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Portfolio > Mutual Funds

SEC Letter OKs Disbursement Delay if Elder Fraud Suspected

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The Securities and Exchange Commission’s Investment Management division told the Investment Company Institute in a Friday no-action letter that it would not bring an enforcement action against a mutual fund or its SEC-registered transfer agent for temporarily delaying for more than seven days the disbursement of redemption proceeds from the fund due to suspected senior financial exploitation.

ICI told the SEC that given its relationship with direct-at-fund shareholders, “the fund’s transfer agent may be best positioned to detect financial exploitation of certain of the fund’s senior and other vulnerable adult shareholders,” and that the mutual fund transfer agents “may wish to protect Specified Adult shareholders from financial exploitation to the same extent that broker-dealers may do so under FINRA Rule 2165.”

ICI also pointed to the North American Securities Administrators Association’s decision in February to adopt a model act designed to protect vulnerable adults from financial exploitation, including allowing broker-dealers or advisors to impose an initial delay of disbursements from an account of an eligible adult for up to 15 business days if financial exploitation is suspected.

“Based on your facts and representations, we would not recommend enforcement action to the SEC against a mutual fund or its SEC-registered transfer agent under Section 22(e) of the Act if, in accordance with the terms and conditions described in your letter, the transfer agent, acting on behalf of the mutual fund, temporarily delays for more than seven days the disbursement of redemption proceeds from the mutual fund account of a Specified Adult held directly with the transfer agent based on a reasonable belief that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted,” Doug Scheidt, IM’s chief counsel, wrote in the no-action letter.

Tamara Salmon, ICI’s associate general counsel, told ThinkAdvisor in a Monday email that ICI “is very pleased that the Commission has provided our members the ability to protect senior investors in mutual funds from financial abuse and exploitation.”

As a result of the SEC’s action, Salmon said, “ICI members now have a new tool to safeguard seniors’ accounts from unscrupulous conduct designed to separate senior citizens from their retirement assets.”

ICI told the SEC in its letter that mutual funds are the investment product of choice for senior investors, with approximately 43.9% of all U.S. households — or about 54.9 million — owning mutual funds in mid-2016.

Approximately 48% of households headed by a baby boomer (born between 1946 and 1964) owned mutual funds in mid-2016, accounting for 38% of mutual fund-owning households and 50% of households’ mutual fund assets.

And approximately 33% of Silent and GI Generation households (born between 1904 and 1945) owned mutual funds in mid-2016, accounting for 11% of mutual fund-owning households and 15% of households’ mutual fund assets.

“These statistics are not surprising when one considers that 92% of mutual fund investors invest to save for retirement,” ICI stated. “This being the case, we believe it necessary for the industry and regulators to work together to protect from financial exploitation the mutual fund assets senior and other vulnerable adult investors depend upon for retirement.”

— Check out New York Halts $5M Hedge Fund Scheme Targeting Elderly on ThinkAdvisor.


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