Vanessa Countryman
Secretary
U.S. Securities and Exchange Commission
100 F St NE
Washington, DC 200549-1090
RE: Roundtable on Combating Elder Investor Fraud
File Number 4-749
Dear Ms. Countryman:
I write on behalf of the Public Investors Advocate Bar Association (“PIABA”), an international bar association comprised of attorneys who represent investors in disputes with their financial advisors. Since its formation in 1990, PIABA has promoted the interests of the public investor in all dispute resolution forums, while also advocating for public education regarding investment fraud and securities industry misconduct. Our members and their clients have a strong interest in issues facing elder investors and steps the Securities and Exchange Commission (the “Commission”) may take to protect such investors.
The Commission’s Retail Strategy Task Force is hosting a Roundtable on Combating Elder Investor Fraud. The Task Force has invited interested parties to submit comments on the subject of the Roundtable. PIABA appreciates the opportunity to provide the insight of our members and their clients on this very important topic.
Older Americans are typically at the peak of their wealth accumulation phase, making them an attractive target for fraudsters. Older Americans who are the victims of fraud may suffer both monetary damages as well as non-monetary damages such as emotional pain and suffering and feelings of shame and depression.1
Unfortunately, there is not rich data on fraud because it is often underreported. For example, according to a study conducted by the FINRA Investor Education Foundation, although 11% of survey respondents reported losing money in a likely fraudulent activity, only 4% actually admitted to being a victim of fraud.2 Approximately a quarter of the survey respondents reported that they may have been asked to invest in a fraudulent investment and at least 16% reported investing money in a likely fraudulent offering.3 A TIAA Institute study found that as many as 8% of the survey respondents had been a victim of at least one fraudulent activity.4 In another study, 5% of survey respondents reported they had been the victim of a fraudulent investment in the past five years.5
In 2018, NASAA members brought enforcement actions that involved over 750 senior victims.6 The enforcement actions concerned unregistered securities, traditional securities, variable annuities, affinity fraud, equity-indexed annuities, and viatical or life settlements.7 Looking back at NASAA’s enforcement statistics over the past five years, these products have consistently been connected with senior investor protection issues.8
Financial Vulnerability
Those nearing retirement may be in a more precarious financial position than past generations. For example, 71 % of Early Boomers, those born between 1948 and 1953, have debt when on the verge of retirement.9 In 2015, the median amount of debt held by Early Boomers was $32,700, with the top quartile holding $146,800 in debt.10 This means that more Americans will carry debt into retirement, and may face challenges servicing the debt in retirement. This study raised concerns that as older persons rebalance their portfolios from riskier investments to more fixed income assets, they may have even greater difficulties managing and paying off their debt burdens.11
Further exemplifying the financial vulnerability of older Americans, a third of survey respondents age 56 to 61 indicated they probably or certainly could not come up with $2,000 in a month’s time.12 That may mean these individuals do not have the financial security to cover a relatively minor medical procedure or home improvement. In fact, another study found that 13% of survey respondents aged 55 or older had past-due medical bills, and 24% are concerned they have too much debt.13
Older Americans are also concerned about their financial security in retirement. The same study found that 42% of survey respondents aged 55 or older worry about running out of money in retirement.14 Among those who have accumulated savings in retirement accounts, the typical balance is about $40,000.15 More than 75% fall short of conservative retirement savings targets based on a retirement age of 67.16 Another study found that among near-retirement households, 30% have no retirement savings, and another third have savings of less than their annual income.17 The typical near-retirement household only has $14,500 saved.18 According to conservative estimates, at a retirement age of 67, retirees should have 8 times their annual income in savings.19 Even at that level, the retiree still has a one in four chance of running out of money.20
With respect to financial literacy, fewer than half of the survey respondents answered the risk question correctly, and less than a third answered a compound interest in debt question correctly.21 One study found that almost 80% of survey respondents say retirees do not know enough about investing to ensure that their retirement savings will last them through retirement.22
Investor Stories: Concerns about Retirement Income
The following investor stories highlight the concerns retired investors may have in retirement: running out of money. In both of these cases, the investors were lured into investing in products which were sold as providing them income streams throughout their retirement. Unfortunately, they didn’t get what they bargained for.
A 72-year-old widow invested following a free lunch seminar at a local restaurant. The broker assured the investor that he would earn her an income stream of 6% while preserving her investment principal. The investor transferred her savings to the broker, who then invested her in non-traded REITs and a business development company. Not only were these investments risky, they were also illiquid. Ultimately, a FINRA arbitration panel ordered the brokerage firm to rescind the purchases of the investments and reimburse the investor for her losses.
An investor in her early 80’s was sold private placements and a “private annuity” by her broker. The widowed investor was told she would have income that would last for the rest of her life. Shortly thereafter, the broker left the firm. The investments turned out to be fraudulent Ponzi schemes, but that was not uncovered until the broker eventually stopped making payments on the “investments” and was finally indicted for his fraudulent scheme. Ultimately, a FINRA arbitration panel ordered the brokerage firm to provide the investor with sufficient funds to allow her to purchase an annuity that would provide her with the income stream she had been guaranteed by the broker.
While these stories ultimately resulted in the investors receiving back at least a portion of their lost retirement through the FINRA arbitration system, there are many situations where similarly wronged investors received back no funds, such as when the guilty party and/or firm are no longer in business or do not have sufficient assets to pay from their wrongful conduct.
Lack of Financial Literacy
Investors lack basic financial literacy, and as a result, are not really in a position to manage their own investments, or to oversee a broker who is managing their investments. One study determined that many of the survey respondents lacked an understanding of basic investment terms, including what would be a reasonable return on an investment.23 The study asked survey respondents how much risk they were willing to take to meet their retirement needs; more than half of the survey respondents indicated that they were not willing to invest in riskier investments regardless of their financial situation.24
Other studies have also found that investors have low financial literacy when it comes to topics such as comprehending risk or compound interest. For example, in a recent study conducted by the TIAA Institute, over 60% of survey respondents answered questions about risk-related concepts incorrectly.25 Another study found that half of survey respondents aged 55 or older could not correctly answer two simple questions about inflation and compound interest.26
Investor Stories: Vulnerable Investors
The following investor stories demonstrate how investors end up trusting bad advice from their financial advisors, in part because of the asymmetry in financial literacy between the investors and their financial advisors.
A group of investors were employees of the Fireman’s Fund Insurance Company. Following “financial education seminars,” the employees invested significant portions of their retirement savings in private placements. Some of the employees retired early, relying on the monthly interest payments they were receiving from the investments. Unfortunately, by mid-2008, most of the investments had stopped paying any interest. Ultimately, a judge ordered the firm responsible for the seminars to pay the investors over $36.8 million to reimburse them for their losses.
In another situation, a 97-year-old investor wanted to ensure that, upon his death, his savings would be passed on to his heirs. Two unscrupulous insurance agents sold him on the concept of annuities, promising an “immediate 10% bonus,” or “immediate 7% growth.” They sold him three annuities over the course of two years, with the investor aged 98 for the last of the purchases. While promising above-average returns for him, what the agents and the underlying annuity issuers actually delivered were products with extraordinary internal fees, incredible complexity, and a near-guaranteed risk of loss insofar as the surrender value of the products would almost certainly be less than the amount invested. The products would have completely failed the intended purpose of providing a lump sum distribution upon the investor’s demise since the only way to access any growth in the products as to hold the annuities for a period of at least five years, and then annuitize them for at least ten more. The investor would have had to reach age 109 in order to access the “accumulation value” – being the sum of the original investment and any growth thereon. To simply break even and access the amount he’d originally invested, he’d be required to have lived till the age of 102.
Unsatisfied with having made tremendous commissions on the first three annuities, the agents approached the investor a year later and convinced him to surrender the largest of the original three annuities, and a portion of another, and use the proceeds to buy a new annuity. The investor was 99 ½ years old at the time. The product the agents sold him: (1) offered no benefits beyond what he already had; (2) offered even more complexity than the products he’d been sold a year before; and, (3) offered the investor the opportunity to break even if he lived to age 114 ½. Particularly offensive was the fact that the death benefit to be paid was the surrender value – not the accumulated value. In short, the product guaranteed the investor a loss, whether he lived or died. After retaining an attorney, the investor was able to get out of the annuities and was able to meet his original goal of leaving his savings to his family, not his insurance agents.
Brokerage Firm Policies to Protect Seniors
NASAA examined steps brokerage firms may take to address senior investor protection. The NASAA study found that only 30% of brokerage firms had adopted senior-specific policies and procedures.27 The individual policies and procedures varied from firm to firm. For example, with respect to suitability, some firms merely reminded brokers that certain suitability information, including age, income, and expenses, should be emphasized when considering a recommendation.28 Other firms restricted what products, such as variable annuities and alternative investments, may be sold to senior investors.29 Certain firms focused on particular concerns for senior investors, such as product concentration issues.30 Over 80% of the firms surveyed did not have a senior-specific review process to monitor for changes to the investor’s financial objectives.31
Investor Story: Failure of the Brokerage Firm to
Protect an Elder Investor
The following investor story demonstrates how the lack of firm policies to follow up on red flags, such as a change of investment objective in an elder investor’s account to be more aggressive, can cause harm.
An investor, a retiree, was assigned to a new broker after his prior broker passed away. The new broker sold off the investor’s income producing investments and began to trade stocks instead. Shortly after taking over the account, the broker changed the investor’s investment objective to “Speculation.” Over the course of the next two years, the broker churned the account, eventually virtually wiping out the account value. Unfortunately, the investor passed away before he could do anything about the broker’s misconduct.
Protecting Elder Investors
As a larger portion of our society approaches retirement with the aging of the Baby Boomer generation, more and more adults may be subject to investment fraud. As the stories above demonstrate, investors need additional protections to ensure those who have saved for retirement will actually have those funds available to them.
While some brokerage firms have taken on the responsibility of adopting policies and procedures aimed at protecting elder investors, more must be done. Currently, FINRA does not require brokerage firms to have supervisory policies specifically aimed at addressing the common red flags that may impact elder investors.
In 2017, NASAA suggested several measures that could be adopted by brokerage firms to improve their policies and procedures:
1) Clear definitions of “seniors” and “vulnerable adults”; firms should evaluate the need for definitions if they do not exist, taking into consideration those states that have adopted the Model Act;
2) Dedicated staff resources responsible for senior-related issues;
3) Guidance for communications with seniors and other senior-specific policies and procedures;
4) More frequent updates of account documentation for seniors, including investment objectives;
5) Heightened suitability review for seniors that is triggered by red flags such as investments in higher risk or complex products, account concentrations, or significant changes to account activity;
6) Training regarding senior issues including the identification and escalation of senior financial exploitation and diminished capacity;
7) Use of a trusted contact form and other resources to assist senior investors;
8) Proper escalation protocols, including clear and specific escalation instructions for registered representatives and other firm personnel, and the designation of decision makers for reporting concerns outside of the firm;
9) How and when to report matters to adult protective services, law enforcement, or state securities regulators; and
10) When to delay account disbursements as a result of escalated concerns.32
NASAA’s suggestions are a good place for the Commission to start. However, rather than encouraging brokerage firms to adopt such policies and procedures, brokerage firms should be mandated to adopt such procedures.
Additionally, beyond simply heighted review for certain red flags, the Commission should consider disallowing firms from selling certain investors certain products. As an example, non-traded REITs and private placements are often sold to retirees as offering a guaranteed income stream, with little focus on their price volatility, illiquidity, and potential for inconsistent or non-existent income streams. Investors are not evaluating these investments on their own, rather these investors are relying on their brokers to make appropriate recommendations in line with the investors’ needs. Unfortunately, all too often, the investors are left to figure out for themselves how they will continue in retirement without access to their hard-earned savings.
Conclusion
PIABA applauds the Commission’s focus on Elder Investment Fraud. However, more must be done to protect investors and to ensure that their retirement savings are protected. Investors should not be left to fend for themselves after being the victim of fraud. PIABA would welcome the opportunity to further discuss these issues with the Retail Strategy Task Force.
Sincerely,
Christine Lazaro
President
Samuel B. Edwards
Executive Vice-President
1 See, e.g., Marguerite DeLiema, Martha Deevy, Annamaria Lusardi, and Olivia S. Mitchell, Exploring the Prevalence, Risk Factors, and Financial Consequences of Fraud: Evidence from the Health and Retirement Study, TIAA Institute (Apr. 2018), https://gflec.org/wp-content/uploads/2018/04/TIAA_Institute_Causes_and_Consequences_RD143_Mitchell_April-2018.pdf?x70028.
2 FINRA Investor Education Foundation, Financial Fraud and Fraud Susceptibility in the United States (Sept. 2013) (“FINRA Financial Fraud Study”), p. 3, https://www.finrafoundation.org/sites/finrafoundation/files/Financial-Fraud-And-Fraud-Susceptibility-In-The-United-States_0_0_0.pdf.
3 Id., pp. 18 & 20.
4 Marguerite DeLiema, Martha Deevy, Annamaria Lusardi, and Olivia S. Mitchell, Causes and Consequences of Financial Mismanagement at Older Ages, TIAA Institute (April 2018), https://gflec.org/wp-content/uploads/2018/04/TIAA_Institute_Causes_and_Consequences_TI_Mitchell_April-2018.pdf?x22667.
5 Marguerite DeLiema, Martha Deevy, Annamaria Lusardi, and Olivia S. Mitchell, Financial Fraud among Older Adults: Evidence and Implications (Dec. 2018), p. 8, https://gflec.org/wp-content/uploads/2018/12/FinancialFraud_JGSS.pdf?x70028.
6 NASAA 2019 Enforcement Report (Sept. 2019), p. 8, https://s30730.pcdn.co/wp-content/uploads/2019/09/2019-Enforcement-Report-Based-on-2018-Data-FINAL.pdf.
7 Id.
8 See, e.g., NASAA 2017 Enforcement Report (2017), https://s30730.pcdn.co/wp-content/uploads/2017/09/2017-Enforcement-Report-Based-on-2016-Data.pdf; NASAA 2015 Enforcement Report (2015), https://s30730.pcdn.co/wp-content/uploads/2011/08/2015-Enforcement-Report-on-2014-Data_FINAL.pdf.
9 Annamaria Lusardi, Olivia S. Mitchell, and Noemi Oggero, Debt and Financial Vulnerability on the Verge of Retirement (Apr. 2019), p. 7, https://gflec.org/wp-content/uploads/2019/05/LusardiMitchellOggero_Debt_4-27-19-JMCB.pdf?x70028.
10 Id.
11 Id. at p. 13.
12 Id. at p. 21.
13 FINRA Investor Education Foundation, The State of U.S. Financial Capability: The 2018 National Financial Capability Study (June 2019), p. 10, 31, https://www.usfinancialcapability.org/downloads/NFCS_2018_Report_Natl_Findings.pdf.
14 Id. at p. 18.
15 Diane Oakley and Kelly Kenneally, Retirement Insecurity 2019 – American’s Views of the Retirement Crisis, National Institute on Retirement Security (Mar. 2019) (“Oakley & Kenneally”), p. 1, https://www.nirsonline.org/wp-content/uploads/2019/02/OpinionResearch_final-1.pdf.
16 Id.
17 Nari Rhee, PhD and Ilana Boivie, The Continuing Retirement Savings Crisis, National Institute on Retirement Security (Mar. 2015), p. 11, https://www.nirsonline.org/wp-content/uploads/2017/07/final_rsc_2015.pdf.
18 Id.
19 Id. at p. 13.
20 Id.
21 Id. at p. 33.
22 Oakley & Kenneally, supra note 15,p. 6.
23 FINRA Financial Fraud Study, supra note 2, p. 3.
24 Id., p. 10.
25 Paul J. Yakoboski, Annamaria Lusardi, and Andrea Hasler, Financial Literacy in the United States and Its Link to Financial Wellness – The 2019 TIAA Institute-GFLEC Personal Finance Index (April 2019), pp. 3 – 5, https://gflec.org/wp-content/uploads/2019/03/TIAA-Institute-GFLEC_P-Fin-Index-Report_April-2019_FINAL-1.pdf?x70028.
26 Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto, Financial Sophistication in the Older Population (Feb. 2013), p. 1, https://gflec.org/wp-content/uploads/2014/12/a738b9_a94ad22b24a84672bf808e19bc0bca70.pdf.
27 NASAA, NASAA Broker-Dealer Section Study of Senior Practices and Procedures, 2016 – 2017 (June 2017), p. 7, https://s30730.pcdn.co/wp-content/uploads/2017/06/BD-Study-of-Senior-Practices-and-Procedures_06152017.pdf.
28 Id. at p. 8.
29 Id.
30 Id.
31 Id. at pp. 11 – 12.
32 Id. at p. 23.