SEC drafting sales suitability rules

Sep 17, 2007 @ 12:01 am

By Sara Hansard

Securities and Exchange Commission officials are drafting a document that defines suitability as it relates to the sale of securities.

“The document is an extensive and comprehensive view of securities and case law in this area,” including some useful examples, Erik Sirri, director of market regulation, said at the SEC’s second annual Seniors Summit.

The aim of the document is to ensure that investment and compliance professionals understand their duties and obligations under the law.

In a related move, SEC officials are also codifying sales-practice principles to govern the way brokers deal with their customers, Mr. Sirri said. The principles are intended to explain how firms should deal with their customers, he said.

However, they are not being crafted as rules, but as guiding standards that “we hope would characterize firms’ interactions with investors,” Mr. Sirri said. About 300 people, including about 150 older Americans, attended the summit at SEC headquarters in Washington, according to agency spokesman John Nester.

Regulators should encourage brokerage firms to strengthen their sales practices, said SEC member Annette Nazareth. That could help “ensure that [firms’] personnel establish and maintain high standards in terms of their interaction with investors, and particularly senior investors.”

Areas prone to abuses

Rules could be strengthened to target areas that have been prone to abuses, such as variable annuities, said Ms. Nazareth. Guidance could be issued to clarify sales practices and identify general principles of firm conduct.

In addition to the guidance, officials unveiled the results of an investigation on “free lunch seminars” that target the elderly, and several new regulations and initiatives that are aimed at protecting them from financial fraud.

Fully 59% of the 110 brokerage firms scrutinized in the “free-lunch” sweep by the SEC, Financial Industry Regulatory Authority and state securities regulators had weak supervisory practices over the seminars, officials said.

Twenty-three percent of the exams uncovered recommendations which were deemed to be unsuitably risky for the older Americans to whom they were being offered, and 13% of the exams uncovered possible fraud and were referred for enforcement action.

The SEC also announced approval of a FINRA rule imposing suitability obligations tailored to variable annuities.

The rule requires brokerage firm principals to review variable-annuity transactions before customer applications are sent to insurance companies for processing. Brokerage firms also must establish supervisory procedures to comply with the rule, and they must document their training for variable-annuity sales.

Older workers fooled

Two new sweep exams were announced by FINRA officials at the summit.

One examines the extent to which brokers rely on professional designations, for instance “senior specialist,” to mislead customers into thinking that they have more expertise than, in fact, they do.

The second evaluates early-retirement seminars conducted by brokers that are designed to entice older workers to liquidate their retirement funds and invest them with specific firms or representatives.

In the past year, FINRA, of New York and Washington, fined Securities America Inc. of Omaha, Neb., and Citigroup Global Markets Inc. of New York a total of $5.5 million for early-retirement schemes that targeted employees at Exxon Mobil Corp. of Irving, Texas, and the former BellSouth Corp. of Atlanta.

The two brokerage firms paid $26 million in restitution to victims.

The two enforcement cases were quite problematic, Elisse Walter, senior executive vice president of the office of regulatory policy and programs at FINRA, said in a telephone interview.

In some cases, long-term employees were lured into retiring prematurely with unreasonable promises of high returns from funds that were rolled over into individual retirement accounts and invested in products that brokers sold, according to officials.

That led the regulator to do sweeps of additional brokerage firms to determine if the seminars are taking place and what information is being given at them, said Ms. Walter.

The time period just before people retire is an “important touch point” for senior citizens, she said.

FINRA will also be conducting education on early-retirement seminars and working with human-resource professionals and unions “in order to ensure that what is happening in those programs is not problematic,” Ms. Walter said.

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