BDs Fall Short on Protecting Seniors: SEC, FINRA

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.