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February 19, 2013

Investors Beware

Across the country, state securities regulators are reporting an upsurge in fraud cases involving retirement savers who have been lured by brokers into complex investments.

This trend should not come as a shock. Prolonged periods of low interest rates create the conditions for fraud and bubbles, as investors seek higher yields by putting their money in riskier investments and as asset prices are driven upward. It happened in the dot-com era of the 1990s and in the housing bubble of the last decade, and it is happening now, in the post-financial-crisis world of near-zero interest rates. Yet despite the link between low interest rates and fraud, federal investor protections are being blocked or loosened at precisely the time when more protection is needed.

For instance, there is no federal requirement for financial brokers who give advice and earn commissions to act in the best interests of their clients. Two years ago, the Securities and Exchange Commission rightly pushed to impose a fiduciary duty on brokers, but the effort has been stalled by financial lobbyists and their Congressional allies, who contend, against all evidence, that more research is needed to justify a fiduciary-duty rule.

As things stand, brokers still have latitude to recommend products that do more to fatten their commissions than to enrich their clients. As detailed in a recent article in The Times by Nathaniel Popper, financial firms are currently paying brokers hefty commissions to sell “alternative investments,” including complex offerings in commodities, real estate trusts, luxury car fleets and television productions. Unlike stocks and bonds, the alternatives are often private offerings that are not subject to disclosure requirements and other investor safeguards that apply to publicly held companies.”

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Read full New York Times editorial here

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