There is a T-shirt that says, “Retired—and Spending My Kids’ Inheritance.” The market for that T-shirt is growing each day, as almost forty million Americans are age 65 or older. By 2050, the number of senior investors is expected to more than double to 89 million.
Securities examiners have extremely high expectations regarding the treatment of senior investors. On September 22, 2008, Mary Schapiro, the current chairperson of the SEC, spoke about the importance of protecting senior investors. At the time, Schapiro was Chief Executive Officer of FINRA and was speaking at the third annual Senior Summit. In her speech, Schapiro said, “While firms owe all their customers the same obligations and duties—age and life stage can be important factors, and firms must make sure that the procedures they have in place take these considerations into account.”
The SEC, NASAA, and FINRA issued a joint report on September 22, 2008, entitled, Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Senior Investors: (http://www.sec.gov/spotlight/seniors/seniorspracticesreport092208.pdf). The report defined “senior investor” as retirees and people nearing retirement, rather than defining the term as a particular age group.
Policies and Procedures to Protect Senior Investors
The joint report suggested a number of policies and procedures that can be implemented to protect senior investors, especially in situations where the client is showing signs of diminished capacity. Implementing those policies and procedures can also benefit the advisory firm. Once these are in place, all persons associated with the firm will know what steps to take if they find themselves in a situation where a client appears to have diminished capacity.
Policies and procedures should be based upon particular risks facing an investment advisor as they relate to senior investors. RIAs should analyze the firm’s operations and pay special attention to risks related to senior investors. One objective of this analysis is to strengthen the firm’s infrastructure, so it can work with senior investors in an ethical, respectful, and informed manner. Policies and procedures can provide for heightened supervision and surveillance protecting senior investors. An RIA can also conduct compliance reviews focused on senior investors.
The report suggests escalation procedures where there are signs that a client has diminished capacity or is the victim of financial abuse. These escalation policies and procedures establish the next steps that a firm should take to address these issues. Below are a few of the policies and procedures an advisory firm might adopt when addressing risks related to senior investors.
- IARs are required to document cases where diminished capacity or financial abuse is suspected, and alert a designated member of the firm to assist with handling the situation
- Where diminished capacity or financial abuse is suspected, IARs are prohibited from making securities recommendations to the investor until it is clear that there is no cause for concern
- The firm’s legal and compliance departments should be alerted regarding the situation and should become involved if necessary
- Depending upon state law and the nature of the situation, the firm should consider contacting a government protective services organization
- IARs should communicate with the investor’s emergency contact and maintain frequent contact with the investor to see if the situation gets better or worse
In instances where a senior investor seems to have diminished mental or physical capacity, IARs may end up working with a person who has power of attorney over the client’s account. Policies and procedures can be implemented to:
- identify changes in account activity where a power of attorney has been added or switched to another person;
- require that copies of all account statements be sent to the account holder and the person with power of attorney; and
- set up a process to verify the authenticity of signatures.
Policies and procedures should require the RIA to create and retain records regarding additional steps taken to address the situation.
Other Policies and Procedures to Prevent Harm to Senior Investors
As we saw in Advertising Advisor Services and Credentials, the SEC warned investors about misleading designations that might confuse seniors. In addition, when examiners conduct an examination, they will be paying special attention to older investors’ accounts. The issue of whether investments are suitable is particularly important when senior investors are involved, and examiners will be looking at whether an RIA’s policies and procedures are designed to prevent harm to senior investors. Compliance procedures should detect and correct violations that may have occurred.
We also saw in Advertising Advisor Services and Credentials that NASAA created a model rule protecting senior investors from misleading designations used by state-registered advisors. Many states have adopted the model rule in full or passed their own version of the regulation to protect senior investors.
The fiduciary duty owed by RIAs does not distinguish between young and old clients. Nevertheless, there are a number of best practices which might be used to protect senior investors including the following:
- Maintaining trade blotters that contain account information, such as age, investment objective, and net worth, next to the transactions to facilitate supervisory review
- Conducting a review of accounts to identify transactions or patterns that might indicate a potential problem
- Using exception reports to identify activities and accounts for additional review, such as listing “speculative” as an investment objective for someone over a specific age
- Requiring a heightened review of certain products, such as variable annuity purchases
- Placing age restrictions on certain investments and products
Firms can also require IARs and associated persons to attend training classes on aging issues, including how to identify signs of diminished capacity and elder financial abuse.
The Big Picture
Investment advisors have always paid special attention to senior investors. Older investors usually have more capital to invest, especially if they have finished raising their children and paying for college educations. In addition, older investors typically realize that they are closing in on retirement and must seriously plan for the next stage of their lives. If older investors are taken advantage of by an unscrupulous financial professional, they may not have time to recover their losses.
Securities examiners will deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors. The SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
On February 2, 2011, the North American Securities Administrators Association published NASAA’s Pro-Investor Legislative Agenda for the 112th Congress. The publication articulated state regulators’ desire to protect baby boomers and seniors and stated:
“One of the highest priorities of NASAA’s membership is to protect vulnerable investors from investment fraud. Notwithstanding the multi-front offensive launched by state and federal securities regulators, fraud is on the rise and senior citizens remain a target for unscrupulous scam artists. Given the number of baby boomers moving toward retirement who are watching their hard-earned investment portfolios decline in value, it is important that state securities regulators work together with Congress to protect those who will be the most vulnerable to investment fraud.”
NASAA also expressed its support for the Senior Investor Protections Enhancement Act of 2011, which was introduced by a Florida Congressman. The bill seeks to impose higher penalties for violations of securities laws if seniors who are age 62 or older are targeted.
Whether there is new legislation or not, securities regulators will deal harshly with RIAs and IARs that take advantage of senior investors. Furthermore, a compliance deficiency putting senior investors at risk is likely to receive a higher level of attention from examiners and more severe sanctions than one that impacts younger clients.