LawFlash

CFPB Issues Report Regarding the Use of “Senior Specialist” Designations by Financial Advisers; Recommends Increased Supervision and Enforcement “Across Industries”

May 16, 2013

In a recent report, the Consumer Financial Protection Bureau (CFPB) highlights ongoing concerns with the use of senior designations by financial advisers, particularly the risk that senior designations may be confusing to customers and facilitate improper sales practices directed toward seniors. This issue has been a priority for securities regulators for a number of years, and while acknowledging that FINRA and many state securities and insurance regulators have already promulgated regulations or best practices in this area,1 the CFPB maintains that more needs to be done, including better tools to help seniors understand senior designations and increased regulatory supervision and enforcement. In addition, the report calls on policymakers and regulators to address senior designation risks “across industries,” not just securities and insurance. As the population of senior citizens grows dramatically, and as retiring seniors face “complex investment decisions” and “strategic investment” choices, these issues will continue to be prominent.2 The CFPB report could lead to renewed heightened scrutiny of senior designations and reinforces the need for all firms that provide financial advice to establish and maintain carefully considered policies, procedures and training as to the use of senior designations and other issues relating to senior citizens.

The CFPB’s Concerns and Recommendations

On April 18, 2013, as required by the Dodd-Frank Act, the CFPB’s Office of Financial Protection for Older Americans issued a report to Congress and the SEC titled “Senior Designations for Financial Advisors: Reducing Consumer Confusion and Risks.” The CFPB’s mandate was to recommend best practices regarding the use of senior designations, particularly with a view toward helping seniors to verify and evaluate a financial advisor’s credentials.3

The report cites a range of professionals who use senior designations, including investment advisers, broker-dealer representatives, accountants, insurance agents, financial planners and “other general financial professionals,” presumably including mortgage originators and other bankers. In addition, there are more than 50 senior designations, many with names or acronyms that are “nearly identical” or imply similar qualifications, when in fact there are significant differences as to training requirements, qualifying prerequisites, conferring organization oversight, whether there is accreditation, and the actual skills and competencies associated with each designation. According to fact finding by the CFPB, the plethora of designations has led to continued confusion among some investors and even financial advisers concerning senior designations, notwithstanding increased regulatory oversight in recent years.

According to the CFPB, the risk of confusion is compounded because many consumers do not understand the legal duty of care owed by their financial adviser, and may incorrectly assume that, a broker-dealer, for instance, owes them a fiduciary duty.4 The implication is that a senior designation makes it more likely that a senior will perceive a financial professional as a fiduciary, even when that is not the case. The CFPB report also cites the prospect of cognitive decline as making senior citizens particularly vulnerable in this regard.

Another concern the CFPB raises is the lack of uniform substantive standards to ensure the value of senior designations. Although accreditation requirements (such as those in the NASAA model rules) are helpful, accreditation does not guarantee that valuable skills and competencies regarding senior citizens are actually being imparted.

To address these issues, the report recommends that:

  • The SEC consider establishing a centralized database that investors can use to look up designations as well as a tracking mechanism to capture complaints and enforcement actions against senior designees;
  • Congress, the SEC and state policymakers consider requiring financial professionals who use a senior designation to provide a disclosure to clients and prospective clients;
  • Policymakers consider providing minimum standards for acquiring senior designations as well as prohibitions on designations issued by any non-accredited conferring organization;
  • Policymakers consider providing minimum standards of conduct for any person holding a senior designation;
  • SEC and state policymakers consider increasing use of existing supervision and enforcement authority to enjoin and penalize misleading or other improper conduct by a holder of a senior designation; and
  • State policymakers consider providing consumers with a private right (where one does not currently exist) to seek appropriate relief for improper conduct in connection with the use of senior designations.

The prospect of heightened scrutiny and additional regulation might suggest to some firms that use of senior designations is not worth the associated compliance burdens. At the same time, the challenges and regulatory issues concerning financial advice to senior citizens are present regardless of whether a senior designation is used, and there does not appear to be a basis for concluding that advisers who use senior designations are somehow more likely to engage in improper sales practices.

Conclusion

The CFPB report could lead to heightened regulatory scrutiny of senior designations. With senior investors constituting an ever-growing customer base, firms that provide financial services, whether in securities or other fields, should prioritize policies, procedures and training to address practices related to senior citizens, including the use of senior designations. In addition to state-specific requirements, firms should be cognizant of the best practices and concerns discussed in the CFPB’s report and FINRA’s Regulatory Notice 11-52. Firms that permit the use of senior designations should carefully vet and monitor the quality of those designations on an ongoing basis. Firms should also provide clear guidelines to their representatives concerning the manner in which senior designations are portrayed to customers or potential customers to reduce the risk of confusion highlighted in the CFPB report and the risk of potential claims.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Burke-Timothy
Applebaum-Matthew
Boch-David

1 In 2011, FINRA issued a regulatory notice that reminds firms of their supervisory obligations regarding the use of senior designations and discusses best practices. See Regulatory Notice 11-52 (Nov. 2011). NASAA and NAIC have also promulgated model rules, which have been adopted by the majority of states. See NASAA, Model Rule On the Use of Senior-Specific Certifications and Professional Designations § 1 (2008), available at http://www.nasaa.org/wp-content/uploads/2011/07/3-Senior_Model_Rule_Adopted.pdf; NAIC, Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities (2008)

2 According to the report, the population in the U.S. of those 65 or older is projected to grow from 35 million to 72 million between 2000 and 2030.

3 The CFPB has broad rulemaking, supervision and enforcement authority with respect to banks and non-banks that offer consumer financial products or services, as defined in the CFPB’s enabling statute. A number of financial services providers, including accountants and tax preparers, insurance companies, and SEC-registered securities firms, are not regulated by the CFPB.

4 The SEC staff made a similar finding in its study of a potential uniform fiduciary standard of conduct for broker-dealers and investment advisers. See Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011), available at www.sec.gov/news/studies/2011/913studyfinal.pdf.

This article was originally published by Bingham McCutchen LLP.