NASAA Series 63Ethical Practices and ObligationsEasy
A client approaches their registered agent asking for advice on an investment opportunity presented by a third party. The client mentions that the third party guarantees a 20% return in 30 days, with no risk, if the client invests $10,000 in a new, unproven cryptocurrency. The agent, knowing this sounds too good to be true, should advise the client that this is likely an example of:
- AA legitimate high-yield investment opportunity.
- BA structured product with embedded derivatives.
- CA Ponzi scheme.
- DA legitimate private placement.
Show answer & explanationAnswer & explanation
Correct answer: C. A Ponzi scheme.
Guaranteed high returns with no risk, especially from an unproven source, are classic red flags for a Ponzi scheme or other investment fraud. Agents have a duty to protect clients from such schemes.
Why the other options are wrong
- A. Guaranteed high returns with no risk are never legitimate investment opportunities.
- B. Structured products are complex but do not typically guarantee no risk with such high returns.
- D. Private placements carry risk and do not offer guaranteed, no-risk returns.
Ponzi Scheme Red Flags
A fraudulent investment operation where returns are paid to earlier investors by money taken from later investors. Key red flags include guaranteed high returns with little or no risk, overly consistent returns, and complex, secretive strategies.
- Promises high, consistent returns.
- Claims 'no risk' or 'guaranteed' returns.
- Often involves unproven or secretive investments.
- Relies on a continuous flow of new investor money.
Memory trick: If it sounds too good, it's probably bad.