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BDs Fall Short on Protecting Seniors: SEC, FINRA

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An examination of 44 broker-dealers by the Securities and Exchange Commission and the Financial Industry Regulatory Authority has found that while most seniors are purchasing simpler products like open-end mutual funds and variable annuities, some BDs are recommending unsuitable products to seniors.

Also, some reps could be violating FINRA’s rule on communications with the public by not tracking which reps use a senior designation, the regulators said.

In their National Senior Investor Initiative joint study released Wednesday, the SEC’s Office of Compliance Inspections and Examinations as well as FINRA staffers assessed whether broker-dealers were recommending riskier and possibly unsuitable securities to senior investors looking for higher returns or that such senior investors may be making financial decisions without fully appreciating the risks associated with those recommendations.

The coordinated exams of the 44 BDs were conducted in 2013 and zeroed in on how firms conduct business with senior investors as they prepare for and enter into retirement. The exams looked at investors age 65 or older.

The exams also focused on the suitability of recommended investments, training of brokerage firm reps, marketing, communications, use of designations such as “senior specialist,” account documentation, disclosures, customer complaints and supervision.

SEC and FINRA staff found that the following were among the top eight revenue-generating securities at the examined firms based on sales to senior investors:

(1) Open-end mutual funds at 77% of the firms;

(2) Variable annuities at 68% of the firms;

(3) Equities at 66% of the firms;

(4) Fixed income investments at 25% of the firms;

(5) Unit investment trusts and ETFs at 20% of the firms;

(6) Nontraded real estate investment trusts at almost 20% of the firms;

(7) Alternative investments such as options, business development companies, and leveraged and inverse ETFs at approximately 15% of the firms; and

(8) Structured products at 11% of the firms.

The regulators noted that with the Social Security Administration estimating that each day for the next 15 years, an average of 10,000 Americans will turn 65, the report is designed to help broker-dealers “assess, craft or refine their policies and procedures for investors as they prepare for and enter into retirement.”  

The report concludes that while mutual funds, variable annuities and equities were most often purchased by senior investors, more complex securities such as UITs, REITs, alternative investments and structured products were also purchased by seniors, but such purchases were less frequent. “Due to the wide-ranging nature of these investment products, it is critical that senior investors are fully informed of the features of any security they are purchasing, including the potential return and associated risks,” the report states.

However, SEC and FINRA staff found evidence indicating that 34% of the firms made one or more potentially unsuitable recommendations of variable annuities. “One of the most prevalent factors contributing to questions about these recommendations was the appropriateness of exchanges, especially in light of fees,” the report states.

Also, about 14% of firms made potentially unsuitable recommendations to purchase alternative investments, which the regulators state can be difficult to value, involve high purchase costs, have limited historical data, and often lack liquidity.

Overall, the report states that firms made more potentially unsuitable recommendations for nontraditional securities such as variable annuities, structured products and REITs than for more traditional securities such as open-end mutual funds, equities and fixed income investments.

As to training reps about senior-related issues, the exams found that more than 77% of the firms incorporated training specific to senior investors and senior issues in their training plans, typically on an annual basis, to educate employees on the needs of senior investors. Approximately 13% of the firms specifically told their reps to notify compliance or supervisory personnel if they suspected diminished capacity or elder financial abuse. In addition, 64% of firms reported conducting general training classes and/or classes to educate firm reps on “sensitive matters relating to senior investors.”

Almost 64% of the examined firms allowed their reps to use senior designations in their sales efforts, and these firms collectively permitted the use of 25 different senior designations.

The designations used entailed a wide range of qualifications, some of which included an approved curriculum, continuing education requirement, and recognition by an organization that is accredited by another institution. Some firms prohibited the use of senior designations that did not meet certain minimum curriculum and continuing education requirements.

For example:

Sixty-four percent of the designations that firms allowed representatives to use required continuing education for the financial professional to maintain the title.

Forty-four percent of the allowed designations were not recognized by any independent accrediting organization.

Of the 28 firms that allowed senior designations, 14% did not track which representatives had a senior designation, which the report states may violate FINRA’s rule on communications with the public (FINRA Rule 2210) and FINRA’s rule on supervision in effect at the time of the examinations (NASD Rule 3010).

“These rules require firms to know how their representatives hold themselves out to the public,” the report states.

As to marketing and communications with the public, the report found that firms appeared to “generally comply with content standards and rules requiring firms to have written policies and procedures,” although staff noted a “few instances” of potentially misleading advertisements and the potential failure to properly supervise the content of radio shows as well as the potential failure to comply with a firm’s written supervisory procedures for seminar materials.

SEC and FINRA staffers also reviewed the types of information firms collected when opening accounts for senior investors to assess compliance with applicable rules and found that about 98% of the firms collected the information for new customer account records required by the rules, with at least 30% of the firms obtaining more information than what is required.

— Check out Protecting Grandma From Elder Abuse on ThinkAdvisor.


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