Fed agencies warn of scams aimed at firms, consumers

David Strow

Tuesday, Nov. 9, 1999 | 11:50 a.m.

"Consumer beware" was the main advice at a Las Vegas convention Monday, as government regulators tried to educate the nation's business media on efforts to protect consumers and investors.

"Investors are continuously bombarded with information from new avenues of communication," said Paul Roye, director of the Securities and Exchange Commission's division of investment management. "Education of investors is extremely important in these times."

Roye spoke Monday morning at the Personal Finance Conference of the Society of American Business Editors and Writers. Roye is the SEC's top official overseeing mutual funds.

He pointed out that it usually isn't the SEC's job to pass judgment on the merits on new business ideas, so long as those ideas aren't illegal. Instead, the SEC is focusing its efforts on forcing companies to make full disclosures to investors to help them make their own judgments.

"Sunlight is the best disinfectant," Roye said. "We can't say that something is a bad idea. We can only go so far as regulators."

One information gap the SEC is trying to close, Roye said, is in mutual fund annual reports. The SEC is undertaking reform efforts to simplify information presented to investors, such as tables of their stock holdings. The agency is also working to compel funds to effectively disclose the effect taxes will have on the actual return realized by an investor.

"That would offer investors a better perspective on the consequences of holding and disposing of the fund's shares," Roye said.

Of particular concern to the SEC, Roye said, is the growing involvement of banks in the securities business. In many cases, investors that go through banks are the most inexperienced investors of all.

Recently, the SEC fined a subsidiary of NationsBank Corp. (now Bank of America) for steering investors toward risky investments that were presented as low risk.

"NationsBank was an example that the SEC won't sit on its hands in that kind of situation," Roye said.

Another campaign underway by the SEC is the push for new legislation regarding the involvement of independent directors on the boards of mutual funds -- a group Roye referred to as the "watchdogs" of mutual funds.

Currently, federal law requires 40 percent of directors to be independent from a fund's management. The SEC wants to increase that to at least 50 percent, and possibly as high as two-thirds.

The SEC is also trying to increase these directors' influence and independence. One measure would require that independent directors be nominated only by other independent directors. A second provision would require an independent director's legal counsel to also be independent from the fund.

"Too often, independent directors have to rely on the fund's management for information," Roye said.

At the Federal Trade Commission, the concern is protecting consumers from much more blatant efforts to con consumers. One new avenue being used by scam artists, said FTC attorney Susan Camp Stocks, is the public's fear of the Year 2000 problem.

"Y2K has brought new life to old scams," Stocks said.

In some cases, Stocks said, people are called at home by a telemarketer supposedly working for the individual's bank. They're then told that their bank account is at risk of failure because of the Y2K bug, then urged to transfer all funds into a "Y2K secure" account -- an account held by the scamster.

In a related scam, a person is called by a "bank representative" who asks for a credit card number, to ensure that the account "will work after Jan. 1." Of course, once the account number is acquired, the account is at the mercy of the con artist.

The elderly are frequent targets of Y2K scams, but Stocks warned that businesses are falling prey to tricks as well. One commonly used con is to send a company a bogus invoice for Y2K services performed. The accounts payable person, not realizing the invoice is false, simply pays the bill.

Another similar trick, Stocks said, is to call a company and offer a long distance service as a "back-up" long distance service, in case the primary carrier fails on Jan. 1. Once the company consents, the service is immediately switched -- a practice known as "slamming."

But other practices are putting customers at risk of fraud, even without their knowledge, Stocks said. One common one is the practice by some banks of selling credit card account information to telemarketers.

In one case, state regulators sued a credit card company that sold customer information to a telemarketer for $4 million. This information included credit card numbers, customer financial histories, account balances and amount of last payments. In a separate case, an operator of an adult-oriented Internet site used credit card numbers bought from a bank to make bogus charges.

Stocks said regulators are currently trying to ban the sale of certain information by banks, but for the moment, the only way to ensure that the information isn't sold is to find the notice of such sales in an account's fine print, then notifying the bank that you don't want that information sold to third parties.

The commission is currently trying to tighten its enforcement of the credit card industry. One particular concern Stocks gave as an example are banks that accept card applications that were torn -- a signal that the application probably was taken out of someone's trash. By developing a centralized database, the FTC hopes to begin identifying issuers that have similar, repeated violations.

"That will give more teeth to charges that a credit card issuer needs to take more care with the cards they issue," Stocks said.