The New Frontier- Retiring Baby Boomers and the Senior …



From PLI’s Course Handbook

Securities Arbitration 2008: Evolving and Improving

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17

the new frontier: retiring baby

boomers and the senior market

Thomas A. Roberts

Barrasso Usdin Kupperman Freeman &

Sarver, LLC

Copyright © 2008 Thomas A. Roberts

Special thanks and credit to Catherine E. Garas

Who was instrumental in preparing this chapter.

The New Frontier: Retiring Baby Boomers and the Senior Market

Thomas A. Roberts *

Barrasso Usdin Kupperman Freeman & Sarver, LLC

Copyright © 2008 Thomas A. Roberts

* Special thanks and credit to Catherine E. Garas who was instrumental in preparing this chapter.

Baby boomers are aging, and that reality could bring an exponential increase in securities arbitration filings. This chapter will put that probability into perspective.

It is projected that by the year 2012 roughly 10,000 Americans will turn 65 each day. By 2030, the US Population aged 65 years and older is expected to double to over 71 million. [1] At that time 20% of the population will be 65 years or older.[2] As baby boomers approach the dawn of their retirement, they have more than $8.5 trillion in investable assets, and stand to inherit roughly $7 trillion from their parents.[3] However, due to the decline in traditional corporate pension plans and the strain on social security, baby boomers have had to take more responsibility for planning for their financial futures. Accordingly, in increasing numbers, baby boomers and seniors are turning to investment professionals to establish secure, profitable plans for their golden years.

The exploding senior population has created numerous opportunities for brokerage firms, investment advisors and financial planners. However, with opportunities for growth also come responsibilities for protection. Senior citizens are increasingly becoming targets of fraud and financial abuse. Consumer Action, a consumer advocacy group, estimates that people age 60 or over represent 30% of fraud victims.[4] Not surprisingly, regulators, legislatures and senior advocates are turning to financial institutions to implement supervisory initiatives directed at detecting internal practices which may mislead or exploit senior citizens. Moreover, financial institutions are often looked at as the first line of defense in policing non-affiliated third parties. This is the time, more than ever, for self-regulation to come to the forefront of brokerage firm and individual investor protection. For, as a seasoned compliance officer once told me, the touchstone of effective supervision is the protection of both the investor and the firm. When supervision fails, arbitrations likely follow.

I. The Regulators’ Senior Initiative

Concerned that financial scams targeting seniors will rise with the aging population, the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”)[5], and the North American Securities Administrators Association, Inc. (“NASAA”) [6] have joined together in a national initiative aimed at protecting seniors from investment fraud and sales of unsuitable securities (the “Senior Initiative”). The Senior Initiative, announced in May 2006, includes three components: (1) targeted examinations to detect abusive sales tactics aimed at seniors, (2) aggressive enforcement of state and federal securities laws in cases involving seniors, and (3) investor education and outreach. [7]

As part of the Senior Initiative, the SEC, FINRA and NASAA have combined their resources, connections and expertise to initiate five major “sweeps”. Regulators use “sweeps” or targeted investigations to gather information and carry out investigations into certain sales practices which have gained regulatory attention due to recent enforcement actions or civil actions. The investigated firms are selected based on a variety of factors, including level and nature of business activity in a particular area, customer complaints, regulatory history, and prior examination findings. Under NASD Rule 8210, member firms are obligated to cooperate with all such investigations, and provide any documents or records requested.[8]

The five senior “sweeps” address the following areas of regulatory concern: (1) “free lunch” seminars targeting the senior market; (2) professional designations or titles that use the terms “senior” or “elderly” or imply that a person has special expertise, certification, or training in advising or servicing senior citizens; (3) early retirement seminars designed to entice older workers to retire early, liquidate their retirement funds, and invest them with a particular registered representatives; (4) sales of principal only, interest only and inverse floater tranches of collateralized mortgage obligations to seniors; and (5) marketing life settlements to seniors. An overview of each sweep follows:

A. “Free Lunch” Seminars

The first sweep was directed at the use of “free lunch” seminars, whereby investment advisors invite investors to attend sales seminars by offering a free meal at upscale locations. Such sales seminars are widely offered by firms looking to sell financial products. They are often advertised in mass-mail invitations, mass email, local newspapers and on websites. According to a recent FINRA survey aimed at senior fraud risk, identified victims of fraud were three times more likely to have attended a “free lunch.” seminar. [9]

The regulators conducted 110 on-site examinations between April 2006 and June 2007. Examinations were targeted in areas of the country that have a large retiree population (i.e. Florida, California, Texas, Arizona, North Carolina, Alabama and South Carolina). These examinations were designed to review firms that offer sales seminars targeted to seniors and retirees for compliance with securities laws and rules intended to protect seniors.

After completing an extensive sweep that spanned 15 months, the regulators issued a joint report entitled “Protecting Senior Investors: Report of Examinations of Securities Firms Providing ‘Free Lunch’ Sales Seminars.”[10] The report includes findings that while the seminars were often advertised as educational and unbiased, ultimately they were designed to use aggressive and high pressure sales tactics to pitch proprietary or affiliated products for which the presenter receives compensation. The joint investigation found that 57% of the firms used advertising and sales materials that may have been misleading or exaggerated or included seemingly unwarranted claims, and that 23% involved recommendations that seniors invest in unsuitable investment products. Fourteen percent of the examinations revealed conduct which may have constituted outright fraud.

The report highlights a lack of supervisory oversight and compliance procedures to address practices which could violate numerous securities laws and FINRA rules of conduct. Remarkably, only 4% of the examinations (5 of the examinations conducted) , revealed no deficiencies or problems. Most importantly, and in order to help brokerage firms improve their supervisory and compliance practices in these areas, the report includes a description of compliance and supervisory practices that appeared to be effective in ensuring adequate supervisory procedures. Among the commended practices were a centralized system for reviewing and approving proposed seminars, advertising and sales materials, using standardized, pre-approved presentation materials, advertising and sales literature for the seminars and having registered principals or “mystery shoppers” randomly attend the seminars.

While the recommended practices are not specifically mandated by the securities laws, they do provide investment professionals with a blueprint of possible changes or improvements to their supervisory and compliance systems. Ultimately, each firm must evaluate its business model, firm culture and resources to determine the appropriate means to keep a strong arm on this issue.

In an effort to educate investors about the concerns with “free lunch” seminars, both FINRA and the SEC have issued Investor Alerts which are available on their websites.[11] These notices encourage investors to take a critical view of such seminars, cognizant of the fact that even if the seminar is framed as an educational event, it is designed to market products. Regulators encourage attendees to do their homework before the seminar, to ask questions at the seminar and to resolve in advance not to be pressured into making any investment decision at the seminar itself.

B. Professional Designations

Regulatory attention is also focused on the use of “professional” designations to mislead and defraud senior investors. The Senior Fraud Survey conducted by FINRA found that a quarter of seniors surveyed were told that their investment professional was specially accredited to handle seniors’ financial issues.[12] Those investors reported that they were more likely to listen to the advice given because of such “specialized accreditation.”

As a result of the first stage of the enforcement investigation, regulators found that investment professionals were using 50 different senior designations. The criteria for obtaining senior designations vary greatly. Some designations require formal certification, including completion of a rigorous course on financial issues, culminating in at least one examination, ethics requirements and ongoing continuing education requirements. However, others require nothing more than the payment of membership dues. Still others involve “educational” requirements focused more on learning how to break into the senior market, than protecting senior advisors. The three most popular designations are “Chartered Retirement Planning Counselor (“CRPC”), Certified Senior Advisor (“CSA”) and Chartered Advisor for Senior Living (“CASL”). These designations are usually on the person’s business card or stationery.

In addition to the FINRA sweep, state lawmakers are taking measures to curb misleading senior designations. In 2007, Massachusetts became the first state to issue regulations relating to senior designations. Effective June 1, 2007, Massachusetts forbid an investment advisor from using “purported credential or professional designation that indicates or implies that a broker-dealer agent has special certification or training in advising or servicing senior investors, unless such credential or professional designation has been accredited by an accreditation organization recognized by the Secretary by rule or order.” [13]  In June 2007, the Secretary of the Commonwealth of Massachusetts issued two orders recognizing the American National Standards Institute and the National Commission of Certifying Agencies as accreditation organizations.

On January 1, 2007, the Nebraska Department of Banking and Finance went so far as to issue a “Special Notice” requesting firms to prohibit the use of professional designations that state or imply a specialized knowledge of the needs of senior investors.[14] On July 31, 2007, the department issued Interpretive Opinion No 26, which lists approved designations by investment advisors and comments that use of designations not listed in the opinion may result in administrative action.[15]

Most recently, on April 1, 2008, the Missouri’s Secretary of State Robin Carnahan announced a new rule which will limit professional designations used by investment advisors and broker dealers in Missouri to those recognized by a nationally recognized accreditation organization.[16] The filed rules are subject to the state regulation filing process and would go into effect on January 1, 2009.

In addition to actions taken by individual states, NASAA recently announced that its membership approved a new model rule prohibiting the misleading use of senior and retiree designations.[17] On April 1, 2008, Karen Tyler, NASAA’s president, urged all NASAA members to adopt it into their jurisdictions as soon as possible. The model rule prohibits the misleading use of senior and retiree designations, while also providing a means by which the state securities administrator may recognize the use of certain designations. The model rule resulted from the collaboration of the state securities administrators and the SEC.

Federal legislatures are taking steps to encourage states to adopt the NASAA model rule. On April 1, 2008, Senator Herb Kohl (D-Wisconsin), Chair of the U.S. Senate Special Committee on Aging, introduced a bill entitled the Senior Investor Protection Act of 2008 (S.2794), which would create a new grant program to encourage state regulators to adopt a uniform standard for the accreditation of senior financial advisors, and help states’ efforts to protect seniors being mislead by these designations. The federal grants are designed to give states the ability to allocate funds for new technology, equipment and training for regulators, prosecutors and law enforcement, hiring individuals to investigate cases and provide educational materials. The legislation has been endorsed by NASAA, the American College and the Financial Planners Association.

C. Early Retirement Seminars

Regulators are also focusing on uncovering registered representatives who improperly advise baby boomers to retire early, cash in their company retirement plans and reinvest the funds in risky investments. In conjunction with the investigations, FINRA implemented a campaign directed at human resource directors and unions to inform these leaders and organizations of the seminars which may be enticing their employees.

In addition, FINRA has issued Investor Alerts which warn senior investors: (1) that taking earlier retirement only makes sense if they have saved enough money to begin with, (2) to make smart investment choices during their retirement years and (3) to not withdraw money at a rate which will deplete their savings too early. While this advice may seem obvious, the number of regulatory actions against such schemes suggests many such investors - blinded by the promise of an early retirement - fail to realize that it may not be possible for them to do so.

D. Selling Complex Structured Products to Seniors, Particularly Collaterized Mortgage Obligations

Another ongoing regulatory investigation concerns the sale of collaterized mortgage obligations (“CMOs”) to seniors. The investigation is focusing (at least in part) on sales of principal only, interest only and inverse floater tranches of CMOs.

First, a brief primer: CMOs are sophisticated financial tools which repackage mortgages to be sold on the secondary market.[18] They are a complex type of pass-through security. A pass-through security is a device (in the form of a trust) through which mortgage payments are collected and distributed to investors. Rather than pass through interest and cash flow from a group of like-featured assets, CMOs are made up of many different pools of assets. The pools held by the CMO, called tranches, each operate according to its own set of rules by which principal and interest get distributed.[19] The difficulty in explaining these products to an arbitrator panel is palpable. Due to the complexity of these products, one would expect that there will be a lot of confused looks on the faces of panel members, confirming their belief that neither the broker nor the customer had a real understanding of the inherent risks associated with the investment.

Given the fact they are among the most complex and intricate securities, CMOs are generally reserved for sophisticated investors. Moreover, because of the current sub-prime mortgage and real estate crisis, these investments are particularly risky and subject to default. FINRA has initiated this sweep because there “appears to be a significant push to sell these complex and risky products to seniors.” [20]

Regulators are concerned that investment professionals recommend such investments to seniors without fully understanding and/or conveying the terms and risks associated. Moreover, given the complex nature of the products and their potential for risk - particularly in the current market - regulators are concerned that such products would be unsuitable for the majority of senior investors.[21]

E. Life Settlements

The regulators have also initiated a sweep concerning the sale of life settlements, also known as “senior settlements”. The concept combines an aspect of ghoulishness with a degree of financial security. A life settlement involves selling the right to receive the death benefit of an existing life insurance policy to a third party for more than the policy’s cash surrender value, but less than the net death benefit amount. The purchasers of the life settlements are generally institutions that either (1) hold the policies to maturity and collect the net death benefit or (2) resell the policies to hedge funds or other investors. In exchange for releasing the right to receive the net death benefit, the transferor receives a lump sum payment. The amount of this payment depends on age, health and the policy’s terms and conditions. Generally, the senior settlement is for some value higher than the cash surrender value, but less than the net death benefit.

While regulators do not condemn all life settlement arrangements, they do warn of their dangers. Because the practice is relatively new and targets seniors who may be in poor health, aggressive sales tactics and abuse may be involved. FINRA Notice to Members 06-38[22] reminds firms and associated persons that life settlements involving variable insurance policies are securities transactions and that firms and associated persons involved with such life settlements are subject to applicable FINRA rules.

The Notice reflects many of FINRA’s concerns with life settlements. Because the purchasers of the policies are often not subject to (or knowledgeable of) the particular duties a brokerage firm owes its clients, FINRA cautions member firms to conduct thorough due diligence of the suitability of the transaction, the disclosures made concerning the costs and risks associated with the transaction,[23] and the policies of the purchasing organization. FINRA recommends firms consider developing a list of approved life settlement providers and/or brokers whose practices are consistent with the firm’s duties to its customers.

In a recent address to NASAA, SEC Commissioner Cox discussed the next stage of the Senior Initiative.[24] The regulators are soliciting input from securities firms to help them identify strong supervisory and compliance practices used by financial firms to help them attend to the special needs and concerns of senior investors. Specifically, regulators are reviewing: (1) advertising and marketing to seniors, (2) opening accounts of seniors, (3) suitability reviews, (4) ongoing review of the customer relationship and (5) the suitability of products as investors get older. Moreover, the regulators intend to pay particular attention to the sale of equity-indexed annuities to seniors.[25]

This latest faze of the Senior Initiative focuses on the special suitability concerns of senior clients. As they settle into retirement, the financial position of seniors may change. They may realize they underestimated their projected income needs. Or, health concerns could cause additional, unanticipated financial burdens. In addition, as seniors age, their ability to understand or recall discussions or investment decisions may diminish. As part of the 2008 Senior Summit, regulators are attempting to address the difficult question of how securities firms can identify a customer’s diminished capacity as he or she ages.

While reviewing and possibly altering compliance and supervisory systems to attend to the needs of seniors may seem a formidable task, addressing these issues today will save much time and expense down the road. Moreover, as investors become more aware of the dangers of rogue brokers and their practices, standing firm on a sound compliance history and supervisory system marks a firm with unmatched integrity.

II. Claims under State Elder Abuse Statutes

As reflected in these regulatory initiatives, interest in senior protection has caught the attention of the government, the media and investors. State and federal regulators, in the financial industry and beyond, are directing efforts to protect the interests of the growing senior population. As the regulatory actions highlighting financial abuse increases, so too will the number of civil actions, including arbitration.

Capitalizing on the attention and need for senior protection, Claimants’ attorneys in some states are now turning to elder abuse statutes to bring claims against brokerage firms, investment advisors and insurance companies for financial exploitation. It is a new adversarial front, which could subject brokerage firms to attorney-fee awards, punitive damages and even a mandatory reporting obligation.

A. Defending a Financial Exploitation Claim

Over half of the 50 states have included “financial exploitation” as a form of elder abuse under their state elder abuse statutes. However, even among those states which provide a specific civil action for “financial manipulation,” the scope of such a claim and the individuals protected varies from state to state. Some only apply elder abuse protection to individuals whose ability to perform basic functions is mentally, physically or psychologically impaired, or who are residents of a long term care facility. Yet some broader statutes allow any person over a certain age to bring a claim for financial exploitation, regardless of whether they are incapacitated, disabled or otherwise impaired.

For example, California has enacted one of the most progressive elder abuse statutes in the nation. California’s Elder Abuse and Dependent Adult Civil Protection Act protects any elder, defined as a California resident age 65 or older[26], from financial abuse. Under the statute, financial abuse against an elder occurs in the following situations:

when a person or entity does any of the following :

(1) Takes, secretes, appropriates, or retains real or personal property of an elder or dependent adult to a wrongful use or with intent to defraud, or both.

(2) Assists in taking, secreting, appropriating, or retaining real or personal property of an elder or dependent adult to a wrongful use or with intent to defraud, or both.[27]

Cal. Welf. & Inst. Code § 15610.30.

Such an individual need only prove bad faith; intent to defraud is not necessary.[28] Under the statute, a person or entity has acted in bad faith if they knew or reasonably should have known that the elder had the right to have the property transferred or made readily available to the elder.. In order to encourage attorneys to take elder abuse cases, the statute allows the plaintiffs to recover attorney’s fees if they prove by a preponderance of the evidence that the defendant is liable for financial abuse. Furthermore, if a plaintiff proves by clear and convincing evidence that the defendant is guilty of oppression, fraud or malice, the plaintiff may recover punitive damages.

Likely due to the broad nature of the elder abuse statute, California is also one of the jurisdictions with reported cases involving elder abuse claims against financial institutions. In Negrete v. Fidelity and Guaranty Life Insurance Co., 444 F.Supp 2d 998 (C.D.Ca. 2006), a class of elderly plaintiffs brought an action claiming the life insurance company engaged in a systematic scheme of defrauding elderly persons into purchasing deferred annuity contracts where the annuity’s maturity date was beyond the actuarial life expectancy of the annuitant. On its motion to dismiss under 12(b)(6), the defendant argued it did not “take, secrete, appropriate or retain real or personal property” because it was engaged in an arms length financial transaction whereby the elder voluntarily entered into the annuity contract, and could request a return of the property at any time.[29] In response, the named plaintiff argued (and the court agreed) that the plaintiffs had alleged taking by stratagem, which is sufficient to state a claim under the elder abuse statute. [30]

While financial exploitation claims were initially designed to curb abuse of elders by individuals, decisions like the Negrete class action suggest plaintiffs’ attorneys will add them to their arsenal when raising claims against large corporations and securities firms. They could also find their way into securities arbitrations. Because many of the state statutes provide for recovery of attorney’s fees, plaintiffs’ attorneys will see them as profitable cases to accept. Moreover, because they involve compelling societal concerns and sympathetic plaintiffs, they will likely pull at the heartstrings of jurors and arbitrators (who may very well fall within the same protected class of seniors). A thorough understanding of the relevant elder abuse statute will help securities firms evaluate potential claims from the onset.

B. Securities Firms’ Obligations to Report Elder Abuse

In addition to having to be prepared to defend claims under state elder abuse laws, securities firms must be prepared to fulfill mandatory reporting requirements if they suspect financial abuse. Forty-four states and the District of Columbia include provisions in their elder abuse statutes which require either “any person” or specified categories of individuals to report suspected elder abuse. Because the representatives of securities firms and broker dealers typically have the opportunity and responsibility to oversee the financial assets of a large percentage of the population, awareness of the reporting requirements applicable to their employees and agents should be part of any supervisory and compliance system.

As with the terms for civil liability, the mandatory reporting requirements of the state elder abuse statutes vary greatly. Of the states with mandatory reporting requirements, only Mississippi specifically lists stockbrokers, financial advisors, investment advisors, financial planners and “any officer or employee of a bank, savings and loan, credit union or any other financial service provider” in the categories of persons required to report abuse.[31] Others states generally provide that “any person” is required to mandate abuse of the form provided in the state elder abuse law.[32]

Apart from Mississippi, the focus on financial institutions reporting elder abuse has been largely limited to financial institutions providing banking services[33]. However, because representatives of securities firms typically have closer relationships with their clients than the local bank teller, more states will likely push to have the categories of mandatory reporters extended to those in the securities industry.

The reason given for mandatory reporting by financial institutions is that they may be the first line of defense for reporting abuse. According to the New York State Office of Children and Family Services Advocates, which unsuccessfully advocated for a change in New York law to require mandatory reporting by bank, “No institution is in a better position to observe and report” suspicious behavior. Arguably the same can be true of brokerage firms or investment advisors. Suspicious behavior in brokerage accounts could include,

• An unusual volume of withdrawals or activity in cash.

• Sudden increases in incurred debt when the elder appears unaware of transactions.

• Withdrawal of funds by a fiduciary or someone else handling the elder's affairs, with no apparent benefit to the elder.

• Implausible reasons for activity are given either by the elder or by the person accompanying him/her.

Because the purpose of the mandatory reporting provisions is to encourage reporting, rather than punish, statutory penalties for failure to report elder abuse are not severe. Typically, the crime is only considered a misdemeanor. Moreover, there have been few prosecutions of mandatory reporters for failure to report. However, a handful of state elder abuse statutes specifically state that a mandatory reporter who fails to report suspected abuse or exploitation can be liable for damages caused by the failure to report.

Understandably, financial institutions are concerned that reporting elder abuse could subject them to liability under federal or state privacy laws, or civil actions by customers for revealing personal information. Moreover, in those states where financial institutions have an affirmative duty to report abuse, they may be concerned that their elderly clients could attempt to hold them liable for failing to report elder abuse.

Presumably in an attempt to alleviate the mandatory reporters’ concerns that they may be subject to liability for reporting elder abuse, all states offer good faith reporters of elder abuse some form of immunity from civil or criminal liability under state law.[34]

However, under the Supremacy Clause of the United States Constitution, immunity provisions in state statutes are not able to provide reporters from civil or criminal liability under federal statutes.[35]

Under Title V of the Gramm Leach Bliley Act, 15 U.S.C. § 6801 et seq., customers must be given notice and an option to opt out of any activities which would involve disseminating any “nonpublic personal information” to “nonaffiliated third parties.” 15 U.S.C. § 6802. However, the Gramm Leach Bliley Act also lists numerous exemptions which will often be applicable in reports of elder abuse. Among them, the Act allows disclosure “to protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability, ” “to the extent specifically permitted or required under other provisions of law ... to law enforcement agencies ... or for an investigation on a matter related to public safety.” 15 U.S.C. § 6802. Furthermore, disclosure is permissible “to comply with Federal, State, or local laws, rules, and other applicable legal requirements,” Id. In 2002, in response to an inquiry from United States Senator Debbie Stabenow, a joint opinion letter issued by the regulatory agencies responsible for the enforcement of the Gramm Leach Bliley Act, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Securities and Exchange Commission and the Federal Trade Commission, concluded that a bank’s reporting obligations under the Michigan elder abuse statute falls within the exemptions to the Act.

Most states have their own form of legislation aimed at protecting citizens’ non-public information, and provide specific instances when financial institutions may disclose customer information. As privacy legislation varies greatly from state to state, so too do the permissible circumstances for disclosure of this information.

Some statutes permit disclosure to comply with a federal or state law, or to a government agency concerning a possible violation of state law. Under the same analogy as with the Gramm Leach Bliley Act, a claim under state privacy laws may be defended under these provisions. Furthermore, if states do not have exemptions to their privacy legislation which would enable a securities firm to provide nonpublic personal information concerning one of its customers, the firm may always disclose public information (e.g., the name of the customer, the name of the perpetrator, and the nature of the suspected abuse). Such disclosures may cause the state agency to initiate an investigation into the matter. As a result of an investigation, the state government agency could always thereby subpoena further records from the firm itself.

Finally, firms may be concerned that customers will initiate civil actions for disclosure of nonpublic personal information. However, the majority of immunity protections in elder abuse laws provide a sound defense for such claims.

III. Conclusion

Protecting the growing senior population is a concern that touches every household in America. Increasingly, regulators, legislatures, advocacy groups and the media are placing more and more emphasis on the dangers of investment schemes which seek to defraud the largest growing (and most wealthy) portion of our population. Amid horrid stories of financial exploitation, fraud and unethical conduct by members of the securities industry, securities firms must take proactive steps to alleviate concerns of older investors, regulators and the legislatures. Such steps require each firm to take a comprehensive review of the firm’s supervisory and compliance systems, attain a thorough understanding of the firm’s duties under state and federal regulatory and statutory law, and implement investor and representative training programs.

The baby boomers have been one of the most influential generations in American history, affectionately dubbed a “generation of doers”. Rather than waiting on the sidelines and letting things happen to them, they have worked so that things will happen through them. Retirement will not change that. Securities firms can still learn a lesson from these baby boomers. Rather than waiting for something to happen to you – arbitrations, regulatory actions, loss of client base- be proactive. Take steps to review your sales practices, revise your supervisory or compliance systems, and educate your clients. Get in the game, or you could be on the bench for the long haul.

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[1] See Wan He, et al., US Census Bureau, Current Population Reports, 65+ in the United States:2005, US Government printing Office, Washington, D.C., (2005), available at .

[2] Id.

[3] Testimony of Patricia D. Struck, Wisconsin Securities Division Administrator and President of the North American Securities Administrators Association, Inc. before the Special Committee on Aging, United States Senate, March 29, 2006.

[4] Consumer Action, “Just Say N0! to Senior Scams”, Published November 2, 2005, available at .

[5] On July 30, 2007, the Financial Regulatory Administration, Inc. was formed from the consolidation of the National Association of Securities Dealers, Inc. (“NASD”) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange (NYSE). FINRA is responsible for rule writing, firm examination, enforcement and arbitration and mediation functions, along with all functions that were previously overseen solely by NASD, including market regulation under contract for NASDAQ, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange.

[6] The NASAA’s membership consists of the securities administrators in the 50 states, the District of Columbia, the U.S. Virgin Islands, Canada, Mexico, and Puerto Rico.

[7] See Press Release from NASAA, SEC and NASAA Launch Program to Protect Senior Investors, May 8, 2006.

[8] The FINRA rulebook currently consists of both NASD Rules and certain NYSE Rules that FINRA has incorporated. FINRA is in the process of consolidating the NASD and incorporated NYSE rules into a single set of FINRA rules. A copy of NASD Rule 8210, and a general discussion of regulatory sweeps can be found on FINRA’s website, at .

[9] In August 2007 the FINRA Investor Education Foundation contracted Applied Research & Consulting LLC to conduct an investor risk survey of investors age 55-67 with at least $2000 in investable assets. The results of the Senior Fraud Survey can be found on FINRA’s website at .

[10] A copy of the regulators’ joint report can be found on the SEC website at ;

[11] The SEC’s commitment to the Senior Initiative is so strong, they have devoted an entire portion of their website to issues concerning senior investors. See . The website also includes numerous investor alerts advising seniors of topics such as a report detailing investment products and sales practices commonly used to defraud seniors ( available at ) and a list of questions seniors should ask their investment professional (available at ) Similarly FINRA has issued many investor alerts designed to educate older investors on how they can protect themselves from fraudulent schemes. See Fraud Fighting 101: Smart Tips for Older Investors (available at ) and Protect Yourself from Early Retirement Scams (available at ).

[12] See notation concerning the Senior Fraud Survey found in footnote 9.

[13] For a copy of the Notice of Final Regulations amending 950 CMR 12.200, see .

[14] For a copy of the January 1, 2007 Special Notice, see .

[15] See Nebraska Department of Banking and Finance Department of Securities Interpretive Opinion No. 26, available at .

[16] A copy of the news release detailing this latest announcement can be found at .

[17] A copy of the NASAA model rule can be found on NASAA’s website at .

[18] In addition to mortgages, banks and corporations may also package and resell other forms of debt, such as car loans or corporate debt. However, the FINRA investigation appears to be focused on collaterized mortgage obligations which include pools of mortgages, not loans for personal property or corporate debt.

[19] See FINRA’s webpage at for a discussion of collaterized mortgage obligations and other types of mortgage backed securities.

[20] See remarks of Mary Shapiro, Chief Executive Officer of FINRA at the 2007 Seniors Summit, September 10, 2007, available at .

[21] See FINRA Notice to Members 05-26, New Products NASD Recommends Best Practices for Reviewing New Products available at .

[22] See FINRA Notice to Members 06-38, Life Settlements: Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties available at

[23] FINRA reminds broker dealers that the costs associated with the transaction are more than simply the lump sum received for the right to claim the net death benefit. In addition, there are additional “costs” such as the customer’s continuing need for coverage, the availability, adequacy and cost of comparable coverage.

[24] See the SEC’s website at for a copy of Chairman Cox’s address to the NASAA.

[25] On April 22, 2008, FINRA issue an investor alert on equity-indexed annuities. See Equity-Indexed Annuities—A Complex Choice available at .

[26] Cal. Welf. & Inst. Code § 15610.27.

[27] Cal. Welf. & Inst. Code § 15610.30.

[28] Id.

[29] Although not mentioned in the opinion, presumably the contract owner would have incurred a surrender charge if they withdrew the principal invested prior to the expiration of a certain time period.

[30] Negrete is currently in the class certification stage of litigation.

[31] See Miss. Code Ann. § 43-47-7(1)(a)(vii.). Virginia’s elder abuse statute also has a voluntary reporting provision which states “[a]ny financial institution staff who suspects that an adult has been exploited financially may report such suspected exploitation. . .” Virginia Stat. §63.2-1606 (emphasis added). The statute defines “financial institution staff” as “any employee of a bank, savings institution, credit union, securities firm, accounting firm, or insurance company.” Id. (emphasis added).

[32] See e.g. Delaware, Del. Stat. Tit. 31, § 3910(a); Indiana, Ind. Stat. § 12-10-3-9(a); Kentucky, Ky. Stat. § 209.030(2); Louisiana, La. Rev. Stat. § 14:403.2(C); Missouri. Mo. Stat. § 660.255; New Hampshire, N.H. Stat. § 161-F:46; New Mexico, N. Mex. Stat. § 27-7-30(A); North Carolina. N. Car. Stat. § 108A-102(a); Oklahoma, Okla. Stat. Tit. 43A § 10-104(A); Rhode Island, R. Is. Stat. § 42-66-8; South Carolina, S. Car. Stat. § 43-35-25(A) (South Carolina mandates reporting only by any person “who has actual knowledge” of abuse); Tennessee, Tenn. Stat. § 71-6-103(b)(1); Texas. Tex. Hum. Res. § 48.051(a) and (c); Utah, Utah Stat. § 62A-3-305; and Wyoming, Wy. Stat. § 35-20-103(a).

[33] The following states specifically list “financial institutions” as mandatory reporters of elder abuse New Mexico, N. Mex. Stat. § 27-7-30(A); Florida, Fla. Stat. § 415.1034(1)(a)(8); Georgia, Ga. Stat. § 30-5-4(a)(1)(B); California, Cal. Welf. & Inst. Code 15630.1; and Mississippi., Miss. Stat. § 43-47-7(1)(a)(vii). Virginia has a provision which permits, but does not require, “financial institutions”, including “securities firms”, to file a report of suspected elder abuse. See VA Stat. § 63.2-1606

[34] See, e.g., Miss. Code Ann. § 43-47-7(4)(stating that any reporting person “shall be presumed to be acting in good faith and in so doing shall be immune from liability, civil or criminal, that might otherwise be incurred or imposed.”); 31 Del.C. § 3910(c).

[35] See United States Constitution, Article VI.

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