This article is a sequel to my last one on FINRA’s 2024 Annual Regulatory Report Things I Worry About (9).

Among other things, FINRA is focusing on services and recommendations by broker-dealers and their registered representatives to retirees, senior investors and investors with diminished capacity.  To state the obvious, the regulator is concerned about the aging of the Boomers in real time.

The Report discusses the application of Regulation Best Interest (Reg BI) to rollover recommendations. Here is what it says in the section on Failure to Comply with the Compliance Obligation:

Failing to have written policies and procedures reasonably designed or enforced with respect to account recommendations, for example, by:

• not being reasonably designed to address recommended transfers of products between brokerage and advisory accounts or rollover recommendations;…

The SEC’s Reg BI says that rollover recommendations are subject to its standards, including the best interest standard of care. The SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors then provides details for the satisfaction of the Reg BI’s duties relative to rollover recommendation. (SEC.gov | Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors). As you might imagine, between Reg BI and the Staff Bulletin, broker-dealers must adopt and implement policies and procedures to ensure that rollover recommendations are developed in a compliant manner. Apparently, some of the broker-dealers examined by FINRA have not done a good job of that. That’s unfortunate since, for most retirement plan participants, a rollover will be the most significant financial decision of their lifetimes.

Beyond that, though, this should be seen as a warning that FINRA will be attentive to this issue in the future and will likely be demanding as time goes by.

In a later part of the Report, under the heading of Effective Practices for the Disclosure Obligation, it says:

Providing Clear Disclosure on Account Type Recommendations: Providing retail customers with clear, accessible materials that allow them to compare the features, benefits and costs of certain account type recommendations (e.g., rollovers).

And under Effective Practices for the Compliance Obligation the Report says:

Implementing New Surveillance Processes: Monitoring associated persons’ compliance with Reg BI by:

• conducting reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
  • account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest;

My point in quoting these provisions is to illustrate the focus of FINRA on rollover recommendations, which in turn…at least in my view…is a message to broker-dealers that rollovers are on the radar of FINRA for future examinations and, where appropriate, enforcement. The light touch on Reg BI violations may continue for a transition period, but that has a limit.

The Report also focuses on senior and elderly investors, as another message of what is to come. It is certainly no secret that the tail end of the Baby Boomers is reaching retirement age and that the oldest Boomers are now about 80 years old. Issues related to aging are going to be magnified in the future (and, to a degree, are already here). The investment industry will be faced with major challenges related to aging.

Here are other related comments in the Report:

• Elderly: Under Effective Practices:

  Investigating Unusual Withdrawal Requests: Conducting thorough inquiries when customers— particularly those who may be elderly or vulnerable—request that an unusually significant amount of funds be disbursed to a personal bank account, including where the disbursements would incur losses, fees or negative tax consequences (e.g., a disbursement from a retirement account), as these could be signs of affinity fraud, relationship fraud, Ponzi schemes or other forms of misappropriation.

• Senior: Under Effective Practices:

  Escalation Process: Implementing and training registered representatives to use a comprehensive process to escalate issues relating to seniors, including but not limited to concerns about financial exploitation, diminished capacity or cognitive decline.

  Senior Investor Specialists: Establishing specialized groups or appointing individuals to handle situations involving elder abuse or diminished capacity; contacting customers’ TCPs—as well as Adult Protective Services, regulators and law enforcement, when necessary—and guiding the development of practices focused on senior customers.

Concluding Thoughts

We have an aging population with all the associated issues, such as diminution of cognitive abilities and the possibility of financial exploitation. That same aging population has, to a significant degree, participated in 401(k) plans and either has or will be rolling their plan benefits over into IRAs, which will likely be their largest financial asset and the source of lifelong income in retirement.

The combination of aging, significant amounts in IRAs, diminution of cognitive abilities, and financial exploitation is a recipe for trouble. Broker-dealers (and investment advisers) need to be attentive to these issues—both to the laws and regulations and to the practical considerations. The loss of substantial financial assets to someone in their 80s or 90s would be a personal tragedy and possibly a liability for financial firms.