Protecting Your Nest Egg Kansas State University Investigate before you invest Agricultural Experiment Station and Cooperative Theresa Foster, FCS Extension Agent, Wabaunsee County Extension Service Angela Cichocki, Dir. of Investor Education, Office of the Ks. Securities Commissioner Nothing But the Blue Sky 3) Companies and salespeople had to be honest and ethical. False and misleading Think back to the days of Jesse James and information intended to defraud investors lawlessness when it ran thick as bison over was not allowed. the prairies. Scoundrels like James weren’t the only thieves on the prowl. These clever Other states soon passed similar laws. The crooks looked professional, sounded U.S. Securities and Exchange Commission honest and claimed to represent solid was created in 1934 to regulate the national companies with legitimate investment securities markets. We now have a system of opportunities. state, federal, and industry regulation. There What trusting investors got is a securities regulator in each was nothing more than a of the 50 United States, the piece of the blue sky. The so- District of Columbia, Puerto called “investments” were Rico, Mexico and the Canadian worthless. The money provinces and territories. usually disappeared into thin air along with the State regulators are often the Fact Sheet salesperson. first to detect illegal and unethical activity through investigations and customer How Kansas Drove complaints. States may suspend and revoke Out a Set of Thieves securities licenses, order fines and sanctions The State of Kansas took action. In 1911, and pursue criminal prosecution in a court Kansas became the first state to enact a law of law. States also work to obtain restitution to protect its citizens from worthless for investors. securities and dishonest salespeople. The new “Blue Sky” law established three Securities laws are still known as blue sky requirements: laws today. What is a security? 1) Companies issuing securities had to register their offerings with the State When people hear the word “security,” they before soliciting investors. They had to most likely think of stocks, bonds and prove that the company was in good mutual funds. Even if you don’t trade on the financial standing and the investment was major stock exchanges, you might still be fair and equitable; investing in securities. Unusual securities have included: 2) People selling securities had to obtain a license from the State before soliciting • Leases in oil and gas wells; investors; and • Farming and ranching operations; • Sale and leaseback agreements for • Conservative: These investors are also pay telephones, ATM machines, kiosks known as “risk-averse investors.” They and similar equipment; want to ensure their money is still there • Viatical settlement contracts and when they need it. They don’t want any “senior life settlement” contracts; potential for loss and prefer secure • Charitable gift annuities; investments like bonds and government- • Coins; issued securities to investing in the stock • Art; and market. • Pyramid schemes. Most Retirees Have There are many others. Any type of passive Issues Like These: investment is probably a security. A passive • They have an investment goal of savings investment is one in which the investor preservation (i.e. they’re more relies on another person to make a profit. conservative investors). • They are, in general, the most common Assessing Your Risk Tolerance victims of fraud because they have nest eggs built up. Risk tolerance is one way to gauge whether • They may lack confidence in asking tough or not a particular investment is right for investment questions. you. It shows how well you handle the potential loss of money from your Investigate Before You Invest investments and can change as your life Many different professionals offer financial circumstances change. When you products or services that that involve determine your risk tolerance, you take into securities and investing. You have the right account your personality, personal goals, to know what qualifies that person to sell you current investing style and your “gut that product. Before you put money into an reaction.” When you take a risk assessment, investment, check it out. there aren’t any right or wrong answers. Investors are classified in three general Contact your state securities regulator to: investment styles: • Make sure the salesperson is properly licensed; • Aggressive: These investors are after • Make sure the investment is registered big returns and are willing to take the (if it is not exempt); necessary risks in order to get them.They • Find out if the person or firm has a might like to gamble or invest in capital history of complaints or regulatory ventures (brand-new companies just out violations. on the market) or international and high-growth stocks. State securities regulators rely on a system of nationwide databases to track licensing, • Moderate: These investors understand registration and disciplinary actions. That there are risks involved when a person means that if a person or company outside invests. They don’t mind taking some the state in which you live solicits you to risk, as long as they know there’s a pretty invest, you can check them out. sure bet their initial investment will still be there when they need it. They tend to Investors who request background checks do a lot of thinking before they invest also alert state securities regulators to people and prefer solid, blue chip companies or companies who are operating illegally. and maybe indexed mutual funds as well. This helps protect others from getting scammed. 2 Before You Invest terms of an investment. Beware of buzz words like “guaranteed,” “safe as a CD,” “risk- • Get everything in writing. free,” and “sleep at night.” • Make sure you understand the risks. • Unauthorized Trades/Churning • If you do not understand how Check your statements for any unauthorized an investment works, avoid it. trades. Watch out for “churning”—excessive After You Invest trading to generate sales commissions. • Keep good records of your • Theft of Client Funds accounts. Investors trust that their money will be used • Stay in touch with your as specified. Get receipts for all deposits. financial adviser. Never pay in cash or make a check payable to • Make sure you are receiving the salesperson’s personal account. regular statements and reports. If You Have Problems • Check your statements for inaccurate information. • Act quickly. • Report problems immediately. • Communicate in writing. • Gather your records and receipts. • Keep copies of everything for yourself. Recognizing Fraud and Abuse • Notify your state securities regulator. Look for common themes and red flags to If the problem is with the salesperson alert you to potential problems with an or an investment you already have… investment. Send a letter describing the problem to the • Unlicensed Salespeople branch manager or compliance officer of • Unregistered Securities your broker-dealer or investment adviser. Use This is a common tactic used to defraud information from your account statements investors. Always verify that the salesperson and reports to support your claim. If the is licensed and authorized to sell securities. problem is not corrected, contact your state Make sure the investment is properly securities regulator to file a complaint. registered before you invest. Note: Certain exemptions from licensing and registration are permitted. If a person Questions To Ask When or company tells you that they are exempt, they must be able to tell you why. Follow You Are Thinking About up with a call to your state securities Buying A Security regulator to verify this information. • Is the SECURITY registered? • Unsuitable Investments • Is the SALESPERSON licensed and Brokers and investment advisers are required to make appropriate authorized to sell securities? recommendations based on factors such as • Are there any disciplinary actions your age, net worth and risk tolerance. Tell against the salesperson or company? your broker your needs and goals. • Do you understand the investment? • Misrepresentation The people selling investments must tell • Do you understand the risks? investors the truth about the risks and 3 If you suspect a scam… Privacy Issues: Are You Walking Notify your state securities regulator on Eggshells? immediately. In order to process your financial account information, your advisor must obtain IN KANSAS: detailed information about you, including Office of the bank account numbers, social security Kansas Securities Commissioner numbers, credit card numbers, birth dates and other identifying information. They Topeka Office: must collect this personal information in 618 S. Kansas Avenue order to comply with the US Patriot Act and Topeka, KS 66603-3804 the Gramm-Leach-Bliley Act. Phone: 1-800-232-9580 www.securities.state.ks.us You should obtain and read a copy of their privacy policy to find out with whom your OUTSIDE OF KANSAS: information will be shared. North American Securities Administrators Association, Inc. 10 G Street, N.E., Suite 710 Protect your nest egg. Washington, D.C. 20002 Phone: 202-737-0900 Investigate before you invest! www.nasaa.org Protecting Your Nest Egg Participant Survey Date: _______________ Your County: _________________________ Are you you?: Male ____ Female ____ Your age category: Teen ____ 20-40 ____41-60 ____ 61+ ____ What types of financial products do you own?: _____ Stocks _____ Bonds _____ Mutual Funds _____ CD’s _____ Annuities _____ Insurance _____ Other___________________ Thank you to Joyce Cantrell, Jennifer Wilson and Kristy Archuleta for reviewing this lesson and to project facilitator Esther Maddux. Brand names appearing in this publication are for product identification purposes only. No endorsement is intended, nor is criticism implied of similar products not mentioned. Publications from Kansas State University are available on the World Wide Web at: www.oznet.ksu.edu Publications from Kansas State University may be freely reproduced for educational purposes. All other rights reserved. In either case, credit Theresa Foster and Angela Cichocki, Protecting Your Nest Egg–Fact Sheet, July 2004.