South Dakota Department of Labor

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South Dakota Department of Labor Regulation,
Division of Securities
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What We Do Our Mission

• To protect investors of securities products,
  franchises and business opportunities by
  investigating complaints, conducting
  examinations, enforcing anti-fraud provisions,
  ensuring investments sold meet standards of full
  disclosure and providing investor education.

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South Dakota Codified Law Enforced by Division of
Securities

• Uniform Securities Act of 2002 - SDCL Chapter
  47-31B
• Franchise Investments - SDCL Chapter 37-5B
• Business Opportunity Law - SDCL Chapter 37-25A

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12 Principles of Financial Literacy

• Map your financial future Those who fail to
  plan, plan to fail.
• Dont expect something for nothing Watch Out
  for Scams!
• High returns equal high risks
• Know your take-home pay
• Compare more than just interest rates - other
  product features
• Pay yourself first
• Money doubles by the Rule of 72
• Your credit past is your credit future
• Start saving young
• Stay insured
• Budget your money
• Dont borrow what you cant repay

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Characteristics of a Scam

• Calls come from distant cities/states
• Salespeople counter every possible objection
• Offer no risk, high returns and secret tips
• Demand immediate action
• Caller mixes believable statements with false
  promises
• Sales person does not respect your right to say
  no
• Makes you feel stupid if you are not interested
  in the offer

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Popular Types of Investment Scams

• Pyramid Schemes
• Precious Metal Fraud
• International Investing
• Stock Swindles Insider Trading
• Franchise/Business Opportunities
• Ponzi Schemes
• Affinity Fraud

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Pyramid Schemes

• One person recruits six friends
• Those six recruit six more
• A nine-level pyramid involves 10,000,000
• Almost everyone loses!

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The Ponzi Investment Scam

• Appears to be a real investment deal
• Scam artist usually organizes as a pyramid scheme
  in which early investors appear to be earning
  returns, but are actually being paid off by
  later investors
• Common examples
• Mortgage deals
• Real estate deals
• Oil and gas leases
• Promissory notes in startup companies
• Housing for the homeless
• Be especially suspicious of a company that claims
  to be registered in one state, physically exists
  in a second state and sells to investors in a
  third.

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Lottery Scam/Sweepstakes Winner

• Often begins with a telephone call from a
  stranger who excitedly tells you that you have
  won a contest. The caller then explains there
  will be some fees you have to pay (taxes or a
  courier fee) to collect your earnings. You send
  the money, but the winnings never arrive.
• Older people often fall for it because it sounds
  like it could solve all their financial problems.
• If you fall for it the scam artist may do what is
  known as re-loading, which is where they tell you
  there is another fee you have to pay and keep
  stringing you along to see how much money they
  can get out of you.
• 2 signature traits
• Caller makes exaggerated claims of the amount of
  money that will have to come out of your winnings
• Tell you that you have to pre-pay to get winnings

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Investor Education Lunch Scam

• Untrained and unlicensed professionals are
  selling seniors investments that offer little
  benefit while lining the agents pockets with a
  fat commission
• Free Lunch seminars
• Seniors enjoy a free meal in a resort-type
  setting, as part of an educational seminar
  offering investment advice
• Main purpose is typically to get an appointment
  to come into the persons home and pressure them
  with high sales tactics to purchase unsuitable
  investment products

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Top 10 Threats to Investors

• Ponzi Schemes- Pay early investors with money
  raised from later investors. The only people who
  make money are the promoters who set the Ponzi in
  motion.
• Unlicensed Individuals Selling Securities- Anyone
  selling securities without a valid securities
  license should be a red alert for investors.
• Unregistered Investment Products- Con artists
  bypass stringent state registration requirements
  to pitch viatical settlements, pay telephone and
  ATM leasing contracts, and other investment
  contracts with the promise of limited or no
  risk and high returns.
• Promissory Notes- Empty promises can leave these
  notes worth less than the paper on which they are
  printed.
• Senior Investment Fraud- Because they have built
  a lifetime of savings, seniors continue to face
  investment fraud by con artists peddling
  unsecured promissory notes, viatical settlements
  and other investments that are either fraudulent
  or unsuitable for them based on their particular
  financial needs.

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Top 10 Threats Continued

• 6. High-Yield Investment Schemes- Con artists
  lure investors with promises of triple digit
  returns through access to risk free guaranteed
  high yield instruments or something equally
  deceptive
• 7. Internet Fraud- Stock promoters are using
  online boiler rooms, instant messaging, and
  fake websites to lure investors into
  pump-and-dump stock schemes.
• 8. Affinity Fraud- Con artists are increasingly
  targeting religious, ethnic, cultural and
  professional groups.
• 9. Variable Annuity Sales Practices- Senior
  investors, in particular, should beware of the
  high surrender fees and steep sales commissions
  agents often earn when they move investors into
  variable annuities.
• 10. Oil and Gas Scams- With oil topping 50 a
  barrel and continued Middle East instability,
  regulators warn that con artists may renew
  schemes promising quick profits in oil and gas
  ventures.

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Questions to Ask Before Hiring a Financial
Professional

• What are your credentials?
• What services will you provide?
• How much will it cost?
• How are you paid?
• Is this product registered
• Are you registered?

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Saving vs. Investing
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Savings (Bank Product)

• Passbook Savings Account (Basic/Regular)
• Money Market Account
• Certificate of Deposit

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Truth in Savings Law

• The Truth in Savings Act (Federal Reserve
  Regulation DD) requires financial institutions to
  disclose the following information on savings
  account plans they offer
• Fees on deposit accounts
• The interest rate
• Other terms and conditions
• The annual percent yield (APY), which is the
  percentage rate expressing the total amount of
  interest that would be received on a 100 deposit
  base on the annual rate and frequency of
  compounding for a 365-day period. Truth in
  Savings defines the year as 365 days rather than
  360, 366, or some other number. This law
  eliminates confusion caused by the more than
  eight million variations of interest calculation
  methods previously used by financial institutions.

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Choosing a Savings Account

• Factors that determine the dollar yield on an
  account
• Interest rate (also called rate of return, or
  annual yield)
• All money earned comes from this factor.
• The following factors reduce money earned and can
  even turn it into a loss
• Fees, charges, and penalties
• Usually based on minimum balance requirements, or
  transition fees
• Balance requirements
• Some accounts require a certain balance before
  paying any interest.
• On money-market accounts, most bank will pay
  different interest rates for different size
  balances. (Higher balance earns a higher rate.)
• Balance calculation method
• Most calculate daily. Some use average of all
  daily balances.

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Investing

• Not FDIC

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Bonds

• What they are
• A bond is an IOU, certifying that you loaned
  money to a government or corporation and
  outlining the terms of repayment.
• How they work
• Buyer may purchase bond at a discount. The bond
  has a fixed interest rate for a fixed period of
  time. When the time is up, the bond is said to
  have matured and the buyer may redeem the bond
  for the full face value.
• Types
• Corporate
• Sold by private companies to raise money.
• If company goes bankrupt, bondholders have first
  claim to the assets, before stockholders.
• Municipal
• Issued by any non-federal government.
• Interest paid comes from taxes or from revenues
  from special projects. Earned Interest is exempt
  from federal income tax.
• Federal Government
• The safest investment you can make. Even if U.S.
  government goes bankrupt, it is obligated to
  repay bonds.

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Stocks

• What they are
• Stock represents ownership of a corporation.
  Stockholders own a share of the company and are
  entitled to a share of the profits as well as a
  vote in how the company is run.
• How earnings are made
• Company profits may be divided among shareholders
  in the form of dividends. Dividends are usually
  paid quarterly.
• Larger profits can be made through an increase in
  the value of the stock on the open market.
• Advantages
• If the market value goes up, the gain can be
  considerable.
• Money is easily accessible.
• Disadvantages
• If market value goes down, the loss can be
  considerable.
• Selecting and managing stock often requires study
  and the help of a good brokerage firm.

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Mutual Funds

• What they are
• Professionally managed portfolios made up of
  stocks, bonds, and other investments.
• How they work
• Individuals buy shares and the fund uses money to
  purchase stocks, bonds, and other investments.
• Profits returned to shareholders monthly,
  quarterly, or semi-annually in the form of
  dividends.
• Advantages
• Allows small investors to take advantage of
  professional account management and
  diversification normally only available to large
  investors.

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Types of Mutual Funds

• Balanced Fund includes a variety of stocks and
  bonds
• Global Bond Fund has corporate bonds of companies
  from around the world
• Global Stock Fund has stocks from companies in
  many parts of the world
• Growth Fund emphasizes companies that are
  expected to increase in value also has higher
  risk
• Income Fund features stock and bonds with high
  dividends and interest
• Industry Fund invest in stocks of companies in a
  single industry (such as technology, health care,
  banking)
• Municipal Bond Fund features debt instruments of
  state and local governments
• Regional Stock Fund involves stocks of companies
  from one geographic region of the world (such as
  Asia or Latin America)

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Variable Annuities

• Typically have something like a 20-year payout
• Usually come with a high commission, which is not
  revealed
• Hybrid between a life insurance policy and an
  investment product
• Often charge hefty penalties when money is
  withdrawn early

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Real Estate

• Ways to Invest
• Buy a house, live in it, and sell it later at a
  profit
• Buy income property (such as an apartment house
  or a commercial building) and rent it
• Buy land and hold it until it rises in value
• Advantages
• Excellent protection against inflation
• Disadvantages
• Can be difficult to convert into cash
• A specialized type of investment requiring study
  and knowledge of business

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Savings and Investment Products
Savings Investing
Source of Return Interest paid on money deposited Interest, dividends, or capital gains or losses
Key Benefit Money is safe and accessible Returns have outpaced inflation over long term
Key Drawback Returns havent outpaced inflation over long term Risk of losing money if securities decline in value
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Savings and Investment Products
Savings Investing
Objective Short-term needs or emergencies Long-term growth
Products Savings account, money-market account, CD Stocks, bonds, mutual funds
Risk None on capital if FDIC insured, inflation risk Varies, depending on investment product
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Risk vs. Reward
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Retirement Plans

• What they are and how they work
• Plans that help individuals set aside money to be
  used after they retire.
• Federal income tax not immediately due on money
  put into a retirement account, or on the interest
  it makes.
• Income tax paid when money is withdrawn.
• Penalty charges apply if money is withdrawn
  before retirement age, except under certain
  circumstances.
• Income after retirement is usually lower, so tax
  rate is lower.

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Retirement Plans

• Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• 401(k)

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Retirement Plans

• Types
• Individual Retirement Account (IRA)
• Allows a person to contribute up to 5,000 of
  earnings per year. Contributions can be made in
  installments or in a lump sum. Set up with a
  financial institution like a bank, broker, or
  mutual fund in which contributions may be
  invested in many types of securities such as
  stocks, bonds, money market, and CDs.
• Traditional IRA
• Roth IRA
• 401(k)

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Retirement Plans

• Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Contributions to account are tax deductible (go
  into account pre-tax). Earnings grow tax-deferred
  until withdrawal. Withdrawals are subject to tax.
• Roth IRA
• 401(k)

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Retirement Plans

• Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• Contribution to this plan is not tax-deductible
  (go into account after-tax), the earnings on the
  account are tax-free for qualified distributions.
  The funds from the Roth IRA may be withdrawn
  after age 59 ½ or after 5 years after account
  opening if the account owner is disabled, for
  educational expenses, or for the purchase of a
  first home.
• 401(k)

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Retirement Plans

• Types
• Individual Retirement Account (IRA)
• Traditional IRA
• Roth IRA
• 401(k)
• Allows a person to contribute to a savings or
  investing plan from his or her pre-tax earnings,
  reducing the amount of tax that must be paid.
  Employer matches contributions up to a certain
  level.

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Cost of Credit

• Fees and Interest
• Fees
• Maintenance Fees
• Service Charge
• Late Fees
• (2) Interest
• Variable Rate Interest can change
• Fixed Rates Interest remains the same

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Credit Cards Debt Impact on You

• Less than 40 credit card holders pay off entire
  balance each month.
• Average interest is 18-21 (Adds 18-21 to price
  of items purchased
• There are 3 large credit reporting agencies.
• All lenders will use your credit report as the
  single most important factor in deciding whether
  or not to lend you money.
• Payment patterns stay on your report for 7 years
  (on-time, 30 days late, 60 days late, 90 days
  late, greater than 90 days late).
• Bankruptcy will show on your reports for 10
  years.

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If You Owe...

• 2,000 on a 19.8 APR Credit Card
• A Minimum Means a
• Payment of... Debt Lasting...
• 2................................................
  32 Years
• 3................................................
  12 Years
• 4................................................
  .8 Years
• 5................................................
  .6 Years

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5,000 Card Debt!

• A recent study found that more than ½ of college
  students accumulated more than 5,000 in credit
  card debt while in school.
• Of the 13,000 respondents, 1/3 piled on more than
  10,000 in credit card debt while in school.
• Only 19 said they did not acquire any credit
  card debt while in school.

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Trying to Find Money for College

• Unscrupulous companies guarantee or promise
  scholarships, grants or fantastic financial aid
  packages. Many use high pressure sales pitches at
  seminars where you-re required to pay immediately
  or risk losing out on the opportunity
• Some companies guarantee they can get
  scholarships on behalf of students or award them
  scholarships in exchange for an advanced fee.
  Most offer money back guarantee, but attach
  conditions that make it impossible to get the
  refund.
• Others provide nothing for the students advance
  fee- not even a list of potential sources
• Some tell students theyve been selected as
  finalists for awards that require an upfront
  fee, sometimes asking for the students checking
  account to confirm eligibility then debit the
  account without the students consent.
• Other companies quote only a relatively small
  monthly or weekly fee and then ask for
  authorization to debit your checking account- for
  an undetermined length of time.

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Tell-Tale Lines

• The scholarship is guaranteed or your money back.
• You cant get this information anywhere else.
• I just need your credit card or bank account
  number to hold this scholarship.
• Well do all the work.
• The scholarship will cost some money.
• Youve been selected by a national foundation to
  receive a scholarship.
• Youre a finalist in a contest you never entered.

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The Rule of 72

• To determine about how many years it will take to
  double your money
• 72 divided by
• Years to double
  investment
• Interest rate
• you can get
• To determine the interest rate that will double
  your money in a set number of years
• 72 divided by
• Interest rate
  required
• Years to
• double investment

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How Simple Interest is Calculated

• Dollar Amount x Interest Rate x Length of Time
  (in years) Amount Earned
• Example
• If you had 100 in a savings account that paid 6
  simple interest, during the first year you would
  earn 6 in interest
• 100 x 0.06 x 1 6
• At the end of two years you would have earned
  12.
• The Account would continue to grow at a rate of
  6 per year, despite the accumulated interest

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How Compound Interest is Calculated

• Interest is paid on original amount of deposit,
  plus any interest earned.
• (Original Amount Earned Interest) x Interest
  Rate x Length of Time Amount Earned
• Example
• If you had 100 in a savings account that paid
  6 interest compounded annually, the first year
  you would earn 6.00 in interest.
• 100 x 0.06 x 1 6
• 100 6 106
• With compound interest, the second year you would
  earn 6.36 in interest.
• The calculation the second year would look like
  this
• 106 x 0.06 x 1 6.36
• 106 6.36 112.36

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Income Expense Statement
Income Source Expenses
Wage from primary job Rent/Mortgage
Wage from second job Housing Bills
Gifts Food
Allowance Clothing
Interest on Savings Laundry/Clothing
Investment Earnings Car Payment
Other Public Transportation
Gas
Maintenance
Insurance
Entertainment
Medical
Emergency
Savings
Personal Care
Gifts
Credit/Loan Payments
Other
Total Total
Net Worth________Total Assets________-Total
Liabilities________