We have written before about senior investors, but I saw a couple of things in the last couple of weeks that suggests this subject needs to be revisited.

First, back in February, the SEC got around to passing FINRA’s proposed rules to protect senior investors, including both new Rule 2165 and amendments to existing Rule 4512.  The upshot is that broker-dealers will be required to make reasonable efforts to obtain from customers the name and contact information of a “Trusted Contact Person,” who, as the name suggests, may be contacted by the broker-dealer to discuss a customer’s account under circumstances that suggest there may be health issues, or if there are suspicions the customer has been the victim of financial exploitation.  In addition, if BD develops a reasonable belief that a senior investor may be the subject of financial exploitation, the BD may place a temporary hold on the disbursement of funds or securities from the senior’s account.  This becomes effective in February 2018.

I thought these were good ideas when they were initially proposed a few years ago, and I still do. Contrary to many commentators, I feel the existing suitability rule is sufficient to cover recommendations made to any customer, including a senior citizen.  Thus, I will not concede that there need to be special rules governing recommendations to seniors.  Seniors have all the protection they need already, given that to be suitable under existing Rule 2111, a recommendation necessarily must take into consideration things like the customer’s income, investment objective, risk tolerance, time horizon, liquidity needs, i.e., the very characteristics that supposedly make seniors special.  In other words, seniors aren’t special when it comes to suitability, as the analysis that must be employed is the exact same.

What I like about the new rules, however, is that while they nominally exist to protect customers, in fact, they are really designed to protect broker-dealers. Now, if a BD develops some suspicion that the lucidity of one of its aging customers is becoming questionable, it reaches out to family members at its own peril of violating a privacy policy, or worse.  Similarly, the idea that today a BD can safely ignore an order from a customer to liquidate a position and wire out the proceeds due to concerns about the customer’s mental health is dubious, at best, given the risk of triggering a complaint for not following a clear order.  The new rules address these situations, providing a safe harbor within which BDs can operate without fear of drawing regulatory attention.  (Even under the new rules, however, there is nothing to prevent a customer from lodging a complaint, or filing an arbitration, if a sell order is not timely executed, so the safety of this harbor extends only to regulator matters.)  I am all for the clear delineation of any safe harbor, no matter how shallow it may ultimately turn out to be.

The second thing I read was a study published by the AARP called “Investment Fraud Vulnerability Study.”  It was designed to try and determine “who and why investors fall prey” to investment scams, or, in other words, to “identify differences between known investment fraud victims and the general investor population.”  The results are pretty interesting.

First, investment scam victims “reported valuing wealth accumulation as a measure of success in life, being open to sales pitches, being willing to take risks, preferring unregulated investments and describing themselves as ideologically conservative.” So, here’s the first weird part:  these customers like risk, they like taking chances on what the Study called “emerging investment opportunities that no has heard about yet,” even knowing, based on ordinary risk/reward considerations, there’s a likelihood they will lose their money.  Indeed, 48% of investment scam victims agreed with the statement that “[t]he most profitable financial returns are often found in investments that are not regulated by the government,” versus only 30% of general investors.  The victims are not naïve grannies, they are dice-rolling, anti-Government Trump supporters, apparently, who are betting they know better.  It makes me wonder why, therefore, that regulators probably spend 75% of their time focusing on protecting these investors from these investments that are somewhat removed from the mainstream.

Second, the victims were targeted by phone calls and emails with investment pitches to a much greater degree than the general investing public. That’s no coincidence, it seems, as the victims also reported that they were three times more likely – four times when it comes to phone calls – to respond positively to such pitches.  If only legitimate BDs had access to such effective lead sheets as the fraudsters apparently have, selling stocks would be a breeze!

Finally, victims skewed toward being male, married and over 70, with a substantial percentage being veterans. Not sure what to make of this, but perhaps it falls somewhere in the same psychological category as men being willing to drive 20 miles in the wrong direction rather than admitting we are lost, or to stop for directions.  It’s also why not every victim complains – sometimes, they just know they messed up, and are willing to accept the consequences.  Of course, that is until some sweet-talking claimants’ counsel convinces them it wasn’t their fault at all!