From the Regulators

Brokers may be recommending riskier, possibly unsuitable securities

By James Langton |

U.S. regulators say they are concerned that some brokers may be recommending unsuitable investments to senior investors, and not providing them with adequate disclosure.

The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued a joint report Wednesday that details the results of a series of recent compliance reviews at brokerage firms that focused on senior investors (those aged over 65); which raise concerns among the regulators' staff that "some broker-dealers may be recommending riskier and possibly unsuitable securities to senior investors looking for higher returns and may be failing to adequately disclose the terms and risks of the securities they recommend."

The report is targeted at brokers, with the goal of helping them assess and possibly beef up their policies with respect to senior investors. In various areas, the report spells out the regulators' findings, and feedback for firms to consider in their own businesses.

The examinations, which were carried out by the SEC's Office of Compliance Inspections and Examinations (OCIE) and FINRA, focused on a broad range of topics, including the types of securities being sold to senior investors, the training of reps on senior specific issues, and how firms address issues relating to aging, such as diminishing cognitive capacity and elder abuse. It also examines the use of designations that convey expertise in seniors issues; firms' marketing and communications that target senior investors; the type of information required to open accounts for senior investors; the suitability of securities sold to senior investors; the disclosure provided to these investors; the sorts of complaints filed by seniors, and the ways firms tracked those complaints; and, the supervision of reps as they interact with senior investors.

The regulators indicate that regulatory compliance issues involving seniors is a high priority, given the projected increase in this segment of the population in the years ahead. They report that census data indicates that the population of those 65 or older in the U.S. is expected to grow from 41 million in 2011 to 79 million by 2040. As a result, they say that this area is
likely to remain a key issue for both regulators and broker-dealers for many years.

Senior investors are also a key issue for Canadian regulators, and the industry. Last year, the Investment Industry Association of Canada (IIAC) published a set of best practices for dealers when it comes to dealing with the seniors. The Ontario Securities Commission (OSC) and its independent Investor Advisory Panel (IAP) held a joint roundtable on seniors issues last year; and, the Mutual Fund Dealers Association of Canada (MFDA) also held its own summit on these issues back in 2013.

In addition to the aging population, the OICE-FINRA report notes that the current low-return environment adds to the regulators concerns, as it may cause firms to recommend, and senior investors to purchase, more complex, non-traditional securities. "It is imperative that senior investors receive proper and understandable disclosures regarding the terms and risks related to securities recommended to them, particularly non-traditional investments," it says.

"With the dramatic increase in the population of our nation's seniors, it is critical that securities regulators work collaboratively to make sure that senior investors are treated fairly. The culture of compliance at firms is key to ensuring that seniors receive suitable recommendations and proper disclosures of the risks, benefits, and costs of any investments they are purchasing," said Susan Axelrod, executive vice president, regulatory operations, at FINRA.