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Regulators Ramp Up Scrutiny of Brokers in an Effort to Protect Senior Investors

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Apr 30th 2015
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Federal regulators continue to heighten their scrutiny of investment advisors and brokers who offer financial products and services to senior investors, and a complaint filed against a New York-based brokerage and money-management firm on April 27 is just one example of the crackdown.

The complaint filed by the Financial Industry Regulatory Authority (FINRA) against Avenir Financial Group, CEO and Chief Compliance Officer Michael Clements, and representative Karim Ahmed Ibrahim (who also goes by the name Chris Allen) alleges misrepresentation about the firm’s financial health and fraud in the sale of equity or promissory notes, primarily to senior investors.

A call to Avenir’s offices in an effort to reach Clements or his attorney for comment was not returned.

The action follows FINRA’s launch of a securities helpline for seniors a week earlier. And in mid-April – in conjunction with the US Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations – FINRA released a report indicating serious concerns about unsuitable investment recommendations made to senior investors.

The joint report, National Senior Investor Initiative, reveals that representatives of the Consumer Financial Protection Bureau, the AARP Education and Outreach Group, and state regulators from Florida, Colorado, California, Texas, and North Carolina believe finance professionals have pitched the wrong financial products to older investors.

The improper recommendations targeted high-risk securities, such as the sale of complex investments. Regulators indicated particular concern for the practices in areas with large retiree populations.

“Staff is concerned that, after a lifetime of accumulated savings, senior investors may meet the financial and risk threshold requirements to invest in more complex financial securities and that broker-dealers may be recommending unsuitable transactions to these senior investors or may not be providing proper and understandable disclosures regarding the terms and related risks of those recommended securities, particularly nontraditional investments,” the report states.

As a result of those concerns, the SEC Office of Compliance Inspections and Examinations and FINRA evaluated how firms conduct business with senior investors, who are identified as age 65 or older, in a series of 44 examinations in 2013.

“Seniors are more dependent than ever on their own investments for retirement,” Andrew Bowden, director of the SEC Office of Compliance Inspections and Examinations, said in a prepared statement. “Broker-dealers are developing and offering a variety of new products and services that are intended to generate higher yields in a low-interest-rate environment. It is imperative that firms are recommending suitable investments and providing proper disclosures regarding the related terms and risks.”

The report includes findings in the following nine compliance areas.

Securities purchased. Senior investors usually buy mutual funds, variable annuities, and stocks. More complex vehicles, such as exchange-traded funds, real estate investment trusts (REITs), and structured products, aren’t bought as frequently. Because there are key differences among these products, senior investors must be made fully aware of all the features, including potential returns and risks.

Training. The majority (77 percent) of firms include training geared to senior investors. The training includes information about risk in certain investments and procedures to follow if reduced mental capacity or elder abuse is noticed.

The use of designations that indicate expertise with senior investors. Firms’ requirements for senior designations varied – and some may be misleading. Investors are advised not to rely on titles to determine expertise. The use of these designations should be supervised and firms may want to establish policies to protect against misuse of the titles. Examiners found that 64 percent of designations required continuing education to maintain the title. Almost half (44 percent) of the titles were not recognized by an independent accrediting organization.

Marketing and communication. Firms generally complied with rules requiring written policies and procedures and content standards. But examiners noticed some potentially misleading ads, potential failure to correctly supervise radio content, and potential failure to comply with the firm’s written supervisory rules for seminar materials.

Account documentation. Almost all of the firms appeared to be collecting required customer information for new accounts, and many firms were gathering more information than is required. But some weren’t updating the information or were using information that was more than 36 months old.

Suitability. Examiners looked at the appropriateness of recommendations for various investment products – from mutual funds to variable annuities and alternative investments – based on excessive fees, concentration of liquid net worth, investment time horizons, age, and suitability of exchanges. They found more potentially unsuitable recommendations for nontraditional securities, such as variable annuities, structured products, and REITs, than for the traditional mutual funds, equities, and fixed-income products.

Disclosures. Disclosures about recommended securities apparently were appropriately provided. But examiners saw what appeared to be inaccurate or incomplete disclosures about nontraditional securities. “Despite general compliance with disclosure requirements, it is important to note that it is unclear how well investors understand the disclosures they receive on recommended securities,” the report states.

Customer complaints. Senior investors most often complained about poor service and high fees. Other complaints included churning, misrepresentation, unsuitable investments, poor advice, and unauthorized trading. Examiners found that all of the firms were reporting customer complaints, but some had trouble compiling the number of senior complaints.

Supervision. The majority of firms examined have written procedures regarding supervision of professionals who deal with seniors. The procedures vary but overall indicate increased attention to senior accounts and transactions involving alternative products. The use of automated systems helps identity concerns regarding senior investors.

The report indicates that the SEC Office of Compliance Inspections and Examinations and FINRA reviews of senior-investor issues are continuing this year.

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