[Senate Hearing 110-301]
[From the U.S. Government Publishing Office]
S. Hrg. 110-301
ADVISING SENIORS ABOUT THEIR MONEY: WHO IS QUALIFIED--AND WHO IS NOT?
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HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
SEPTEMBER 5, 2007
__________
Serial No. 110-13
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware MEL MARTINEZ, Florida
BILL NELSON, Florida LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island ARLEN SPECTER, Pennsylvania
Debra Whitman, Staff Director
Catherine Finley, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Opening Statement of Senator David Vitter........................ 2
Opening Statement of Senator Claire McCaskill.................... 3
Opening Statement of Senator Norm Coleman........................ 4
Opening Statement of Senator Bob Casey........................... 5
Opening Statement of Senator Ken Salazar......................... 7
Opening Statement of Senator Gordon H. Smith..................... 8
Panel I
Christopher Cox, chairman, U.S. Securities and Exchange
Commission, Washington, DC..................................... 9
Panel II
Lori Swanson, Attorney General, State of Minnesota, St. Paul, MN. 29
William Galvin, secretary of the Commonwealth, Boston, MA........ 45
Joseph Borg, president, North America Securities Administration
Association, Washington, DC.................................... 52
Nicholas Nicolette, president, Financial Planning Association,
Washington, DC................................................. 61
Sandy Praeger, insurance commissioner, Topeka Kansas; on behalf
of the National Association of Insurance Commissioners......... 69
Panel III
Gary Bhojwani, president and CEO, Allianz Life Insurance of North
America, Minneapolis, MN....................................... 84
Edwin Pittock, president, Society of Certified Senior Advisors,
Denver, CO..................................................... 101
APPENDIX
Responses to Senator Kohl's Questions from Secretary Galvin...... 123
Responses to Senator Smith's Questions from Secretary Galvin..... 124
Responses to Senator Kohl's Questions from Joseph Borg........... 129
Responses to Senator Smith's Questions from Joseph Borg.......... 130
Responses to Senator Kohl's Questions from Nicholas Nicolette.... 138
Responses to Senator Smith's Questions from Nicholas Nicolette... 139
Responses to Senator Kohl's Questions from Sandy Praeger......... 142
Responses to Senator Smith's Questions from Sandy Praeger........ 143
Responses to Senator Kohl's Questions from Gary Bhojwani......... 170
Responses to Senator Smith's Questions from Gary Bhojwani........ 171
Responses to Senator Smith's Questions from Edwin Pittock........ 177
Letter submitted by Frank Keating, president and CEO of the
American Council of Life Insurers.............................. 178
Letter submitted by Brian K. Atchinson, president and CEO,
Insurance Markeplace Standards Association (IMSA).............. 180
Statement submitted on behalf of CEASE, Coalition to End Elder
Financial Abuse................................................ 185
Statement submitted from the National Association of Insurance
and Financial Advisors (NAIFA)................................. 189
(iii)
Testimony submitted from Certfied Financial Planner Board of
Standards, Inc................................................. 193
Statement submitted by Walt Woerheide, Ph.D., CFP, vice president
of Academics and Dean, The American College.................... 199
Statement submitted by James Kendzel MPH, SPHR, executive
director, National Organization for Competency Assurance (NOCA) 205
Testimony of Steven R. McCarty and Jeffrey S. Kopitz, chairman
and president of the National Ethics Bureau.................... 217
Reply to the National Ethics Bureau's Testimony from the director
of the Massachusetts Securities Division....................... 222
Statement submitted by the National Association for Fixed
Annuities (NAFA)............................................... 225
Letter submitted by the Old Mutual Financial Network (OMFN)...... 229
ADVISING SENIORS ABOUT THEIR MONEY: WHO IS QUALIFIED--AND WHO IS NOT?
---------- --
WEDNESDAY, SEPTEMBER 5, 2007
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 3:05 p.m., in
room SD-628, Dirksen Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl, Salazar, Casey, McCaskill, Smith,
Coleman, and Vitter.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon. We welcome you all this
afternoon to today's hearing. We particularly want to thank our
witnesses for taking time out of their busy schedules to be
here with us.
Today, we intend to examine the nationally growing problem
of poorly trained ``senior investment specialists'' and take
the first step toward much-needed reform. Many seniors are
discovering that their life savings will not see them through
their Golden Years, and they are turning to investments to
increase their retirement income.
With the intent of investing wisely and knowledgably, older
Americans often turn to financial advisors. An investigation
conducted by this Committee has found that many seniors are
losing their retirement income and savings by placing their
trust in so-called ``advisors'' who, in many cases, may not
deserve that moniker.
More and more individuals are representing themselves as
certified ``senior'' investment specialists when they often
have limited or no education, no experience in extremely
complicated financial matters. It is estimated that there are
thousands of individuals holding themselves out as ``senior''
specialists. Although some may have legitimate credentials,
oftentimes they do not.
We know that an attorney must go to school for 3 years and
pass a State Bar Exam. A CPA must have a college degree, an
additional year of study, and must also pass a national exam.
Neither can offer their professional services without these
credentials.
Seniors should be able to trust the people who invest their
money. They should not be worried that the title after their
advisor's name is oftentimes scarcely more than a marketing
ploy, and that it was not earned through sufficiently rigorous
financial education or financial training.
You can see from the poster that we have here today, there
are many different designations, and they all sound very
official. These are just a handful of those being marketed
today.
You would be very surprised to know that, in order to
obtain some of them, all it takes is a weekend and as many
cracks at an open book, multiple-choice exam that is needed. We
can't tell the difference between the more legitimate titles
and those with less rigorous standards.
We can't tell. Can you? More importantly, can our seniors?
During this hearing, we will also take a look at how some
of these so-called ``senior advisors'' and other inadequately
trained sales agents are placing seniors' money in investments
unsuitable for their needs. We want to make it clear at the
outset that we are not taking any position on the benefits or
relative value of any financial products.
However, some investment products are extremely complex and
require a trained expert to explain their costs and their
benefits. Unfortunately, many seniors are not receiving these
clear and unbiased explanations when they receive financial
advice.
To be fair and to gain as wide a perspective as possible,
we have invited a number of financial and insurance-related
organizations to provide their written views on these issues,
and we have made those statements available.
While it is true that many financial advisors hold
reputable designations, far too many do not. More importantly,
having too many designations and certifications out there can
only serve to confuse our seniors.
Older Americans need to know whom they can trust. To
address this problem, we intend to develop legislation that
will provide a uniform standard for the accreditation of senior
financial advisors.
In the months to come, we will also be working with the
financial and investment industries to reform the use of
designations. We are pleased that increasing concern
surrounding this issue has already caused a number of companies
to ban or limit the use of ``Senior Specialist'' designations
by their employees.
So once again, we thank all of our witnesses for being
willing to take part in this Committee's work. With that, I
would like to call upon the Members here today to make whatever
opening comments they would like. We would start with the first
one who arrived, David Vitter.
OPENING STATEMENT OF SENATOR DAVID VITTER
Senator Vitter. Thank you, Mr. Chairman. I want to thank
you and Ranking Member Smith for calling this hearing. It is a
very serious issue and, therefore, a very necessary and
important hearing.
I just want to briefly say on my opening statement that I
know from personal conversations and visits, I know that this
is a very real problem in Louisiana, as elsewhere. In fact,
given events and circumstances over the last couple of year,
particularly the hurricanes, I think it may be even more
challenging in Louisiana.
The hurricanes Katrina and Rita have put enormous burdens
on all of our citizens, including so many seniors. It has also
put enormous strains on the criminal justice system, and that
has meant less ability to look at these sorts of fraud issues
and cases versus violent crime.
At the same time, the latest census data shows that
Louisiana has over 370,000 households with one or more seniors
in them. This problem and this challenge hasn't abated simply
because all of those other challenges are there.
So it is very real problem that I have heard about
directly, and I certainly look forward to the hearing, and look
forward to being part of constructive solutions.
Thank you.
The Chairman. Thank you very much, Senator Vitter.
Senator McCaskill.
OPENING STATEMENT OF SENATOR CLAIRE MCCASKILL
Senator McCaskill. Thank you, Mr. Chairman.
This is an incredibly important topic, and I am glad that
we have several panels. I want to apologize. At my pay grade,
Mr. Chairman, I have to go preside, and so I have to leave the
hearing at 4 and will not be here for some of the----
So I want to bring to the attention of the other Members of
the Committee that might be here how important it is, I think,
to talk to the certified senior advisors witness. Because, in
looking at the marketing materials that this group puts out,
let me read just a couple of things for--and particularly for
our first witness, because I think it is relevant to his job,
certainly.
Basically, one of the things said to a group of seniors
that were asked to come have lunch, ``Wall Street, stocks,
bonds, mutual funds. Tired of losing money? Learn how to invest
in the stock market without risk to your principal.''
``Retirees are doing this in record numbers.'' ``How to grow in
a volatile stock market without giving back your gains.'' ``How
to take advantage of an automatic strategy indicating when to
buy and when to sell.'' Now, the interesting thing is, when you
go to the marketing for CSA--and why someone should come and
pay $1,195 to get this certification--they talk about
marketing, and marketing, and marketing and marketing. In fact,
if you look at the list of things they learn about, very few of
the chapters involve any kind of financial expertise
whatsoever.
I think maybe the most telling part of their marketing is
they list the group of people that should buy this $1,195
course, over the Internet, to become a certified senior
advisor. They say--they list all the people that can benefit
from it, clergy, CPAs, doctors, nurses, pharmacists. Perhaps
the one that is most telling about how low they may be willing
to go, gravesite managers.
I just think that there are people taking advantage here,
and I think there are things we can do without interfering in
solid business practices for many financial planners that are
out there. I know the certified financial planner designation
is a serious and significant one. I know it is a very difficult
exam. I know it involves serious study.
So I want to make sure that we don't paint too broad a
brush here and indict good, hardworking people that are
knowledgeable, that are trying to help seniors with--and so
that is the delicate balance we have got to find, Mr. Chairman,
is how can we ferret out people who are willing to take
advantage because they are trying to make more money, and those
who are really trying to get educated so that they can advise
seniors in the most serious and responsible way.
I am glad you are having this hearing. I hope I have an
opportunity to stay for as much of it as possible. Thank you
for giving me an opportunity to open with a few comments.
The Chairman. Thank you, Senator McCaskill.
Senator Coleman.
OPENING STATEMENT OF SENATOR NORM COLEMAN
Senator Coleman. Thank you, Mr. Chairman. I come to this
hearing not just as a Senator, but as the son of a senior
parent. We all care deeply about--others in my generation about
their parents' well-being. These kind of issues become very
personal.
I would like to note the Minnesota presence at today's
hearing. Chairman Cox, who was born in my home city of St.
Paul, the Minnesotas Attorney General, Lori Swanson, and Gary
Bhojwani, who is the president of Golden Valley, Minnesota-
based Allianz Life Insurance. So Minnesota is well represented.
Mr. Chairman, as more and more seniors seek to preserve and
protect their savings for their Golden Years, they have turned
increasingly to financial products such as annuities, and there
is no question that these annuities can play a positive role in
a senior's financial well-being. But in certain circumstances,
they also serve as financial deathtraps to seniors.
We have had a lot of media interest in this issue, legal
developments, which highlight some questionable, if not
illegal, practices. I am troubled by what I see is, in some
instances, a betrayal of trust.
We have titles. They are very fancy-sounding, but what is
behind them? For a senior, what do they think that they are
getting with this, which should be a trust relationship?
My State, Mr. Chairman, provides strong protection for
consumers in terms of performance suitability, licensing and
exam requirements, but my State has also seen its share of
problems.
Just last month, the State's Department of Commerce, which
regulates insurance companies, levied a $1.4 million fine, the
third largest fine in history, on American Investors Life
Insurance Company and two of its subsidiaries, AmerUs Life and
Senior Benefit Services, for practices relating to the sale of
annuities. As many as 5,000 Minnesotans were affected by the
sales, according to the Department.
Just last year, the same Department imposed the largest
fine ever, in the amount of $2.5 million, on Conseco Life
Insurance for illegal practices relating to their sale of
insurance products, including annuities.
These are troubling. I would argue that it is in the
bottom-line interest of the industry to do its part to inspire
trust and confidence. In the end, no one wins when consumers
are hurt and trust is lost in important and worthwhile
financial products.
In the end, there is a trust issue here. There are good
products out there, but I think everyone is a loser. We
continue to have these issues of a lack of trust and a lack of
confidence.
I was struck by a comment made last month to our Star-
Tribune, the Minneapolis-based Statewide paper, by the
Department of Commerce Chief Examiner, Paul Hanson. He said,
``There is less abuse of annuities today, but the practice
still goes on.''
I would say, ``Mr. Chairman, that that is unacceptable.''
Although I am encouraged that some in the industry appear to be
seeking to address the concerns and problems that have been
raised by seniors and policymakers, we must do more, and I
think this hearing is a reflection of that.
I thank the Chairman for holding the hearing. I look
forward to hearing from the witnesses as to how further abuses
can be prevented from happening again, and then what we as
policymakers need to do to provide greater trust and greater
confidence and greater security for our seniors in this very
important area.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Coleman.
At this time we will turn to our first panel, and we are
very pleased to have Chris Cox, who is Chairman of the
Securities and Exchange Commission, as our individual here.
Chairman Cox has served as the SEC Chairman since August of
2005 and, before that, he was a distinguished Member of the
House of Representatives for many years. So, we welcome you
back to the Hill, Chairman Cox. We look forward to your
testimony.
Just before you speak, we will ask the two distinguished
Senators who just arrived to make some comments, if they wish,
Senator Salazar and Senator Casey.
OPENING STATEMENT OF SENATOR BOB CASEY
Senator Casey. Mr. Chairman, thank you very much, and I
appreciate Senator Salazar letting me go ahead of him. I was in
the door 1 minute before him, so I made it under the line.
Thank you, Mr. Chairman, for calling this hearing. It is
important that we focus on this issue, for a whole variety of
reasons.
We appreciate the witnesses who will be here. Chairman Cox
is our first witness. Thank you for your service in the
Congress, as well as now in a different position in the Federal
Government.
I come from a State where we have just about--we are either
second or third now in the percent of Pennsylvanians over the
age of 65 compared to every other State. We have got a little
more than 15.5 percent of our population over 65, 1.9 million
Pennsylvanians.
We know that in Pennsylvania, the highest--or I should say
the fastest-growing population are those over age 85 and up, so
this is a major challenge for all of us. We all know some of
the terminology that is applied to people sometimes who have
very little experience, may have taken a very limited course,
maybe 4 hours on the Internet, and all of a sudden they are
supposed to be an expert to advise older Americans on highly
complex matters.
I am going to submit my whole statement for the record. But
I know that one of our witnesses will speak about Arthur Moyer,
a former machinist from Pennsylvania who is now deceased, who
was tragically misled by an individual who presented himself as
a senior ``expert,'' and induced Mr. Moyer into investing
$500,000 in a deferred annuity that Mr. Moyer could not touch
for a period of 10 years. Mr. Moyer was 79 years old at the
time he received this.
To say it is misinformed is an understatement. Terribly
misinformed advice. It certainly was not in the best interest
of Mr. Moyer, nor would it be for any American.
Less than a year after this, Mr. Moyer died, and his family
claims the stress and the impact of this incident contributed
to his decline, his health decline, and his death. Yet, the
financial ``expert'' who induced Mr. Moyer to take these
actions, is still in business.
So this is serious business. This isn't just an academic
hearing. It is a hearing about how unscrupulous and unethical
people have an impact on people's lives. Sometimes their life
physically, but certainly financially.
So with that, I am grateful to have this opportunity to
learn more about this and to question our witnesses. Mr.
Chairman, I thank you for calling the hearing.
[The prepared statement of Senator Casey follows:]
Prepared Statement of Senator Robert P. Casey
Thank you, Chairman Kohl, for holding this very important
hearing. The issue we are here to discuss is extremely
disturbing and one that has received too little attention. I'm
grateful we have this opportunity to shed some increased light
on this issue today and examine the potential solutions.
Prior to being elected to the Senate, I spent 10 years as a
public servant in Pennsylvania, as Auditor General and
Treasurer. During this time, I fought numerous battles for the
safety and protection of our older citizens. As our population
lives longer, the number of older individuals is increasing--
last year, there were more than 37 million citizens age 65 and
older. Pennsylvania has the third largest population of older
citizens in the country--1.9 million. Nothing is more important
to me on the domestic front than ensuring that our seniors do
not fall prey to unscrupulous, unethical or even fraudulent
practices like the type we are here today to examine.
Specifically, we are addressing the issue of so-called
senior financial ``experts'' who may have had as little as a
four-hour course on the internet to prepare them for advising
seniors on highly complex financial investment decisions. Yet,
with such minimal--practically non-existent--training, they
wield impressive titles like ``Certified Senior Advisor.'' They
engage in practices such as ``free lunches'' to draw in
retirees, provide them fancy written materials to further
establish professional credibility and then induce seniors into
what have often turned out to be unwise and even disastrous
financial investments. These ``Certified Senior Advisors'' get
hefty commissions. In return, our older citizens may lose their
life savings to unwise investments that they often cannot touch
for long periods of time--in some cases up to 10 or 15 years--
without incurring enormous penalties.
Even those of us who are not grappling with the challenges
of growing older can be mystified by the many available options
for financial investments. Everywhere you look there are
advertisements for financial investment assistance. For an
individual seeking financial assistance with retirement and
living expenses and perhaps facing limited income options, a
professional with the title ``Certified Senior Advisor'' sounds
pretty credible and reliable. Apparently that is exactly what
these ``experts'' are hoping they will believe. According to
the AARP, seniors control more than $14 trillion in assets--
they are an attractive target for unscrupulous schemes.
Mr. Arthur Moyer, a former machinist from PA--now
deceased--was tragically misled by an individual who presented
himself as a senior ``expert'' and induced Mr. Moyer into
investing $500,000 in a deferred annuity that Mr. Moyer then
could not touch for a period of ten years. Mr. Moyer was 79 at
the time he received this extremely misinformed advice. It
certainly was not in his best interests. Less than a year
later, Mr. Moyer died. His family claims the stress and upset
from this incident contributed to his health decline and death.
Yet the financial ``expert'' who induced Mr. Moyer is still in
business.
I know seven states are releasing the results of
investigations into these practices and I look forward to
learning the results of these investigations and continuing
such examinations in other states. The bottom line is that this
kind of practice should not be happening and we need to protect
our older citizens. There are legitimate financial advisors out
there--who are doing their jobs and looking out for the
interests of their clients but there are far too many
unqualified individuals who are not. I am glad to see that the
Securities and Exchange Commission is sponsoring a Summit next
week on this issue and that I look forward to other testimony
concerning efforts underway in the states. I look forward to
working with you all to ensure that our older citizens get the
education and assistance they need to be safe from these
practices in the future. Thank you.
The Chairman. Thank you, Senator Casey.
Senator Salazar.
OPENING STATEMENT OF SENATOR KEN SALAZAR
Senator Salazar. Thank you very much, Chairman Kohl, for
holding this hearing on this very important issue. Let me just
say thank you as well to the witnesses who are here today. I
have a statement for the record that I will submit for the
record, and I will just supplement that, Mr. Chairman, with a
couple of comments.
First, during my 6-year tenure as Colorado Attorney
General, one of the things that I tried to focus on was to make
sure that we were doing everything we could to protect our
seniors from financial exploitation. That financial
exploitation comes in many dresses and many forms.
It comes in sweepstakes fraud. It comes in contractor
fraud. It comes in a whole host of ways in which seniors are
victimized in every single community and every single State
across our Nation.
I always found it to be a frontal assault to one of the
values that we ought to hold dear as Americans, and that is the
value of respecting our elders. It was in that regard that I
joined with AARP as Attorney General in forming a program
called AARP Elder Watch, which was an effort to try to educate
seniors with respect to the things that they ought to be
watching out for so that their life would not end up in the
kind of victimization and tragedy that we will hear recounted
here today, I am sure, from witnesses.
So I would hope that one of the things, Mr. Chairman, that
comes out of this Committee is that we can help our Congress,
our Nation, figure out ways of honoring that value, of
respecting our elders and protecting seniors from the financial
exploitation that often victimizes many seniors across America.
I would venture to say that there is not a person alive who
has not watched seniors in their own family be victimized,
whether it is through charitable fraud, whether it is through
sweepstakes fraud, or whether it is through the kind of
financial exploitation and consulting practices that we will
hear about more today.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Salazar.
Our distinguished Ranking Member has just arrived, Senator
Smith, and we would love to hear from you.
OPENING STATEMENT OF SENATOR GORDON SMITH, RANKING MEMBER
Senator Smith. Thank you, Mr. Chairman. So appreciate your
convening this hearing on this important topic.
Recently, the Wall Street Journal indicated that $12
trillion suits in U.S. investment and insurance accounts
earmarked for retirement. In the next 40 years, boomers are
poised to inherit $7 trillion from their parents. With that
kind of money at stake, it is clearly easy to see why many
would be targeting it for fraud.
Again this backdrop, states report a marked increase in the
number of complaints relating to the use of professional
designations that claim to provide expertise in the area of
seniors' finances. Many States, including my own State of
Oregon, have issued consumer alerts warning investors about
financial advisors who hold themselves out as senior
specialists.
That in mind, Mr. Chairman, I recently charged several of
my staffers on the Aging Committee to take the exam, to see
what it took to qualify themselves as specialists. One of them
took the CSA exam.
She read all the material in 1 hour. She sat for a 3-hour
exam and, in 1\1/2\ hours, she obtained a passing score of 82
percent. I wonder how much of a specialist she really is in
that, even though I know her to be a very brilliant person.
Wonder if the standard is high enough to establish her as a
specialist?
Misuse of specialist designations, lack of transparency in
investment transactions and the Nation's declining savings rate
have created a perfect storm for financial exploitation of
America's seniors.
Therefore, it is no surprise to hear that complaints are on
the rise. I hope that today's witnesses can shed some light on
the legitimacy and utility of specialist designations.
Ultimately, I hope the message emerges that, while we must
combat investment scams and other types of financial fraud and
abuse, we must ensure that we do not discourage Americans from
saving and investing in their future.
To the contrary, our country needs to save and invest more.
So I will do my part, Mr. Chairman, to help increase the
financial literacy of seniors, and I am working on all kinds of
bills to that effect with Democratic colleagues on the Finance
Committee, to make sure that the investment community that is
out there is safe for seniors to go into so they can prepare
for their retirements.
To that end, I am developing, along with Democratic
colleagues on the Finance Committee, a bill that is targeted
toward improving financial literacy. So I look forward to
hearing from our witnesses, their recommendations for
additional assistance that Congress might be able to provide,
to prevent fraud among investors and to help victims recover
their assets.
So thank you, Mr. Chairman, for this hearing.
The Chairman. Thank you, Senator Smith.
At this time, we do turn to Chris Cox for your testimony.
We appreciate your being here.
STATEMENT OF CHRISTOPHER COX, CHAIRMAN, U.S. SECURITIES AND
EXCHANGE COMMISSION, WASHINGTON, DC
Mr. Cox. Thank you very much, Chairman Kohl, Ranking Member
Smith, and Members of the Committee. I am pleased to be here
today to discuss the important work that the SEC is doing to
protect our Nation's senior citizens.
Financial fraud against the elderly is a topic that I, my
fellow SEC Commissioners, and every professional staff member
at the SEC care deeply about. That is why, since I became
Chairman, I have made protecting senior citizens and their
investments one of our top priorities at the Commission.
Some Census numbers that were released earlier this year
will add to what you have already elucidated in your opening
statements about the magnitude of this issue. In 2006 there
were over 37 million Americans age 65 and older. That accounts
for 12 percent of the population. That is as if the entire
State of California, every man, woman and child, were over 65
in the largest State, most populous State, in our country.
In addition, longevity is increasingly the norm in our
country. In the 21st century, Americans are going to be living
increasingly longer, significantly longer than their parents,
and significantly longer than most of them planned for when
they were planning their retirements.
It is estimated that Americans 65 and older currently hold
over $15 trillion in assets. That already is an all-time
record. Yet nearly a third of that group say that they don't
have enough money even to meet their basic living needs.
Those who do have sufficient funds to invest may be tempted
to take greater risks with their investments because they have
to achieve higher returns in order to make their savings
stretch out and last over a longer period than they or anyone
else expected. That makes them prime targets for scam artists
and securities swindlers, and that is why the SEC is so deeply
interested in this.
It is a tragic fact that investment fraud hurts older
Americans more than any other group because, when a senior
citizen loses his or her life savings, they lose everything for
good. They simply don't have enough years left to make it back,
to earn once again that nest egg for a safe and secure
retirement.
Taking care of my own parent's finances, I have grappled
with these issues very directly. Before my mother died a few
years ago, she was pestered by a seemingly endless barrage of
annuity schemes and mortgage offers.
Despite the fact that she was suffering from throat cancer
and could barely speak, she received repeated, unsolicited
telephone pitches, over the phone and even in person. Even
though my father was suffering from Alzheimer's disease, the
brokers hit on him, as well.
The products that these brokers were pushing weren't just
unsuitable, but affirmatively harmful to anyone in my parents'
circumstances. Both during my time in Congress and since I have
become Chairman of the SEC, I have heard hundreds of similar
stories from constituents and from colleagues.
It is heartbreaking to see a loved one ripped off by
underhanded tactics that may comply with the letter, but
certainly not the spirit, of the law. That is why at the
Securities and Exchange Commission we are always doing our best
to protect all investors as if they were our own parent or
relative.
Since I have become Chairman, we have been attacking the
problem from all angles, from investor education to targeted
examinations to aggressive enforcement efforts. We have
partnered with other organizations, many of whom you have
invited here as your witnesses today, such as the AARP, the
Financial Industry Regulatory Authority, and the North American
Securities Administrators Association, as well as regulators in
the 50 States on seniors-related initiatives.
Working with all of these partners, the SEC held our first-
ever Seniors Summit last summer in 2006 to coordinate our
Nation's efforts to protect older Americans from investment
fraud and abuses. At the 2007 Seniors Summit, which will be
held next week on September 10, we will gather together even
more of the Nation's resources to protect seniors.
One important part of that event, which by the way is open
to the public, will be a ``Lunch and Learn'' program focused on
how to combat investment fraud by understanding the persuasion
tactics most often used by fraudsters to prey upon senior
investors. We will kick off this year's event with a
presentation on the findings of the SEC's examination of ``free
lunch'' sales seminars aimed a seniors. This has been a joint
effort among the SEC and State law enforcement.
We will also discuss the best ways to educate seniors about
the latest investments pitfalls, and we will hear about recent
SEC and State enforcement efforts that are going after fraud on
seniors.
At the SEC, we are also arming senior investors with
information that they can use to identify and avoid potentially
fraudulent schemes. We are giving them tools to deal with
aggressive sales tactics and to assess the financial products
that are being offered to them.
These efforts, I should point out, aren't just aimed at
seniors. They are also intended to reach caregivers, including
children, grandchildren, and trusted loved ones. They are
designed for younger workers who are just now beginning to plan
for their retirement strategies and getting ready to deal with
contingencies later in life.
In the last year we have placed significant emphasis on
investor education initiatives directed toward older Americans.
We have partnered with other regulators and with consumer
organizations, including AARP, to sponsor over 40 events to
educate seniors across the United States. So far, over 50,000
senior citizens have attended these events.
We have also devoted a significant portion of the SEC's
website to the unique issues facing senior investors. Since not
all seniors are Web-savvy, or perhaps they once were but now
they can no longer read the fine print on computer screens, we
have also packaged all of our online seniors materials into a
single hard copy senior's guide with large, easy-to-read fonts
that we will make available to anyone by mail upon request.
Last year as part of our new initiative to help protect
senior investors, our Office of Compliance Inspections and
Examinations joined together with State securities regulators,
as well as with the NASD and the New York Stock Exchange, in a
coordinated series of examinations of financial firms that
sponsor free lunch sales seminars, often at local restaurants
and hotels. The final and complete results of these exams will
be released at the second Senior Summit next week.
But even at this point it is clear that we were right to
identify these free lunch seminars as posing special risks to
senior investors. Our examinations have found that, despite
being advertised as educational, or touting the claim that
nothing will be sold, the purpose of these seminars is usually
to convince anyone who shows up to open new accounts with the
sponsoring firm and, ultimately, to sell them financial
products.
Over the past 2 years alone, the SEC's Division of
Enforcement has brought over 40 enforcement actions involving
fraud against seniors. A good example of these kinds of cases
to protect seniors is SEC against D.W. Heath & Associates,
where the SEC worked with the Riverside County District
Attorney's office to crack down on a $145 million Ponzi scheme
that lured elderly victims in Southern California to workshops
with the promise of free food. After providing them with a nice
meal, they then proved the truth of the old adage that there
is, in fact, no such thing as a free lunch by bilking these
older investors out of their retirement money in exchange for
what they said were safe and guaranteed notes.
In just the past 2 months, we have brought three
significant enforcement actions targeting seniors, two of which
were emergency actions, to halt ongoing activities. The first
of these was in July, when we filed the emergency action
against AmeriFirst and their principals.
Our complaint alleged that AmeriFirst sales agents lured
elderly investors and others saving for their retirement with
advertisements for relatively high-yielding FDIC-insured
Certificates of Deposit. Then, using the tried-and-true bait-
and-switch, they convinced the investors to purchase instead
so-called Secured Debt Obligations, or SDOs.
Fortunately the SEC was able to get preliminary injunctions
and asset freezes. But, as in too many cases like this, much of
the money was spent before we got there.
In another case this July, SEC against Earthly Mineral
Solutions, we sued two Nevada companies and their officers for
allegedly convincing a number of senior investors, some who
were saving for their retirements, others who were seniors, to
liquidate their personal IRAs and invest in what the company
said were completely safe mining interests.
A few weeks ago, in SEC against Secure Investment Services,
we took emergency action to shut down an alleged $25 million
father-daughter Ponzi scheme that targeted hundreds of senior
and other investors nationwide. The father-daughter team in
this case pocketed over $700,000 of the investor's money for
their own personal use.
Each of these cases is different, of course, but they all
have in common that the victims are older Americans whose few
remaining years don't allow them enough time to ever recover
from securities fraud. What we are increasingly finding through
our examination sweeps of investment advisors and brokers who
market their wares to seniors is that the fraud artists and
swindlers among them who prey on older investors often have the
same MO.
They call themselves ``Senior Experts'' in order to gain
the victim's trust. They use fancy designations, such as
``Certified Senior Investment Planner,'' or ``Registered Senior
Investment Advisor'' to give the impression that they have
older investors' best interests at heart. But all too often
these are just clever marketing ploys to bait the hook so that
they can reel in another sucker. They sound like genuine
designations that require months or years of study and rigorous
examinations. But in reality, they may be issued by some fly
by-night operator on the Internet, or they might be the pure
invention of the broker or the investment advisor.
Mr. Chairman, I have long believed that there is a special
place in Hell for those who would swindle older Americans out
of their life savings. That is why I am so pleased that this
Committee has focused on this issue of senior professional
designations. It is why the SEC is working hard to forge a
national solution to this urgent problem.
At our Seniors Summit next week, we will tackle this
problem with our fellow regulators from the States, some of
whom you will hear from on your next panel. This is an issue
you are very properly highlighting in this hearing, and I
commend you for doing so. We need to do everything that we can
to ensure that seniors are well informed about the experience,
the background and the expertise of those who are advising them
about their investments.
Mr. Chairman, these are important issues that will only
become more important in the years ahead. We are facing now the
biggest demographic wave in our Nation's history; some 76
million Americans will soon retire. We can be sure that the
fraud artists, following the Willie Sutton Principle, will go
where the money is.
Men and women who have worked all their lives, saved for
their retirement, just as they should have, and now need to
rely on trustworthy investment advisors and brokers to help
them manage their savings through their retirement years,
deserve better than that. It is up to all of us to work to see
to it that their life savings are protected.
So thank you again for the national attention that you are
bringing to this issue, and for the opportunity that you have
given me to testify today.
I would be happy to take your questions.
The Chairman. Thank you very much, Chairman Cox.
In your testimony, you state that you are looking into
whether the SEC State regulators and/or Congress should be
doing more to address the growing problems associated with
``Senior Professional Designations,'' the multiplicity of them
and, in many cases, the inadequacy of what it is that they know
and what they are trying to do.
Can you tell us a little bit more about some of the
potential solutions that you may well be considering?
Mr. Cox. Yes. Thank you, Mr. Chairman.
Just as you and this Committee are concerned about this
issue, so are State legislatures, the securities regulators in
the States, and the Securities & Exchange Commission.
What we have is a cacophony. There is a lot of alphabet
soup, and it is very confusing. You don't have to be long in
the tooth, and perhaps have a difficult time reading the fine
print or perhaps be a little forgetful, to run into problems
trying to understand what you are dealing with here.
It is just plain confusing to anybody, and so it cries out
for something a little bit more consumer-friendly. This is true
for consumers of any age.
Part of the problem is that there are so many different
organizations, even legitimate organizations, issuing
legitimate designations.
So one question that I think we should all ask ourselves
is, ``Is this a case where there is need for uniformity?'' Is
this a case where a national approach and a Federal solution
might contribute something? Is this a case, if not that, where
some model form of regulation would make sense?
I think you will hear shortly from the president of the
North American Securities Administrators Association, Joe Borg,
that that is in the works.
At our Seniors Summit next week, we are going to focus our
attention on this issue. We will bring the SEC, the State
regulators and others together in a meeting to try and hammer
out some more solutions to this. We have talked about it before
in the past, and I think, working with you and the Congress, we
should be able to make short work of this.
The Chairman. Thank you very much.
Senator Smith.
Senator Smith. Thank you, Mr. Chairman.
Chris, good to see you again. Thank you for being here, and
the job that you are doing at the SEC.
Chris, like the Chairman, I wonder if we are doing enough
to increase financial literacy as people retire. I was struck
recently by something I read that showed that the basic
understanding of financial literacy was about 1 percent.
One percent of investors understand basic investing
principles. The survey said an astounding 43 percent would take
the bait of ``you can't lose'' investment scams. Sixty-six
percent would meet with a financial advisor without checking
his or her credentials. Only 33 percent who have used a
financial planner have actually checked the planner's
background. Forty seven percent of investors do not have a
financial planner to determine how much to save and invest for
retirement.
I wonder if you have any additional ideas you would like us
to turn into legislation for how we can increase financial
literacy among seniors. I do have a bill that would require the
Social Security Administration to provide for someone, when
they become eligible to Social Security, a handbook, a
pamphlet, the basic financial terms so that they can be better
informed.
I hope I am not just adding to all the mail that they get
in their mailbox. But I wonder if there is some way we can
break through this because, otherwise, this problem the
Committee's addressing today is just simply going to grow.
Mr. Cox. Well, you are very right to focus on this issue.
At the Securities and Exchange Commission, because we
understand that investor education is such an important part of
success in this area, we have recently announced a significant
expansion of our Office of Investor Education and Advocacy.
We have created within that office a dedicated director for
the Office of Investor Education, and we are going to give that
director more resources to focus directly on this effort.
As I mentioned during my formal testimony, we participate
in a great number of activities across the country. Just in the
senior area, we have had over 50,000 attendees at the events
that we are sponsoring or participating in, and we are going to
continue to do that. But it is a big country, and trying to
reach 300 million people with a consistent message and trying
to get people to pay attention when they are very busy and,
ironically, trying to earn a living--where they will earn the
money that we are hoping that they will wisely save----
Senator Smith. The Seniors Conference you are doing, is
that in Washington?
Mr. Cox. Yes, it is here.
Senator Smith. Do you take those around the country?
Mr. Cox. Yes. This is meant to draw a lot of attention, and
also put together a lot of expertise so we can truly forge a
solution here.
Senator Smith. Who is invited to it?
Mr. Cox. First of all, all of us who are responsible for
securities regulation at the Federal and the State levels.
Second, private sector nonprofit organizations and for-profit
organizations, and the public who are concerned and interested.
Senator Smith. You heard my description of my staffer who I
had take this test to certify as a specialist. She would tell
you, if she were here, that she is not a specialist, but read
the materials provided. She did it in an hour and she took the
exam in half the time that was allocated, and got a B on the
test.
What do you think of that? Do we need to strengthen that
standard for what is required to become a specialist?
Mr. Cox. Absolutely. Seventy years ago, the Congress
decided that uniform national regulation of our securities
markets was an important national objective.
Now, I think we have long since gotten over the question of
whether or not there is a role here for the Federal Government.
There is. It is very, very important in this case for there to
be some consistency, uniformity and, ultimately, a standard
against which you can enforce.
We have very broad authority at the SEC already to bring
fraud charges, and I outlined just some of the cases. We
brought another case involving seniors just this morning, and a
big one. We are going to continue to do that.
What you just described might not quite make it to the
point where we could say that is garden-variety securities
fraud, but it makes you uncomfortable. So one of the things
that we might do is tighten up in this area so there is a
bright line that you can enforce against.
Senator Smith. Is that something you can do without an act
of Congress?
Mr. Cox. I don't know. One of the things that we are going
to be focused on at the Seniors Summit is whether an act of
Congress is something that we should be seeking. But we hope to
have an answer for you on that very soon.
Senator Smith. I would appreciate learning what you find
out.
Mr. Chairman, maybe we can pursue it. Thank you.
The Chairman. Very good. Thank you very much, Senator
Smith.
Senator McCaskill.
Senator McCaskill. I notice in the testimony of the
individual who is going to testify after I leave, from the
Society of Certified Senior Advisors, that he represents in
this that, in fact, your representatives have gone through
their training, and represents that the training is adequate.
The other interesting thing he represents in here, that
``The Society of Certified Senior Advisors is not a company
that qualifies or certifies anyone as a specialist in senior
investments.'' Now, then you go down the page, and it
references over and over again ``Certified Seniors Advisors''
after he has said within the same document that they are not
certifying anyone on financial investment. So you think,
``Well, what are they certified in'' if they are saying it is
not financial investments?
Now, the interesting part is you get down the same page,
and it says, ``Finally, beginning January 1, 2008, any
Certified Senior Advisor who is not currently using
disclosure'' that he references, that they don't certify
anyone, ``Is going to be required to provide the disclosure
prior to the completion of a transaction.''
So clearly embodied in this is the idea that there are
transactions going on, and most of the transactions that are
even tangentially touched upon in the book they have are
financial. So it is a bunch of double-speak, and I think that
we are going to have to be much more aggressive than we have
been, and I know a lot of States have. I know in our State,
just a month ago or so, there was a cease-and-desist order
against someone using this designation, inappropriately
marketing insurance products, telling people to switch
investments.
I just want--do you feel comfortable pushing the SEC to go
further in going after these designations that they admit don't
certify anything in terms of financial advice, but yet they
want them to disclose that prior to the completion of a
transaction?
Mr. Cox. Absolutely. That is why we are so happy to be here
today as part of this hearing that you are putting together,
and it is why we are so happy to be here as part of a group of
people you have called together who, coincidentally, are many
of the same people that will be working together at the Seniors
Summit next week.
This is an issue that the SEC and the State regulators have
been focused on for some time. Now, there has been some good
work that has been done in this area. Some States have been
enacting reforms, but I think it is time that we take a look at
this from a national perspective.
Senator McCaskill. The other thing I might talk about just
for a minute before I go is the education of seniors. In this
testimony and some of the other testimony this morning, and
even in your testimony, there is talk about the websites.
Well, I think--I know that I have finally gotten my mother
to the point that she will play bridge and e-mail, and she is
probably going to be furious that I said that out loud. But she
is e-mailing, and now she is beginning to use Google a little
bit.
But this was a push, and it took a lot. I think most
seniors that are going to be victimized by this, they are not
the seniors that are on the Web. Do you have any suggestions as
to ways we could use the Social Security Administration or
other senior organizations, or administration officials that
touch seniors on a daily basis?
Maybe it is through the Medicare program. Maybe it is
through Social Security, but some way that we can at least put
a warning out, a simple warning, ``Beware of Designations. Do
not rely on designations unless your Secretary of State's
office in your State indicates to you that it is a valid
certification in terms of financial advice.''
Mr. Cox. Well, first I think you are very right to be
sensitive to the notion that not all seniors, and indeed not
all people of any age, have facility with the Internet. That is
obviously changing. We can imagine where people that are 8, 9,
and 10 years old today will be when they are 75. They will
probably be quite proficient.
Senator McCaskill. Our kids will be great.
Mr. Cox. They will be behind in some other technologies,
however, that will have overtaken what we have today.
It might well be, as I mentioned earlier, that someone
formerly proficient with computers, for whatever reason can't
do it anymore, and so we have to make sure that we are reaching
people in any number of ways, including the old-fashioned way,
in writing.
But, also, we want to make sure that we recognize the
opportunity that we have with older Americans to touch the
caregiver, the person that they trust, that they talk to about
their investments. Sometimes that is a child. Sometimes that is
another relative. Sometimes it is a trusted friend of the
family.
Sometimes, in addition, we find that those very people are
the source of fraud against seniors. All too often, the child
is the one ripping off the parent. I wish I weren't here as
Chairman of the SEC to highlight that now well-known fact, but
that is also something we have to work around.
So no single way of doing this is ever going to be right,
and creative solutions such as the one that you have suggested
are things we have to be open to.
Senator McCaskill. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator McCaskill.
Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman.
First of all, thank you, Chris, for all of your leadership
on this and other issues. I have enormous confidence in it
based on your service in the House, among other things.
This poster obviously gets to pretty much the central
question of this discussion. We have been dancing around it a
little bit. What are your thoughts about what the best solution
is? Specifically, let us start with the obvious question. Do we
need one or more titles and sets of criteria embodied in
Federal law?
Mr. Cox. That is the right question to ask, or one of the
right questions to ask. Even though that is the topic of this
hearing, even though the SEC and our staff have been working on
this for a long time, as have the men and women from the State
law enforcement and securities regulatory agencies who are here
with us today, I don't know that the answer to that question is
definitively yes or no. But I am absolutely certain that there
is a role for the Federal Government here.
I am very encouraged by the fact that there is model
regulation being considered and developed. In fact I am
encouraged by the general notion that that is possible. There
are, after all, a number of private organizations that
legitimately issue these designations, and there is an awful
lot of complexity in the financial markets.
Being an expert in one product may be worth the
designation, and we don't want to step on that necessarily by
saying there is going to be one size that fits all, and thus
underserve consumers.
But we will be very particular and careful about it. I
think what you should ask of us is that, without wasting too
much more time--not that we have wasted any at all, but with
alacrity--that we come back to you with a sturdy recommendation
and an answer to that very question.
Senator Vitter. OK. As sort of a preview to that process,
what would some of the obvious alternatives be? One is what I
just said. I mean, one obvious alternative is one or more
Federal--one or more titles and sets of criteria embodied in
Federal law.
Short of that, I guess there could be model State
legislation, model regulation short of legislation. What is the
sort of menu of options that we are likely to consider?
Mr. Cox. Well, a very standard Federal approach is to
recognize some, one or more reliable, trusted arbiters who
could be State regulators, private organizations, self-
regulatory organizations, who keep abreast of this constantly,
and to say that this is the source of reliability and truth and
accuracy in this area. For this purpose, that will satisfy SEC
requirements.
Another approach would be to be even more free-form about
it and let not only States but private organizations develop,
as they will, these designations, but require some basic
methodology for accrediting a certification so that you could
be certified in something we can't even imagine right now. But,
if you are so certified, you would have gone through a rigorous
training program that must include this much time in and so on,
to deal with Senator Smith's concern that this is 5 minutes and
you are finished.
Senator Vitter. OK, and another inquiry, in terms of your
enforcement actions.
We could quadruple your budget, and obviously the SEC would
still only be able to touch a relatively small percentage of
the bad actors out there. So in that context, seems to me
important that the penalties are very meaningful, not cost of
doing business. do you think the penalties available to you are
adequate now in that context?
Mr. Cox. Yes. Since Congress passed the Remedies Act, the
SEC has had abundant authority in this area. Particularly when
it comes to making the people who are responsible for the
wrongdoing and the fraud pay and pay dearly, the law gives SEC
law enforcement that authority.
Senator Vitter. Right.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Vitter.
Senator Casey.
Senator Casey. Thank you, Mr. Chairman.
I wanted to pick up on the enforcement questions. In
particular, Chairman Cox, in your testimony you talk about 40
enforcement actions involving fraud on seniors in the last 2
years. Is that correct?
Mr. Cox. Yes, over that. Over 40.
Senator Casey. You are satisfied with the regulatory or
legal authority you have? You think it is ample enough, the
authority itself?
Mr. Cox. Well, that is a broad question, and we actually do
seek additional authorities in a variety of areas, and ask our
authorizing committees in the House and Senate for it annually.
So I don't want to suggest that there aren't improvements
possible. But, with respect to going after fraud in this space,
absolutely. We have abundant authority to go after garden-
variety fraud.
Senator Casey. I realize a lot of this is you have got to
work with, is--as I think is constructive to work with State
regulators, State securities commissions and others, other
State officials and offices.
I want to understand better. When you say we filed an
emergency action, can you tell us what that means and how it
plays out in the--sometimes we know when a civil suit is filed
in our system of justice, even criminal matters can take an
awful long time. But I just want to get a sense from you what
the process is, once you institute an emergency action, how
that plays out.
Mr. Cox. Well, we will rush into court and ask for a TRO,
an asset freeze. We want to make sure, that once we realize
that people are bleeding off the money that they said was going
to go for one purpose and in fact it is not, it is going to pay
for their yacht or going to other investors in a Ponzi scheme.
We want to stop the bleeding and preserve as much of the
investors' original money as we possibly can. Courts are
generally sympathetic to the Federal Government coming in and
asking for that kind of relief.
Senator Casey. So you get injunctive relief initially?
Mr. Cox. Exactly.
Senator Casey. When you reach the point where you have been
able to prosecute or pursue an action against a particular
entity or individual, to the point where there is a judgment or
to the point where it is resolved, what kind of penalties are
we talking about, just to give everyone here a sense of what
penalties can be leveled?
I guess the follow-up to that is do you think the penalties
that you have available to you, or the sanctions, are adequate
to deal with this particular problem?
Mr. Cox. Yes to the second question. The sanctions that we
seek, and normally are successful in obtaining, include civil
money penalties. They include what we call disgorgement, which
is paying back any ill-gotten gains.
Penalties are separate and on top of that. They include
what we informally refer to as ``time-outs,'' suspensions from
practice before the Commission, which means your professional
opportunity to be a lawyer or an accountant or an investment
advisor, what have you.
In addition to suspensions, we can simply bar people. We
can give them lifetime bars. We can make sure that they never
serve on the Board of Directors of a public company or as an
officer. So we have a variety of sanctions that go directly to
the person and, in totality on the civil side, I think they are
abundantly adequate.
We also very frequently partner with criminal authorities--
in the Federal Government, the Department of Justice, the U.S.
Attorneys, and also in the States. It is not at all uncommon
for us to jointly announce civil and criminal charges. Within
the bounds of the law, we cooperate with the criminal
authorities in bringing their cases as we bring ours, and that
has been very successful, as well.
Senator Casey. You referred to civil monetary penalties.
What are those amounts, or what are the thresholds or triggers
that would drive the amount that that individual or that entity
is sanctioned with? Is there a way to describe how those--what
those amounts are or what triggers a certain amount?
Mr. Cox. Yes. In general, the penalties are tiered based
upon the egregiousness of the conduct, and there are
guidelines, if you will, for issuing penalties in particular
amounts based on each occurrence of the offense. There are also
occasions in which the penalties are intended to be tied to the
extent of the benefit that was received by the fraud, and tied
to the amounts of the disgorgement in those cases.
Senator Casey. There is nothing as it pertains to those
civil monetary penalties that you would change, or that you
think needs more legislative action to increase or to enhance
the civil monetary penalties?
Mr. Cox. No. I think we have the authority that we need in
the civil monetary penalty area.
Senator Casey. Thank you very much.
The Chairman. Thank you very much, Senator Casey.
Mr. Cox, we really want to thank you for coming here today
and talking to us, talking about all the things you know, your
knowledge, your expertise, the plans that you have to work
together with us at the SEC to do something significant about
this issue. We are looking forward to working with you to get
something done. Again, we thank you for being here today.
Mr. Cox. Thank you very much, Mr. Chairman. We at the SEC
appreciate your leadership on this issue and look forward to
working with you, as well.
The Chairman. Thank you very much.
[The prepared statement of Mr. Cox follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The Chairman. May we now move to the second panel? Our
first witness on the second panel will be Lori Swanson, who is
the attorney general of the State of Minnesota. Attorney
General Swanson has served in that position since January, and
previously served as Minnesota's solicitor general and deputy
attorney general. Strong advocate, she is, for the public in
areas, including financial fraud against the elderly, and also
consumer protection.
Then we will hear from William Galvin, who is secretary of
the Commonwealth of Massachusetts. Secretary Galvin serves as
the State's chief securities regulator. He has earned a
national reputation for aggressively protecting investors.
Next witness will be Joseph Borg, who is president of the
North American Securities Administrators Association, known as
NASAA. He is also director of the Alabama Securities
Commission. NASAA is the oldest international organization
devoted to investor protection. Its fundamental mission is
protecting our consumers who purchase securities or investment
advice.
Then, we will have Nicholas Nicolette, who is a Certified
Financial Planner and president of the Financial Planning
Association (FPA). The FPA is an advocacy organization whose
stated aim is to be a community that fosters the value of
financial planning and advances the financial planning
profession. Mr. Nicolette has been an SEC registered investment
advisor since 1992, and he has substantial experience in the
industry that we are examining today.
Our next witness will be introduced by Senator Smith.
Senator Smith. Thank you, Senator.
Commissioner Sandy Praeger is our final witness, and she is
the Commissioner of Insurance for the State of Kansas. She is
testifying today on behalf of the National Association of
Insurance Commissioners.
Ms. Praeger will testify on steps necessary to provide
training, competence and suitability standards for investment
planners, and the NAIC's efforts to protect seniors from
financial fraud.
The Chairman. That is good. We thank you very much, and we
appreciate the witnesses being here today.
Ms. Swanson, we will take your testimony.
STATEMENT OF LORI SWANSON, ATTORNEY GENERAL, STATE OF
MINNESOTA, ST. PAUL, MN
Ms. Swanson. Good afternoon. My name is Lori Swanson. I am
the attorney general of the State of Minnesota, and I thank
you, Chairman Kohl, Ranking Member Smith and the entire
Committee for your leadership in conducting these important
hearings today.
When asked why he robbed banks, Jesse James once replied,
``Because that is where the money is.'' Well, for the same
reasons today, our senior citizens are often targeted with
financial opportunism.
This Committee on Aging knows the demographics well, and so
does the insurance industry. Consider these statements by one
company, Allianz, when training its agents on how to conduct
sales seminars. ``The increasing number of seniors brings a
huge market opportunity.'' ``Senior citizens represent 80
percent of all money in U.S. savings and loan institutions, and
own 77 percent of all financial assets in America.''
Now, some insurance agents make very high commissions for
selling some of these long-term deferred annuities of up to 9
to 12 percent, plus other incentives. An agent who sells
$100,000 annuity may receive a commission of $9,000 to $12,000
for just a few hours of work.
To recoup the large commission, the insurance company often
imposes hefty and long surrender penalties that go for many
years if a senior withdraws their money early. Our office, like
others around the country, has seen agents using titles like
``Certified Senior Advisor,'' ``Senior Specialist,'' ``Senior
Counselor,'' to suggest that the agent has some type of special
credentials as it relates to senior citizens, or is looking out
for seniors' best interest when, in fact, these titles are
simply nothing more than marketing gimmicks.
Several insurance companies, including Allianz and American
Equity, have been gold sponsors of the so-called Million Dollar
Academy, which holds a 2-day annuity university. The
opportunistic practices of the Million Dollar Academy have been
profiled and exposed in the Wall Street Journal and the New
York Times. Our office is currently trying to help, through
pending litigation, senior citizens who became sitting ducks
for agents trained at the Million Dollar Academy.
This includes, for example, a 75-year-old retired teacher
and pastor from suburban Minnesota. They attended one of these
free dinner seminars sponsored by an agent who called himself
an Elder Counselor, and he put $30,000 of $50,000 in liquid
assets into a long-term annuity with surrender periods for 10
years supposedly to shield their money if they had to go into a
nursing home. The problem with that is the wife has cancer,
cognitive disabilities, needs the money but can't get access to
it without paying a hefty surrender penalty.
In March, my office filed the lawsuit against American
Family Prepaid Legal Corporation and Heritage Marketing
Insurance Services. Our lawsuit--and other attorney generals
have sued them, too--and our lawsuit alleges that these
companies sold living trusts to senior citizens that they
didn't need, and then used the entry of the living trust to go
on and sell annuities.
The person would come to their door saying that they were
an asset preservation specialist. In fact what they were
really--was an insurance agent, and then aggressively sold
annuities on behalf of at least five very well known national
insurance companies.
A training manual from that case told its agents things
like ``Never ask a closing question like, ``What do you
think,'' or, ``Would you like to sign up for the plan.'' These
are yes/no questions that never work. Remember, the prospective
client does not want to buy anything. Questions like these
rarely lead to sales. Instead, always assume the close.'' Then,
it says just pick up your pen and start filling up the
application. Don't ask the senior, ``Do you want to buy the
annuity?''
The manual tells agents how to mislead the senior by
describing the annuity as ``Very similar to a savings account
at the bank.'' Heritage even trained agents how to stop seniors
from talking to their kids before they made a purchase.
In January, we filed a lawsuit against Allianz Life
Insurance Company, whose deferred annuities imposed surrender
periods of up to 12 years and surrender fees of up to 15
percent for early withdrawal. Our office has received over 250
complaints about the sale of Allianz' annuities, which is a
remarkable number since only a small fraction of aggrieved
senior citizens ever file complaints.
In April we filed a similar lawsuit against American Equity
Investment Life Insurance Company, whose annuities imposed
surrender charges of up to 25 percent and surrender periods as
long as 16 years. Both of these insurers sold senior citizens
long-term deferred annuities that were not suitable for their
needs and, in many cases, misrepresented the terms of the
annuity.
Long-term annuities were sold to senior citizens in their
70's and 80's even though the senior would need access to their
very limited savings in order to meet future health and long-
term care expenses.
For example, an 86-year-old woman from rural Minnesota
worked as a nurse's aide before she retired. She managed to
save up in her life $49,000 in retirement savings and, of that,
almost all of it was put into an annuity with a 12-year
surrender period that lasts until she is 94 years old. She
wants to move into an assisted living facility, can't because
her money is tied up in this long-term annuity.
Likewise, an 86-year-old guy from rural Minnesota, he was a
retired farm laborer, gets a little less than $500 a month from
Social Security, lives in public housing, had the same thing
happen to him. When he was 80, American Equity put $24,000,
most of his liquid net worth, into an annuity with a 15-year
surrender penalty.
Now, the fellow had to cash it in just to pay for his
living expenses, but he had to pay $6,800, or almost a quarter
of his net worth, in order to cash it in just so he could
afford to live.
Insurance companies like these that sell unsuitable long-
term deferred annuities to senior citizens are turning a blind
eye to, and indeed encouraging and profiting the most from the
aggressive sales practices of their agents. Before selling a
70- or 80-year-old an annuity that may lock up a senior
citizen's life savings for as long as 12 to 16 years, insurance
companies should make proper inquiry into whether the senior
can really afford to have their money tied up that long, or
whether the senior might instead need access to their money to
pay for the kinds of expenses we face as we age.
Thank you.
[The prepared statement of Ms. Swanson follows:]
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The Chairman. Thank you very much, Ms. Swanson.
Mr. Galvin.
STATEMENT OF WILLIAM GALVIN, SECRETARY OF THE COMMONWEALTH,
BOSTON, MA
Mr. Galvin. Thank you.
Chairman Kohl and Ranking Member Smith, I am William
Galvin. I am the secretary of the Commonwealth of
Massachusetts. As head of the Massachusetts Securities
Division, I am the chief securities regulator in Massachusetts.
I want to applaud your decision to investigate the
deceptive marketing of annuities and other financial products
for senior citizens. This is an area of compelling concern in
Massachusetts, and I know in other States, as well.
Through investigations and complaints from the public, my
office has become aware of very troubling sales tactics. A
veritable army of alleged ``Senior Specialists'' have been
using sophisticated marketing tools to give senior citizens the
impression that they are acting as their unbiased and skilled
advisors. However, the real objective is to convince them to
purchase a specific product that the specialist offers. Often
the product is a high-commission annuity which has been sold
under false pretenses and which the purchaser does not fully
understand.
Although annuities may be a valuable tool in one's
financial portfolio, often the annuities that we have seen sold
to seniors are unsuitable due to lengthy lockup periods, as you
just heard, large surrender fees, and negative tax
implications. Many of these disadvantages are not disclosed or
explained by the so-called senior specialists.
In an effort to cloak themselves with legitimacy as
financial advisors, many annuities salespersons have used
titles such as ``Certified Elder Planning Specialist,'' which
was conferred by an entity called Brokers Choice, which
required nothing more than payment to Brokers Choice and 96
hours of self-study, all done through the mail.
Brokers Choice also created senior financial survival
workshops, where the purported advisor gives a free financial
planning seminar on a whole range of senior-specific topics,
all of which were geared toward deceiving and frightening the
elderly into purchasing annuities with exorbitant commissions.
As another example, annuity salesmen have been using the
Certified Senior Advisor designation to give the impression
that they have specialized expertise in senior financial
affairs, and that they are acting in the role of an advisor.
For example, one agent stated in his advertising materials
that he is the one of 7,000 Certified Senior Advisors in the
U.S., and is therefore well trained on many issues, especially
senior finances. However, my office's investigation into this
designation indicated that it was primarily a marketing tool,
and CSAs did not receive meaningful training on financial
issues involving seniors.
As another example, a number of salespeople are using the
so-called ``Piece Of Pie'' sales model--I don't know if that is
trademarked or not, but it is what they call it--which is also
geared toward senior citizens. The Piece Of Pie seminars
specifically try to scare seniors away from the financial
products they currently own, or are currently involved with,
and to cast doubt on the competence of the person's existing
advisor.
For example, Piece Of Pie's presentation includes slides
warning that banks may not be safe, and that the average rate
of return in the stock market is ``A big lie.'' In addition,
the Piece Of Pie materials bootstrap their scare tactics to
other concerns that seniors might have, such as bird flu,
identity theft, retirement, long-term care, and the cost of
prescription drugs and nursing home care.
After gaining the client's confidence and trust through a
series of meetings, the annuity is offered as the recommended
solution to the client's concerns. We have also seen a
proliferation of third-party publishing companies that provide
agents with prewritten books, articles and newsletters, which
are often used to give seniors the impression that the agent
has specialized expertise that he or she does not really have.
For example, Javelin Marketing sells a monthly series of
SeniorFinance--that is one word--newsletters, which allow the
agent to insert his name and picture before sending it out to
clients, implying that he indeed has authored it. Oftentimes,
this is a misconception that is promoted to the seniors.
These are merely a few of the marketing tools that the
Massachusetts Securities Division has seen. Often, the
insurance company that underwrites the product will sponsor the
agent's acquisition of these marketing tools from the third-
party vendors that provide them. This allows the insurance
companies to enjoy the benefit of increasing sales while
preserving the ability to distance themselves from any negative
association with the marketing materials.
I am truly alarmed at the level of deception employed
against unsuspecting seniors who are looking for someone to
guide them through their financial concerns. Our office has
been flooded with countless stories of harm to seniors, and I
could go into several examples which would only repeat some of
the statements you have already heard, most especially taking
advantage of people late in their years at a time when they
need access and liquidity to their money where they are being
deprived of it, not to mention the high fees.
This has come across the board. It is men and women. It is
people who have some experience in financial expertise, and
some who have absolutely none.
I know that the purpose of today's hearing is to discuss
what we can do, and that is why I would like to proceed to that
part of my testimony where it talks about what we have done in
Massachusetts.
We indeed have already adopted regulations that apply to
all of our broker-dealers and financial advisors that address
the issue of questionable credentials. The regulation that we
have now put in place prohibits the use of senior-specific
credentials or professional designations unless the credential
has been accredited by a reputable national accreditation
organization. Examples of such organizations are the American
National Standards Institute and the National Organization of
Competency Assurance, both of which accredit personal
certification programs.
During the comment period on our regulation, our rule met
with a favorable response from industry participants, as well
as senior citizens and consumer advocacy groups.
I want to thank the Chairman and each Member of the
Committee for the opportunity to appear and provide this
testimony, and I look forward to answering any questions you
may have and providing you with additional information you may
request.
I can't stress how important it is that we move promptly. I
think we see the marketing continuing to evolve here. As
quickly as we uncover one particular set of terms, another one
emerges.
I also think it is important to bear in mind as we put
together a plan, whether it be at the State level or the
national level, that we have to put something out that is going
to stand the test that inevitably it is going to have in the
courts or commercial-free speech allegations and other such
things.
In Massachusetts, our experience has been based on
qualifying the material based upon our past experience,
qualifying it based on specific accreditation. I do think you
are going to need that flexibility in any effort, whether it be
regulatory or legislative.
[The prepared statement of Mr. Galvin follows:]
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The Chairman. Very good, Mr. Galvin.
Mr. Borg.
STATEMENT OF JOSEPH BORG, PRESIDENT, NORTH AMERICAN SECURITIES
ADMINISTRATORS ASSOCIATION, WASHINGTON, DC
Mr. Borg. Chairman Kohl, Ranking Member Smith, we commend
you for your ongoing investigation of investment fraud
targeting our Nation's seniors. We share your outrage at the
practices used to swindle seniors out of their hard-earned
money that they need for a secure retirement.
State regulators, as the first line of defense for
investors, are at the forefront in detecting the problem of
senior abuse and responding to it aggressively. We believe the
most effective weapons against fraud are vigorous enforcement,
investor education and innovative regulation. The States have
been active in all of these areas.
NASAA and its members have led the effort to educate the
public about senior fraud. In 2003 NASAA created the Senior
Investor Resource Center on our website. The fourth episode in
our Alert Investor podcast, ``How To Talk To Your Parents About
Senior Investment Fraud,'' was released this May. NASA members
also partner with grassroots organizations such as AARP.
One successful example is the Senior Sleuth checklist
program, in which AARP volunteers attend free lunch seminars
targeting seniors and report their findings back to State
securities regulators.
There are two types of senior abuse that we find especially
troubling--the free lunch seminars and the misleading
professional designations, and we are responding. We have all
been invited to a free lunch or other dinner investment seminar
that you just can't afford to miss, according to the ads. As
you can see from the posters, there are recurrent themes in
these enticing ads.
A free gourmet meal, tips on how to earn great returns
while eliminating market risk, and a warm welcome to spouses of
the invitees. Nothing will be sold. There is no cost or
obligation, except the high-pressure sales pitch comes with a
call a few days later from a Senior Specialist salesman.
The violations we see range from outright lies and the
conversion of investor funds to more sophisticated forms of
abuse. Often, the salesman recommends liquidating securities
positions and using the proceeds to purchase indexed or
variable annuity products, which are often grossly unsuitable
for senior citizens. These recommendations also may constitute
the dissemination of financial advice for compensation without
an investment adviser license, a violation of State securities
laws.
Since 2003, State securities regulators have been actively
investigating and bringing cases to stop the spread of abusive
sales practices that often emanate from these events. From
steakhouses in Arizona to country clubs in Virginia, the
retirement savings of seniors, as well as of those nearing
retirement, are being targeted by salesmen who put their own
personal interests ahead of those of their clients. There is no
such thing as a free lunch.
For example, in June 2007, Missouri Securities took action
against an Ozark man for misleading senior investors by
conducting seminars targeting older investors, discussing tax
investment issues, insurance matters, but not the facts and the
risks about the investments--or his felony fraud conviction,
for that matter. He took in $1.3 million over a 2-year period,
and there is only $12,000 that remains.
Colorado, securities and law enforcement authorities won a
securities fraud conviction and a 20-year prison sentence of a
con man who defrauded mostly older adults of almost $600,000 in
retirement savings through free lunch programs at retirement
centers.
California, Department of Corporations charged an
individual with fraudulently operating as an investment adviser
after he made recommendations primarily to seniors who invested
$15 million through seminars with free lunches at country clubs
and high-end restaurants.
As Chairman Cox mentioned, in 2007, seven States joined
forces with the SEC and FINRA in examinations to detect abusive
sales tactics aimed at seniors during the free lunch seminars.
Our full report on these exams will be released next week, as
the Chairman mentioned. But preliminary findings confirm that
the seniors attending the free lunch seminars are often subject
to fraud, misrepresentations, and other violations of the
securities laws.
State securities regulators continue to see the use of
impressive sounding but often highly misleading titles and
professional designations, many of which imply a special
expertise in addressing the financial needs of seniors, all for
the purpose of gaining a senior's trust. Often, these
designations are used in conjunction with the free lunch
seminars, or highlighted in mass mailings, business cards and
other promotional materials.
NASAA created a task force to address the senior
designations problem. We found that a substantial number of our
regulators had taken enforcement actions against individuals
who had used the senior designation in a deceptive manner.
Investigations, I assure you, are continuing.
We are also responding to the problem of senior
designations with regulatory solutions. I want to commend
Massachusetts's secretary of the Commonwealth, Bill Galvin, for
his leadership in addressing the problem not only through
effective enforcement, but also through innovative rulemaking.
The multi-front offensive launched by State and Federal
securities regulators and today's hearing is a testament to the
fact that senior citizens remain a target for unscrupulous
salespersons, and further action is necessary to punish and
deter the wrongdoing. The NASAA task force has been working on
a model rule suitable for adoption by every NASAA member,
which--would create a separate violation of law to use a
designation to mislead investors. We will urge its adoption in
every jurisdiction.
Also, Congress should explore proposals to assist law
enforcement, to ensure that those who take advantage of our
Nation's elderly will be held accountable. Problems will remain
as long as the benefits to the perpetrators outweigh the costs.
Enhanced penalties for senior abuse, ranging from fines to jail
terms, should help raise those costs, deter law violations and
punish those who would exploit senior investors.
In conclusion, this Committee's examination of investment
fraud against the growing senior population is an important
step in highlighting a serious problem and working toward
solutions. The entire community of State securities regulators
will continue to play an active role in protecting seniors
through enforcement, education and regulation.
Thank you again for the opportunity to appear today. I look
forward to answering any questions you may have and providing
any assistance that we can in the future. Thank you.
[The prepared statement of Mr. Borg follows:]
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The Chairman. Thank you, Mr. Borg.
Mr. Nicolette.
STATEMENT OF NICHOLAS NICOLETTE, PRESIDENT, FINANCIAL PLANNING
ASSOCIATION, WASHINGTON, DC
Mr. Nicolette. Thank you, Chairman Kohl and Ranking Member
Smith, for providing me the opportunity to add my voice to the
chorus of concern raised in the testimony you have heard today.
I am Nicholas Nicolette, president of the Financial
Planning Association, which represents over 28,000 financial
planning professionals. In my day job I am a partner in
Sterling Financial Group, a small financial planning firm in
Sparta, NJ, and I reside in Port Jervis, NY.
FPA strongly commends this Committee for investigating the
perplexing world of senior financial designations and shining a
spotlight on the alphabet soup of certifications and
designations that leaves too many elderly consumers vulnerable
to incompetent or fraudulent financial advice. I am proud to
lead an organization of professionals who are committed to
adhering to the highest standards of professional competence
and ethics.
Our position on consumer protection is as simple as it is
unwavering. Financial planners have a fiduciary duty to their
clients. Put another way, we are obliged to act in the best
interest of our clients, even if it is to our own detriment.
There is no higher standard.
I am also proud to say that, like most FPA members, I hold
the Certified Financial Planner certification, or CFP. FPA
supports the CFP mark, administered by CFP Board of Standards,
as the highest standard for competent, ethical financial
planners. CFP professionals have clearly demonstrated that they
possess the four Es--Education, Examination, Experience and
Ethics.
CFP certification is not the only credential that can or
should be trusted by the public, but it represents so much of
what is missing from some of the other 100-plus designations
and certifications this Committee has investigated. Without
these basic criteria, rigorous education and examination,
experience and enforceable ethics, you cannot sustain
credibility or the public trust.
The tragic stories we have heard so far today are all-too-
common and cast a pall over the entire financial services
industry. I have heard from a number of our Members who have
helped reassemble the shattered lives of senior citizens,
victims of these pseudo-financial experts. These seniors have
spent a lifetime working hard, raising and educating their
children, and saving with the goal of living their retirement
years with dignity and respect.
One particular tragic case that came to my attention from
an FPA member in Pennsylvania involved an elderly man who was
victimized by an annuity salesman carrying a Senior
Certification. You may have read about it in this morning's
Washington Post, or as Senator Casey referenced.
The 79-year-old man was persuaded by the salesman to sign a
Power Of Attorney, giving the agent access to the individual's
CDs, cash and mutual funds. The assets, not coincidentally,
ended up in unsuitable annuities.
When the victim learned he had been cleaned out, his family
said that he went into a deep depression and died a few months
later. The insurance company offered the gentleman his money
back in a letter which arrived on the day of his funeral. His
family buried him with the letter in his pocket.
Sadly, this insurance salesman is still doing business
today despite being sanctioned several times by State insurance
officials.
In contrast to the product-driven process employed by this
agent, FPA supports a client-centered process. CFP
practitioners, for example, are required by their ethics code
to use six clearly defined steps in the planning process to
help people achieve their life goals.
In the case of this unfortunate victim, we would have
created a budget plan and identified cash-flow needs for daily
needs and emergencies before looking at strategies and possible
product solutions for ensuring that he did not outlive his
resources. We would be required to clearly disclose all
conflicts of interest and, just as important, how we are paid.
so how can we help our seniors from those who would prey on
them? A combination of well-crafted regulation, vigorous
enforcement action and education are the key.
Today, individuals are required to make more financial
decisions that impact the quality of their lives than ever
before. We have a responsibility to create an environment in
which they can seek guidance and make decisions with confidence
that their interests are being put first.
Director Borg has discussed NASAA's plans to adopt a model
regulation that we hope will discourage the use of bogus
credentials. We look forward to working with NASAA toward that
end.
Regulators must also continue to be vigilant and act
decisively when they see early indications of fraud. In some
ways, though, their hands are tied by an antiquated regulatory
system that continues to permit a lower standard for advice in
the sale of insurance products.
State insurance laws are now only playing catch-up to
securities laws by establishing suitability requirements in
certain product sales. If an insurance agent, or any
professional, uses a title or marketing materials suggesting he
or she acts in the client's best interest, then they should be
held to a fiduciary standard.
Finally, we must help investors, young and old alike, to
educate themselves about the background of the person with whom
they are investing their assets and their trust.
Thank you again for allowing me to testify today, and I
will be happy to respond to your questions later.
[The prepared statement of Mr. Nicolette follows:]
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The Chairman. Thank you, Mr. Nicolette.
Ms. Praeger.
STATEMENT OF SANDY PRAEGER, INSURANCE COMMISSIONER, TOPEKA, KS,
ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS
Ms. Praeger. Thank you, Chairman Kohl and Ranking Member
Smith. I really appreciate the opportunity to be here today
representing the Kansas Insurance Department, but also as
president-elect of the National Association of Insurance
Commissioners. We really applaud you for holding this important
hearing.
As you know, a recent series of news articles have really
highlighted the problems with the use of these professional
designations, such as Certified Senior Advisor, Certified
Retirement Financial Advisor, Chartered Senior Financial
Planner, and Certified Financial Gerontologist--I thought a
gerontologist was a physician, but I guess not--that imply
expertise in providing investment advice to senior citizens.
In the experience of State regulators, these designations
involve very little actual training regarding the needs of this
vulnerable population. It appears that these designations,
which are granted by for-profit entities, serve more as
marketing tools than as actual evidence of education or
professional development.
Most of the problems that have been reported with those
using these credentials in marketing materials have dealt with
the sale of unsuitable annuities to senior citizens. Through
the adoption of the suitability guidelines in Kansas and our
enforcement activities, we are beginning to see a decline in
the number of complaints that we are dealing with in our
department. But we have also observed that companies have
instituted more aggressive training requirements and compliance
efforts with the producers that are authorized to sell their
products, and we hope this is a trend that will continue.
The NAIC has also taken specific action to require that
agents and companies selling annuities to senior citizens--and
actually to all Americans, for that matter--take affirmative
steps to ensure the suitability of the annuity for the
consumer. In 2000, the NAIC adopted a white paper calling for
the development of suitability standard for non-registered
products similar to those that existed for some time under the
Security and Exchange Commission for registered products.
The resulting senior protection and annuities transaction
model regulation, or the suitability model, was adopted by the
NAIC in 2003. This new model was another tool that regulators
could use to protect consumers from inappropriate sales
practices in addition to the NAIC's annuity disclosure model
regulation, which had been adopted a few years earlier, which
provides consumers the basic questions they should ask before
purchasing an annuity.
Because purchasing life insurance and annuity products is
often a complicated and confusing process for consumers of all
ages, not just for seniors, the NAIC overwhelmingly adopted
revisions to the suitability model in 2006 to have its
requirements apply to all consumers, regardless of age. The
suitability model imposes duties and responsibilities on
insurers and insurance producers regarding the suitability of a
sale or exchange of an annuity to a consumer.
Specifically, in recommending to a consumer the purchase of
an annuity or the exchange of annuity, the insurance producer
must have reasonable grounds for believing that the
recommendation is suitable for that consumer. Prior to the
execution of a purchase or exchange of the recommended annuity,
the insurance producer or insurer must make all reasonable
efforts to obtain information concerning, (1) the consumer's
financial status, (2) the consumer's tax status, (3) the
consumer's investment objectives, and (4) any other information
used or considered to be reasonable in making the
recommendation to the consumer.
To ensure compliance with these requirements, an insurer
must establish and maintain a system of supervision that
includes maintaining written procedures and conducting periodic
reviews of its records that must be reasonably designed to
assist in detecting and preventing violations of the
suitability model. Should a producer or an insurer fail to meet
their obligations under the model, the Commissioner may order
an insurer or producer to take corrective action, and may also
impose fines.
Approximately 32 States have adopted the suitability model
or similar suitability regulations. Some States, Kansas and
Missouri for example, had already enacted laws covering all
consumers, regardless of age, prior to the 2006 revisions.
Other States, such as Iowa and Wisconsin, have also included
life insurance products in the suitability standards.
As insurance commissioner, I take my responsibility for the
enforcement of these regulations seriously. Since taking office
in January 2003, our department has received 506 annuity
complaints and have recovered more than $7.3 million for
individuals who have had problems with those annuity products.
The complaints range from misleading advertising and marketing
to claims handling, with the most frequent category of
complaint being misrepresentation of the product being
purchased.
As demonstrated by our experience in Kansas, State
regulators have acted diligently to ensure that injured
consumers are made whole. My counterparts in other States have
also been engaged on this issue. While the total number of
complaints remains low relative to other lines of insurance,
the complaints are still significant and show a troubling trend
over time.
For the States that have reported data on annuity sales to
the NAIC, there has been a marked increase in the number of
total complaints in the categories of suitability, agent
handling and misrepresentation over the past 3 years. The total
number of annuity complaints reported in these categories rose
from approximately 1,400 in 2004 to more than 2,300 in 2006.
The proportion of these complaints attributed to suitability
issues has also increased each year from just over 10 percent
in 2005 to more than 18 percent in the data reported thus far
in 2007.
To be clear, each and every complaint is reviewed and
investigated by the State Department of Insurance. Since 2004,
more than 75 percent of these annuity complaints have been--
that have been reported to State regulators and to the NAIC
have been resolved in favor of the consumer.
There is no doubt that abuses do exist and that State and
Federal officials entrusted with the responsibility of
protecting consumers must remain vigilant in their oversight of
annuity sales. To this end, insurance commissioners have issued
a consumer alert to warn senior citizens about abusive sales
practices and to urge them to be sure that they fully
understand the product they are purchasing before signing the
contract.
I appreciate the opportunity to testify before the
Committee today, and thank you for your attention to this
really important issue. I would stand ready to answer
questions.
[The prepared statement of Ms. Praeger follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Praeger.
As you know, the hearing today is entitled, ``Advising
Seniors About Their Money--Who Is Qualified And Who Is Not,''
and all the various ways you have testified on this issue. But
in terms of that question, who is qualified and who is not,
advising seniors about their money, I would like to ask each of
you to tell me the one thing, or maybe the two things, that are
most important, that we need to put in place, that we need to
do to improve this whole area of advice that is being given to
seniors on how to invest their money.
How do we improve that whole thing, one or two things? Ms.
Swanson?
Ms. Swanson. Sure, Chairman Kohl. Again, thank you for your
leadership in this. as we heard from the testimony, it is
incredibly important.
The agents who are out there are not rogue insurance
agents. I think it is important that we recognize that none of
these sales would happen unless there was an insurance company
also selling the product. Insurance companies could borrow from
the war on drugs and ``Just Say No'' when you do have an agent
out there who is using the misrepresentations, who is out
hustling policies, these free lunch seminars.
Insurance companies, when the application comes in, they
can stop it right there, and I think it is important that they
be ultimately held accountable. They are the ones making the
most money. I do think it is important that Congress also pass
regulations to deal with the abuse of titles that we are
seeing, these Certified Senior Representatives and so on,
because those titles do lure the senior citizen into believing
that that agent is looking out for their best interest as
opposed to that agent's bottom line.
Similarly, some of the abusive marketing that we have seen
with regard to the free lunches and whatnot, I mean, senior
citizens are lured to those, No. 1. Many are lonely. It is a
social event for them. No. 2, many are on fixed incomes. They
don't get to go out to lunch and dinner but for these type of
offers. I think cracking down and reining in on those practices
would be helpful as well.
The Chairman. Very good.
Mr. Galvin.
Mr. Galvin. Mr. Chairman, I think obviously the need to
somehow regulate the title is very important. That is why
Massachusetts has taken action and, as you have heard from
other speakers today, the idea is that there should be some
requirement of something meaningful being behind the titles
that are used.
I would also echo what the attorney general has said, that
I think it is important that the beneficiaries, in the sense
those who make money out of these practices, have to pay. These
people are, in fact, agents of larger entities that are making
money. I certainly think that, by making sure that they pay,
that they will certainly curtail some of the actions of their
agents.
Last, I think there has to be some opportunity for
rescission. I think what we have heard, apart from the horror
stories of individuals who have been taken advantage of, is the
difficulty of getting rescission once this is uncovered. I
think perhaps some national legislative effort, or some
coordinated effort that would make it clear that, once there is
a showing that there has been misrepresentation or fraud or
deceit of some kind, that there should be a period that the
individual can, or their legal representatives, can get
rescission of the contract.
This is particularly appropriate in the case of annuities,
which seems to be the biggest problem here, but I think there
could be other types of financial products. The Chairman of the
SEC referred to some of those other products, as well.
I think we have to keep in mind that the industry that we
are seeking to regulate, while very dynamic and, indeed,
beneficial to many people in our country, also has the capacity
to morph rather regularly into new variants. So if we calibrate
our legislative effort or our regulatory effort only to one
particular problem, we will find that they will move on before
we have a chance to catch up.
So I think there has to be somehow a permanent right of
rescission when fraud or deceptive practices is shown.
The Chairman. That is good.
Mr. Borg.
Mr. Borg. Thank you, Mr. Chairman. Let me add to what
Attorney General Swanson and Secretary Galvin said.
A couple of things come to mind. Certainly what the FPA has
talked about, the overall fiduciary standard. The violation of
a fiduciary standard allows civil and criminal penalties in
most States of some type or another. However, if you limit it
strictly to the agent speaking and do not go up the chain, you
are not solving the problem. So an overall fiduciary standard
would certainly enhance civil and criminal penalties.
Now, although that may be an end results with the civil
penalties, let us remember what we are trying to accomplish
here. We are all at this table putting out forest fires, and
there are raging forest fires trying to stop these things. We
have got to figure out who is holding the match and blow out
the match before that forest fire starts.
From that point of view, we have to add certain qualities.
Up-the-chain liability, as Secretary Galvin has mentioned, is
important. The companies need to be responsible for the actions
of their agents.
Further, I think education is important, but a slightly
different twist on the education. General education that is
disseminated across the board has limited effect.
One of the programs we are using in my State is a special
program that seniors watch. It is a cable TV that is called The
Time Of Your Life. It starts with a clock that goes 60, 70, 80.
It is a very, very popular show that is getting a lot of
attention.
That type of education where you have a TV show or a cable
show, something they can watch as opposed to read, is very,
very important. Certainly working with the AARP and other
groups of that nature is very helpful, as well.
I would add one more. We have to stop the problem 30 years
from now by starting in our school system now. We have been
advocating investor education, financial information in the
school system now, not just for seniors, but let us face it,
our children become seniors down the road. We have to start
now. One of the ways to do that is mandate financial education
as part of the curriculum, and let us get away from,
``Teenagers who ask, how can I be out of money? I still have
checks in my checkbook.'' That type of education, must start
early, not only on the senior level, but----with school-aged
children.
Thank you very much.
The Chairman. All right. I would like to just throw out
another question here, and you may decide you want to comment
or not. Our next panel is going to consist of president and CEO
of Allianz Life Insurance of North American. Are you all
familiar with Allianz?
Mr. Borg. Yes.
The Chairman. You are? They are the ones who market these
products, have agents that market these products. I mean, you
think they are doing a great job? You think they are doing a
lousy job?
If you were here sitting in this chair today--I mean, you
have talked about getting up the food chain, you know, get to
those people, hold them accountable. I will start with you, Ms.
Praeger, Allianz. One of your favorite companies in the world?
Something less? A, B, C, D, what?
Ms. Praeger. I think the market for annuity products has
definitely grown. There is no question. Allianz leads the--in
the development of those products.
But I think as seniors--as the Baby Boom generation ages,
and we all want to--I kind of view that period from 1965 to
1985 as another career. I want to become really good at living
my retirement years. People are concerned about having the
sufficient income.
So I think the products--and we do certainly scrutinize the
products before they go into our market--the problem really is
the aggressive way that agents sell the products, and I think
some of the commissions that encourage perhaps the
inappropriate sales. So I really--and I think the titles, these
designations which imply trust and try to garner trust, are
really one of the problems.
So I think the focus needs to be on where the agent and the
consumer interact.
The Chairman. Good.
Mr. Nicolette.
Mr. Nicolette. Well, I would like to address that.
One, clearly the State commissioners are in a great
position, and the insurance regulators, to oversee insurance
companies. That needs to be done right up to the--at the very
top and held them--be held accountable.
But there is a huge impact of all this I would like to
address because it doesn't impact just the senior, which is a
horrible thing. It impacts their family. It impacts their
community. It does impact our society.
I think that is why we are all here. It is not just about
the product sale, because that is one of the things, obviously,
is the issue here on a big aspect.
It is not just investments. It is not just insurance
product. It is really, regardless of those two things, it is
about advice.
All of these individuals are utilizing designations and
sales seminars and luncheons to allow people to believe that
they are going to receive objective advice. I think that is one
area that we can all work together, is to be able to help
oversee and to bring together universal standards of care that
all people who give advice will be held accountable to, not the
sale of a product, but how you provide advice. The SEC has been
doing a very good job in terms of how they look at that.
As a financial planner, if I provide advice, I have a
different set of standard than if I just sell a product. I
think what we are seeing are people using a designation to make
people feel they are receiving advice, that they can trust the
person that is giving them advice, and then they are selling
them an insurance product that is not covered by the Advisors
Act that the SEC oversees. These commissioners and all of us
together I think can work to make sure there is a universal
standard that they would be held accountable, that anyone
providing advice would be held accountable, too.
The Chairman. All right.
Mr. Borg, you know anything about Allianz?
Mr. Borg. Yes, sir. I think the question was am I a fan of
Allianz, or do I know about their products. Now, their biggest
single product I think to date is the Allianz Master Dex 10
product. It has, for example, features that are never explained
to the customer, and they wouldn't understand it anyway. Half
the time, the agents who sell it don't understand it.
Let me give you a hypothetical on the Master Dex 10. For
example, if you put in $100,000, at the end of 10 years it is
worth $241,000 annuitized.
Now, to the average investor, that means at the end of 10
years I get my $241,000. Oh, no. It doesn't work that way.
If you cash out any time within the 10 years, you lose all
the bonuses. You lose all the benefits, and you have to pay a
surrender charge that's approximately 12.5 percent.
If you cash out at the end of 10 years, that $100,000,
would return approximately $101,800 back to the investor. So,
for 10 years, you made $1,800 because you cashed it out. What
you have to do then is hold it for another 10 years and take
out a payout over 10 years as an annuity, 10 percent each year.
Now, there are some other factors. You can take out some up
front, some out back. The other thing is a lot of folks don't
annuitize. Well, what do they want to do with their money? They
are going to leave it to their grandkids or grandchildren.
What happens if they cash out of this product at death?
Guess what? You have to annuitize then, too, otherwise you
don't get the market bonus. You have to pay fees, because it
basically has an interminable surrender charge if you cash it
out at any time.
So there you are--I would be happy to supply more
information on this product to the Committee if you would so
choose.
The Chairman. Good. Good.
Mr. Galvin, you want to say--you know anything about
Allianz, because they are going to be testifying afterwards.
Mr. Galvin. Yes, sir. Obviously they were involved--well,
they have been involved in some of the cases. They are
providers of some of the products we are concerned about. Our
focus has largely been on the sales tactics.
The Chairman. Yes.
Mr. Galvin. Obviously the underlying products present some
of the problems you have heard today. As I said in my earlier
remarks, I think it is important to focus on the tactics
because the products are going to change. The products are
going to adjust. People are going to try to make money. We
understand that.
Clearly, when there is a product that has some of the
deceptive qualities that have been just described to you, that
presents a real problem. The fact that people, no matter how
sophisticated they are or think they are, may not really
understand them.
But I do think it is important that we think about the
sales practices, because that is where I think we can best
protect the public.
The Chairman. Good.
Last comment, Ms. Swanson.
Ms. Swanson. Chairman Kohl, I do. Allianz is a Minnesota
company. I am in litigation with them right now, because what
they have done is they have taken a boatload of senior citizens
and sold them very, very unsuitable long-term annuities.
In Minnesota we have a suitability law that applies not
just to the agent but to the insurance company. It says that
they need to make reasonable inquiry before the sale is made as
to whether it is suitable, and then before it is sold,
determine is it suitable. That has not happened with regard to
Allianz.
The biggest problem we have seen is misrepresentations in
the sale of the policies, but then also just putting seniors on
very modest incomes and very modest net worth into these
incredibly long-term policies where they are going to need
access to that money to pay for healthcare or prescription
drugs or groceries.
I suspect Allianz is going to say, ``But we make plain
English disclosure statements to these senior citizens.'' If I
could beg just a moment's indulgence and read your part of one,
here is a plain English disclosure, part of a three-page
document written in about eight or nine-point font.
``The cash surrender value is equal to the greater of the
guaranteed minimum value or the accumulation value less the
applicable surrender charge and multiplied by the market value
adjustment. The market value adjustment is the factor by which
the full surrender, partial surrenders are adjusted. During the
surrender period, the market value adjustment equals A over B,
where A is one plus the guaranteed initial rate, B is one plus
the current new business interest rate plus .5 percent, and T
is the number of days.'' I could go on and on.
But, the point is, when you give this to an ordinary senior
citizen, they are not going to understand it. Frankly, Chairman
Kohl, I have a hard time understanding it. Insurance companies
can stop these practices.
There will always be insurance agents bent on making
improper sales. The insurance companies can just say, ``We are
not going to tolerate those products. We may lose a little
profit, but we are not going to do it because our senior
citizens deserve better.''
The Chairman. OK.
You have been a great panel. You have really added a lot to
the very important subject, and we appreciate your being here.
All right, last panel. First witness will be Gary Bhojwani,
who is, believe it or not, the president and CEO of Allianz.
They distribute individual insurance products through over
240,000 independent agents, registered representatives and
financial planners nationwide. Mr. Bhojwani, thank you so much
for being here.
Our second witness will be Edwin Pittock, who is president
and founder of the Society of Certified Senior Advisors, which
is a company that trains and credentials people as certified
senior advisors, CSAs. Since the designation's creation in
1996, approximately 25,000 people have enrolled in this
training.
Mr. Pittock, we are glad you are here, too.
Mr. Pittock. Thank you, Senator Kohl.
The Chairman. We would love to hear your testimony.
Mr. Bhojwani, would you like to speak first?
STATEMENT OF GARY BHOJWANI, PRESIDENT AND CEO, ALLIANZ
INSURANCE OF NORTH AMERICA, MINNEAPOLIS, MN
Mr. Bhojwani. That would be great. Thank you.
Good afternoon, Chairman Kohl. My name is Gary Bhojwani. I
am the president and CEO of Allianz Life Insurance Company.
I appreciate the opportunity to be here today on behalf of
our employees, the independent agents who sell our products,
and the consumers who hold nearly a million policies with us.
We are very proud of the important role our annuity products
play in providing financial security for individuals.
Annuities play a vital role for seniors. With changing
demographics, the decline of defined benefit pension plans and
the challenges faced by social security, the issue of outliving
ones assets is becoming a more acute concern for millions of
Americans.
Annuities can play a critical role in retirement planning
because they are the only product that can guarantee a stream
of income for life. They are also valuable products for tax
planning and transfer of wealth to beneficiaries.
We recognize the responsibility we have to the individuals
who place their hard-earned savings with us. Our products
provide financial peace of mind for hundreds of thousands of
consumers.
Our processes, including the steps we take to protect
seniors, have earned Allianz high customer satisfaction ratings
in the marketplace. We take great pride in our complaint ratio
of less than one-half of 1 percent.
Allianz Life is a market leader in fixed index annuity
sales. We also sell variable annuities, life insurance and
long-term care insurance. We have been an industry leader in
developing a robust set of controls and consumer safeguards.
We recognize that there are many factors that determine
whether or not an annuity is suitable for an individual. Our
processes ensure that our products are clearly described to
consumers, and that they are purchased only when suitable.
First, Allianz introduced the first plain English point-of-
purchase disclosure for fixed annuities, which we call a
``Statement of Understanding,'' not because we are required to
do so, but because we believe it is critical that individuals
understand the products they purchase.
In addition, 2 years ago we developed an internal
suitability process for every fixed annuity purchase
nationwide. The process also requires our agents to collect
other financial data and other information so we can evaluate
the suitability of every purchase. We will not issue a policy
without a completed and signed disclosure and suitability form.
Our internal review process is thorough, utilizing a
suitability rules engine for every policy and an escalated
review process when needed. We do not accept business that does
not meet our rigorous suitability requirements.
The process looks at many factors, including net worth. In
fact, the median net worth for an Allianz policyholder age 75
or above is $500,000 excluding their home.
They purchase our annuities for numerous reasons, including
tax-deferred growth, as an estate planning tool, and because
their principal is protected. Our procedures exceed the
requirements of any State suitability law or regulation, and we
believe it is a best practice in the industry.
Last year, we implemented a post-purchase survey process in
partnership with LIMRA, an independent third-party
organization, to help ensure that consumers understand the
product they purchase from Allianz and to evaluate the purchase
process itself.
When there appears to be confusion about the product
features or a concern about service, we follow up directly with
the consumer. In addition, we are today announcing that we will
institute a process by which Allianz employees will call every
fixed annuity purchaser aged 75 or older to go through the
features of the product with them and to be certain that those
features are understood. As a part of these verification calls,
we will offer refunds upon request.
Allianz offers training to our duly licensed agents to help
them understand our products, our practices and their
obligation to consumers. When we determine that an agent has
engaged in improper sales practices, we terminate the agent
immediately.
We are also announcing today that we are developing a list
of approved designations that we will allow our agents to use
when they market Allianz products. The use of designations that
are not on this list will be prohibited in association with the
purchase of an Allianz product.
Finally, we are in the process of hiring a chief
suitability officer, another first in the industry. This person
will report directly to me and will lead our ongoing efforts to
help ensure that any product purchased by any consumer is
suitable for their needs. Each of these processes, and several
others that we employ, are continually revised and improved,
and we are committed to doing even more because we believe that
satisfied customers are the key to our reputation and our
sustainability.
Chairman Kohl, thank you again for providing me with the
opportunity to testify today. We applaud the work being
performed by the Committee. SEC Chairman Cox has said that
there needs to be greater coordination between Federal and
State officials. We strongly agree, and we think that there is
an important role for industry grounds to play, as well.
I appreciate the opportunity to share with the Committee
the actions that Allianz Life announced today, allowing only
certain designations and making verification calls to customers
above the age of 75. There are further steps that we are taking
to ensure that customers understand and are satisfied with the
products they purchase from us.
I will be pleased to answer any questions that you may
have.
[The prepared statement of Mr. Bhojwani follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you so much for your testimony, and
thank you for being here.
Mr. Pittock.
STATEMENT OF EDWIN PITTOCK, PRESIDENT, SOCIETY OF CERTIFIED
SENIOR ADVISORS, DENVER, CO
Mr. Pittock. Chairman Kohl, I am Ed Pittock, president of
Society of Certified Senior Advisors, and thank you for the
invitation to provide the Senate Special Committee on Aging
with information about our organization and its Certified
Senior Advisor designation training.
My organization's purpose is to equip professionals to
serve and benefit seniors through better communication, deeper
understanding, greater empathy and more knowledge of the
resources available to meet seniors' needs.
If seniors were not different and did not face
circumstances all their own, there would be no need for this
Committee. But seniors are different, and that is why there is
a need for education about aging, and education about aging is
what my organization provides.
America's seniors deserve to work with persons who made the
effort to learn something about seniors and the unique
challenges and changes aging presents. SCSA teaches realtors,
financial planners, healthcare providers and others about those
challenges, and they in turn use that knowledge to supplement
their own vocational abilities.
In the discussion of designations and credentials, that has
been a common mistake to compare the CSA designation with
financial designations. Such comparisons are simply inaccurate
and unfair.
Comparing the CSA designation to a financial designation is
like comparing learning Spanish to getting a degree in
business. Learning Spanish can't make you a businessperson but,
if you are a businessperson who wants to work in the Spanish-
speaking community, it is a valuable supplement. Both are very
useful, depending on what you want to do.
But the fact that the business degree took more time, cost
more money and involved more testing in no way diminishes the
value of learning Spanish. The same principle applies to
credentials.
So let me emphasize this. The CSA designation is not an
investment or a financial designation, and we do not hold
ourselves--our training or our designation out as experts
simply because they have our credential.
Because of the special nature of our credential, we have
developed a disclosure statement that clearly defines what our
CS credential is and what it is not. It states, ``Certified
Senior Advisors have supplemented their individual professional
licenses, credentials and education with knowledge about aging
and working with seniors.
Know what those licenses, credentials and education
signify. The CSA designation alone does not imply expertise in
financial health or social matters.'' Details, www.csa.us.
While our disclosure statement is clear about what a CSA,
it can't adequately describe what one learns to become a CSA.
Toward that end, we enthusiastically encourage any Members of
the Senate Special Committee on Aging or its staff to go
through our entire training, as a number of regulators and
others have done.
We hold CSAs to a high ethical standard and enforce it
vigorously. Over the past 5 years, the independent CSA Board of
Standards heard 127 cases, resulting in 33 revocations of the
designation, and 27 suspensions.
We continually solicit the advice of regulators and others
about how we can better achieve our common goal of protecting
seniors. We fully recognize the potential of any credential to
be misused or misrepresented.
Unscrupulous people do unscrupulous things. When someone
crosses the line, it is more than a betrayal of trust to the
public. It is a betrayal of trust to the schools where they
were educated, to the companies that hired to them, to the
agencies that license them, and to the organizations that
credentialed them.
We believe that the problem of persons misrepresenting
their credentials, can be addressed with two steps. First,
there should be a requirement of all designations to adopt a
disclosure statement. No senior can be expected to know what
someone's credentials mean.
This lack of understanding makes it incumbent on
credentialing organizations to spell out what they confer and
what they don't. The answer is not to limit the number of
credentials or to discourage the education behind them or to
require that someone conceal their credentials and education.
Full disclosure limits the ability of an unscrupulous
person to misrepresent a credential and increases the
consumer's ability to make informed choices about whom they
work with. Second, as the North American Securities
Administrators Association proposes, there should be a single
national standard for credentials, to give clear rules of the
road to professionals, companies credentialing organizations
and the public.
On behalf of Society of Certified Senior Advisors and our
12,000-plus member CSAs and the seniors they serve, I thank you
for your interest and commitment to our mutual goal of
providing our Nation's seniors with attention they deserve.
[The prepared statement of Mr. Pittock follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you so much.
Mr. Bhojwani, I want to make it clear that your company is
by no means the only firm that is alleged to have problems with
the type of sales and marketing practices outlined by the
Minnesota Attorney General today and by other State regulatory
officials, and in--also in recent critical media accounts.
Your representatives have outlined to the Committee staff
an impressive set of written guidelines and oversight
procedures as you have, governing the sale by your agents of
certain complex financial products such as annuities, and your
testimony was very impressive in that respect.
Yet, the question is, if these rules are being followed or
enforced so well, then why are State regulatory officials
relating such a considerable volume of alleged abuses to us
about your company?
Mr. Bhojwani. Chairman Kohl, thank you for the question,
and thank you for the acknowledgement of our efforts, as well
as the industry issues at large.
We take great pride in the efforts that we take. We believe
we have a valuable product to offer. We believe we have very
stringent processes in place. The reality is we are part of a
much larger company and a much larger industry.
If we look at our company solely, our parent company
comprises the 16th largest company in the world. We have a
dominant market share in this space. The reality of American
business today, you are going to attract a certain number of
problems and complaints by sheer virtue of size. I want to be
clear that even one complaint, even one concern, is taken
seriously, and it is unacceptable. We have a litany of
processes that we go through, and those processes continue to
improve every day. I would love the opportunity to share some
of those processes with you in detail, if I may.
The Chairman. Go ahead.
Mr. Bhojwani. First of all, 6 years ago we introduced and
made mandatory a Statement of Understanding. Now, what this
statement requires is that the consumer, the purchaser of our
product, goes through with their agent, with their
representative, an explanation in detail in as plain English as
can be made possible, what the product does, what some of the
features are, what some of the problems are.
It goes through that in a great deal of detail, and it is
required that the consumer sign and acknowledge that. We won't
take an application without that.
Two years ago we introduced a detailed suitability process.
The suitability process captures a variety of detailed
information on what it takes to purchase our products and just
assesses whether or not the product is suitable for that
particular consumer. We look at things like household income,
net worth, financial objectives, liquidity, the source of the
annuities funds, and so on and so forth.
If any one of those variables in that suitability process
are out of line, each application goes through a suitability
engine, the application is then submitted and selected for
elevated review, where we have a panel of experts within the
company that go through that. We have approximately 130
applications a week that are taken to this elevated review
process. We take the suitability issue very seriously.
In addition to the suitability engine, we have a variety of
training that we ask our agents to go through. We don't require
it, but it is provided. The reality is that our best agents,
the agents that produce the most business with us, are the ones
who take advantage of this training.
We have a team of 75 licensed insurance agents on our
staff. We call it the FAST team, Fast Accurate Service Team.
Those agents are designated to answer detailed questions for
consumers or agents that call in. That is all they do, to make
sure that the product is represented accurately.
We have a post-survey process. LIMRA, an independent third
party, reaches out to the consumers that purchase our products
and gives us the data on the understanding of the product
itself as well as the sales process.
I have announced today that we will be taking the
additional steps of calling out to any purchasers of our
product over the age of 75 and offering refunds where it is
appropriate.
We have also announced today our efforts relative to
designations. I couldn't agree more with most of the testimony
I have heard today about the importance of making sure that
designations that are used with our seniors are accurate and
well understood. We firmly support that, and we have announced
today that we will be providing that list and only allowing
that list to be used in the marketing of our products.
We also have announced previously the appointment of a
chief suitability officer. This officer's job is to make sure
that we are always mindful of the consumer perspective.
The processes that we have implemented as early as 6 years
ago continue to evolve. I am hopeful that the processes we will
be talking about 2 years from now are even better than today's.
The reality is we need to keep working at this. We take
this very seriously. Even one complaint is unacceptable, and we
will do everything we can to make sure the number's as close as
possible to zero.
The Chairman. That is very good. Thank you.
Mr. Pittock, we appreciate your invitation to the Committee
staff to visit your facilities, undergo your Certified Senior
Advisor, the CSA training program, which according to your
testimony disclaimer, seeks only to enhance knowledge of senior
issues of various types. However, our concern today relates
more to the actions of agents and others, because that is your
CSA designation rather than anything you or your immediate
staff may be doing.
How do you oversee individuals once they have earned your
CSA designation? How do you oversee them?
Mr. Pittock. Thank you, Senator Kohl.
There are several activities that take place. Each year our
CSAs have to complete a disclosure statement that says they
have had no regulatory or legal activities against them during
the past year. We get reports working with regulators, and we
also go to regulator websites to see if a CSA appears on that
website for any action, even before the 1-year reporting comes
up.
Then we have self-reporting, that the CSA has to tell us
immediately, according to our CSA Code of Professional
Responsibility, which is 26 pages long. But if they have an
issue, legally or with a regulator, they are to report that to
us immediately.
Now, when I say ``us,'' that goes to our independent CSA
Board of Standards. That Board of Standards then will
investigate, normally if there is a regulatory action that
takes place, there will be an immediate suspension,
administrative suspension, while the investigation goes along,
and then that could lead to either a revocation or permanent
suspension.
The Chairman. Well, you have heard testimony today that
State authorities, such as Secretary Galvin, consider your CSA
designation to be very little more than a marketing tool to
gain access to seniors' money, and not a useful educational
credential. How do you respond to what he said?
Mr. Pittock. Our education really builds a lot of empathy
for seniors, and it does help for anybody that is working with
seniors. The disclosure statement that we require makes it very
clear that it is not a marketing device, that this designation
is a supplement. It is a supplement to one's knowledge or
credential or license that they hold, and the CSA designation
alone does not imply expertise in health, financial or social
issues.
The Chairman. Well, when a person goes out and says to
potential clients, ``I am a Certified Senior Advisor,'' that
sounds pretty important, doesn't it? I mean, you--people who
hear that, a certified senior advisor, I have been trained, I
have gone through a program, I have a designation, I--people
who he comes into contact with, particularly seniors,
oftentimes might understandably look at that person as being
someone who is very, very well qualified to assist them in
their financial planning.
In fact, isn't that what you are attempting? Don't you want
your CSAs to be regarded as such? Isn't that the purpose of
your program?
Mr. Pittock. What we want them to be regarded as and known
as is somebody that has gone the extra step to understand the
issues that seniors face, and that we all face as we age.
The Chairman. Right.
Mr. Pittock. There are really three parts to this aging
process. It is not just the financial or the economic.
The Chairman. But would you describe them as real experts
in this whole field? Your CSAs?
Mr. Pittock. No. the CSA designation alone does not
represent expertise in health, financial or social issues.
The Chairman. Do you think that there is some people who
come into contact with your CSAs who are under the impression
that it does represent expertise?
Mr. Pittock. If the CSA represents himself correctly, as
our statement says they are to do, there should be no
misunderstanding. If they do mislead or misuse the designation
in any way, that designation will be revoked, and they won't
have the option to use it any further.
The Chairman. Really? How many designations are revoked all
the time?
Mr. Pittock. There have been 33 revoked.
The Chairman. In what period of time?
Mr. Pittock. That is in the past 5 years.
The Chairman. In 5 years?
Mr. Pittock. Yes.
The Chairman. You have how many total CSAs?
Mr. Pittock. There are approximately 12,000.
The Chairman. Twelve thousand. Thirty-three have been
revoked.
Mr. Pittock. Yes.
The Chairman. That is almost zero. That is close to being
zero.
Mr. Pittock. The number of cases----
The Chairman. It would have to be--these must be really
egregious violations if 33 out of 12,000.
Mr. Pittock. Well, our code of professional responsibility
is very clear that they can't mislead a senior in any way. They
have got to follow the rules and the regulations of their own
license.
Since this hearing dealt with the financial aspects of
licenses and so on, those people area obligated to follow the
rules of whether it is a securities or an insurance license. If
in any way they violate that, then the designation will be
revoked.
The Chairman. OK, good.
Well, gentlemen, anything you would like to say? We
appreciate your being here, and you have provided good
testimony, and to--you have been frank and honest and
informative, and it has been very good for this panel.
But I would like to give you a chance, as I have with the
other panelists, to say a word or two before we let you go
today. Mr. Bhojwani, would you like to say something?
Mr. Bhojwani. I would. Thank you, Chairman, Kohl.
I want to emphasize what you have heard many of your
previous panelists talk about. There is clearly a change in
demographics. There is clearly a change in the needs of this
country's retirees.
Be they 59 years old, 65 years old or 75 years old, there
is clearly a trend, where many of these retirees have a very
real chance, a very real likelihood of outliving their assets.
There are a variety of solutions to this. There is no one
single solution that will solve all of these needs.
But we believe very strongly that our products, our
annuities, our life insurance products, have a role to play.
Not the only role and not a one-size-fits-all role, but we have
a role to play, and we very much look forward to being part of
the solution as we move forward to collectively deal with these
very real needs for our retiring Americans.
Thank you.
The Chairman. Thank you so much.
Mr. Pittock.
Mr. Pittock. Senator Kohl, I would like to say this, that
our training benefits seniors. We give professionals the
information they need to communicate better, understand more
effectively and find seniors the resources that they need,
because there are a lot of issues that we all face with aging.
So seniors deserve to work with professionals that have
gone the extra step to learn about the whole aging process,
which is the health, the economic and the social aspects of
aging. They all are important. You can't just succeed in one.
We work closely with regulators to ensure that our efforts
are very transparent, and we work to protect the seniors with
the regulators. We developed a seminar, ``Nine Tips To Avoid
Financial Fraud,'' that our members have given hundreds of
these around the country. They are strictly to help people
understand how to avoid financial fraud.
So one of the reasons that we developed the disclosure
statement was to make it clear exactly what the designation
confers. I think every designation should approach this with
that in mind.
Thank you for inviting me.
The Chairman. Well, we thank you both for being here, as
well as all the other panelists today. Clearly, we are talking
about a very important issue in our society, our seniors and
what kind of information they get based--to make decisions on,
in many cases their meager resources, and trying to make them
last their lifetime.
There is a lot of work to be done, and the information you
have provided us is going to be very helpful. So again, we
thank you for coming.
With that, this hearing is adjourned.
[Whereupon at 5:17 p.m., the Committee was adjourned.]
A P P E N D I X
----------
Responses to Senator Kohl's Questions from Secretary Galvin
Question. Some of the senior designations' sponsors have
represented to the Committee that their titles do not
necessarily confer any special financial expertise. While that
may be technically correct, isn't it also true that many sales
agents holding these same designations represent themselves as
financial experts to vulnerable elderly customers?
Answer. Yes. Despite the fact that the sponsors of senior-
specific designations have recently been representing that
their designations do not necessarily confer any special
financial expertise, The Commonwealth of Massachusetts has seen
many instances of sales agents using these designations to
present themselves as financial experts to elderly customers.
For example, one insurance agent and security broker-dealer
representative stated in his advertising materials that he ``is
one of 7,000 Certified Senior Advisors (CSA) in the U.S. and
therefore is well trained in many issues especially senior
finances.'' (emphasis added). After receiving numerous customer
complaints, the Massachusetts Securities Division initiated an
administrative action against this agent and his broker-dealer,
alleging that the agent had engaged in dishonest and unethical
business practices by presenting himself as an unbiased and
objective advisor to seniors when he, in fact, had the primary
objective of selling as many high-commission annuities as
possible.\1\ Many of these products were sold without regard to
suitability for the particular client's age, tax situation or
cash flow needs. This agent made more than $700,000 in
commissions selling annuities and other financial products in
2005, one of the years that he held his CSA designation. One of
the complainants in this case (a woman in her seventies)
indicated that the CSA designation was instrumental in her
decision to purchase the annuity products the agent was
selling.
---------------------------------------------------------------------------
\1\ In the Matter of Michael DelMonico, Workman Securities
Corporation, Paul Maxa and Robert Vollbrecht, Docket Number E-2007-0020
(March 6, 2007), available on the Massachusetts Securities Division's
website (www.sec.state.ma.us/sct/sctidx.htm).
---------------------------------------------------------------------------
Similarly, the Massachusetts Securities Division received
another complaint regarding another annuity salesman who stated
in his advertising materials that he ``became a Certified
Senior Advisor, and as such, he is uniquely qualified to help
seniors protect their assets from nursing home costs, stock
market volatility, and probate costs through proper planning
and diversification.'' (emphasis added).\2\ We have spoken with
a number of customers of this ``advisor'', all of whom thought
they were going to see a qualified investment advisor, and all
of whom were sold annuities and other insurance products by
that agent. In August of this year, the Division field an
administrative complaint against this Certified Senior Advisor
resulting from allegations by a terminally ill eighty-six-year-
old man who did not have access to sufficient cash to properly
attend to wrapping up his estate because most of his money was
locked up in three annuities that were sold to him by his
agent. The victim was a World War II fighter pilot with the
Distinguished Flying Cross and a retired banker. According to
these allegations, the agent sold him the first annuity two
weeks after his wife died and immediately after he had
undergone hip-replacement surgery. One of the high-commission
annuities sold to this man (at age 84) locked his money up for
13 years and subjected it to an initial surrender fee of 15%.
The victim complained to the annuity company, Allianz, but his
complaint was denied. He recently passed away without having
obtained the relief he requested.
---------------------------------------------------------------------------
\2\ In the Matter of Steven Michael Anzuoni and Fairway Financial
Insurance Agency, Inc., Docket No. E-2007-0026 (August 22, 2007).
---------------------------------------------------------------------------
As yet another example, the Massachusetts Securities
Division filed another administrative complaint against another
insurance salesman that was holding himself out as an objective
and unbiased, knowledgeable advisor.\3\ His promotional
materials stated that he ``is a Certified Senior Advisor who
has spent 15 years in the study, presentation and service of
Finance and financial related products.'' (Emphasis in
original). In fact, the only study he engaged in after college
was the minimal study required to obtain the CSA designation.
In the same promotional materials he listed the telephone
number of the Society of Certified Senior Advisors, along with
the Better Business Bureau, the Massachusetts Division of
Insurance and Massachusetts Securities Division. The Division
took testimony of a customer of this agent who was in her
seventies who had expressed concern about an annuity that he
had sold her. When the customer was attempting to determine
whether to follow the agent's advice (and purchase the equity-
indexed annuity he was selling), she called the Society of
Certified Senior Advisors and was informed that he checked out
as a senior financial advisor. She testified as follows:
---------------------------------------------------------------------------
\3\ In the Matter of John Christopher Huck, Docket Number 2006-0109
(March 6, 2007).
---------------------------------------------------------------------------
A. . . . There's one of these, Denver, CO, here Society of
Senior Advisors. I told him I had contacted them about him.
Q. What was the nature of that conversation?
A. Well that was--see somebody gave me their name. Well
there are the four places that he said I could call and check
on him so I looked up that and I called them and she said that
he had passed whatever tests or exams they take to become a
senior financial advisor . . . She just said they had no
problem with him. That everything that he went through with
them was fine.
Q. And by they you mean this Society of Senior--
A. Society of Senior Advisors out in Denver, CO.
In a subsequent telephone conversation with Division
personnel, this customer indicated that she thought the agent
had the proper state registrations to provide investment
advice, based on her telephone conversation with the Society of
Certified Senior Advisors--despite the fact the he was not
registered as an investment adviser representative with the
Division. This led her to decide to follow the agent's advice
and purchase the annuities he was selling. The customer
subsequently expressed concern she did not understand how the
interest rate worked or that the product was not FDIC insured,
and the surrender fees and lock-up period has not been
explained to her.
Question. I would like your recommendations on how state
regulators and other ``continuing education'' -approving
organizations could best modify their policies regarding
``continuing education'' accreditation in order to limit the
incentives that may be fueling the exponential growth in these
senior designations. I would note that the CFP Board has
undertaken a study of this issue in regard to its own policies,
which is outlined in their written statement to the Committee.
Answer. The Massachusetts Securities Division does not have
any specific experience with the approval of continuing
education accreditation. However, the Division believes that
the exponential growth of bogus professional designations
referred to in the question has directly resulted from the
enormous commissions that can be made from selling certain
annuity products. Those commissions, obtained by selling
products such as variable annuities and equity-indexed
annuities, often range between 7 and 9 percent of the amount
invested, and might, in some instances, be higher. These larger
commissions have fueled the quest for ever-more sophisticated--
and often deceptive--marketing tools to facilitate the sale of
these products. Ironically, while the purported advisor has
enormous financial incentives to sell certain high-commission
products (as opposed to other, lower commission products) and
to put a large amount of elderly person's money into those
products (because the commission is based on the amount of the
product sold), the professional designations are often used to
give the impression that the so-called advisor is acting
objectively, independently and for the benefit of the elderly
client.
------
Responses to Senator Smith's Questions from Secretary Galvin
Accreditation Standards
Question 1. In Secretary Galvin's statement, he suggests
that one level of assurance regarding the credibility of a
specialty designation is accreditation by a national
organization, such as the National Commission for Certifying
Agencies. It is my understanding that CSA currently is
undergoing that very accreditation process. If SCSA is able to
obtain accreditation for the CSA designation, will that assuage
your concerns about the CSA designation?
Answer. Under the new Massachusetts regulations, a
credential or professional designation that indicates or
implies special certification or training in advising or
servicing senior investors cannot be used by broker-dealer
agents or investment adviser representatives unless the entity
granting the credential has been accredited by a nationally-
recognized accreditation organization.\1\
---------------------------------------------------------------------------
\1\ The newly-adopted regulations and the administrative record
supporting those regulations are available on the Massachusetts
Securities Division's website (www.sec.state.ma.us/sct/sctidx.htm).
---------------------------------------------------------------------------
According to information submitted by the Society of
Certified Senior Advisors (``SCSA'') to the Massachusetts
Securities Division, SCSA has not officially applied for
accreditation with any recognized accreditation organization,
but has had communications with the National Commission for
Certifying Agencies (``NCCA'') indicating that it intends to
submit an application in the near future. Assuming that the
SCSA were to successfully obtain accreditation, the designation
could then be used by broker-dealer agents and investment-
adviser representatives in The Commonwealth of Massachusetts
without violating the new regulations.
The new regulations do not limit the Commonwealth's
authority under existing provisions of law to address
dishonest, unethical or fraudulent conduct if such a situation
were to arise.
Question 2. Does the accreditation process really provide
sufficient assurances regarding the credibility and utility of
a specialty designation?
Answer. Information received by the Massachusetts
Securities Division from the American National Standards
Institute (``ANSI'') and the National Commission for Certifying
Agencies (``NCAA'') indicates that they have rigorous
accreditation process that could not be met by a sponsor of the
designation unless the designation had rigorous training,
testing, disciplinary and recertification processes.
ANSI is a 501(c)(3) nonprofit organization based in
Washington, DC. It accredits personnel certifications programs
that satisfy the requirements set forth in its ``Policy and
Procedures for Accreditation of Personnel Certification
Programs''. These principles require certification programs to
demonstrate high level of integrity and technical and
administrative quality, to serve the public interest and to
have a tangible value. Applicants for accreditation are
required to submit an application providing detailed
information regarding the applicant's organizational structure
and credentialing programs. ANSI reviews these materials and
also conducts an on-site audit. ANSI will often identify
deficiencies and require corrective actions to be taken prior
to granting accreditation. ANSI has accredited a number of
designations in a variety of disciplines, such as, for example,
the Board of Certified Safety Professionals' ``Certified Safety
Professional'' designation and the Construction Manager
Certification Institute's ``Certified Construction Manager''
designation.
NOCA is a 501(c)(3) nonprofit organization based in
Washington, DC. NCCA, which is NOCA's separately governed
accreditation arm, accredits certification programs that
satisfy its ``Standards for the Accreditation of Certification
Programs''. The mission of NCAA is to ``ensure the health,
welfare, and safety of the public through the accreditation of
a variety of certification programs/organizations that assess
professional competency''. NCCA uses a peer review process to
establish accreditation standards, evaluate compliance with the
standards, recognize organizations/programs which demonstrate
compliance and serve as a resource on quality certification.
NCCA's standards address the structure and governance of the
certifying agency, the characteristics of the certification
program, the information required to be available to
applicants, certificants and the public, and the
recertification initiatives of the certifying agency.
Applicants for accreditation are required to submit an
application providing detailed information regarding the
applicant's organizational structure and credentialing programs
and must explain how they comply or will comply with NCAA's
standards for accreditation. NCCA has accredited a number of
designations in a variety of disciplines, such as, for example,
the American Association of Medical Assistants' ``Certified
Medical Assistant'' designation, the American College of Sports
Medicine's ``Certified Personal Trainer'', ``Exercise
Specialist'' and ``Health/Fitness Instructor'' designations,
and many others, including the Certified Financial Planner
Board of Standards, Inc.'s ``Certified Financial Planner''
designation.
Complaint Data
Question 3. In preparation for this hearing I asked several
state and federal entities to provide my staff with data on the
number of investment fraud complaints received, and the amount
of money lost to investment scams. Most entities were not able
to provide particularly specific or useful data. This concerns
me, because federal and state partners can't craft intelligent
solutions to address investment fraud if they can't even
adequately define the magnitude of the problem. Can you please
explain what type of complaint data your organization collects?
Answer. Each year, the Massachusetts Securities Division
compiles information on the number of complaints received,
inquiries opened and closed, investigations opened and closed
types of violations, products used in connection with
defrauding investors, the amount of money returned to
investors, fines and penalties imposed and the number of
administrative hearings held.
Question 4. With what entities is this information shared,
e.g., with which federal and/or state law enforcement partners?
Answer. The Massachusetts Securities Division shares the
information described in response 3 above with the North
American Securities Administrators Association and would share
such information with any state or federal enforcement partner
that requested it.
Question 5. In as much detail as possible, please provide
the Committee with all relevant data and trend analysis on
investment fraud complaints received and/or investigated by
your organization for years 2003 through 2007.
Answer. In 2006, the Massachusetts Securities Division
responded to approximately 5,400 investor complaints via our
toll-free hotline. It opened 250 inquiries and closed 241
inquires, opened 106 investigations and closed 92
investigations, returned $2,700,300,000 to investors, imposed
fines in the aggregate amount of $6,257,356, and held 10
administrative hearings. The enforcement actions that were
successfully concluded involved fraud, unlicensed individuals
or entities, unregistered securities, failure to supervise,
unsuitability, unauthorized trading, books and records and
abuse of senior citizens. Abuse of senior citizens factored
into approximately 37 percent of enforcement actions. Products
involved in the enforcement actions we have undertaken include
variable annuities, equity-indexed annuities, certificates of
deposited or similar bank-related products and other products.
The products used to defraud seniors included traditional
stocks and bonds, unregistered securities and variable of
equity-indexed annuities.
These figures are comparable to figures for other calendar
years.
Question 6. Do you have any estimates regarding how much
money investors lose each year to investment fraud?
Answer. The Massachusetts Securities Division does not have
any estimates regarding how much money investors lose each year
to investor fraud.
Mandatory Sales Disclosures
Question 1. Under state and federal law, what point-of-sale
disclosures must agents, brokers, producers, advisors, etc.
make to investors?
Answer. Regulations promulgated under the Massachusetts
Uniform Securities Act set forth principles to ensure integrity
in client communications, which would include point-of-sale
disclosures to investors. For example, 950 Code of
Massachusetts Regulations (``CMR''), Section 12.205(9)(c)(8)
lists certain dishonest and unethical practices for investment
advisers. Included in this list is:
Misrepresenting to any advisory client, or prospective
advisory client, the qualifications of the adviser, its
representatives or any employees, or misrepresenting the nature
of the advisory services being offered or fees to be charged
for such services, or omitting to state a material fact
necessary to make the statements made regarding qualifications,
services or fees, in light of the circumstances under which
they are made not misleading.
Similarly, 950 CMR Section 12.204(1)(a)(18) lists certain
dishonest and unethical sales practices for broker-dealer
agents. Included in the list is ``making any advertising or
sales presentation, either in written or oral form, in such a
fashion as to be deceptive or misleading.''
In addition, FINRA Rule 2210 (``Standards Applicable to All
Communications with the Public'') sets forth the guiding
principles for customer communications by broker dealers and
investment advisers. These principles are further refined by
interpretive releases published by FINRA, such as IM-2210-1
(``Guidelines to Ensure That Communications With the Public Are
Not Misleading'') and IM-2210-2 (``Communications with the
Public About Variable Life Insurance and Variable Annuities'').
For example, one of the guidelines in IM-2210-1 states:
``Members must consider the nature of the audience to which the
communication will be directed. Different levels of explanation
or detail may be necessary depending on the audience to which a
communication is directed.'' Massachusetts has incorporated
Rule 2210 into its regulations covering securities broker
dealers and investment advisers.
Massachusetts also has certain specific disclosure
obligations. For example, 950 CMR Section 12.205(8)(e) requires
investment advisors to disclose, before the purchase or sale of
a security with respect to which investment advice has been
rendered, the total amount of sales commission or other fees to
be charged. Similarly, FINRA has certain rules providing
disclosure requirements for certain products. For example,
FINRA's new rule, Rule 2821, pertaining to sales of variable
annuities, includes the requirements that the customer be
informed of various features of deferred variable annuities,
such as the potential surrender periods and surrender charges,
potential tax penalties for early redemption, mortality and
expense fees, advisory fees and potential charges for and
features of riders.
Question 2. It is my understanding that there are various
model documents circulating in the industry that establish
point of sale disclosures that must be made to prospective
investors. While many of these documents seem to provide useful
information regarding the investment product, I am troubled
that consumers don't seem to have easy access to information
that would help them determine whether their sales agent has
improper motives or conflicts of interest, for example, sales
commission structures. It seems that transparency in investment
transactions is a key element to preventing fraud. Therefore,
should state and federal regulators impose more stringent and
comprehensive disclosure requirements on agents, brokers,
producers, advisors, etc.?
Answer. The Massachusetts Securities Division has received
a number of complaints, and has initiated and adjudicated a
number of administrative proceedings, involving purported
advisors to senior citizens who have consistently steered those
citizens to high-commission annuity products. Often the product
is unsuitable to the senior citizen due to lengthy lock-up
periods and large surrender fees. Time and time again we have
heard from seniors that they were not aware that the agent had
received such a high commission on the product, which
commissions can range from 7 to 9 percent of the amount
invested, and might, in some instances, be higher. Rather, the
senior is told that the advisor's services will not cost the
senior citizen anything.
We have seen that these enormous commissions often strongly
influence that chose of products the so-called senior advisor
recommends. For many annuity products, there appears to be a
correlation between size of the commission and certain
characteristics of the product that are disadvantageous to the
consumer, such as lengthy lock-up periods, high surrender fees,
low interest rates or, for equity-indexed annuities, a low
participation in the increase of the equity index that the
annuity is tied to. In many instances, we have seen purported
advisors putting almost every senior that comes to them for
advice into the same high commission products, as a one-size-
fits-all approach that does not properly factor in the
specifics of the customer's circumstances.
Accordingly, I believe that up front, point-of-sale
disclosure of the commissions the agent stands to receive on
the various products recommends or sold would make those
transactions (and the motives underlying them) more
transparent.
In addition, the Massachusetts Securities Division has seen
many instances of seniors purchasing annuities based on initial
teaser interest rates, which rates fall precipitously after the
first year and remain low for the lengthy remainder of the
annuity's lock-up period. Recently, we have heard from many
senior citizens who have found themselves locked into an
annuity product which ties up their money for many years but
which pays an annual interest rate that is a full two
percentage points less than a CD that would tie up their money
for one year. Seniors are also often wooed by an up front
``bonus'' that, in fact, is only collectable if the product is
held for a very long period of time. The true nature of these
interest rates and bonuses, should be clearly disclosed.
The disclosures described above should be in a stand-alone,
easy to read format, because if they are buried in fifty pages
of dense fine print, they will not be meaningful. The customer
should sign the disclosure to indicate that the customer has,
in fact read the disclosure. Of course, it should be remembered
that the risk of the disclosure-based approach is that the
agent could quickly gloss over the documents when making the
sale, have the trusting senior sign the document on the agent's
representation that it is just paperwork, and then the agent
would have the signed disclosure in the file as a defense if
the consumer were to complain in the future.
Question 3. What are the most important pieces of
information that investors should obtain to determine whether
their sales agent has improper motives or conflicts of
interest, and from what sources can they obtain this
information?
Answer. Please see response to question 2, immediately
above.
Question 4. Under state and federal law, what recourse do
consumers have if misled in the sale of an investment product,
for example, does current law provide for rescission rights?
Answer. Under Massachusetts law, any person who offers and
sells a security by means of any untrue statement of a material
fact or by omitting a material fact is liable in a private
action to the buyer of the security. Analogously, under federal
law, there is a private right of action under Section 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5.
In addition, in many of the enforcement actions brought by
the Massachusetts Securities Division involving misleading and
deceptive sales practices, the Division seeks restitution for
investors. For example, in its recently-settled case against
Investors Capital Corporation (``ICC''),\1\ the Division had
alleged that this broker-dealer had not properly supervised its
many agents. Those agents, who were not registered or properly
qualified as investment advisers, were using such titles as
``Certified Senior Advisor'' to hold themselves out as
investment advisers and convincing senior citizens to sell
financial products and purchase high-commission equity-indexed
and other annuities. In many instances, the annuity product was
unsuitable for senior citizens due to lengthy lock-up periods,
high surrender fees and potentially disadvantageous tax
consequences. In its ultimate settlement with the Division, ICC
agreed to reimburse purchasers of those annuities in
Massachusetts who chose to surrender the annuities all early
withdrawal penalties, in an amount such that they would
receive, at a minimum, their principal amount invested plus 3
percent annual interest.
---------------------------------------------------------------------------
\1\ In the Matter of Investors Capital Corp. & Investors Capital
Holdings, Ltd., Consent Order, Docket Nos. E-2005-0190 & E-2006-0060
(December 19, 2006).
---------------------------------------------------------------------------
Differences in Regulation of Securities Compared to
Insurance Products
Question 5. In Mr. Nicolette's statement, he indicates that
regulators' hands are ``tied by an antiquated regulatory system
that continues to permit a lower standard for advice in the
sale of insurance products'' as compared to securities. Do you
agree with this assessment, that is, is the regulatory system
antiquated?
Answer. I am not the principal regulator of insurance
products in The Commonwealth of Massachusetts. However, I will
note that a number of enforcement actions that the
Massachusetts Securities Division has initiated have involved
insurance agents using sham professional designations to cloak
themselves as senior specialists and to misleadingly hold
themselves out as investment advisors and advising senior
citizens to purchase fixed annuities and other insurance
products. Those annuities are often unsuitable to the senior
citizen client due to high surrender fees, lengthy lock-up
periods and potentially disadvantageous tax consequences.
Question 6. Are insurance products under-regulated?
Answer. Please see response to question number 5
immediately above.
Question 7. Notwithstanding the current legislative and
regulatory landscape, what ideally should be the SEC's role in
authenticating, regulating, and/or conscripting use of
specialty designations, i.e., should SEC assume primary
enforcement responsibility, is enforcement responsibility best
left to state regulators, or should federal and state
regulators share enforcement responsibilities?
Answer. The Massachusetts Securities Division believes that
the SEC and state governments should work together to address
the problem of deceptive or misleading professional
designations geared towards senior citizens. The Massachusetts
Securities Division has initiated a number of enforcement
actions against purported senior specialists using
sophisticated and misleading marketing tools (including senior-
specific professional designations) to convince senior citizens
to purchase unsuitable annuity products. Based on conversations
with regulators in other states, it is our understanding that
these abusive marketing tactics have been replicated in many
states. We believe that a coordinated approach with the SEC and
other states would lead to a stronger and more uniform attack
on these deceptive marketing platforms nationwide.
In addition, Massachusetts has recently adopted a
regulation prohibiting broker-dealer agents and investment
adviser representatives from using a purported credential or
professional designation that indicates or implies that a
broker-dealer agent has special certification or training in
advising or servicing senior investors, unless such credential
or professional designation has been accredited by a reputable
national accreditation organization (such as the National
Commission for Certifying Agencies or the American National
Standards Institute).\2\ We are hopeful that this regulation
will become a nationwide model and that the SEC would work with
the states to help coordinate enforcement of this rule.
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\2\ The newly-adopted regulations and the administrative record
supporting those regulations are available on Massachusetts Securities
Division's website (www.sec.state.ma.us/sct/sctidx.htm).
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Responses to Senator Kohl's Questions from Nicholas Nicolette
Question. What are you and your colleagues prepared to do
to protect the credibility of legitimate designations and
separate them from those that do not?
Answer. I don't believe this question is applicable to a
voluntary membership organization such as the Financial
Planning Association. However, we would encourage state and
federal regulators to do the utmost possible to protect what is
probably the most vulnerable consumer segment in response to
abusive marketing and sales practices.
Question. In your view, how many of the hundreds of
designations are worthy of credibility with seniors?
Answer. I believe that each designation, specialty or
broad-based, is best left to the discretion of state and
federal regulators in terms of evaluating abusive or misleading
marketing and sales practices. FPA does not have the resources
to properly evaluate the hundreds of designations available in
the marketplace, other than it has always supported the CFP
designation as an appropriate means of delivering competent and
ethical financial planning advice to the public.
We elaborate on a possible solution to the question of how
to determine the credibility of a designation--irrespective of
abusive marketing practices--in response to Question 7 by
Ranking Member Smith.
Question. You've mentioned that the insurance industry
seems to have a lesser regulatory burden than in the securities
arena. What else needs to be done here to make what you'd
regard as a level playing field to fully protect the interests
of our seniors?
Answer. I believe that an appropriate standard of care with
respect to advice offered on insurance products is
conspicuously lacking in the present scheme of state
regulation. Insurance regulation, in my view, has always been
focused on monitoring the solvency of insurance companies,
i.e., actuarial data applied to a company's ability to pay out
claims, not on how to effective oversee abusive sales or
marketing practices. To complicate matters, there are gaps in
regulation between insurance and securities regulators in the
sale of hybrid products, and sometimes overlap in products. For
example, equity index annuities are insurance products that are
often marketed as providing policy holders the ability to
participate in stock market returns without the risks. However,
there is risk in losing money in these complex products, mostly
from churning practices, and there is typically a cap on the
rate of return that doesn't mirror the full return of their
benchmarks in the stock market. We believe these products do
hold risk to policyholders and should be subject to oversight
by securities regulators. Conversely, variable annuities are
regulated by both insurance and federal regulators, but contain
elements of both an investment and annuity product. Both equity
index and variable annuity products can serve the same purpose
of providing income to a senior in retirement. Why should they
be subject to different standards of care?
As mentioned above, the challenge for Congress is
addressing the old regulatory framework that permits insurance
products and advice to be the responsibility of state insurance
regulators, and securities products and investment advice the
jurisdiction of state and federal securities regulators. In
addition, retirement advice is regulated by the U.S. Department
of Labor, and falls under separate congressional committee
oversight than for securities and banking regulators. None of
these areas of product sales and advice are harmonized so that
seniors and other investors receive level standards of
protection.
Since many insurance and securities firms are delivering
vastly different product solutions to address the same client
needs, there is a critical need for regulation to be harmonized
and applied in a uniform manner so that seniors better
understand their options across industry sectors. Eliminating
bias in the sales process and applying uniform standards to
advice-givers would thus require an act of Congress and major
regulatory reform. To fully protect our seniors, and for that
matter, all Americans, the level playing field in regulation
should ideally center not on standards applied to individual
product solutions, but on the delivery of integrated financial
advice covering all aspects of a person's financial objectives.
The individuals holding out as experts, with the implication
that they are providing objective advice--whether in regard to
the specific needs of a retirement person, or broad financial
solutions at any stage in life--should be held to a fiduciary
standard, be subject to relevant standards of competency, and
always be required to disclose conflicts of interest.
Responses to Senator Smith's Questions from Nicholas Nicolette
Accreditation Standards
Question 1. In Secretary Galvin's statement, he suggests
that one level of assurance regarding the credibility of a
specialty designation is accreditation by a national
organization, such as the National Commission for Certifying
Agencies. It is my understanding that CSA currently is
undergoing that very accreditation process. If SCSA is able to
obtain accreditation for the CSA designation, will that assuage
your concerns about the CSA designation?
Answer. Referring to written comments by the Financial
Planning Association to the Massachusetts Securities Division,
FPA is on record supporting the Division's proposal to limit
the use of designations to those that meet a commonly
understood baseline, such as accreditation by the National
Commission for Certifying Agencies (NCCA). Whether such a
baseline is appropriate for all designations may depend on
whether the individual holds other credentials that provide an
appropriate framework of competency and knowledge in which to
apply the learning from a specialty designation. In the case of
the CSA, for example, if the individual also holds the CFP
designation, which is accredited by the NCCA and serves as a
solid foundation to provide personal financial advice,
additional accreditation may not be needed in order to further
one's knowledge about a specific area of practice, as long as
the specialty designation meets a baseline educational
standard. In general, per my testimony, we believe that
rigorous education, examination, enforceable ethical standards,
and experience are all basic criteria that should be applied to
any designation. Without these, you cannot sustain credibility
or the public trust.
Question 2. Does the accreditation process really provide
sufficient assurances regarding the credibility and utility of
a specialty designation?
Answer. I would refer back to my previous comment that in
order for any accreditation process to be truly effective, the
four `E's are needed with any designation: rigorous education,
examination, ethics and experience requirements.
Complaint Data
Question 3. In preparation for this hearing I asked several
state and federal entities to provide my staff with data on the
number of investment fraud complaints received, and the amount
of money lost to investment scams. Most entities were not able
to provide particularly specific or useful data. This concerns
me, because federal and state partners can't craft intelligent
solutions to address investment fraud if they can't even
adequately define the magnitude of the problem. Can you please
explain what type of complaint data your organization collects?
Answer. FPA collects only complaint data that it receives,
or that comes to its attention, regarding members of the
association. We do not maintain any specific categories of
complaints such as senior fraud.
Question 4. With what entities is this information shared,
e.g., with which federal and/or state law enforcement partners?
We do not share this information with federal or state
authorities unless we believe a crime has been committed that
has been previously unreported, or unless such information is
requested from a regulatory body.
Question 5. In as much detail as possible, please provide
the Committee with all relevant data and trend analysis on
investment fraud complaints received and/or investigated by
your organization for years 2003 through 2007.
Answer. FPA is a voluntary membership organization with no
authority to investigate fraud complaints from the public
except in connection with ethics complaints against its own
members.
Question 6. Do you have any estimates regarding how much
money investors lose each year to investment fraud?
Answer. We do not maintain such statistics.
Mandatory Sales disclosures
Question 1. Under state and federal law, what point-of-sale
disclosures must agents, brokers, producers, advisors, etc.
make to investors?
Answer. Point-of-sale disclosure rules vary by state, by
industry, and under federal law. These rules apply to
registrants under those jurisdictions in their capacities as
licensed agents, brokers, or advisers. Financial planners are
not per se regulated by federal or state authorities. However,
many carry licenses as securities and insurance brokers, and
investment advisers. In addition, FPA requires individual
members to comply with a strict code of ethics, which requires
disclosure of conflicts of interests and all sources of
compensation in their role as financial planners. The code of
ethics largely mirrors that of the CFP Board of Standards for
CFP certificants.
Question 2. It is my understanding that there are various
model documents circulating in the industry that establish
point of sale disclosures that must be made to prospective
investors. While many of these documents seem to provide useful
information regarding the investment product, I am troubled
that consumers don't seem to have easy access to information
that would help them determine whether their sales agent has
improper motives or conflicts of interest, for example, sales
commission structures. It seems that transparency in investment
transactions is a key element to preventing fraud.Therefore,
should state and federal regulators impose more stringent and
comprehensive disclosure requirements on agents, brokers,
producers, advisors, etc.?
Answer. I would draw a distinction between comprehensive
and meaningful disclosure. Consumers can receive extensive
disclosure in fine print, and ignore it. More important than
simply requiring additional disclosure is subjecting the
adviser to a fiduciary duty that requires him or her to
effectively disclose these conflicts, and to remedy potential
problems so that these are resolved in the interest of the
client.
Question 3. What are the most important pieces of
information that investors should obtain to determine whether
their sales agent has improper motives or conflicts of
interest, and from what sources can they obtain this
information?
Answer. The most important pieces of information that
investors should obtain from their sales agent or adviser are
about qualifications (learning and experience); disciplinary
history; business and personal relationships that may pose
conflicts; sources of compensation; scope of engagement; and
responsibilities of each party to undertake the recommendations
of the adviser/agent.
Question 4. Under federal and state law, what recourse do
consumers have if misled in sale of investment products? Does
current law provide for rescission rights?
Answer. I cannot provide a comprehensive response to
consumer recourse for injury under all financial services laws.
Under the Investment Advisers Act of 1940, you have a right to
sue the firm and/or individual in court unless there is a
binding arbitration agreement. The law, as I understand it,
provides only for a rescission of fees paid to the adviser
under certain conditions, not for investor losses.
Differences in Regulation of Securities Compared to
Insurance Products.
Question 5. In Mr. Nicolette's statement, he indicates that
regulators' hands are ``tied by an antiquated regulatory system
that continues to permit a lower standard for advice in the
sale of insurance products'' as compared to securities. Do you
agree with this assessment, that is, is the regulatory system
antiquated?
Answer. N/A, since you are inviting opinion on FPA's
assessment regarding the need for reform of insurance
regulation.
Question 6. Are insurance products under-regulated?
Answer. Insurance regulators traditionally have focused on
solvency of insurance companies and their ability to pay out
for losses and their ability to provide income streams through
the life of a fixed annuity policy. Insurance products are
under-regulated in the areas of sales practices and advice on
insurance products. Prior to the consolidation of financial
services firms under one roof offering a variety of services
and products, the average consumer understood the role of the
insurance agent. Today, the average life insurance agent no
longer holds out in that manner. Caveat emptor is no longer a
way to provide the consumer with fair warning that there is an
inherent and obvious conflict. If the consumer is confused or
uncertain over the standard of care to be applied in the
relationship, and the agent is unqualified to give advice or
unwilling to disclose conflicts of interest or act in the
client's best interest, then the laws should be reformed, and
new ways of enforcement considered. Presently there is no
blanket fiduciary duty or transparency in the sale of insurance
products, although insurance regulators in recent years have
begun to move in that direction by imposing limited suitability
standards.
Question 7. Notwithstanding the current legislative and
regulatory landscape, what ideally should be the SEC's role in
authenticating, regulating, and/or conscripting use of
specialty designations, i.e., should SEC assume primary
enforcement responsibility, is enforcement responsibility best
left to state regulators, or should federal and state
regulators share enforcement responsibilities?
Answer. I believe there is an opportunity for a shared
private sector and public responsibility in the review of
specialty designations, and such a review should be approached
in a balanced way that preserves fundamental guarantees to the
right of commercial speech, but at the same time protection for
the public from abusive marketing practices. Preferably, a
group of peers on a professional regulatory board, independent
and free of conflicts of interest, accountable to a public
agency, such as the SEC or a state authority, and with the
appropriate expertise and knowledge, should have the ability to
respond quickly and effectively in reviewing specialty
designations, and be able to make objective, authoritative
recommendations to the appropriate enforcement authority with
regard to any discrepancies in the curriculum, exam content,
and any experience requirements.
It would then be up to the appropriate enforcement
authority to go through a three-step process. First, determine
whether to accept the recommendations of the professional peer
group in evaluating the intrinsic value of the specialty
designation, and second, if it is a legitimate designation,
determine whether any private sector ethics procedures are in
place and working effectively to protect the public. If the
regulator finds that there is an inadequate disciplinary
process, and a systemic problem with fraud and deceit in the
marketplace, then appropriate enforcement measures obviously
should be taken to eliminate fraud and deceit. Further, the
regulator should also work with the peer review body to
determine whether any changes are needed to the educational,
testing, ethics and disciplinary requirements associated with
the designation.
FPA does not have a position on whether this authority
should be left primarily to the SEC, to the states, or should
be a shared authority. Our primary concern is that because many
firms in the four primary regulated areas of financial
services--insurance, banking, securities and investment
advisers--are offering many of the same services, that uniform
standards for the delivery of advice (not the sale of products,
necessarily) should apply to all advice-givers.
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Responses to Senator Smith's Questions from Edwin Pittock
Question. One of my staff members recently sat for the
proctored CSA certification exam. She has no specialty training
or academic background on the topics covered in your exam. Yet
with only 1 hour of preparation, she completed your 3 hour exam
in 1\1/2\ hours and obtained a passing score of 82 percent. No
disrespect to my staffer, but I am troubled by the ease with
which she passed your exam. Are you?
Answer. No. Almost one-fourth of persons who take the exam
fail it. It is not surprising at all that a highly educated
person immersed in senior issues and qualified to serve an
important staff role on the Senate Special Committee on Aging
would be able to pass an exam that measures general, broad
knowledge of issues facing seniors.
Question. In response to the concerns raised at the
hearing, do you anticipate making changes to your certification
process to make it more rigorous? If yes, please describe.
Answer. Yes. It is unclear at this point exactly how the
emerging regulation envisioned by the North American Securities
Administrators Association pertaining to so-called ``senior''
designations will affect our certification process. We intend
to meet or exceed whatever requirements and standards come out
of NASAA's efforts in this regard.
Question. Under state and federal law, what point-of-sale
disclosures must agents, brokers, producers, advisors, etc.
make to investors?
Answer. In addition to following all applicable state and
federal laws and company regulations, CSAs must provide this
disclosure in writing to clients before the completion of a
transaction: Certified Senior Advisors (CSA) have supplemented
their individual professional licenses, credentials and
education with knowledge about aging and working with seniors.
Know what those licenses, credentials and education signify.
The CSA designation alone does not imply expertise in
financial, health or social matters. Details: www.csa.us.
Question. What are the most important pieces of information
that investors should obtain to determine whether their sales
agent has improper motives or conflicts of interest, and from
what sources can they obtain this information?
Answer. Although we believe that disclosure is inherently
helpful and that all designations should have a disclosure
statement, we are not an investment designation and therefore
would not claim to be qualified to answer this question. In
general, we believe appropriate regulators are the best neutral
source of information about any industry.
Question. Under state and federal law, what recourse do
consumers have if misled in the sale of an investment product,
for example, or does current law provide for rescission rights?
Answer. As an education company focused on people instead
of products or professions, we are not qualified to answer.
Question. In Mr. Nicollete's statement, he indicates that
regulators' hands are ``tied by an antiquated regulatory system
that continues to permit a lower standard for advice in the
sale of insurance products'' as compared to securities. Do you
agree with this assessment, that is, is the regulatory system
antiquated?
Answer. We are not part of the insurance industry, do not
endorse any products and are not well-versed in the regulations
of various industries, so we are not qualified to answer.
Question. Are insurance products under-regulations?
Answer. It appears to us, as one who is exposed to
insurance products only peripherally and as they pertain to
various regulatory actions taken against Certified Senior
Advisors, that there is considerable friction between the
securities industry and the insurance industry over the extent
to which certain annuity products should be regulated and who
should be allowed to sell them. Whether the problem is the
products themselves or some aspect of regulation, we do not
know. However, the independent CSA Board of Standards will hold
all CSAs to the highest standards and regulations promulgated.
Question. Notwithstanding the current legislative and
regulatory landscape, what ideally should be the SEC's role in
authenticating, regulating, and/or conscripting use of
specialty designations, i.e., should SEC assume primary
enforcement responsibility, is enforcement responsibility best
left to state regulators, or should federal and state
regulators share enforcement responsibilities?
Answer. We agree with Chairman Cox's observation that any
regulation should take into account Constitutional protections
of commercial speech and would refer the Committee to Peel v.
Attorney Registration and Disciplinary Commission of Illinois,
496 U.S. 91 (1990) and Ibanez v. State of Florida, Board of
Accountancy (1994).
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