Structured products are among the top five revenue-generating securities for companies selling financial products to senior investors in the US, according to the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra). Open-ended mutual funds were in the top five for 77% of companies contacted by the SEC and Finra in their National Senior Investor Initiative report, published on April 15.
“Finra, in particular, wants to ensure that brokers’ policies and procedures are sufficient to ensure that complex products end up in the accounts of those who understand what they are buying, and they continue to focus on that when examining market participants,” said Lloyd Harmetz, partner at Morrison & Foerster in New York.
Variable annuities were at 68%, equities at 66%, fixed income at 25%, unit investment trusts and exchange-traded funds at 20%, non-traded real estate investment trusts at 20%, with alternative investments, including inverse ETFs, at 15%.
“The regulators seem to have taken to heart the fact that individuals living on a fixed income can suffer in the low rate environment and they worry that the elderly may not understand the risk that is necessarily undertaken to achieve higher returns,” said Chris Schell, partner at Davis Polk in New York.
Anecdotally, product providers were surprised by the release as the distributors they speak to are “very conscious and conservative”.
The examination revealed that 77% of companies incorporated training specific to senior investors, with training including an evaluation of investor understanding of recommended products, the changing investment needs as investors age and escalation steps in the event that a representative notices “signs of diminished capacity or elder financial abuse”. Specifically, 13% of the selling companies told their representatives to notify compliance or supervisory personnel if they suspected either of these two conditions.
The training described warning signs that may indicate possible elder financial abuse “such as sudden changes in investment approach; changes in behaviour of a senior client, which could stem from a fear of a family member of guardian; problems reaching the senior in question; or a new family member or contact suddenly attempting to make transactions in the senior client’s account without proper authorisation”.
Almost 64% of the examined companies allowed their representatives to use senior designations (ie. job titles) in their sales efforts, and these companies collectively permitted the use of 25 different senior designations, while 44% of the allowed designations were not recognised by any independent accrediting organisation.
Much of what is included under marketing and communications restates common sense, with particular reference to the tenets of Finra’s Rule 2210(d)(1), which details content standards when communicating with the public.
Unsurprisingly, there was most to say about suitability: “In a low interest rate environment, firms may be recommending non-traditional investments to supplement the income streams of senior investors,” stated the 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-ended funds, equities and fixed income investments.”
The regulators noted that disclosure standards was generally appropriate, with Reits and variable annuities attracting the only note of caution.
Further observations included the revelation that at least 16% of firms used 70 years old as the age for implementing age-based policies and procedures, with at least 5% establishing age-based policies and procedures for investors as young as 60. While the regulators are happy with supervisors calling the over-70s who buy variable annuities, they would prefer that a compliance officer is brought in to make the call to the over-75s when they are buying market-linked certificates of deposits. One firm required a central supervisory review group to approve new brokerage accounts for investors of 80 or older to make initial determinations as to whether the securities to be purchased appeared to be suitable.
Related stories:
US SEC to focus on suitability and disclosure of ‘Trojan horses’
Avoiding securities fraud prosecution: using the SEC’s 2015 examination priorities as a compliance roadmap when dealing with retail investors
Renegade SEC commissioner calls for review of complex products
Finra identifies and warns non-compliant creators and distributors