On April 15, 2015, the SEC’s Office of Internal Compliance Inspections and Examinations (OCIE), together with FINRA, released a report focusing on sales of investment products to seniors, including investments in structured products.1 The report, as well as increased scrutiny by the SEC and FINRA on investments by the elderly in general, is a reflection of the aging American population and the need of many of them for higher-yielding investments. Further, traditional investments, such as savings accounts, are earning historically low yields, resulting in an increased interest in non- traditional securities.

The report is based on 44 examinations conducted in 2013, which focused on how firms conduct business with senior investors.

Structure of the Report

The report addresses a number of key areas in which FINRA and other regulations impact sales to senior investors. Each section summarizes the relevant rules, referring in many cases to prior FINRA statements. Most of these sections are followed by “Notable Practices,” which appear to represent recommendations from FINRA and the OCIE. These sections include:

  • Training
  • Use of Senior Designations
  • Marketing and Communications
  • Account Documentation
  • Suitability
  • Disclosures
  • Customer Complaints
  • Supervision

Of course, although they may be useful for many firms, the report concludes that these “Notable Practices” are not intended to be a “safe harbor” or a checklist for good compliance; each member firm must consider the relevant issues in light of its business.

Focus on Structured Products

Significant Sales. Consistent with prior practice, the report pays significant attention to this asset class. Structured products accounted for one of the top five categories of sales at 11% of the firms surveyed.2

Suitability Issues. The report notes that 7% of the firms made potentially unsuitable recommendations for sales of structured notes and market-linked CDs. In particular, “[i]t appeared that firm representatives failed to consider investors’ risk tolerances, investment concentrations, the illiquid nature of these securities, and investors’ age and time horizon when assessing suitability. For example, representatives made multiple recommendations for market-linked CDs, which exceeded maximum firm thresholds of investable assets and product concentrations.”3

On the other hand, the report points out that the industry’s policies and procedures relating to the sales of structured products are paying increased attention to the issues relating to sales to senior investors. For example, FINRA noted policies that involved the pre-approval of purchases by customers aged 70 or older or prohibitions on sales of structured products to customers above a specific age unless the firm granted an exception.

Recommendations and Conclusions

In the report, the OCIE and FINRA examine steps a firm may take to better protect elderly investors from the risks related to these investments. These steps include providing training for employees to ensure that representatives understand the needs of their senior investors, as well as establishing guidelines for determining the suitability of an investment for an individual customer. These guidelines may include a customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the representative in connection with the recommendation. Specifically, when dealing with structured products or other non-traditional securities, OCIE and FINRA suggest that representatives focus on the appropriateness of exchanges, excessive fees, concentration of liquid net worth, short investment time horizon, and age to determine suitability.

Because of the current investment environment, the issues addressed in this report will likely remain a priority for the SEC and FINRA. Additionally, regulators at the state level are also focused on the risks related to structured products and are looking to partner with the SEC and FINRA to help regulate the sell of these products.4