From the August 2009 issue of Boomer Market Advisor • Subscribe!

What happens after the free lunch

Investigative wheels sometimes turn slowly, but they do turn. While you've no doubt heard of the increased regulatory scrutiny of so-called free lunch seminars, the SEC has finally made its move.

In September 2007, the SEC, FINRA and NASAA issued a report titled "Protecting Senior Investors: Report of Examinations of Securities Firms Providing 'Free Lunch' Sales Seminars," in which the regulators expressed concern about "unscrupulous and abusive sales practices and investment frauds targeted towards senior investors."

On June 30, 2009, the Commission filed an administrative proceeding alleging that a registered broker/dealer, several representatives and supervisors committed securities fraud in the use of free lunch seminars at restaurants in South Florida in the sale of unsuitable variable annuities to senior citizens. The lure was a free lunch, which the SEC's new director of enforcement characterized as "low-tech bait for their high-scale scheme."

The SEC charges that three brokers and one broker/supervisor offered and sold variable annuities at seminars set up to tout the firm's financial services and, sometimes, variable annuities in particular. The action alleges that in one-on-one sales meetings with the customers after the seminars, the reps made various representations about the securities, but omitted to disclose, in the context of variable annuities, the material facts that there were early withdrawal fees, the guaranteed preservation of principal was triggered only by the death of an annuitant, and the value could fluctuate and decline until the annuitant's death.

The SEC also accuses the broker/dealer's president with failing to implement the firm's supervisory procedures in a way that reasonably would be expected to detect and prevent the representatives' violations of federal securities laws. The charges also include that the chief compliance officer and two local supervisors failed reasonably to supervise the three brokers with a view toward detecting and preventing the violations.

Regulators' criticisms of these seminars as set forth in their 2007 report - in other words what not to do when putting one on - include the use of advertising and sale materials with misleading or exaggerated or unwarranted claims, that attendees may not understand that the seminar is sponsored by an undisclosed company with a financial interest in product sales, firms poorly supervise the sales seminars, and registered representatives or investment advisors holding the seminars recommend investments that do not appear suitable for individual customers.

The underlying concern of the regulators is that the so-called free lunch often offers an attractive inducement to attend, target attendees are seniors, the seminars are designed to sell and many broker/dealers do not submit the sales materials to FINRA for review as required under FINRA Rule 2210(c)(2)(A). The 2007 report also set forth what the regulators found to be effective compliance and supervisory practices for providers of "free lunch" sales seminars. The recommended best practices all focus on establishing processes for review and supervision of the seminars, the advertising materials, the sales literature and a standard outline for the program presentation, as well as approval of any seminar guest speakers.

Moreover, firm monitoring and review figure prominently into the effectiveness of compliance.

Securities regulators now have made clear that they will put in the display case, and eat for lunch, those who misuse or abuse free lunch sales seminars.

Jacob S. Frenkel is a partner in the law firm Shulman, Rogers, Gandal, Pordy & Ecker, P.A. in Rockville, Md. He is a former SEC Enforcement lawyer and former federal prosecutor who chairs his law firm's Securities Enforcement and White-Collar Criminal Practice Group.

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