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“Special Report – Investment Funds”

investment ponzi scheme

The news that broke last month about the indictments relating to a “Ponzi scheme” was pretty grim.  Operating right here out of Long Island, the alleged wrongdoers preyed on a number of investors, including a volunteer firefighting organization.

            As a service to our clients, particularly those with service-award programs, Hometown Firefighters has prepared this Special Report on what to know before putting money into an investment fund.  Despite last month’s indictments, investment funds can still play an important role in properly investing and diversifying service-award-program assets.

            We hope you find this Special Report helpful, and please contact us if you have any questions.




The right answer

1. Should all fund assets be held by an independent, third-party custodian? Absolutely.  The custodian can be a bank, trust company or a brokerage firm, but it is crucial that the fund itself not hold the assets it is responsible for investing.
2. Should the fund principal and fund investment manager be separate entities? Yes – to maintain better control and oversight of the fund’s operations, the entity running the fund should be separate and distinct from the entity managing the fund’s investments.
3. Should the fund principal and fund investment manager be controlled by different individuals? Yes – again, separation of control adds an additional layer of protection against potential mishandling of the fund’s assets.
4. Should the fund investment manager be registered with the Securities and Exchange Commission? Not all investment managers are required to be registered with the SEC.  However, investing in a fund that is managed by an SEC-registered investment manager provides assurance that the manager’s practices and operations are being overseen by a federal regulator. Ask if the manager is registered with the SEC.
5. Should the fund be registered with New York State? State registration provides another indication of the legitimacy of both the fund and those responsible for overseeing its operations. Ask if registered in NY.
6. Should the fund be organized under US law? Although the laws of some countries are comparable in terms of investor protections to those of the US, that is not the case for all countries.  It is therefore prudent to look for a fund that has been organized under US law.
7. Should the fund be located and have its operations within the US? In some special circumstances, investing through an “offshore” fund may be advisable, but if those circumstances don’t exist, which they won’t for most service-award programs, stay in the USA.
8. Should the fund be located and have its operations within New York State? New York State’s laws on investor protection and its financial-services regulators are among the best in the country.  Take advantage of them.
9. Was a fund principal ever barred from associating with any member of the Financial Industry Regulatory Authority? If the answer is yes, that’s a definite danger signal – stay away from the fund!


10. Should the fund be open only to New York State investors? Although funds offered nationally can be just fine, we see advantages with a fund that is only available to investors located in New York State.  We believe such a fund has a better focus- and as a result will go the extra mile to satisfy its investors and run a first-rate operation.
11. Should the fund principal and fund investment manager be engaged in businesses unrelated to financial services? We think not because we’d just as soon avoid both the distractions and conflicts these unrelated businesses might present to the principal and investment manager.
12. Should investments in the fund through non-US trusts be permitted? We don’t think so.  We want investments in the fund to flow through the US financial system.  We don’t need the money to make unnecessary side trips.
13. How should we react to a fund that promotes itself as liquid and suitable as a short-term investment? We think caution is in order here.  For service-award programs in particular, the investing time horizon should be a long one.  If liquidity is needed, an insured bank account could be the best choice.
14. Should the fund’s account statements be prepared by the fund principal? Definitely not.  This is a red flag.  You don’t want the person running the fund also telling investors what the fund is worth. 
  1. 15.  Should fund account statements be prepared by an independent third party?
We think this is essential.  We want an outsider communicating directly with the investor about the most important piece of information about the fund: what the investment is worth.
16. Should the fund principal control multiple funds allowing commingling and transfers among funds? This makes us uncomfortable, as it presents opportunities for mischief.  We would take an extra hard look at such a fund.
17. Should a fund direct investors to make deposits in the fund through non-US bank accounts? Another red flag.  There’s generally no need for this.  Be wary. 
18. What if a fund represents that its investments are guaranteed like bank certificates of deposit? Be skeptical of this claim, highly skeptical. 



Some additional points…


Audits We believe a fund should be audited annually by an independent certified public accounting firm.  And we also believe the fund should be audited by an accounting firm with a national practice that specializes in and focuses exclusively on investment funds.
Regulatory history We also believe a fund’s investment manager should be one that has been registered with the Securities and Exchange Commission for some period of time.  Similarly, those offering the fund should be conducting business as a broker/dealer under the auspices of the Financial Industry Regulatory Authority.
Experience in the volunteer emergency-service market For our service-award-program clients, we believe the fund should be overseen by individuals who have experience in providing financial products and services to emergency-service organizations.  These organizations have particular needs and requirements that only those who have worked with them can fully appreciate.
Relationships Finally, know the people you are dealing with.  We believe there is no real substitute for the trust and confidence built up over years of knowing and working with someone.  That’s as true for investment funds as it is for just about any other endeavor.


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