NEW YORK — Intensifying its recent focus on protecting retirees, the
Financial Industry Regulatory Authority began last month a sweep of broker-dealers focusing on the use of exemptions in the tax code to withdraw money from retirement accounts for clients before they reach 59½.
Abuse of the part of the tax code that covers early withdrawals, known as Section 72(t), has been the subject of several regulatory actions over the past year, industry lawyers noted. “I do think it’s an emerging issue,” said David Bellaire, general counsel with the Financial Services Institute Inc. of Atlanta, which represents independent-contractor broker-dealers and their affiliated advisers. “I haven’t heard people talk about this until recent enforcement actions.”
At least 10 firms — and potentially more — are subject to the sweep, which will be handled by FINRA’s offices in Washington and New York as well as district offices in Denver and New Orleans, said Brian Rubin, a partner with Sutherland Asbill & Brennan LLP of Washington and a former lawyer with NASD, one of FINRA’s predecessor organizations.
Wirehouses, smaller firms and independent-contractor broker-dealers will be included in the sweep, he said. In the sweep letter, part of FINRA’s request for information focuses on “all seminars and/or other events directed at potential or early retirees, including prospects that are under age 59½.”
“All the regulators are working to protect the seniors,” Mr. Bellaire said.
State regulators and their counterparts with the Securities and Exchange Commission and FINRA have recently focused on three issues involving seniors, he noted. They are the designations that some financial advisers use, such as “senior adviser” and “senior specialist;” free lunch seminars that brokers give to seniors to discuss investments; and the sale of variable annuities to seniors and those annuities’ lack of liquidity.
“Now, the fourth thing is 72(t)s,” Mr. Bellaire said. “Perhaps they’re trying to figure out how big a problem they may or may not be.”
At times, regulators and the industry quarrel over the term “sweep” and its definition when regulators ask broker-dealers for information.
Sweep letter
Mr. Bellaire defined a sweep as having three chief parts. First, it is an inquiry by regulators based on a decision to gather information; second, the inquiry goes to a cross-section of broker-dealers; and finally, a small number of broker-dealers may eventually face some type of enforcement action.
The sweep letter, which was dated July 27, asks for extensive information on seminars, including an agenda, a list of attendees and whether any supervisor or compliance executive from the broker-dealer attended the event.
The letter also requests a copy of all written or electronic correspondence, including e-mails sent by broker-dealers to their registered representatives where Section 72(t) is discussed. FINRA also wants all correspondence to the brokers’ clients that discuss Section 72(t).
NASD’s previous actions on this issue included New York-based
Citigroup Global Markets Inc.’s agreement in June to pay more than $15 million in fines and restitution for failing to supervise a team of brokers in Charlotte, N.C., who used misleading sales materials in dozens of meetings with employees of BellSouth Corp. of Atlanta.
And last September, NASD fined Securities America Inc. of Omaha, Neb., $2.5 million and ordered it to pay restitution of $13.8 million to clients for failing to supervise an affiliated broker who induced 32 former employees of Irving, Texas-based Exxon Mobil Corp. to retire early because of an exaggerated and misleading sales presentation that promised them they could use Section 72(t) withdrawals to replace current income. At that time, NASD issued an alert to investors warning them of such sales pitches.
