SEC and FINRA Focus on Elder Investors

On June 10th, in remarks before the 2015 Reuters Wealth Management Summit in New York City, FINRA CEO Richard Ketchum mentioned that the agency is currently drafting guidance for brokers dealing with elder investors. Specifically, the guidance will cover instances in which brokers may delay transactions if they believe the client is suffering from dementia or being unduly influenced by an outside party (like a caregiver). We've blogged previously about the high profile that elder issues are taking in both the SEC's and FINRA's examination priorities for 2015, as well as some of the facets of dealing with elder investors that advisors must be aware of.

This is a tough area for the industry to attempt to self-regulate because the consequences of a delayed transaction can be so great. Unfavorable price changes can occur during the waiting period, leaving investors worse off once the verified transaction actually goes through. Conversely, with no waiting period, elder investors may invest or transfer a substantial portion of their wealth into a fraudulent investment offering, from which their funds will likely be irretrievable. Given the gravity of an elder investor losing a substantial part of their wealth, some state regulators (Washington for example) have already imposed holding periods for withdrawals and wire transfer out of elder investor accounts. FINRA is working with the SEC to help provide clarifying guidance on these types of situations to the industry as a whole.

In a related release on Monday, the SEC issued an alert for senior investors to help them identify red flags that could indicate investment fraud. The five primary indicators of fraud that they identified are:

• Promises of High Returns with Low Risk
• Solicitations from Unregistered Persons
• Investment Professionals with Red Flags in their Background
• Pressure to Buy Quickly
• "Free Meal" seminars used to hard sell products to elder investors, not to educate them.

Particular emphasis is placed on making sure that the advisor is registered and in good standing with regulators. Even then, the SEC encourages elder investors to consider the advisor’s background carefully, evaluating: "(1) employment at firms that have been expelled from the securities industry; (2) personal bankruptcy; (3) termination; (4) being subject to internal review by an employer; (5) a high number of customer complaints; (6) failed industry qualification examinations; (7) federal tax liens; and (8) repeatedly moving firms."

The SEC's advice is both sound and practical, but may not be fully achievable. While the SEC's guidance (and the help lines and other assistance they make available to investors) is admirable, it is most likely that some of the burden of evaluating elders’ investments will need to fall to the advisors themselves. We look forward to seeing the progress that FINRA and the SEC make this year toward that end.