The Securities and Exchange Commission is finding a “particular problem” with advertising and marketing materials associated with the sale of variable annuities and equity indexed annuities to retirees and near-retirees as it continues with suitability exams of broker-dealers in several states with large retirement communities.
The exams are part of an increased agency focus “on sales and marketing of securities products to senior citizens and those in the pre-retirement stage, where suitability and marketing must be carefully monitored,” said Mary Ann Gadziala, associate director at the Office of Compliance Inspections and Examinations at the SEC, in comments to compliance professionals Oct. 19.
At the same time, she said, the agency is revising its compliance and examination systems to not only focus on sales and marketing of securities products to senior citizens and those in the pre-retirement stage, but also to “anticipate potential compliance challenges.”
Another new focus in examinations is on money laundering, the official said.
She articulated the agency’s examination priorities in comments “Broker-Dealer Examination and Compliance Developments” Oct. 19 before the national meeting of the National Society of Compliance Professionals.
Regarding money laundering, Gadziala said that “not only is the anti-money laundering program important in combating terrorist financing, but there always seem to be new rules and nuances to address the clever new activities of those who would abuse our financial system for nefarious purposes.”
The problems with the advertising and marketing materials are being discovered as the agency conducts “almost 90″ suitability examinations at broker-dealers in Florida, California, Texas, Arizona, North Carolina and Alabama–states with large retirement communities,” she said.
“We expect that many of our general sales practice and suitability exams in our program nationwide will key in on sales to senior citizens, as well,” she said, noting that rules relating to sales, suitability, and supervision “are areas of focus.”
SEC Chairman Christopher Cox and North American Securities Administrators Association President Patricia Struck announced on May 8 a joint examination initiative of broker-dealers in areas where there are large number of retirees. Involved are officials of the SEC, a number of states and the self-regulatory organizations.
Targets of the exams are broker-dealers, investment advisors, investment companies, transfer agents, clearing agencies, and the SROs.
Gadziala said there are currently about 9,000 registered investment advisors, 990 fund complexes with over 8,000 mutual fund portfolios, and 6,100 registered broker-dealers with 170,000 branch offices and almost 660,000 registered representatives.
In addition, there are also 550 SEC-registered transfer agents and 7 clearing agencies.
The joint examination initiative with the states and SROs involves aggressive enforcement, targeted examinations, and investor education and outreach programs to protect seniors from investment fraud and sales of unsuitable securities, she said.
Gadziala said that in addition to the suitability examinations with respect to seniors, there are also a number of products that the agency as well as compliance officials “should all carefully monitor.”
Some of the products that may raise compliance challenges include 529 plans, variable annuities, illiquid securities, and IPOs, she said.
“And despite all the valuable work that has been done by regulators and the industry, we continue to find some firms that are not providing investors with appropriate breakpoint discounts on mutual fund purchases,” she said.