The Securities and Exchange Commission’s Office of Investor Advocate recently published an overview of the SEC’s efforts to protect senior investors from financial exploitation. The report serves as a guide for financial services professionals, as well as policymakers, attorneys, and the general public. The report details the SEC’s multi-pronged approach to preventing senior financial exploitation, which includes examinations, enforcement, policy making and investor education.
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has prioritized protecting seniors through risk-based exams of broker-dealers and a national initiative focused on investment advisers. OCIE has been examining how broker-dealers have been implementing and complying with new FINRA Rule 2165 and amended Rule 4512. OCIE found that it is “still too early” to make any conclusions as to how firms have implemented these rules.
OCIE also recently conducted a seniors-focused sweep of over 200 investment advisers with significant senior exposure (defined by either a large percentage of accounts held by senior investors, or a large percentage of a firm’s assets under management held by seniors). The exams assessed advisers’ policies, procedures and practices addressing clients who were 62 years old or older. The exams focused on whether: (i) clients provided trusted contacts; (ii) how advisers responded to concerns over diminished capacity; (iii) practices for handling requests to change beneficiaries; and (iv) training provided to employees focused on spotting signs of financial exploitation.
OCIE observed that one-third to one-half of the firms examined had some or all of these policies. Some firms adopted written policies and procedures; others were informal or unwritten. On the critical issue of training client facing personnel, however, OCIE found that most firms had not provided senior/vulnerable investor issues training to their employees.
Weaknesses Found in Policies and Procedures
OCIE observed the following weaknesses in the policies and procedures of certain advisers:
The policies were not tailored to the adviser’s specific business model and client base. OCIE also saw this weakness in previous exams of broker-dealers.
The policies were not specific enough. Firm’s escalation policies failed to state the concrete steps the representatives should take if they had a suspicion of exploitation.
The policies did not have defined criteria (i.e. age, retirement status or other factors) for determining whether a client counted as a senior.
Even where there was a requirement to document concerns over diminished capacity, the firm’s supervisory systems were not coded to note such information. The deficiency prevented the firm from generating reports that could easily identify clients or accounts where those concerns were flagged.
The guidance about how to spot signs of diminished capacity was too general or insufficient about how to spot red flags.
Even where policies required the firm to reach out to a trusted contact after suspicion of exploitation, the policies did not require the client to provide a name of a trusted contact from the outset.
Where policies addressed client requests to change beneficiaries on specific products or accounts, they did not discuss client requests to change beneficiaries across all accounts or products held in the customer relationship.
The policies failied to specify how accounts, flagged for suspicious changes to account beneficiaries, would be monitored and supervised.
The SEC made the following recommendations to protect senior clients:
Tailor policies and procedures to the firm’s particular business lines and clients.
- Include clear escalation procedures that specify concrete steps registered representatives should take and who in particular they should notify. “The more specific, the better.”
- Understand the overlap and differences between requirements under FINRA Rules 2165 and 4512, state report and hold laws and the Senior Safe Act.
- Train employees about FINRA’s disbursement hold rule, Rule 2165, in order to use the regulatory safe harbor.
- Train employees to detect the red flags of financial exploitation and to understand the steps to take if they suspect abuse, including how to report suspected exploitation internally and to the state agencies.
The industry is dealing with a flood of aging investors with the greying of the Baby Boom generation. Unfortunately, with that flood, there will be a corresponding rise in senior abuse and exploitation claims. In light of this, it is no surprise that senior-related issues continue to be a focus of regulators.
The seniors-focused sweep of advisers was part of the OCIE’s ongoing efforts to protect senior retail investors as expressed in the SEC’s 2019 Examination Priorities. With this valuable guidance from the SEC, broker-dealers and investment advisers must consider how to adapt to the new environment impacting vulnerable customers. Firms should be evaluating their compliance programs, including the necessary training, and whether their policies and procedures need to be updated to reflect the increasing focus on senior and vulnerable investors.