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Best Interest Standard of Care for Advisors #8

Senior Clients:  The SEC is looking at practices of RIAs

I am writing two series of articles that together are called “The Bests.” One is about Best Practices for Plan Sponsors and the other is about the Best Interest Standard of Care for Advisors. Each series is numbered separately to make it easier to identify the articles that are most relevant to you.

The SEC has initiated examinations of investment advisers concerning their practices in working with Senior Clients. According to the SEC, a “ ‘Senior Client’ is defined as any retail advisory client who is age 62 or older, retired, or transitioning to retirement, including accounts of deceased clients, and retail clients in joint accounts with at least one individual meeting this definition.”

The examination starts with 11 questions about Senior Clients.  The questions are the same for all of the exams that we have seen, suggesting that this is a national survey project for the SEC to gain an understanding of the current practices of investment advisers.  However, some attorneys believe that the SEC staff view these questions as reflecting the fiduciary practices that investment advisers should already be using to manage the issues unique to Senior Clients.

Here are some of the 11 questions:

  • Provide any policies and procedures designed to address issues associated with clients who are Senior Clients and perceived by the Adviser to have possible issues associated with diminished capacity or competence.

  • Provide any policies and procedures concerning the handling of client requests for changes to beneficiaries, including all policies and procedures concerning monitoring and supervision relating to changes to beneficiaries.

  • Provide any policies and procedures concerning powers of attorney, including all policies and procedures concerning monitoring and supervision relating to changes in power of attorney as they relate to the adviser and/or third parties with power of attorney authority.

  • Provide any policies and procedures that contemplate or consider establishing a trusted point of contact in the case the client(s) have a diminished capacity or competence.

  • Provide any policies and procedures designed to facilitate the transition of a Senior Client from actively employed to a retired status (e.g., communication with a client to setup an updated investment profile).

As this initiative indicates, the SEC (and other regulators) are focusing on issues related to older investors. That is, at the least, partially related to the aging of the Baby Boomers in a 401(k), 403(b), and IRA world where retirees must rely on their savings to provide income for 20, 25, 30 or more years.

In my view, we are in the early stages of regulation and examination of investment issues related to older investors.  The SEC and FINRA (and other regulators) will be more active in the future and the risk levels for investment advisors are rising.

As a result, investment advisers should consider the issues being raised by the SEC in these examinations, and then review their practices, policies and procedures to update them for the current regulatory environment.

Here are a couple of suggestions for best practices and risk management:

  • Obtain contact information for persons who are trusted by the Senior Client and have the Senior Client agree that you may contact them if you have concerns.

  • Provide training to the advisors and staff in your firm to identify red flags for diminished capacity and elder financial abuse, and develop policies to escalate the matter when red flags are identified.

  • Require periodic (g., annual) updated training to ensure a high level of awareness within your firm.

  • Review each of the SEC’s requests, determine the appropriate responses for your firm, and document those decisions in your policies, and review and update those practices periodically.

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About this Author

Fred Reish, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

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