Recent Moves to Protect Seniors from Fraud in Sale of Investment Products

A few years ago, one of the more perplexing cases handled by Penn State’s Elder Protection Clinic involved the sale of deferred annuities (specifically, an annuity that would not fully mature for 20 years) to a senior, a widow in her early 80s. 

The individual was a ripe target for a manipulative sales pitch, having recently been diagnosed with early stages of dementia, even though at the moment of sale she was still living independently in her home.  She was able to talk and communicate; arguably she did not seem impaired.  She was told the product would save on taxes — a pitch alluring to the frugal woman — except for the fact that she really didn’t need to save on taxes.  

If one lives long enough or has looming care needs even at an earlier age, an individual’s post-death estate planning goals can conflict with pre-death care needs. In the clinic client’s case, the woman’s  annual income was modest, and her total estate was not large enough to trigger other major taxes.  The assets used to fund the annuity were virtually her entire savings.  Several months later, her daughter learned of the purchase, while exploring care options for her mother. Her mother was facing ineligibility for Medicaid, as the purchase of the deferred annuity would be treated as transfer, while the alternative was a large penalty if she cashed in the annuity “early.” 

How often does this — or worse — happen? 

In “Still No Free Lunch: Recent Regulatory Initiatives to Protect Seniors From Fraud in the Sale of Investment Products,” 41 Securities Regulation Law Journal 397 (Winter 2013) (paywall protected; available on Westlaw as 41 No 4 SECRLJ Art 2), attorneys  Ivan B. Knauer and Michele C. Zarychta address recent efforts to prevent or address fraudulent practices by an array of regulatory bodies. The 2013 piece updates their 2008 article (available at 36 No 4 SECRLJ Art 3). They outline several types of fraud and various financial products often marketed specifically to elders.  For example, they observe:

“One of the most pressing concerns of the regulatory entities is the improper — or at least confusing– use of ‘senior’ designations by professionals, implying that a professional has expertise or training in senior-specific issues.  FINRA [the Financial Industry Regulatory Authority] ‘Rule of Conduct 2210 prohibits brokerage firms and brokers registered with FINRA from referencing nonexistent or self-conferred degrees or designations or referencing legitimate degrees or designations in a misleading manner.’  Misleading use of such designations may also violate federal securities laws or state laws.”

The authors, who are experienced in representation of investment and financial service companies, recognize that business lawyers can help clients recognize the need to “take measures to ensure that their own policies and procedures protect seniors.”  “Still No Free Lunch” is a reminder that attorneys who are advisers to companies can and should be a larger part of the solution, rather than be viewed as part of the problem. 

In reading the article, which emphasizes  regulators’ programs to “educate” the public, I am struck by the likelihood that a key tipping point occurs when a senior’s susceptibility to a manipulative pitch is outweighed by his or her weakened ability to recognize risk, regardless of any fraud-prevention education. That was true, for example, with our clinic’s client.  Her life-time frugal nature was still intact; however, her judgment about whether she needed to “save” money on taxes was diminished. More education was not the solution for her, as she had probably lost the ability to appreciate its application.  Indeed, a common marketing practice to seniors — free lunches or dinners disguised as “educational seminars” — trades upon that very fact, thus giving rise to the “no free lunch” theme in both articles by authors Knauer and Zarychta.

The authors detail stepped up enforcement efforts, including recent measures by the Consumer Financial Protection Bureau, established in 2010. 

Hat tip to Penn State Dickinson Law Professor Lance Cole, who shared this interesting article.