And just what was the prevailing opinion on suitability and credentials, something which precipitated this fall’s entire season of self-reflection? SEC Chair Christopher Cox’s own presentation to the Senate committee offered some clues:
Protecting Senior Citizens from Investment Fraud
by Chairman Christopher Cox
U.S. Securities & Exchange Commission
Before the United States Senate Special Committee on Aging
September 5, 2007
Chairman Kohl, Ranking Member Smith, and Members of the Committee:
I am pleased to be here today to discuss the important work the Securities and Exchange Commission is doing to protect investors, including our nation’s senior citizens. Financial fraud against the elderly is a topic that I, my fellow SEC Commissioners, and the SEC staff care about deeply.
Protecting senior investors is one of the most important issues of our time – and I’ve made it one of my highest priorities since becoming Chairman of the SEC. Some census numbers released earlier this year give us a sense of the magnitude of this issue. In 2006, there were more than 37 million Americans age 65 and older, accounting for 12 percent of the total population. There were five million people age 85 and older, nearly two million in their nineties, and over 73,000 Americans age 100 or older. Longevity is now the norm in our country, and for that we can all be grateful – but it also means we need to be prepared. Every year, as medical miracles allow us to enjoy a larger population of senior citizens, the task of protecting retirement nest eggs grows in importance.
In the 21st century, Americans will live significantly longer than their parents – and longer than most of them planned for their retirement. A number of older Americans will face difficulties in making their retirement assets last an extra decade or more. It is estimated that Americans 65 and older hold $15 trillion in assets, an all-time record. Yet nearly a third of that group say they do not have enough money even to meet their basic living expenses. Those with sufficient funds to invest may be tempted to take higher risks with their investments in order to achieve higher returns, instead of switching into low-yield, safe investments like the retirees of yesteryear. That will make them prime targets for scam artists and securities swindlers.
Just as the notorious Willie Sutton described the bank robber’s propensity to “go where the money is,” securities fraudsters will follow the money, too. Households led by people over 40 already own 91 percent of America’s net worth, and Americans aged 55-64 have the highest income and the highest net worth of any age group, according to the Federal Reserve’s Survey of Consumer Finances. As the baby boomers continue to age, it will be a very short while before the vast majority of the nation’s savings are in the hands of America’s elderly.
We have long known that the elderly are especially vulnerable to the financially devastating impact of frauds and scams, and there are several reasons for this. A recent study by a researcher from the Federal Reserve and a professor at the University of Texas is only the most recent of many to suggest that one reason is the declining mental faculties of senior investors, which negatively impacts their personal financial management.1 And investment fraud hurts seniors more than any other group, because when seniors lose their life’s savings, they lack the time to rebuild a nest egg.
Taking care of my own parents’ finances, I have grappled with this important issue on a very personal level. Before my mother died a few years ago, she was pestered by a seemingly endless barrage of annuity schemes and mortgage offers. Despite the fact that she was suffering from throat cancer and could barely speak, she received repeated unsolicited sales pitches over the phone and even in person. Even though my father was suffering from Alzheimer’s disease, the brokers preyed upon him as well.
The products these brokers were pushing weren’t just unsuitable, but affirmatively harmful to anyone in my parents’ circumstances. The annuity products they purchased locked up their modest savings with huge penalties. I particularly remember one persistent salesman who called more than a dozen times, pestering my mother to refinance her safe, low-rate 30-year mortgage with a short-term loan that had a balloon and a teaser rate. That would have cost my parents their home when it came due. Even though I personally warned him never to call her again, he continued.
Both during my time in Congress and since I’ve become Chairman of the SEC, I’ve heard hundreds of similar stories from constituents and colleagues. It is heartbreaking to see a loved one ripped off by underhanded tactics that may comply with the letter but not the spirit of the law. That’s why, at the Commission, we’re always doing our best to protect all investors as if they’re our own mother or relative.
The SEC is the investor’s advocate – and when it comes to senior investors, we have a special responsibility. We need to do everything we can to ensure that seniors are well-educated about the important choices they make, and that they are treated fairly and appropriately by brokers, investment advisers, and others in the securities industry. And we need to see that anyone who takes advantage of seniors through investment scams is brought to justice swiftly. Since I became Chairman, we have been attacking the problem from a number of angles – from investor education, to targeted examinations, to aggressive enforcement efforts. In this initiative, we have partnered with other organizations.
Working Effectively with Partners
Helping our nation’s seniors is not a task that can be undertaken solely by the federal government. Efforts by multiple parties are necessary to protect them from investment fraud, as well as to equip them with the necessary skills to identify and avoid possible investment scams. That’s why the SEC has initiated efforts to partner with other organizations, such as the AARP, the Financial Industry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA) on seniors-related initiatives.
Working together, we held our first Seniors Summit in July 2006 to coordinate our efforts to protect older Americans from investment fraud and abusive sales practices.
At the 2006 Summit, the NASD Investor Education Foundation unveiled a new study on investment fraud. The study explored the reasons the elderly are victimized by fraud, and offered some very interesting findings. Fraudsters, the study found, use hundreds of sophisticated social influence tactics to get their victims to sign on and often bombard their victims using a combination of these tactics. Among the most common social influence tactics are “phantom fixation” (the con artist dangles the prospect of wealth or prizes to tantalize the victim), “social consensus” (the con artist convinces a victim that peers, neighbors, and other respected people in the community are all making this particular investment), “scarcity” (the con artists makes the investment seem rare so the victim will feel pressured to act quickly), and “reciprocity” (the con artist provides a small favor, such as a free lunch, to induce the victim to return the favor in kind by buying the investment).
At the 2007 Seniors Summit, which will be held next week on September 10th, we will gather even more of the nation’s resources to protect seniors. One important part of the event, open to the public, will be a “lunch and learn” program focused on how to combat investment fraud by understanding the persuasion tactics most often used by fraudsters who prey on seniors. This is one lunch seminar that won’t be a come-on to deceptive sales tactics.
But to shine a spotlight on how free meals are used as a lure to attract senior investors, we will kick off this year’s event with a presentation of the findings of the SEC’s examination of “free lunch” sales seminars aimed at seniors, which has been a joint effort among federal and state law enforcement. We will also discuss how best to educate seniors about investments and hear about recent enforcement actions to address fraud on seniors.
A major part of the Commission’s program to prevent fraud against seniors is investor education. Indeed, investor education and outreach are critical parts of every aspect of the Commission’s work. In this regard, the Commission has sought to arm senior investors with information that they can use to identify and avoid potential fraudulent investment schemes, to deal with aggressive sales tactics, and to assess the financial products available to them. These efforts are aimed not only at seniors, but also their caregivers – as well as pre-retirement workers, who are encouraged to plan for contingencies later in life.
In the last year, we’ve placed significant emphasis on investor education initiatives directed towards seniors, and partnered with other regulators and consumer organizations, including AARP, to sponsor over 40 events to educate senior investors across the U.S. So far, more than 50,000 seniors have attended.
We have also devoted a portion of the SEC website specifically to the issues facing senior investors ( www.sec.gov/investor/seniors.shtml ). The site provides links to critical information on investments that are commonly marketed to seniors, and detailed warnings about common scam tactics. Realizing that not all seniors are web savvy, and many are unable to read the small print on computer screens, we have also packaged all of our online senior-related materials into a single hard-copy Seniors Guide with large, easy to read fonts. The SEC’s Office of Investor Education and Advocacy will mail the 108-page investment fraud guide to any investor, free of charge, upon request.
Earlier this summer, I announced a significant expansion of the Office of Investor Education and Advocacy (OIEA). A new focus for OIEA will be assessing the views and needs of retail investors, including seniors, and ensuring that those views inform the Commission’s regulatory policies and disclosure programs. The new Director of OIEA, Kristi Kaepplein, is bringing new energy and ideas to the Commission’s longstanding program of protecting seniors and other individual investors.