chang
Swenson Investments and Commodities
Mike Teslow
Andrew Wieting
Southern Trust Securities, Inc.

Global Futures Exchange and Trading Co. Inc.
Kattayoun Hakimian
The Barbashop LLC
Ronald T. Barba
Aspirant Management LLC
Luckow Group Inc.
Paul D. Luckow
Quick Trade Futures Inc.
Jim Xu
IFG Markets LLC
Wilson Cheng
Belvedere Asset Management LLC
Keith D. Pagan
Prime Algo Financial LLC
Yves S. Soete
Success Bullion USA LLC
Chris Jann
Chazon QTA Quantitative Trading Artists LLC
Lawrence I. Fejokwu
Wealthbuilder Capital Advisors
Courtney D. Smith

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