The Financial Industry Regulatory Authority (FINRA) is concerned about sales of church bonds through inappropriate sales practices by brokers. This matter has earned church bonds a spot on FINRA's list of examination and enforcement priorities for 2012. Inappropriate sales of church bonds are usually affiliated with affinity fraud, making it somewhat easier for scam artists to hide the real risks associated with the bonds. This is why FINRA is initiating efforts to prevent broker misconduct and to make sure that firms are performing their due diligence, which will ultimately aid it protecting investors' assets.
Church bonds have numerous risks and problems. Among the risks associated with the bonds is their lack of liquidity. Liquidity issues arises because church bond issuances are small ($10 million or less), which translates into a lack of any secondary market for the bonds to trade in. In addition, the true financial condition and creditworthiness of church bond issuers are difficult to determine because their underlying source of revenue is never really clear. Still, church bond salespersons have been able to capitalize on the low interest rate environment and the desire for a relatively secure source of income, primarily by retirees - the impact of an increasing number of church bond defaults on retirees' investment portfolio has been devastating. This unfortunate reality was sparked by the general economic decline, which hindered the ability of many churches to pay their debt due to a slowdown in church donations.
The law requires broker-dealers and investment advisers to perform adequate due diligence before recommending investments such as church bonds to their clients. Some of the responsibilities include: 1) having a reasonable basis to believe that the investment is suitable; 2) examining the risks associated with the investment; and 3) making full disclosure of the risks associated with the investment. Unfortunately, these responsibilities often go unfulfilled. Therefore, investors can bring forth claims against broker-dealers for losses incurred.
Affinity fraud is a form of illegal conduct typically associated with an appeal to a common interest. Some examples of a common interest include a church, club, and cultural association. Scam artists target and exploit the tendency of members to ascribe to the trustworthiness of a fellow member. In the case of a church, scam artists pitch the notion that the funds will be to support the mission of the church.
Have you suffered losses in church bonds? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.