SEC Investor Advocate Wants Elder Fraud Rule for RIAs

Rick Fleming also lays out at MarketCounsel Summit what third-party audit rule for advisors should look like

SEC Investor Advocate Rick Fleming. SEC Investor Advocate Rick Fleming.

Securities and Exchange Commission Investor Advocate Rick Fleming is “actively” assessing what type of rule the agency should promulgate for RIAs to protect elderly or handicapped customers’ account if there is a reasonable belief of elder fraud.

The Financial Industry Regulatory Authority and the North American Securities Administrators Association have recently proposed rules to place a temporary hold on disbursement of funds or securities from accounts in case of potential fraud.

“I haven’t made an official recommendation to the commission or Congress” on a rule for federally registered advisors to “put a pause on transactions” that look to be elder fraud, Fleming said during comments at the MarketCounsel Summit in Miami Beach on Wednesday, “but that’s something I’m looking into.”

Fleming said that he has also not yet commented on FINRA’s proposal, which the self-regulator released for comment in mid-October. The comment period on FINRA’s plan expired Nov. 30. The comment period on the NASAA plan expired Oct. 29.

Fleming said that his main worry regarding elder fraud is that when looking at demographics, “you have a generation that’s starting to retire, with lots of elderly and a much greater number of seniors suffering from diminished capacity.” What’s more, he added, “boomers are going to be retiring with greater control of their retirement assets than previous generations have. So now we have people retiring that have built up a nest egg that will have control over those assets, at the same time they have diminished capacity issues. I think you could have a recipe for real problems.”

As to advisor exams, Fleming said that while Congress has appropriated some more funds to the agency — and the agency is now using some of those funds to “take on a new crew of examiners”—he’s always supported the idea that the agency should be allowed to assess user fees on advisors to boost the frequency of exams.

“Quite a ways down” his list of how to boost advisor exams would be third-party exams, which he said the agency “will likely move on.”

If the agency does adopt such a proposal, Fleming said such a rule should very specificially list the auditor’s duties “objectively as possible so that we can assess their job,” and also require “asset verification” whether the advisor has custody or not. “After Madoff, SEC has ramped up asset verification, which is good,” Fleming said.  

Third-party examiners should also have “some sort of regulatory or review structure over top of them,” Fleming added, “because there is a conflict between the firm being audited and the auditor.”

--- Check out DOL Out of Bounds With Fiduciary Rule: Bachus, Kotz on ThinkAdvisor.

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