What is the government doing to curtail the spread of senior fraud?

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA) have many initiatives to protect senior investors. They work jointly to identify effective practices by financial services firms who deal with senior investors and provide information about these practices publicly
These regulators have increasingly focused on protecting older investors, many investment advisers and broker-dealer firms are evaluating their current practices in serving seniors. SEC staff, FINRA and the NASAA solicit input from all interested parties in order to identify strong supervisory, compliance and other practices used by financial services firms serving seniors in the following areas: marketing and advertising to seniors; account opening; product and account review; ongoing review of the relationship and appropriateness of products; discerning and meeting the changing needs of customers as they age, surveillance and compliance reviews; and training for firm employees. This effort is one part of the multifaceted coordinated national initiative to protect seniors from investment fraud and sales of unsuitable securities that was announced by SEC Chairman Christopher Cox, NASAA, and FINRA (formerly the National Association of Security Dealers and the New York Stock Exchange) in May, 2006. The initiative has several components, including targeted examinations, enforcement of the securities laws in cases of fraud against seniors, and active investor education and outreach.

 Free Lunch Seminars

In September of 2007, these government agencies coordinated efforts to research “Free Lunch” Sales Seminars sponsored by financial services firms to target sales of investment products to seniors with an offer of a free meal for attendees. Sales seminars are often advertised in local newspapers, through mass-mailed invitations, mass-email, and on websites. The following states were selected due to their large populations of retirees: Florida, California, Texas, Arizona, North Carolina, Alabama and South Carolina. Targeted examinations were conducted in order to review firms that offered sales seminars for seniors and retirees. Specifically, the exams reviewed: 

• Advertising, seminar materials and sales literature for any misrepresentations, exaggerations, or omissions of material information;
• Customer transactions to evaluate suitability of investment recommendations that were made; and
• Supervisory systems, policies, and procedures used to detect and prevent violations of the securities laws for adequacy.

These examinations produced the following findings:

• Sponsors of the “free lunch” sales seminars offer attractive inducements to attend. These can include free door prizes, vacation deals and free books.
• The target audience is seniors
• The seminars are designed to sell investment products such as variable annuities, real estate investment trusts, equity indexed annuities, mutual funds, private placements of speculative securities and reverse mortgages.
• In only 5% of the seminars did the regulators find effective controls for supervision and compliance.
• Half of the exams found that firms used misleading or exaggerated claims.
• The target audience is 23% of the exams indicated that registered representatives or investment advisers holding the sales seminars had recommended investments that did not appear to be suitable for the customer.
• 13% of the seminars may have involved fraud including serious misrepresentations of risk and return, liquidation of accounts without the customer’s knowledge or consent, and sales of fictitious investments.
• One of the conclusions of these “Free Lunch” Sales Seminars is that investors should take time to research the financial services firms, the financial adviser and the product being offered before opening an account or making a purchase.