There's no such thing as a free lunch in the investment advice sector, especially when brokers use the afternoon meal as a way to interest prospective elderly clients in high-fee investment products, according to the SEC.
Kevin Goodman, national associate director of the Securities and Exchange Commission's broker-dealer examination program, said the agency targets brokers who frequently sponsor such lunches to attract new clients, who are often seniors.
“We have seen during our examinations a strong correlation between using the free lunch seminars and successfully selling high-commission products,” Mr. Goodman said Tuesday at a conference in New York focused on senior investors and sponsored by the Securities Industry and Financial Markets Association.
Although he said there is nothing inherently wrong with hosting marketing lunches, brokerage firms should supervise them properly.
“There is undeniable correlation between conducting [lunches] and higher incidents of problematic behavior,” Mr. Goodman said.
Free lunches were once used as a way to market a brokerage's services to a large group of people, said Joseph Borg, director of the Alabama Securities Commission. Now, firms are using the lunches to gather information about attendees' assets and fashion sales pitches for financial products.
“We think the real danger is the after-market meeting, so to speak,” Mr. Borg said at the SIFMA event.
Another area of concern for regulators is the proliferation of advice credentials that purport to show that a broker is a specialist in retirement investing. Often, the certifications are dubious.
“The more impressive-sounding the designation and the less tied it was to actual education or accomplishments, the more problems we saw associated with the people who used those,” Mr. Goodman said.
The Financial Industry Regulatory Authority Inc. recently
established a hotline for seniors and has found that many calls center on a broker's qualifications.
“I think one of our focuses has been and will continue to be the use of senior designations,” Ann-Marie Mason, a Finra director and counsel for litigation and policy, said at the SIFMA event. “Just being informed by 1,700 calls, folks just don't understand it. They don't know what it means. There is no common nomenclature.”
The SEC, Finra and state regulators have made elder financial abuse a priority due to the thousands of baby boomers retiring daily, and growing worries about diminished mental capacity among the senior population.
The Finra board recently
approved a proposed rule that would allow brokers to put a hold on a financial transaction and contact a client's family or other trusted person if they suspected the transaction involved exploitation. A regulatory notice about the Finra rule is expected to be released within days, which will begin a comment period.
In late September, the North American Securities Administrators Association Inc.
released a model rule that provides a safe harbor for brokers who report suspected financial fraud to a state's adult protective services. It also enables them to place a hold on the transaction.
SIFMA said it supports state efforts but also wants federal legislation.
“Additionally, we continue to advocate for a national standard that provides protection to senior investors' assets while also providing protection from liability and retaliation for brokers so they will be able to report suspected abuses,” Kenneth E. Bentsen Jr., SIFMA president and chief executive, said at the conference.
