Five Rules for Avoiding Investment Fraud

There is no foolproof way to protect against investment fraud. But by verifying registration, knowing some of the major signs of investment fraud, and following some simple rules, Canadians can better protect themselves from fraud.

Rule 1 – Only Deal with Registered Advisors

In Canada, investment firms and advisors are licensed to sell investments by a process called “registration”. A provincial or territorial securities commission regulates each registered firm and advisor. Some are also governed by investment industry self-regulatory organizations (SROs). The two SROs in Canada are the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA).

To minimize the risk of fraud, you should deal only with registered advisors and firms. Check the registration of both the advisor and the firm before you invest. You should also check the advisor’s disciplinary history before investing.

    • Registration – You can check registration at AreTheyRegistered.ca. For further information about conducting background checks, see the Investor Resources section of FAIR Canada’s website.
    • Discipline – You can review disciplinary history records on the Disciplined Persons List. If the advisor has a history of disciplinary action, this is a red flag. You should make sure you fully understand any proceedings brought against them before investing, or find an advisor who does not have a disciplinary history.

NOTE: Generally speaking, advisors and firms governed by SROs are subject to a closer level of regulation and supervision. An additional advantage of dealing with an advisor or firm regulated by an SRO is that they are required to participate in a compensation fund (the Canadian Investor Protection Fund or the Investor Protection Fund). The compensation fund may provide coverage to investors in the event of firm insolvency. For details on coverage, go to CIPF or IPC.

Rule 2 – Be Aware of Fraud ‘Warning Signs’

Unrealistic Returns – Unrealistic rates of return are a big red flag. Investments that offer a higher-than-market rate of return and little to no risk are almost always fraudulent. The CSA’s 2012 Investor Index found that many Canadians have unrealistic expectations of market returns. When asked what they think the annual rate of return on the average investment portfolio is, only 12% of Canadians gave a realistic estimate.

Guaranteed High Returns – With most investments, there are no guarantees. Guaranteed high returns are a red flag that the investment is likely a scam.

Pressure to Borrow – Pressure to borrow money to invest is an investment fraud warning sign. Fraudsters often recommend that you borrow to invest. FAIR Canada believes it is highly inappropriate (and overly risky) for most individuals to borrow to invest (otherwise known as ‘leverage’), particularly where it involves borrowing against your home. If you lose your investment, borrowed money still needs to be repaid. If your house was used as collateral, it could be sold to cover your investment losses. Even in legitimate investments, leverage can lead to financial ruin for consumers.

High-Pressure Sales – Recognize high-pressure sales tactics (“limited time, act now” or “don’t miss this opportunity”). Such tactics are investment fraud flags. Legitimate investment opportunities should provide you with adequate time to review any information and make an informed decision. Do not make spur-of-the-moment decisions with your life savings. Take your time and if unsure, don’t invest. Visit BeFraudAware.ca for more persuasion techniques you should be aware of.

“Inside Information” – Another flag involves exclusivity (particularly where the information is “confidential” or “inside information”). Registered investments (see Rule 4 below) are required to file public information, so there would be no reason to require investors to keep any details about such investments secret.

Ponzi Schemes – The Ponzi scheme is one of the most common forms of investment fraud. A Ponzi scheme lures investors in with the promise of high returns. The fraudster pays early investors “returns” from funds contributed by new investors, and steals the rest. The schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out. If you have been dealing with someone who is not registered and have received “interest” payments or account statements this is no guarantee that the investment is legitimate. Learn more about other common scams.

Rule 3 – Cheques Payable to Registered Firms, Not Individuals or Other Companies

Only hand over money in the name of registered firms (see Rule 1). Never issue a cheque made out to an advisor personally (i.e. in the individual’s name rather than the firm’s). If you are asked to make funds payable to the individual or some other entity, this should be a red flag that something isn’t right.

Rule 4 – Stick to Receipted Investments

Unsophisticated investors, generally speaking, should only invest in products that securities regulators have given some scrutiny to. Usually this means a document called a prospectus and other disclosure documents about the investment have been filed with the securities regulator. Investments in unregulated private real estate offerings and “bulletin board listed” (over-the-counter) companies have often turned out to be scams. To find out whether a particular investment has a prospectus, call your provincial securities regulator.

You should not invest in an investment that does not have a prospectus unless you are a sophisticated investor with enough knowledge and experience to carefully investigate a prospectus-exempt investment.

Rule 5 – Ask Questions, Verify, and ‘Just Say No’

If you do not understand an investment after discussing it with your advisor, do not buy it. Never sign a blank document or one that you do not understand. Scam artists and unethical advisors will often ask investors to lie about their personal financial situation: do not lie about your income or other information.

Provincial securities regulators have contact centers to answer inquiries. If you have any questions, don’t hesitate to call your local regulator and ask. If you think that an investment opportunity is a scam or is not suitable for you, don’t be afraid or embarrassed to just say no.

For more information see:

AMF’s – Fraud Prevention

BCSC’s InvestRight – Avoid Investment Fraud

FAIR Canada’s – Be a Well-Informed Investor

FCNB’s – Frauds and Scams

OSC’s – Investment Fraud Checklist 

OSC’s Get Smart About Money – Protecting Against Fraud

CSA’s – Protect your money: Avoiding frauds and scams


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