The Financial Industry Regulatory Authority (FINRA) issued a regulatory notice this month that contained the results of a survey of retail broker-dealer firms regarding the use and oversight of senior designations in an effort to better understand their approach to a vulnerable segment of the population.
One area of particular focus was the use of certifications and designations that imply expertise, certification, training or specialty in advising senior investors.
Vulnerable Customers
Vulnerable customers may be more susceptible to fraud, as FINRA noted in a compliance letter it sent to firms earlier this year that reminded them to exercise extreme care in their supervisory responsibilities.
Firms Overcharging Elderly Customers
In an example of what can go wrong, the letter recounted a recent enforcement action through which FINRA expelled a firm and barred two brokers from practice for overcharging an elderly investor $1.2 million in undisclosed markups, including $767,000 in fraudulently excessive markups.
The survey, conducted in January, was meant to assess what firms are doing to avoid such fraud. It showed that some firms ban senior designations, but most permit their use by brokers so long as the person obtains prior approval. Some firms verify the credentials underlying such designations.
While FINRA said the results were mostly positive, it found some firms did too little to monitor the quality of the designations that brokers were allowed to use.
In certain instances, senior designations had meaningless standards. FINRA said it was “concerned by the use of standards that did nothing to ensure that brokers possessed financial services skills that were unique or valuable to senior investors”, a finding consistent across survey participants.
“Senior citizens are unlikely to be able to differentiate between designations that represent an enhanced level of proficiency in dealing with financial matters relevant to senior investors, versus a designation that is simply a marketing tool”, FINRA’s notice said.
In addition, the notice said “some firms had no procedure in place to determine the prerequisites a broker would need to obtain a senior designation”.
Widespread Use of Senior Designations
FINRA surveyed retail broker-dealer of various sizes, product mixes and business models, from various locations, and 157 responded.
The results showed widespread use of senior designations. Specifically, 68 percent of the respondents said they allow their use by registered brokers. Among these firms, 89 percent presently employ brokers with these designations and 11 percent do not have any at this time.
Among those who have brokers with senior designations, 66 percent of the firms require brokers to get approval and to verify their credentials, 23 percent require only approval, not verification, and 11 percent do not require either approval or verification.
Survey respondents were also asked whether they prohibit the use of any designations, and 73 percent said they did. Some banned only one or two designations, but other firms allowed the use of only a small number.
Only two firms said they require brokers to obtain senior or other professional designations prior to marketing products to senior investors.
The firms that require approval of senior designations indicated that they review course work, continuing education and other prerequisite requirements before allowing the designation. Other criteria included an assessment of state requirements.
FINRA Outlined the Rules & Sound Practices
To improve the situation, FINRA outlined the rules and sound practices in the notice and encouraged its members to follow them.
Rule 3010 of the National Association of Securities Dealers (NASD) — a FINRA predecessor — requires each firm to have supervisory procedures in place reasonably designed to prevent brokers from using a senior designation in an unethical or misleading manner.
Expertise in Senior Investments
The notice stated that “broker-dealer firms that allow the use of any title or designation that conveys expertise in senior investments or retirement planning where such expertise does not exist may violate FINRA Rule 2010, NASD Rule 2210, New York Stock Exchange (NYSE) Rule 472, and anti-fraud provisions of the federal securities laws”.
NASD Rule 2210 and NYSE 472 prohibit firms and brokers from making false, exaggerated, unwarranted or misleading statements or claims. This includes talking up nonexistent or self-conferred degrees or designations or referencing legitimate qualifications in a misleading manner, the notice said.
Establish Adequate Supervisory Procedures
“Firms need to establish adequate supervisory procedures to ensure their brokers do not violate any of these rules and requirements”, the notice said. The procedures need to be in writing, communicated clearly to employees and consistently enforced. They need to cover in detail cover how senior designations may be used.
Regarding sales efforts, FINRA reminded firms in the notice that “all advertisements and sales literature — including materials that feature senior designations — must be approved in writing by a registered principal of the firm pursuant to NASD Rule 2210(b)(1)”.
Best Practices Firms Should Consider Based on Circumstances
For example, they can reduce the risk of confusion or over-reliance by restricting their brokers to using only those designations that indicate they possess substantive knowledge that will help them better serve and protect senior investors.
The Well Run Firms
The well-run firms who responded to the survey prohibit designations that do not have a rigorous curriculum, an emphasis on ethics, requirements for continuing education and a public disciplinary process, the notice said. These firms also require brokers to demonstrate a level of experience in retirement planning and other related matters, as well as the ability to work with senior investors.
Moreover, the notice said “many firms indicated that they assess a designation according to whether it is recognized or issued by a reputable or accredited organization and whether this organization has a code of ethics or standards of professional conduct”.
Review & Restrictions
Many firms described the valuable practice of comprehensively reviewing advertising, sales literature and emails to make sure brokers are not using self-conferred or misleading designations that have not been earned or approved without the firm’s knowledge. Some firms search on key words when reviewing correspondence and emails to monitor the use of designations.
To detect and prevent these types of violations, some firms allow their brokers to only use business cards or letterhead approved by the firm.
Other firms prohibit a practice that can often result in securities fraud: the use of senior designations during sales seminars or so-called “free lunches” with senior investors, where the potential clients are often at their most vulnerable.
Some respondents also conduct unannounced audits of branch offices to make sure all marketing materials are being used appropriately.
Continuous Training
Regarding training, certain firms said they require their people to attend sessions focused on retirement planning, senior investor ethics, and the proper use of senior designations in advertising, sales literature and correspondence. Through such training firms try to ensure their brokers are aware of the special issues surrounding senior investors.
In addition, among those firms that allow senior designations only with approval, some require brokers to periodically certify the designations they use. They must also certify that these designations are not self-conferred, that they meet the continuing education requirements, and that the broker is in good standing with the organization that conferred the designation.
While this information is self-reported, it gives firms another tool to help them monitor the use of designations.
Guiliano Law Group
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
