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Regulation and Compliance > Federal Regulation > SEC

Sticking Up for Senior Investors

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As the market turmoil rages on, one group of clients–seniors–don’t have the luxury of being able to take some hits to their portfolios now with the hope of gaining it back in years to come. As SEC Chairman Christopher Cox said during the Commission’s third Senior Summit last month: “Looking past the current market turmoil to the long run isn’t an option” because older Americans need access to their investments now.

Indeed, the issue of helping the oldest among us protect their retirement nest eggs becomes even more pressing when we recall that baby boomers control upwards of $13 trillion in household investable assets, or more than 50% of total U.S. household investment assets. U.S. Census projections as of August 2008 also show that at year-end 2007, approximately 38 million people were 65 or older. By 2020, that number will reach almost 55 million.

During the past two years, the SEC has brought more than 50 enforcement actions against people perpetrating frauds that the agency says were harming retirees and older investors. The most recent case–levied by the SEC in mid-September–charged an unregistered broker/dealer and his company, Global Marketing Consultants, based in Loveland, Colorado, with misappropriating funds from seniors and other investors through two investing schemes. The ongoing threat of fraud against senior investors coupled with the fact that there’s such a large number of seniors–with lots of cash to be looked after–compelled the SEC’s Office of Compliance Inspections and Examinations (OCIE), the North American Securities Administrators Association (NAASA), and the Financial Industry Regulatory Authority (FINRA) to conduct a joint study of how financial services firms are honing their compliance, supervisory, and other practices to best serve senior investors.

The report (available at, which the groups released at the Summit in late September, notes areas of concern that firms are addressing such as meeting regulatory obligations when assessing appropriate investments for investors at different life stages, marketing retirement products to investors who are at or near retirement, as well as recognizing signs of diminished capacity or financial abuse. The groups also note in the report that they define “senior investor” as someone who is retired or is near retirement, not by a specific age. The report also highlights the fact that not all firms are alike, so one practice may make sense for one firm, but not another.

Senior Specialists

When it comes to restructuring their supervisory and compliance procedures, some firms are designating employees within the firm–from compliance, legal or management–to focus on senior-related issues. Firms are also reviewing the adequacy of their policies and procedures as it relates to life-stage issues–which refer to the key milestones in investors’ lives. Daniel Sibears, executive VP of member regulation programs at FINRA, whpoke on a panel during the Summit, said one area not mentioned in the report is that firms are providing training for staff that allows them to come up to speed on areas where regulators are focusing their efforts. For instance, he said, FINRA is now studying unauthorized switching in variable annuities.

Joe Borg, a NASAA director and director of the Alabama Securities Commission, who sat on the panel with Sibears, said firms are also “improving their communication with seniors.” This is vital, added David Tittsworth, executive director of the Investment Adviser Association, another panel member, because “if you get the communication right with the client, things fall into place; if not, things break down.” Firms are encouraging seniors to keep an emergency contact on file with their advisor, like a trusted family member, and are also talking up the benefits–and pitfalls–of having a power of attorney.

Scenario Training and the Web

Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, pointed out during her remarks that firms are doing “quite a lot of training using a variety of techniques”–including using real-life scenarios–to help their employees brush up on senior-related issues. As part of the training efforts, firms are creating Web-based modules, the report says, that focus on issues like diminished capacity, suitability, communicating with senior investors, advertising, and the use of professional designations and elder abuse. NASAA’s Borg noted that since the SEC’s sweep targeting senior seminars, many firms have pretty much done away with such seminars. Firms are now conducting their own seminars that teach securities professionals how to put together an appropriate seminar, and often have compliance personnel attend the senior-related events.

Recognizing signs of diminished mental capacity is important for advisors, particularly since they face potential liability if they fail to address this issue, so firms are stepping up their training in this regard. The report notes that securities professionals, of course, “cannot take advantage of investors in a manner that would violate an advisor’s fiduciary duty to the investor or a securities broker’s responsibility to follow just and equitable principles of trade.” Firms, the report says, “have an obligation to supervise employees to prevent this behavior.”

Jason Karlawish, associate professor of Medicine and Medical Ethics at the University of Pennsylvania Medical School, was on hand at the Summit to talk specifically about detecting diminished mental capacity. One of the biggest red flags of diminished capacity, he says, is changes in a person’s ability to perform day-to-day activities. Can they use the telephone? Do they know the day and date? Are they taking their medication when they should? Do they open their mail and pay their bills on time? It can range from very subtle changes in behavior, he said, to more complex issues, like managing money. Indeed, because advisors are on the front line in dealing with seniors, the report notes the signs of diminished capacity that they can look for. Those signs would include the investor has trouble speaking or communicating; they are unable to appreciate the consequences of decisions; and they make decisions that are inconsistent with their current long-term goals or commitments.

Another area firms are focusing on is ensuring seniors are offered appropriate investments. Since investors of the same age have differing risk tolerances and investment profiles, they should be offered different investments. What’s more, an investor’s age and life stage, the report notes, are also important in discerning the right investment. Richards of the SEC noted that firms “are targeting supervisory review policies to clients over a certain age.” Specifically, she said, “firms are assigning investment objectives to each product,” which helps the advisor in selecting the appropriate one. Also, firms are adopting policies for sales of variable annuities, with one firm, Richards noted, designating “a team of experts to review variable annuity transactions.”

The sheer number of seniors today and in the future highlights the importance regulators, and advisors, will place on making sure senior investors are protected.


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