The SEC’s Office of Investor Education and Advocacy, the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA), the National Futures Association (NFA), and the North American Securities Administrators Association (NASAA) are issuing this Investor Bulletin to highlight some key topics for World Investor Week 2021, a global campaign to raise awareness about the importance of investor education and protection. From October 4-10, 2021, investors, investment professionals, teachers, parents, researchers, and others are encouraged to make a special effort to promote investor education. Here are a few current key topics we are seeing for Main Street investors in the United States.
Environmental, Social and Governance (ESG) Investing
ESG investing has gained popularity with investors over time. Investors may hear about ESG investing from financial professionals, from investment-focused online sites, or even from popular media. “ESG” stands for environmental, social, and governance. It is often also called sustainable investing, socially responsible investing, and impact investing. ESG investing is a way of investing in companies based on their commitment to one or more ESG factors.
- The environmental factor might focus on a company’s impact on the environment or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
- The social factor might focus on the company’s relationship with people and society, or whether the company invests in its community.
- The governance factor might focus on issues such as how the company is run and executive compensation.
Different investments may weight environmental, social and governance factors differently and also may focus on different specific criteria within a factor. Investments that don’t have “ESG” in the name may still incorporate elements of ESG investing into their portfolios. For information about mutual funds and exchange-traded funds that use an ESG investing strategy, see Environmental, Social and Governance (ESG) Funds – Investor Bulletin.
Digital Assets
Digital assets are part of a new and evolving ecosystem of financial technologies that includes virtual currencies, smart contracts, and applications that may rely on distributed ledger, or “blockchain,” networks. Digital assets can take many forms and can represent a physical asset, a virtual asset, a value, and/or a right. Depending on the facts and circumstances, including how they are structured, digital assets may be securities, cash commodities, or derivatives.
New projects, coins, and tokens are created every day and hyped on social media, in discussion boards, and via messaging apps. Unfortunately, many investors have lost money because projects fail, are hacked, or were created to defraud investors. In addition, fraudsters use social media, messaging platforms, and even dating websites to convince investors to send them digital assets to trade. Investors have also been lured onto trading websites designed to steal their money.
Investors should fully understand the technology behind a project, token, or coin, as well as the risks of investment before committing any money. Digital assets can be highly volatile and thinly traded, making them more easy to manipulate. Investors should only trust their money to registered financial professionals. If people offer to trade for you, verify they are registered with the NFA, SEC or FINRA. See the CFTC’s customer resources for digital assets and Spotlight on Initial Coin Offerings and Digital Assets to learn more.
Day Trading
Day traders rapidly buy, sell and short-sell stocks, options, or futures throughout the day in the hope that their positions gain value for the seconds or minutes they hold the shares or contracts, allowing them to lock in quick profits. Retail investors may seek to profit from volatile markets by buying commodity futures, options or individual stocks, including stock in heavily-promoted companies with smaller market capitalizations. Day trading is extremely risky and can result in substantial financial losses in a very short period of time. The leverage created by futures contracts, margin loans, or options can amplify risks.
Sometimes the stocks, options, or commodities targeted by day traders may be discussed in social media, news aggregators, investment research websites, online investment newsletters, ratings websites, message boards, chat rooms, and discussion forums. It can be tempting to jump on the bandwagon and follow whatever the crowd seems to be doing. Sometimes, however, following the crowd may lead to significant investment losses. For information about these significant risks and tips for long-term investing, see Investor Alert: Thinking About Investing in the Latest Hot Stock? Understand the Significant Risks of Short-Term Trading Based on Social Media; or Customer Advisory: Understand Risks and Markets before Reacting to Internet Hype. For information on rules that apply to people who engage in day trading, read Am I a Pattern Day Trader? and Margin Rules for Day Trading.
SPACs
“SPAC” stands for special purpose acquisition company, and it is a type of blank check company. SPACs have become a popular vehicle for transitioning a company from a private company to a publicly traded company. Certain market participants believe that, by going public through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional initial public offerings, or IPOs.
These types of transactions, in which a SPAC acquires or merges with a private company, occur after, often many months or more than a year after, the SPAC has completed its own IPO. Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public. This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO. For more information about investing in SPACs, see What You Need to Know About SPACs – Updated Investor Bulletin.
Avoiding Brokerage Imposter Scams
While investing-related scams are certainly not new, new variants emerge virtually every day. Over the past year, securities regulators have observed an increase in cyber-related incidents, including fraudsters creating fake websites using the names and professional details of actual industry professionals (who have no connection to the imposter sites). Impersonation is one of the oldest scams, but it can be difficult to spot unless you know what you’re looking for. Beyond the typical mistakes—such as poor grammar, misspellings, odd or awkward phrasings, or misuse of investor terminology—a significant red flag of a brokerage imposter scam is the use of a registered representative’s name as the domain name for the website (e.g., firstnamemiddlenamelastname.com). In July 2021, the FBI and Securities and Exchange Commission issued a warning to investors about this problem, and FINRA provided additional tips to help investors spot the fakes at Beware of Broker Imposter Scams.
If you have questions about your investments or your investment professional, you can call the SEC’s investor assistance line (800) 732-0330. You can also report a problem concerning your investments or report possible securities fraud to the SEC, or by emailing [email protected]. Follow us on Twitter and Facebook and sign up for updates on investing-related topics and news.
Additional Resources
CFTC: Article: Don’t be Re-Victimized by Recovery Frauds
CFTC: Article: 6 Steps to Take after Discovering Fraud
FINRA: Follow a Course to Smart Investing, a series of six quick mini-modules to help investors build essential investment knowledge and skills
This Investor Bulletin represents the views of the staff of the Office of Investor Education and Advocacy. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This Bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.