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Regulators Battling Elder Abuse Say Free Lunches Aren’t So Free

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The Securities Industry and Financial Markets Association shared some harrowing facts about the aging American population and the continued threat of financial exploitation of these seniors.

Nearly one in five Americans aged 65 or older have been victimized by financial fraud. However, it is estimated that only one in 44 cases of financial elder abuse is reported.

With roughly 10,000 Americans turning 65 every day for the next 15 years, these problems are not going away any time soon.

During a panel discussion at SIFMA’s Senior Investors Forum on Tuesday in New York, representatives from three different regulatory powers – the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority’s Board and the North American Securities Administrators Association – discussed how they are responding to the growing threat of elder abuse.

Joseph Borg, director of the Alabama Securities Commission and prior two-time president and current board member of NASAA, says the fight against financial exploitation of seniors still has a ways to go.

“This is an emerging area,” he said. “This area of financial exploitation of seniors is at the stage now where drunk driving was 20 years ago. No one had drunk driving issues 20 years ago but look what happened when [Mothers Against Drunk Driving] got involved and now nobody puts up with drunk driving anymore. Financial exploitation of seniors is where drunk driving was 20 years ago and it’s going to take time.

Here are three areas where regulators see room for improvement:

What’s So Wrong With a Free Lunch?

Free lunch programs, which are no new marketing technique, are still a problematic area for seniors that regulators continue to target.

Borg said free lunch programs or seminars have “always been a rather big issue” for NASAA state regulators.

“We see it on a local level,” he said. “We’re usually the first ones to get the call, ‘Hey I got this free lunch seminar.’ I know in our state and in other states we’ve had things like [a program] where we actually had folks got these notices, go and take notes for us.”

Borg called them “undercover agents.”

Because of this and other regulations, Borg has seen a shift in the free lunch programs.

“We’ve seen a definite shift – I think most of the lunch programs we see now that cause us problems are probably independent insurance agents selling certain products or whatnot and perhaps out-and-out frauds on the other end of the spectrum,” Borg said. “I think there’s’ been less of the lunch programs by what I would call the regulated communities. And I think that has to do with the recognition of the supervision issues and script reviews and things of that nature. I think that’s been a lot more controlled.”

What Borg has also seen is a shift from using the lunch seminar as a primary marketing tool to now using it as an introduction to identify and target specific seniors on a one-on-one basis. He called this a “real danger.”

From the SEC perspective on free lunches, Goodman implied it continues to be an important issue.

“We have seen during our examinations a strong correlation between using the free lunch seminars and successfully selling the high-commissioned products,” Goodman said. “We also see those used primarily to attract senior investors and often if you look at the invitation – although it might not be problematic on its face – it stresses things that we all suspect are not the real focus of the invitation. It’s talking about ‘How to Maximize Social Security’ and ‘How to Engage in Estate Planning’ that might have very little to do with the products that are actually being sold.”

If the SEC sees that free lunch seminars are being heavily used it will conduct an exam.

“I think there is an undeniable correlation between conducting [free lunch programs] and higher incidents of problematic behavior,” Goodman said. “I’m sure they’re used in a lot of cases as a very legitimate way of getting before the customers that one would need to get before. But we have used them as a targeting technique for examinations and we do see that correlation.”

Designs on Senior Designations

One of the things that regulators focus on heavily is marketing. And, senior designations or senior-specific titles is a way that some firms market their services that could be an indicator of a potential problem.

Kevin Goodman, national associate director at the U.S. Securities & Exchange Commission where he runs the Office of Broker-Dealer Examinations, discussed how the SEC is targeting senior designations.

“I don’t remember how many different designations we saw used in our examinations but it was well, well into the double digits,” Goodman said. “The more impressive sounding the designation and the less tied it was to actual education or accomplishments – the more problems we saw associated with the people that use them.”

Goodman said the SEC uses senior designations to target “particular registered reps for examinations.”

“There’s nothing in-and-of-itself wrong with using a senior designation, but when they start to really exaggerate what it means to have that credential, that’s got a huge correlation with problematic behavior,” he said.

Meanwhile, FINRA’s senior hotline has received 1,700 calls since it got instituted back in April. And, according to Ann-Marie Mason, director and counsel in the litigation and policy unit of the Regulatory Operations Department of FINRA, a number of those calls question a brokers designations.

“A large number of those calls are centered around, ‘This is what my broker told me. These are the designations he or she has, how can I find out if my broker has a nick on his record?’” Mason said. “I think one of our focuses will be – and has been and will continue to be – the use of senior designations. Just being informed by these 1700 calls, folks don’t understand it. They don’t’ understand what it means. There’s no common nomenclature. There’s no common educational requirements surrounding any of these things so I think it will continue to be a focus for FINRA.”

In 2008, NASAA adopted a rule on the use of senior-specific certifications or designations, and according to BORG, most states have passed a rule to that effect.

“For example, when we do find [a certification that has no basis], that is going to trigger a regulatory inquiry and chances are a bar from the industry – a suspension or a bar or some trigger,” Borg said. “I will say that our experience in the questionable certifications or designations has been a lot more in the smaller broker areas or the IA sector or the unlicensed sector.”

Borg believes the problem still exists and will continue to because it is used as way to distinguish oneself against the competition from a senior investor’s perspective.

“What we’re seeing when we talk to folks that have been approached by these folks [with senior designations] is that they’re talking to maybe one or two financial professionals and the kicker is that the reason they went with B as opposed to A is because [the financial professional] started talking about ‘I’m really certified to deal with elder Americans,’” Borg explained.

No Rest on Targeting Pause Laws

Ira Hammerman, executive vice president and general counsel of SIFMA, described how SIFMA isworking with various states to advocate for legislation to basically have a “Pause Law.”

“Give firms the protective ability to call “Time Out” if the customer [or] the senior wants to transfer money out of the account by way of example the famous Nigerian lottery scam or other scams,” Hammerman explained during the panel. “It’s great that states like Washington and Missouri and Delaware have already moved in that direction but there’s more work to be done.”

Both NASAA and FINRA have recently proposed their own versions of a “Pause Law.”

NASAA’s proposed model act addresses issues faced by broker-dealer and investment advisor firms and their employees when confronted with suspected financial exploitation of seniors and other vulnerable adults. It is out for public comment until the end of the month.

Borg said the proposal “basically provides immunity for a firm that reports the suspicion of a fraud of a senior” and share it with Adult Protective Services. It would also put a 10-day hold of dispersion of funds, with the possibility to extend this.

In mid-September, FINRA issued for public comment a new rule that would allow firms to place a temporary hold on disbursement of funds or securities from an elderly or mentally/physically handicapped customer’s account if there is a reasonable belief that the person is being financially exploited.

“We are seeking to amend one of our current rules (4512) to require member firms to get trusted contact information,” Mason said. Adding, “This rule is put into place such that it gives the broker-dealers an opportunity to notify a trusted contact if they suspect that there is some type of financial exploitation or that Grandma may not be doing well today.”

Mason said FINRA is interested in hearing people’s comments on the proposed rule, specifically about the length of pause, notification period, and any adverse economic impacts or litigation risks.

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