Security regulators last week continued to question some of the ways investment firms and professionals represent their products, their sales tools and themselves, particularly to seniors.
Less than a week after issuing a sharp attack on allegedly deceptive professional titles used by producers selling to older investors, the Securities and Exchange Commission took these actions:
Approved a new rule obliging broker dealers to be sure deferred variable annuity products they sell to seniors are right for their needs (see related stories on page 6).
Cracked down on the disguising of product sales pitches as retirement seminars.
In conjunction with other regulators, the SEC issued a report accusing some broker-dealers, investment advisors and other financial services firms of using so-called “free lunch” seminars to pressure seniors to buy financial products, some of which were inappropriate to their needs.
The report was the result of an investigation last year by the SEC, FINRA and regulators in Florida, South Carolina, Alabama and other states with large senior populations, according to SEC chairman Christopher Cox.
In a briefing on the report held Sept. 10, Cox faulted many seminar hosts for inducing individuals to attend by offering free lunches, golf, vacations or other inducements. Not only are such free-lunch meetings disguised sales presentation but some also promote financial products deemed by regulators to be unsuitable for many seniors, including deferred VAs, real-estate investment trusts or speculative securities, Cox charged.
Examiners for the SEC and some state regulators found 59% of free-lunch seminars they investigated provided investment information that was misleading, exaggerated or downright wrong, according to the report.
In addition, 50% of the meetings were promoted by ads featuring exaggerated or deceptive advertising claims, such as “Immediately add $100,000 to your net worth,” according to the report, issued by the SEC’s Office of Compliance, Inspections and Examinations in conjunction with the North American Securities Administrators Association and the Financial Industry Regulatory Authority (FINRA), both in Washington.
Of seminars probed by examiners, 23% involved possibly unsuitable recommendations, such as an illiquid investment suggested to an investor who would soon need the cash. In addition, 13% of seminars appeared to be downright fraudulent, the report charged.
The questionable practices were referred for possible disciplinary action by the SEC, FINRA or state regulators, according to Cox.
The report urged financial firms to explain in their promotional material when free-lunch seminars are really aimed at selling financial products. They should also disclose when they are backed by any company with a financial interest in the products being presented, it stated.
Along with misleading professional designations, misleading free-lunch seminars were among the most troubling practices of advisors selling financial products to seniors, added NASAA president Joseph Borg, who also spoke at the briefing.
“The most effective weapons against fraud are vigorous enforcement and investor education,” said Borg, who is also director of Alabama’s Securities Commission.
In a related move, the SEC joined with the Hawaii securities commissioner last week to charge a Honolulu advisor with offering free lunch seminars to lure seniors to invest inappropriately in equity indexed annuities.
The regulators filed separate actions against Mark K. Teruya and his company, Senior Resources of Hawaii, Honolulu, asking his firm to cease using breakfast and dinner seminars to attract retirees, then arrange for follow-up meetings with its sales reps.
During the follow-up meetings, Teruya induced clients to sign blank forms by misrepresenting the purpose of the forms, then using the forms to sell the senior’s security holdings without their knowledge, the officials alleged.
Teruya generated $2 million in commissions by selling the securities and investing the proceeds in EIA contracts, they charged.
Teruya was not available to comment.
This article includes additional reporting by Allison Bell, senior editor of National Underwriter.