Brokers concerned that senior abuse concerns could lead to costly regulation

They agree with intent of possible legislation, but worry about compliance costs

Jan 26, 2016 @ 4:48 pm

By Bruce Kelly and Mark Schoeff Jr.

+ Zoom

Securities regulators of all stripes in 2016 will remain intently focused on the elderly and any potential financial exploitation of older investors. While broker-dealer executives agree about protecting seniors from abusive sales practices, they worry that some regulatory actions could add more cost to their businesses.

Defending the elderly from investing ripoffs is sort of like mom and apple pie — no one is against it, especially as baby boomers swell the retirement population. As with most regulation, however, there are differences of opinion on how to accomplish the objective.

The states in particular are taking the lead regarding the issue, according to Judith Shaw, Maine securities administrator and president of the North American Securities Administrators Association.

The state regulators' model rule would require financial advisers to report suspected abuse to state securities officials and adult protective services.

NASAA's vote on the measure closed Jan. 22, but the results have not been tabulated. If NASAA advances the rule, it would then have to be approved by individual states.

The Financial Services Institute, which represents independent broker-dealers, is concerned that the state regulators' reporting mandate would “overload” adult protective services with abuse reports from firms that are seeking to shield themselves from potential lawsuits.

“We think mere suspicion will be the standard in making those reports,” David Bellaire, FSI executive vice president and general counsel, told reporters Tuesday at FSI's OneVoice conference in Orlando, Fla. “That will result in a lot of false leads that APS has to track down.”

Mr. Bellaire said allowing firms to make their own reporting determinations would work better.

“If there's a permissive reporting standard, firms would be self-motivated to report to protect their investors, to protect their financial advisers as well as to protect themselves from litigation associated with the heirs ... finding out their father or mother had been exploited,” he said.

But the leader of the state regulators' effort said strong reporting requirements are needed because senior abuse “can literally be a matter of life and death.”

“We would much rather get [a report] that turns out to be nothing than to miss something that turns out to be really important,” Ms. Shaw said at the FSI conference. “We simply have to ask the industry to trust that APS and state securities regulators know how to discern the difference.”

Meanwhile, the Financial Industry Regulatory Authority Inc. also is making senior issues a top regulatory priority in 2016, and is working closely with the states on the matter, said Robert Colby, Finra's chief legal officer, at the FSI conference.

A proposed Finra rule would require brokers to designate a trusted contact person for a customer's account and would allow them to stop disbursements from the account and notify the contact if they are concerned the customer is being preyed upon.

Finra's proposed rule, however, does not require advisers to report suspected abuse to state officials.

Mr. Colby said it would be unusual to mandate that its members interact with any other regulator.

“It's not in our zone,” Mr. Colby said on the sidelines of the FSI conference. “I don't think there's a single rule that requires our members to report to another government agency.”

Finra, state regulators and the Securities and Exchange Commission have all made protecting senior investors a priority. The goal of the proposed rules is to give financial advisers a safe harbor from privacy laws when acting on suspected abuse. Because they haven't had these protections in the past, many have felt hamstrung in reporting much of the trouble they witness.

In other regulatory updates from FSI, Finra this year also is focusing on fixed-income disclosure, particularly what types of markups brokerage firms are adding when selling securities, he said. Finra has seen markups that are 20 times higher than typical, Mr. Colby said, adding “that's just not right.”

(More: Industry, investor advocates clash on bond-price-transparency proposals)

In Finra's letter focusing on exam priorities for the securities industry issued earlier this month, one focus was on firms' compliance culture. Mr. Colby said Finra was interested in finding out more regarding the overall “attitude” specific firms bring to the table when conducting business. Finra is looking at the firm's leadership on down, he said, including what type of role-models exist in a firm's top leadership ranks.

Key questions involve how firms are handling conflicts, he said. If a firm violates an industry rule, how is it following up, he asked. Finra is beginning its look at firm culture with the largest broker-dealers first, he said.


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