A recent report published by securities industry regulators concerning brokerage firm examinations in 2013 that led to important insights concerning brokerage firm sales practices directed towards senior investors. The information gathered from examinations conducted by SEC and FINRA regulators was published in the National Senior Investor Initiative Report which draws from detailed statistical analysis of brokerage firms and the investment recommendations made by the financial advisors they are charged to supervise. The staff researchers who compiled the data provided insightful explanation of the economic and securities market conditions since the credit crisis which has created the risks and perils faced by senior investors.
Since the credit crisis in 2008-2009, the Federal Reserve Board has maintained a historically low interest rate monetary policy to stabilize the U.S. economy and financial system. One result of the dramatic decline in interest rates has created a bubble in the price of long-term bonds and greatly reduced the interest paid on liquid deposits, time deposits and intermediate-term bonds, including treasury and municipal issues. As a result, most senior investors have experienced a significant decline in the income from investments they have traditionally relied upon.
Regulatory Staff Members Voice Concern
The historically low yields paid on conservative income-producing investments has created an environment conducive to the recommendation of more complex, and possibly unsuitable, securities to senior investors as a means of replacing the lost income sources. According to regulatory staff writers, “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 non-traditional investments.” With the low interest rate environment as an economic backdrop regulators examined whether broker firms were recommending riskier and potentially unsuitable securities to senior investors looking to enhance retirement income or that senior investors may be making financial decisions without full disclosure of all relevant information.
In connection with the examinations, regulators met with groups interested in the protection of senior investor rights with representatives from the Consumer Financial Protection Bureau; the AARP Education and Outreach Group; and state regulators from Florida, Colorado, California, Texas, and North Carolina. The purpose was to identify risks to senior investors that the industry groups and government agencies had observed, especially in geographic areas known to have large numbers of senior investors. The majority of these groups expressed serious concerns about the unsuitable recommendation of high-risk securities, particularly the sale of non-traditional, complex investments to senior investors.
According to National Senior Investor Initiative Report, the examination results determined the top revenue-generating transactions recommended to senior investors by brokerage firms as follows:
1) Open-end mutual funds at 77% of the firms;
2) Variable annuities at 68% of the firms;
3) Equities at 66% of the firms;
4) Fixed income investments at 25% of the firms;
5) UITs and Exchange Traded Funds at 20% of the firms;
6) Non-traded REITs at almost 20% of the firms;
7) Alternative investments such as options, BDCs, and leveraged inverse ETFs at
approximately 15% of the firms; and
8) Structured products at 11% of the firms.
Fair and Balanced Communications
Brokerage firms must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any recommended security or type of security, industry, or service. Financial advisors may not omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading. According to National Senior Investor Initiative Report, “Staff observed what appeared to be inaccurate or incomplete disclosures primarily related to non-traditional securities such as variable annuities and REITs.”
Broker-dealers generally have an obligation to recommend only those specific investments or overall investment strategies that are suitable for their customers. The concept of suitability is codified in the FINRA sales practice rules and regulations and is considered a brokerage firm obligation under the antifraud provisions of the federal securities laws designed to address the problem of elder financial fraud. According to National Senior Investor Initiative Report, “Staff found that firms made more potentially unsuitable recommendations for non-traditional securities such as variable annuities, structured products, and REITs than for more traditional securities such as open-end mutual funds, equities, and fixed income investments.”
In such a low interest rate environment, brokerage firms are recommending non-traditional, more complex investments to senior investors. Brokerage firms that recommend non-traditional, complex securities to senior investors, such as variable annuities, ETFs, REITs, alternative investments, have heightened responsibility to supervise its financial advisors. Brokerage firms must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a senior investor based on the individual’s investment profile.
Klayman & Toskes, P.A. is dedicated to the rights of senior investors and strongly believes that when investors retire and have to decide what to do with their retirement funds, they seek advice from financial advisor with the expectation that the advice they receive will be in their best interests. Securities industry regulators have enacted laws to protect senior investors against elder financial fraud. Klayman & Toskes, P.A. represents senior investors in elder financial fraud cases to recovery investment losses.