Financial advisors are held to a high standard under federal law; if standards are not upheld, consequences ensue.  

Creating Trust in Financial Advisors 

The Stock Market Crash of 1929 along with the Great Depression paved the way for the Investment Advisers Act (IAA) of 1940 as well as other financial regulations. Shortly before this act, the Securities Act of 1933 was put in place to elicit more transparency in financial statements and establish laws against misrepresentation and fraud in securities markets. The Investment Company Act of 1940 was also created to clearly define the responsibilities and requirements of investment companies. 

These safeguards were put in place so that investors could feel comfortable investing and listening to the advice of those who are experts in the field. Following these guidelines is not open for interpretation, they must be adhered to entirely by every financial advisor and financial company. 

Under these acts, financial advisors are required to prioritize their clients interests’ over their own. An advisor cannot make unnecessary trades, or give investment advice based on the desire for a higher commission. Following the guidelines set forth in these acts results in financial advisors who can be trusted and depended on. 

When Trust Falters with a Financial Advisor 

When mistrust occurs between a client and a financial advisor, it is a no-win situation for everyone involved. The IAA prohibits advisors from using fraudulent schemes, making untrue statements, or engaging in any activities that mislead or defraud clients. Some examples of fraud that can occur when the rules of the IAA are not followed include: 

• Omission of Material Facts: Failing to disclose conflicts of interest, risks associated with an investment, hidden fees, or withholding any critical information violates the trust that has been established. 

• Undisclosed Kickbacks or Revenue Sharing: Received undisclosed payments in exchange for directing client transactions. 

• Misleading Marketing Materials: All advertisements, brochures, and any other forms of communication used to solicit clients have to be truthful. Making untrue statements, making fake testimonials, or providing false investment performance information is all illegal. 

• Fair Fees: Investment advisors must make sure that their fees are appropriate and fair, and must disclose them to the client. 

• Misrepresentation of Qualifications: Advisors may exaggerate their past investment returns, or their credentials. 

When an advisor commits one of the offenses listed above, or another type of fraud not listed, they open themselves up to consequences from the Securities and Exchange Commission (SEC). Potential criminal charges, especially if willful misconduct has occurred, will be filed. 

Federal Fraud Investigations 

A financial advisor is brought into a federal fraud investigation when regulatory bodies like the Financial Industry Regulatory Authority (FINRA), or the SEC, or law enforcement agencies like the FBI or Department of Justice receive reports of, or detect through their own oversight, violations of securities laws. When this level of investigation occurs, there has most likely been evidence of significant investor harm. 

Some other common causes that give rise to a federal fraud investigation include: 

Client Complaints: A formal complaint making an accusation of fraud, misappropriation of funds, or unauthorized trading generally leads to a FINRA inquiry. 

Red Flags discovered through Surveillance: Regulatory agencies like FINRA flag unusual patterns like excessive trading which are then investigated. 

Form U5 Disclosures: When a financial advisor is fired, resigns, or is allowed to resign after an accusation of fraud, the company they work for must file a U5 disclosure form. This form immediately triggers an investigation. 

If a financial advisor is found guilty of taking part in financial fraud, the consequences are severe. Years in prison, extremely high fines, and the complete loss of career are guaranteed. Even if the federal government does not end up pressing charges, victims or the SEC may file civil charges. It is very important that any financial advisor accused of committing financial federal fraud secure the help of an experienced attorney immediately. 

Seek Counsel If You Are Accused 

As soon as an investigation is precipitated, it is imperative to hire an experienced, knowledgeable attorney like those at the Law Offices of Robert J. DeGroot. Investigations move quickly and having help on your side from the beginning can bring about a more favorable outcome. 

Reach out to the Law Offices of Robert J. DeGroot today if you, or someone you know, is under investigation for federal fraud.