While it continues to not make headlines, the SEC has put out some important alerts over Twitter under Investor Education (@SEC_Investor_Ed). For reasons we can only speculate on (investor apathy? willingness to be bamboozled?) the Commission’s education twitter handle only has 37,000 followers – far less than the number of individual investors who are routinely harmed by market fraud in the course of a year.
And since we follow them, and we know most other compliance professionals do as well, we speculate that the number of actual retail investors looking to the Agency for information remains pitifully small.
This is a mistake.
The SEC is coming off a bad patch, to put it mildly. But it appears to be actually moving towards much more robust action on the behalf of market integrity. The SEC’s Twitter stream tells you what they are working on right now, tells you what the Commission thinks is important right now.
Earlier today, the SEC tweeted an alert titled “Federal Regulators Issue Guidance On Reporting Financial Abuse Of Older Adults” saying “recent studies suggest that financial exploitation is the most common form of elder abuse and that only a small fraction of incidents is reported.”
The most common form of abuse. That’s pretty striking.
Let’s not sugar coat this: we have all been lulled into a sense of helplessness by generations of academic economists insisting that People Always Act In Their Own Self Interest. The big problem with that proposition is that most people have no idea what their actual interests are. Instead, people generally act on impulse. Even for those who give some thought to their actions, “planning” usually boils down to “we’ll set up a diversified portfolio… a little of this… a little of that…” You actually paid someone to do that with your money? C’mon, America. Time to get serious.
The combination of fear about not having set enough aside for retirement, plus trepidation over being left to one’s own devices – plus, as the Alert points out, “cognitive decline” which leads to poorer than average decision making – makes older folks sitting ducks for scam artists.
This brief Alert says “employees of financial institutions may be able to spot irregular transactions or behavior that signals financial abuse,” and that these employees “can play a key role in preventing and detecting elder financial exploitation by reporting suspicious activities.” We think this could be a significant opening wedge for the Commission to start holding financial firms responsible for elder fraud committed by third parties.
Fraudsters don’t always register with the financial authorities. But stockbrokers and advisers do. The umbrella regulatory organization for the financial services industry, FINRA, issued guidance for its members in 2010. If you are concerned that you, or someone you know, may be vulnerable, you may want to start by seeing what FINRA wants its members to do by way of guarding against elder fraud.
FINRA’s head of investor education testified last year before the Senate Special Committee on Aging that the Authority considers protection of elderly investors a high priority. In light of today’s Alert, we wouldn’t be surprised to see a new FINRA release in the coming months reminding members of their duty to provide special care in their dealings with the elderly.
But how can this help you – or your aging parents?
FINRA has the authority to hold a broker responsible for activity in an investment account, even if the broker doesn’t manage the account. Brokerage firms have a duty to ensure that transactions are Suitable for the individual customer, and investors who manage their own money have been able to recover losses if the firm was deemed not to have exercised due care by permitting them to trade excessively or to make unsuitable investments.
One common form of fraud is for stock promoters to induce gullible investors to buy large blocks of worthless stocks. These transactions are done as “unsolicited trades” in the victim’s brokerage account. If they are unsuitable (almost always a sure bet), FINRA has the power to hold the brokerage firm liable, even if they had nothing to do with promoting the stock.
Consumer advocates have long complained that the deck is stacked overwhelmingly against the individual investor. But note that today’s Twitter release represents regulatory guidance on behalf of seven federal agencies. One of them is the new Consumer Financial Protection Bureau. And at least two of the others – the SEC and the Comptroller of the Currency – have failed miserably in recent years and need to make headlines going forward.
We urge you to follow SEC Investor Education, if only to see how the Commission is positioning itself. Many of us have a cynical view of the Commission. But you get nothin’ for nothin’. If you think your concerns are important, you need to make your voice heard. The SEC routinely opens up new rule proposals for public comment, yet rules that have the potential to affect millions of private investors are often commented on overwhelmingly by major financial institutions – whose interests are often better served by the status quo than by proposed regulatory changes.
The Commission can only respond to your concerns if it hears them. Get with the program.
By Moshe Silver
Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.