Protecting the Financial Future of Seniors and Retirees
Commissioner Luis A. Aguilar
The American Retirement Initiative’s Winter 2014 Summit<br>Washington, DC
Feb. 4, 2014
Thank you, Keith [Green], for that kind introduction. I am pleased to sponsor The American Retirement Initiative’s Winter 2014 Summit. Protecting our nation’s seniors and retirees has continued to be an important mission for me. They are among the most vulnerable investors in our country. For these reasons, it is imperative to engage in solution-oriented dialogue and raise public awareness of the plight of American seniors and retirees. Before I continue my remarks, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC” or “Commission”), my fellow Commissioners, or members of the staff.
Let me start by stating the obvious: “baby boomers” are now “retiring boomers.” As baby boomers enter retirement, many are retiring much sooner than expected—often involuntarily. Specifically, a survey sponsored by The Society of Actuaries indicated that while Americans plan to retire at a median age of 65, they are actually retiring at a median age of 58. This is a full seven years earlier than planned. The survey showed that many factors led to retirement. Some of these factors are voluntary, but many are not. Many individuals felt forced out of their jobs or compelled to retire. Others retired because of corporate downsizing and/or the availability of financial incentives to retire. Interestingly, research shows that those Americans facing retirement contemplated that they would find some interesting work to keep them occupied during retirement—and earn some extra money. Unfortunately, the data shows that this is just not the case. In reality, many retirees who anticipated working in retirement did not work.
There are also retirement issues unique to certain groups-particularly African-Americans and Hispanics. As a result, we have two panels today focusing on the retirement issues confronting these groups. Although these two groups have made tremendous progress in our country, their relationship with our financial services industry can be characterized as lacking and in need of significantly more attention.
In 2010, the Department of Labor issued a report on a study concluding that disparities in retirement security existed for women and racial minorities. The statistics are troubling. For example, more African-American workers are out of the labor force at ages 55-64 than other groups, primarily because of higher rates of disability. The report also stated that older women who are alone,, after the age of 65, are much more likely to be poor than married women, and that women of color are much more likely to be poor than white women. Moreover, the Urban Institute noted that, in 2009, 65% of white wage and salary workers were offered employer-sponsored retirement plans compared to only 56% for African-American workers.
Just last month, a survey by the Social Security Administration based on the most recent data shows that African-Americans had lower earnings than the overall population. This means that African-Americans will likely receive lower Social Security benefits at retirement, because these benefits are based on lifetime earnings. Moreover, African-Americans are less likely to be married compared to the total U.S. population, suggesting that they are less likely to qualify for Social Security spouse and survivor benefits that might otherwise assist their financial well-being at retirement.
Similarly, a recent survey of Hispanics and their financial and retirement planning shows that the annual household incomes of Hispanics are even lower than the African-American community and, of course, lower than the general U.S. population. According to the survey, Hispanics also anticipate retiring at age 66 and continuing to work at least part-time during retirement, which, as noted earlier, may be a bit too optimistic. The survey also indicates that more than 50% of Hispanics surveyed had a poor understanding of retirement plans at work. Moreover, the data shows that only 38% of Hispanic workers had access to employer-sponsored retirement plans and, of those, only 71% actually contributed to the plans—compared to 85% of the general population.
Obviously, these surveys and studies have important implications for those that are planning for retirement. Among other things, it means that they have a shorter period of time to accumulate wealth needed for retirement. The longer retirement period also means that they will need to be better prepared to address threats to their retirement nest eggs—such as inflation, health care costs, and long-term care. In addition, they will need to be more vigilant in protecting their assets from fraudsters and those who prey on, and target, seniors and retirees.
Today’s panels will discuss many of the issues I just mentioned. For the remaining time I have this morning, I would like to highlight:
- Some serious issues related to elderly financial abuse; and
- Some regulatory initiatives designed to protect the financial future of seniors and retirees.
Elder Financial Abuse
A recent survey showed that 84% of experts specializing in investment fraud and financial exploitation of American senior citizens agree that the problem of fraud targeting the elderly is getting worse. Nearly all of those experts said that elderly Americans are vulnerable to financial swindles, and that the problem of investment fraud against seniors is serious. Indeed, it has been estimated that about one in five Americans aged 65 or older—that’s about 7.3 million senior citizens—already have been victimized by financial fraud. Given these statistics, it is imperative for regulators to work even harder to protect these vulnerable seniors by enforcing laws that reduce the opportunities for fraud.
Demographically, seniors will soon be the largest percentage of the American population. Experts have been forecasting this for some time, as the baby boomer generation ages and retires. What has not been emphasized—as clearly—is the tremendous generational inequality of wealth between some seniors and everyone else. The good news is that, in the aggregate, today’s senior population has been successful in accumulating assets. As noted by a former director of fraud education and outreach for the California Department of Corporations, the state’s securities regulator, aging baby boomers have accumulated substantial assets, either through inheritance, home equity, or a lifetime of saving for retirement. The bad news is that these aging baby boomers are ripe for abuse. This disparity between seniors and everyone else, including their own children, exponentially increases the vulnerability of seniors to financial exploitation. To make matters worse, according to a survey of state securities regulators, financial planners, health care professionals, law enforcement officials, and other experts, the top financial exploiters of older Americans include family members and caregivers. It’s not a pretty picture when those closest to you cannot be trusted.
The SEC’s own enforcement efforts show a continuing trend of fraudulent activities aimed at senior citizens and the elderly. I will mention just a few examples from this past year:
In March 2013, the SEC shut down a $3 million Ponzi scheme that targeted seniors—including an elderly investor suffering from a stroke and dementia—by falsely promising high profits from commercial and residential rental properties.
In August 2013, the SEC filed an administrative action against an individual for targeting senior citizens on Medicaid, and selling them over $1.8 million in promissory notes that purportedly guaranteed a high return.
- In November 2013, the SEC charged an individual for defrauding elderly and retired investors into making purported safe investments in government bonds. Instead, he misappropriated about $2.8 million of investor funds to pay his mortgage and make commission payments to his salespeople.
In addition to these egregious fraudulent schemes, the SEC has issued guidance to warn the public about other types of fraud targeting seniors, including oil and gas scams, prime bank fraud, and scams promising high returns or risk-free investments.
Regrettably, there will always be those who prey on the vulnerable and seek to exploit them. This is the reason why we must have in place a strong regulatory framework that limits the opportunities for fraud and deception.
I would now like to discuss some of the actions the SEC is taking to safeguard retirement assets, including strengthening our examination programs, partnering with other regulators, and sponsoring events like today’s Summit that is designed to address issues that are important to senior investors.
National Examination Program (NEP) Priorities
One recent example involves the SEC’s National Examination Program, which last month published its 2014 examination priorities. The publication of the priorities is designed to inform investors and registrants about areas that are perceived to have heightened risks. These exam priorities were developed based on, among other things, communications with other regulators and agencies, as well as comments and tips received directly from investors and SEC-registered entities. I would like to point out two initiatives that are particularly important to seniors and retirees: (1) an initiative that focuses on retirement vehicles and rollovers; and (2) an initiative in the broker-dealer exam program that focuses on sales practices and supervision.
First, the SEC is taking a closer look at what happens when, during changes in employment or when entering retirement, investors have several options for what to do with the retirement plan assets held at their former employers. In particular, the SEC will focus on the practices of financial advisers in making recommendations on rollover Individual Retirement Accounts, or IRAs. Indeed, a FINRA regulatory notice has recognized the conflict of interest between a broker-dealer’s financial incentive to recommend that plan assets be rolled over to an IRA—in which case the broker-dealer earns a commission—and a recommendation that an investor leaves her plan assets with her former employer or rollover the assets to a plan sponsored by a new employer, which will result in little or no compensation for the broker-dealer. A financial adviser affiliated with a broker-dealer clearly has an economic incentive to encourage an investor to rollover plan assets into an IRA managed by the broker-dealer. This issue is important because, among other reasons, about 98% of IRAs with balances of $25,000 or less are held in brokerage accounts, and the largest source of contributions to IRAs are rollovers from employer-sponsored retirement plans. Simply stated, there are a lot of potential commission dollars that can influence the advice given.
Given this inherent conflict of interest, the SEC plans to review the practices and incentives of investment advisers and broker-dealers in making recommendations on these rollover IRAs. In particular, the SEC will examine the sales practices of investment advisers that are targeting retirement-age workers to rollover their employer-sponsored 401(k) plans into higher cost investments. The SEC will also examine broker-dealers and investment advisers for possible improper or misleading marketing and advertising, conflicts, suitability, churning, and the use of potentially misleading professional designations when making recommendations on rollover IRAs.
Second, as part of its exam priorities for 2014 and our continuing efforts to protect retail investors, especially elderly investors, the SEC will examine broker-dealer sales practices to detect and prevent fraud and other violations, including affinity fraud targeting seniors. The SEC will also focus on broker-dealers’ supervision of registered representatives with significant disciplinary histories. Last year, a Wall Street Journal article reported that, from 2005 to 2012, more than 5,000 brokers licensed to sell securities had worked at a firm that had been expelled by FINRA. Notwithstanding that their former firm had been expelled, these brokers remained in the industry. Often these brokers go from one problematic broker-dealer to another. This pattern of brokers moving from one problem broker-dealer to another is sometimes called “cockroaching.” During my tenure as Commissioner, I have seen a multitude of enforcement cases involving recidivist brokers. In fact, this issue is of such serious concern that the Commission has discussed with the SEC staff the need to address this problem. I am glad to report some positive movement. Just last month, FINRA reported the formation of an enforcement team dedicated to reviewing brokers whose records show a pattern of complaints relating to sales practice abuses. I expect that the staff of the SEC and FINRA will work closely to address the problem of recidivist brokers. We need to address this issue to reduce investor harm and restore investor trust and confidence, which is fundamental to encouraging Americans to invest their savings in our capital markets and fundamental to protecting their retirement assets.
Although it is important that seniors and retirees be vigilant and be the first line of defense in protecting their own assets, the importance of regulatory oversight cannot be understated. As one survey shows, most seniors do not have all the information they need to pick a financial adviser to help protect their retirement assets. And about three in five experts said that seniors are not able to determine the “legitimacy, value, and authenticity of credentials held by their financial advisers and planners.” For this and other reasons, the SEC and other regulators must continue to play an important role in securing the financial future of American retirees, and working proactively to protect retirement assets is a step in the right direction.
Reporting Elder Financial Abuse
As I near the end of my remarks, I would also like to say a few words about the need to report elder financial abuse. Unfortunately, recent studies have shown that only a small fraction of elder financial abuse is reported. Senior citizens are attractive targets for financial exploitation by fraudsters because they generally have significant assets or equity in their homes. In addition, they are particularly vulnerable because of isolation, cognitive decline, physical disability, and health problems. One survey showed that one in five doctors and nurses often deal with older victims of investment fraud, and 92% of these doctors and nurses think that even mild cognitive impairment often make seniors more vulnerable to investment fraud. Given this information, it is important to encourage the prompt reporting of suspected financial exploitation of the elderly to appropriate authorities in order to trigger intervention, prevent financial losses, and provide other types of assistance.
Unfortunately, many financial institutions may hesitate to report suspected elder financial abuse if it entails disclosing nonpublic personal information about their customers. Their hesitation comes from a concern that this information cannot be shared with others due to limitations on sharing such information under the Gramm-Leach-Bliley Act. The law, however, is not meant to shield fraudulent activities targeting older adults. To make that clear, the SEC and other federal regulators issued guidance last year confirming that it is lawful for financial institutions to use customer information for purposes of reporting suspected financial abuse of older adults to local, state, or federal agencies. The guidance also provides information on potential signs of elder financial abuse, such as erratic or unusual banking transactions. The hope is that, by encouraging prompt reporting of elder financial abuse, seniors and retirees can get the assistance they need, when they need it.
I will conclude my remarks by reaffirming my commitment to protect our nation’s seniors and retirees. This is an important priority for me personally and for the agency. Elder financial abuse is a problem growing exponentially, and the SEC must remain vigilant in detecting and prosecuting fraud targeted at the elderly. Gatherings like today’s event help support, protect, and empower our seniors and retirees.
I would like to thank the SEC staff, especially Maya Samms and Steven Mosier from the SEC University, for working with Keith and me over the last few months to put together this event. And, of course, I need to thank my Chief of Staff, Smeeta Ramarathnam, and my counsel, Paul Gumagay, for their work leading up to today. Because of everyone’s collective hard work, we can expect an exciting day filled with fulsome discussions of issues that are important to our nation’s seniors and retirees.
Today’s panels will consist of experts from outside and inside the SEC, and I want to thank each of them for taking the time for being here and contributing their knowledge. I expect today’s discussions to be informative, and I encourage the audience to participate.
Thank you and enjoy the event.
 The Society of Actuaries, 2013 Risks and Process of Retirement Survey Report of Findings, p. 3 (Dec. 2013), available at http://www.soa.org/Files/Research/Projects/research-2013-retirement-survey.pdf.
 For example, some retirees looked forward to enjoying retirement by pursuing passions and interests and no longer having to work for pay. Id. at 8.
 See id. at 8.
 See id.
 See id.
 Id. Undoubtedly, the urgent need to help Americans plan and save for retirement prompted President Barack Obama—during his State of the Union Address last week—to direct the U.S. Department of Treasury to create a retirement savings program intended to help American workers build a nest egg for retirement. See The White House, Office of the Press Secretary, President Barack Obama’s State of the Union Address (Jan. 28, 2014), available at http://www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address; see also, The White House, Office of the Press Secretary, Presidential Memorandum -- Retirement Savings Security: Memorandum for the Secretary of the Treasury (Jan. 28, 2014), available at http://www.whitehouse.gov/the-press-office/2014/01/28/presidential-memorandum-retirement-savings-security.
 See U.S. Department of Labor, Employee Benefits Security Administration, Disparities for Women and Minorities in Retirement Savings (2010), available at http://www.dol.gov/ebsa/publications/2010ACreport3.html.
 See id.
 Patricia P. Martin and John L. Murphy, U.S. Social Security Administration, Office of Retirement and Disability Policy, African-Americans: Description of Social Security and Supplemental Security Income Participation and Benefit Levels Using the American Community Survey, Research and Statistics Note No. 2014-01 (released Jan. 2014), available at http://www.ssa.gov/policy/docs/rsnotes/rsn2014-01.html.
 See id.
 See id.
 2014 Prudential Research, The Hispanic American Financial Experience, p. 8 (Jan. 2014), available at http://www.prudential.com/media/managed/hispanic_en/prudential_hafe_researchstudy_2014_en.pdf.
 See id. at 13.
 See id. at 2.
 See id. at 14; supra note 7.
 Investor Protection Trust, Survey: More than 4 Out of 5 Experts Say Financial Abuse of Elderly is Getting Worse (June 13, 2012), available at http://www.investorprotection.org/downloads/IPT_Elder_Fraud_Survey_News_Release_06-13-12.pdf.
 See id.
 Investor Protection Trust, Survey: Elder Investment Fraud and Financial Exploitation, pp. 3, 26 (June 15, 2010), available at http://www.investorprotection.org/downloads/EIFFE_Survey_Report.pdf.
 Kimberly Blanton, Center for Retirement Research at Boston College, The Rise of Financial Fraud: Scams Never Change but Disguises Do, p. 3 (Feb. 2012), available at http://fsp.bc.edu/wp-content/uploads/2012/02/Scams-RFTF.pdf.
 Investor Protection Trust, Survey: Family Members, Caregivers and Swindlers are Top Financial Exploiters of Older Americans (Aug. 15, 2012), available at http://www.investorprotection.org/downloads/IPT-IPI_EIFFE_Expert_Survey_News_Release_08-15-12.pdf.
 SEC v. Brown, et al., Lit Rels. No. 22642 (Mar. 12, 2013), available at http://www.sec.gov/litigation/litreleases/2013/lr22642.htm.
 In the Matter of Richard D. Hicks, Admin. Proc. File No. 3-15413 (Aug. 13, 2013), available at http://www.sec.gov/litigation/admin/2013/33-9440.pdf.
 SEC Press Release, SEC Charges Colorado Man in Scheme Targeting Elderly Investors (Nov. 21, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540397404.
 SEC’s Office of Investor Education and Advocacy, A Guide for Seniors: Protect Yourself Against Investment Fraud, pp. 7-8, available at http://www.sec.gov/investor/seniors/guideforseniors.pdf. Last year, the SEC issued an investor alert on Ponzi scheme using virtual currencies. See SEC’s Office of Investor Education and Advocacy, Investor Alert: Ponzi Schemes Using Virtual Currencies (July 2013), available at http://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf. Fraudsters are always finding ways to prey on others. For example, the recent interest in Bitcoin currency has already been used to defraud investors. In July 2013, the Commission charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, a virtual currency traded on online exchanges for conventional currencies like the U.S. dollar or used to purchase goods or services online. See SEC Press Release, SEC Charges Texas Man with Running Bitcoin-Denominated Ponzi Scheme (July 23, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539730583. This individual promised investors up to 7% weekly interest and claimed that invested funds would be used for Bitcoin arbitrage activities to generate returns. Id. Instead, he used investor funds to pay other investors in a Ponzi scheme and pay his personal expenses. Id.
 SEC’s Office of Compliance Inspections and Examinations, National Exam Program, Examination Priorities for 2014 (Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
 Id. at 1.
 Id. at 3, 7.
 Financial Industry Regulatory Authority (“FINRA”), Regulatory Notice No. 13-45, Rollovers to Individual Retirement Accounts: FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers, p. 4 (Dec. 2013), available at https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p418695.pdf.
 See id.
 Id. at 2 (citing to Letter to Employee Benefits Security Administration from Davis & Harman, April 12, 2011 (transmitting study prepared by Oliver Wyman Inc.)).
 Id. at 2.
 SEC’s Office of Compliance Inspections and Examinations, National Exam Program, Examination Priorities for 2014, p. 3 (Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
 See id. at 7 and n. 10.
 See id. at 7. The SEC will also examine broker-dealer sales practices to detect and prevent potential securities law violations such as microcap fraud, unsuitable recommendations of high-yield and complex products, sales and promotion of unregistered offerings by unregistered entities, and affinity fraud in general. Id.
 Jean Eaglesham and Rob Barry, Wall Street Journal, More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities (Oct. 4, 2013), available at http://online.wsj.com/news/articles/SB10001424052702303643304579107442831410708.
 FINRA News Release, FINRA Releases 2014 Regulatory and Exam Priorities (Jan. 2, 2014), available at https://www.finra.org/Newsroom/NewsReleases/2014/P412649 and https://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p419710.pdf. This initiative expanded FINRA’s High Risk Broker initiative, launched in 2013 to identify problem brokers. See id. at 3. FINRA said it would use an analytical tool called the Broker Migration Model to identify and monitor brokers who moved from one problem FINRA-regulated firm to another problem FINRA-regulated firm, as well as the firms that employ such brokers. See id.
 See supra note 22.
 Id. at 2.
 See SEC Press Release, Federal Regulators Issue Guidance on Reporting Financial Abuse of Older Adults (Sept. 24, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539837338; Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, available at http://www.sec.gov/news/press/2013/elder-abuse-guidance.pdf (citations omitted).
 See id.
 Investor Protection Trust, Survey: 1 in 5 Doctors, Nurses Aware They are Often Dealing with Older Victims of Investment Swindles (June 12, 2013), available at http://www.investorprotection.org/downloads/IPT_EIFFE_Medical_Survey_Release_06-12-13.pdf.
 In 2013, the SEC and a coalition of federal regulators issued an interagency guidance stating that the disclosure of nonpublic personal information about consumers to local, state, or federal agencies for purposes of reporting suspected financial abuse of older adults falls within an exception to the Gramm-Leach-Bliley Act. See Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, p. 3, available at http://www.sec.gov/news/press/2013/elder-abuse-guidance.pdf. This Act generally prohibits disclosures of nonpublic personal information about a consumer to a nonaffiliated third party unless certain procedures are followed. See id.
 Id. at 4. Other signs include situations where a financial institution is unable to speak directly with the older adult; a new caretaker suddenly begins conducting financial transactions without proper documentation on behalf of the older adult; or the older adult’s financial management suddenly changes, for example, through a change of power of attorney. Id. at 5.