Bates Research - 05-23-19
SEC Office of the Investor Advocate Releases New Report on Efforts to Protect Seniors
An Engagement Adviser in the SEC Office of Investor Advocate (OIA) has prepared a valuable overview report on the SEC’s efforts to protect seniors from financial exploitation. The 25-page paper highlights the agency’s examination, enforcement and regulatory policy, in addition to its education and outreach activities. The paper also offers suggestions for financial firms and financial service providers to consider when reviewing their compliance processes and procedures.
Bates follows regulatory and enforcement developments on senior financial exploitation issues closely. In addition to tracking current events across the wide spectrum of state and federal regulators and legislators, Bates Research published its own white paper on senior fraud last September. In that paper—citing to some of the previous work done by the OIA Adviser—we described some of the compliance challenges facing firms as they confront a complex and evolving regulatory environment. In this article, we review key observations from this latest OIA report which hones in, specifically, on the SEC’s approach to combating senior financial fraud.
SEC Compliance Inspections and Examinations
The OIA Adviser summarized the “evolution of industry policies, procedures and practices” as a way of understanding the agency’s current regulatory framework. The summary is also important in order to appreciate the urgencies, the multiple actors and the historical progression of the issue.
Of more practical significance, perhaps, is the review of the most recent risk examinations of broker-dealers, investment advisers, and other entities conducted in several ways by the Office of Compliance Inspections and Examinations (OCIE), including OCIE’s findings on the recurring gaps in compliance. These include (i) failures to tailor policies to a firm’s specific business models and client bases and (ii) policies and procedures that lack necessary specificity.
The Adviser provided many specific examples, including firms’ wholesale adoption of policies and procedures from other entities, improper delegations of core responsibilities to third parties without documentation and vaguely defined criteria for identifying senior customers. Other examples highlighted uneven procedures designed for some products (like insurance, IRAs and retirement products) but not others, deficiencies in monitoring and supervision, and inadequate training. He described issues related to diminished capacity, retirement account management, trusted points of contact and changes to account beneficiaries. In so doing, the report provides a helpful checklist for compliance officers as they review their policies and procedures.
SEC Enforcement Cases
The author also reviewed a handful of Enforcement Division cases (in particular those derived from the data driven investigations by the Retail Strategy Task Force) concerning fraudulent schemes against seniors. These were selective but include prosecuted Ponzi, boiler room, pyramid, theft and misappropriation of funds and securities price (or volume) manipulation schemes. Among the sources the agency draws on to “ferret out” these schemes are suspicious activity report filings (see Bates article here for a review of a recent CFPB Report on SARs filings and elder financial exploitation), the tips and referrals hotline, and programs to encourage and reward whistleblowers.
Regulatory Policy and Public Education
In a brief review of SEC-related regulatory policy, the report touches on FINRA rule amendments on “Customer Account Information” and “Financial Exploitation of Specified Adults.” It emphasizes that these regulatory changes are part of the new toolkit designed to help regulators combat senior financial fraud and notes, generally, the importance of the NASAA Model Act, state laws and Congress’ Senior Safe Act of 2018. It also describes the importance of the no-action letter process for the mitigation of potentially serious impacts of the amended rules on broker dealers, as well as the SEC efforts to educate the public through a series of activities ranging from live events and town halls to webinars and other online content. Highlighting the work of Office of Investor Education and Advocacy (OIEA), the importance of access to background checks for financial professionals is also underscored.
OIA Warns of Continuing Challenges
The report also cautions that there are demographic, market and technological challenges that will continue to impact the fight against financial fraud. The lure of the scam, the aging of the American population, issues of cognitive impairment, shifts from defined-benefit to defined-contribution retirement plans (that require retirees to more actively manage their own savings), a continuing low interest rate environment (which “tempts” investors to reach for yield)—these are all trends that are part of the landscape. In addition, he cites the challenges that are presented by new technologies, which give fraudsters new ways to exploit seniors but also allow “the SEC and others to work smarter and more effectively in combatting elder abuse.”
Another interesting observation is the challenge presented by the sheer size of the problem and the heavy financial and emotional toll it inflicts. The OIA recognizes that this creates an urgent desire for action on the part of legislators, regulators and law enforcement. In doing so, however, they must acknowledge the complexity of balancing the rights of the elderly to make their own financial decisions (and to have access to their accounts and to privacy) against the efforts and rules intended to protect the vulnerable from suspected financial exploitation, “even if it comes at the expense of the individual’s autonomy.”
The value of the OIA report lies in its collation of all the various activities undertaken by the SEC on a single priority: curbing senior financial exploitation. As to its guidance for financial firms, the OIA offers general, but common-sense recommendations. These include greater attention to: (i) tailored policies, procedures and practices that specifically address seniors; (ii) better awareness of the growing list of federal and state requirements, safe harbors and rules; and (iii) training employees on the signs of and steps to take regarding financial exploitation.
The OIA also recommends that financial firms “go beyond compliance and strongly consider taking voluntary action, if warranted, to protect seniors.” Such voluntary action would include more aggressive intervention in pausing disbursements in suspicious circumstances, engaging with trusted contacts when health or cognitive decline questions emerge, notifying authorities and extensive training.
As the SEC and other regulators raise expectations on firms for more risk-based compliance, the OIA report is helpful. Its overview of the many elements of regulatory intervention helps firms to understand the broader view of the regulator and, therefore, to better anticipate and prepare for regulatory oversight on senior financial exploitation. Bates will continue to keep you informed.
For more information concerning financial issues related to vulnerable and senior investors, including senior investor expert witnesses, damages analysis, and compliance, please contact Bates Group today.
Financial institutions may also be interested in Bates Investor Risk Assessment to protect your vulnerable and elder investors and firm while meeting regulatory expectations.
 Stephen Deane, Engagement Adviser in the SEC Office of the Investor Advocate.