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Promissory Note Fraud Tops Investor Complaints

December 14, 2017

Financial advisors may want to educate their clients on common types of investor fraud. Promissory notes are the top source of investor complaints or investigations, followed by Ponzi schemes, oil or gas-related investments, affinity fraud and variable annuity sales, according to a North American Securities Administrators Association survey cited by InvestmentNews.

Promissory notes were cited as the most frequently occurring source of complaints by 74% of state securities regulators, according to the survey that polled all 50 U.S. jurisdictions, the publication writes. The notes were involved in 138 enforcement actions by state regulators in 2016, according to the NASAA’s 2017 report cited by InvestmentNews.

With the current low interest rates, the “lure of high-interest-bearing promissory notes” is particularly attractive to seniors and people living on fixed income, says Joseph Borg, NASAA president and Alabama Securities Commission director, according to InvestmentNews.

Legitimate promissory notes are typically sold to sophisticated investors and are used by companies to raise capital, according to the NASAA. Borg warns investors to be particularly cautious of notes with a duration of under nine months, according to InvestmentNews. Most of the incidents involved short-term notes, which sometimes don’t require registration as securities, according to the publication.

Ponzi schemes and real estate scams, meanwhile, were both cited by 54% of state regulators as the most common source of complaints, InvestmentNews writes. Fifty percent of regulators also cited oil and gas-related products, 28% cited affinity fraud and 26% cited variable annuity sales practices, according to the publication.

NASAA has also highlighted initial coin offerings, cryptocurrency contracts for difference and identity theft as the three main rising dangers for 2018, InvestmentNews writes.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.