finra

Gerri Walsh
President, FINRA Investor Education Foundation
Vice President, FINRA Investor Education

Statement for the Record for Senate Special Committee on Aging Hearing

 

November 15, 2012

Chairman Kohl, Ranking Member Corker and Members of the Committee:

 

The Financial Industry Regulatory Authority (FINRA) appreciates the opportunity to submit this statement for the record of the Committee's hearing to examine fraud among senior investors. Our comments focus on the outreach and educational initiatives FINRA has underway to protect all investors—including seniors—from falling victim to financial fraud.

 

FINRA and the FINRA Investor Education Foundation

FINRA is the largest non-governmental regulator for all securities firms doing business with the public in the United States. FINRA oversees nearly 4,345 brokerage firms and about 162,410 branch offices, and more than 635,140 registered securities representatives. We touch virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.

 

FINRA believes that investor education is a critical component of investor protection—and that we are uniquely positioned to provide valuable educational information and tools to retail investors. Over the last decade, we have worked hard to develop a strong investor education outreach program. We produce alerts, interactive tools and educational content to help investors make wise financial decisions. Our BrokerCheck tool, for example, provides investors with a quick way to check a broker's disciplinary and professional background. Encouraging people to take this simple step before doing business—or continuing to do business—with a broker is part of our greater commitment to protecting investors.

 

In 2003, FINRA created the FINRA Investor Education Foundation, currently the largest foundation in the United States dedicated to investor education. The FINRA Foundation seeks to provide underserved Americans with the knowledge, skills and tools necessary for financial success throughout life. To date, the FINRA Foundation has approved approximately $73 million in financial education and investor protection initiatives through a combination of educational and research grants, as well as targeted projects managed directly by the FINRA Foundation.

 

How FINRA Protects Older Investors

At FINRA, we serve every U.S. investor, from newlyweds planning to buy a home to parents saving for a child's college education to seniors depending on a secure retirement. Over the past five years, we have been keenly focused on issues impacting older investors, especially those at or approaching retirement. For example, in September 2007, FINRA issued Regulatory Notice 07-43, which highlighted certain issues common to many older investors—including suitability, senior- or retirement-specific credentials or professional designations, high-pressure sales seminars and diminished capacity. The Notice reminded broker-dealers of their obligations in this area and provided examples of industry best practices. That same year, FINRA's Member Education and Training Department launched the first in a series of webcasts to help registered representatives and other frontline brokerage firm employees learn about their compliance obligations when working with senior customers. Topics in this free educational series include Senior Investor Issues: Diminished Decisional Capacity, Senior Investor Suitability Considerations and Supervisory Considerations for Working with Seniors—and are available at www.finra.org/Industry/Issues/Seniors.

 

In 2008 and 2010, FINRA joined with other regulators to issue findings and guidance on firms' practices relative to senior investors. More recently, at the beginning of 2011, FINRA issued its Annual Regulatory and Examination Priorities Letter, which reiterated that the protection of vulnerable customers, including senior investors, continues to be a high regulatory priority—and that one area of particular focus is the use of certifications and designations that imply expertise, certification, training or specialty in advising senior investors. And in November 2011, FINRA published Regulatory Notice 11-52: FINRA Reminds Firms of Their Obligations Regarding the Supervision of Registered Persons Using Senior Designations to remind firms of their supervisory obligations regarding the use of certifications and designations that imply expertise, certification, training or specialty in advising senior investors.

 

In addition to educational outreach to regulated firms and registered personnel, FINRA has also increased our efforts to fight fraud and, to that end, established several programs to help root out bad actors and help consumers protect themselves. In early 2009, we created the Office of the Whistleblower, and later that year, also established the Office of Fraud Detection and Market Intelligence (OFDMI). Through this office, staff with expertise in fraud detection and investigation can provide a heightened review of potentially serious frauds. OFDMI's mission is to ensure that allegations of serious fraud received by FINRA in the form of complaints, regulatory filings and other sources are subjected to a heightened review. OFDMI serves as a centralized point of contact on fraud issues, within FINRA and externally with other regulators and the public. The creation of OFDMI has expedited fraud detection and investigation, by pursuing matters as far as possible and by referring cases that fall outside of FINRA's scope to the appropriate authorities.

 

Investor Protection Campaign

One of the major initiatives of the FINRA Foundation aims to reduce investor susceptibility to fraud. Launched in 2008, the Investor Protection Campaign (IPC) is an innovative, research-based, multi-faceted effort intended to help investors understand how they might be susceptible to investment fraud and to replace risky investment behaviors with fraud detection and prevention behaviors. Armed with research around investment fraud victims and fraudster tactics, as well as the field-tested Outsmarting Investment Fraud curriculum and related resources, the program has achieved the following results to date:

 

  • public television distribution of the award-winning documentary, Trick$ of the Trade: Outsmarting Investment Fraud, with 760 airings on 172 public television stations in 76 television markets across 31 states since September 2010, reaching an estimated 51 million households of consumers age 50 and older;
  • in-person and direct-mail distribution of more than 100,000 DVD copies of the documentary and over 300,000 Fighting Fraud 101 brochures;
  • delivery of more than 640 presentations in conjunction with national, state and local partners that have reached more than 33,000 investors nationwide;
  • training of 40 percent of Better Business Bureau affiliates to deliver the curriculum in local communities;
  • "live" fraud prevention counseling to almost 28,000 investors through outbound calls from a network of Fraud Fighter Call Centers; and
  • creation of a Financial Fraud Research Center and release of a white paper that comprehensively examines what is currently known about retail financial fraud.

 

The campaign builds upon FINRA Foundation-funded research unveiled in July 2006 that shattered the stereotypes of senior investment fraud victims, revealing a fraud victim profile that was counterintuitive in many respects. Instead of being isolated, frail and gullible, fraud victims tended to be married, college-educated males with above-average incomes and above-average levels of financial literacy. The research further identified the sophisticated and highly effective influence tactics that fraudsters use to carry out investment scams. These findings forced regulators and senior citizen advocates alike to rethink how best to approach the challenge of equipping older investors with the tools and information they need to thwart fraudsters touting investment scams.

 

In 2007, the Foundation conducted extensive due diligence to develop a program to meet these challenges, coordinating closely with one of the lead social scientists on the 2006 study, Doug Shadel, director of AARP's Washington State office. Adopting best practices recommended by the Organization for Economic Co-operation and Development (see OECD, Examining Consumer Policy: A Report on Consumer Information Campaigns Concerning Scams (December 20, 2005)), we structured the Investor Protection Campaign to focus less on shortterm, information-led "warning" strategies and more on a longer term, skills-based "educating" strategy backed by significant research and resources.

 

In 2008, the FINRA Foundation launched the Investor Protection Campaign, seeking to protect all investors, especially those over the age of 55, from investment fraud by helping them to recognize their vulnerability to financial fraud, to identify persuasion tactics and to take simple steps to reduce risky behaviors. The centerpiece of the campaign is a field-tested persuasion resistance curriculum, Outsmarting Investment Fraud, which we developed in consultation with an array of experts in psychology, marketing and fraud. Designed to be flexible (with half-hour and hour-long versions available), the curriculum typically features a moderated presentation with video clips and hands-on learning activities that covers some of the most common tactics employed by fraudsters:

 

  • Phantom Riches—dangling the prospect of wealth or enticing investors with something they want but can't have. "These oil wells are guaranteed to produce $6,800 a month in income."
  • Source Credibility or Authority—building credibility and trust by claiming to be an expert. "I've been in the business for 20 years, hold the 'XYZ' credential and wouldn't offer an investment that doesn't make money for my clients."
  • Social Consensus—leading the target to believe that other savvy investors have already invested. "This is how 'Famous Person' got his or her start. I know it's a lot of money, but I'm in—and so is my mom and half her church. Everyone agrees it's worth every dime."
  • Reciprocity—manipulating human tendencies to return one favor with another, often used to prospect clients at free meal seminars and build a relationship. "I'll give you a break on my commission if you buy now—half off" or "You came to my seminar last week, let me come to your home to discuss more opportunities."
  • Scarcity—creating a false sense of urgency by claiming an offer is limited, either by time, quantity or audience. "There are only two units left, so I'd sign today if I were you" or "Only a select group of investors will be able to get in on this deal."

 

The steps investors can take to avoid fraud and to separate fraudulent offers from legitimate opportunities boil down to two words: ask and check. We arm investors with questions to ask about both any investment they're considering and the individuals who tout it—and we show them where to turn to independently verify the answers they get.

 

Our curriculum has been field-tested twice using treatment and control groups—first to determine the extent to which our workshops reduced susceptibility to fraudulent sales pitches, and then to assess both impact and persistence over time. In each instance, investors who had participated in one of our persuasion resistance workshops prior to being pitched on a new investment opportunity were half as likely to agree to receive materials about the deal compared with a control group (who had not yet been exposed to the campaign's messaging).

 

In 2009, we produced an hour-long documentary, Trick$ of the Trade: Outsmarting Investment Fraud, modeled specifically after the Outsmarting Investment Fraud curriculum. American Public Television began distributing the documentary in September 2010 through public television stations nationwide and remains available for station airings through September of 2013. The show has received two Telly Awards (which honor the best local, regional and cable television commercials and programs, the finest video and film productions, and exemplary work created for the Web)—one for social issues and one under the how-to/instructional category. In 2010, Trick$ of the Trade was also recognized by Kiplinger's Personal Finance magazine as a "Best of Everything 2010: Best Personal-Finance Resources."

 

Since launching the campaign, we have endeavored to de-stigmatize victimhood and to engage multiple partners and the media to help spread key messages. National partners include the Securities and Exchange Commission, the AARP Foundation, the Council of Better Business Bureaus and the National White Collar Crime Center, among others. Partners at the local level include state securities regulators, state AARP offices and various other government, non-profit and grassroots organizations, including crime prevention networks.

 

The ongoing project comprises three primary elements:

 

  1. Research Facilitation: adding to and beginning to organize the body of knowledge around investment fraud in order to better equip fraud detection and prevention professionals with evidence-based information and resources;
  2. Educational Resources & Programs: developing and testing interventions and resources that help investors avoid fraud; and
  3. Outreach Partnerships & Public Awareness: leveraging partnerships to expand the reach of the project and refining outreach strategies to maximize the number of investors positively reached with the field-tested curriculum and research-based messages.

 

With respect to the research element of the campaign, the FINRA Foundation partnered with the Stanford Center on Longevity to launch the Financial Fraud Research Center in August 2011. The Center's focus is individual consumer financial fraud—particularly fraud achieved using deception, including phony lottery awards, investment scams and online phishing schemes. The Center seeks to facilitate understanding, prevention and detection of financial fraud by compiling and making available information about research across a range of disciplines (from psychology to criminology to marketing and more), connecting research to practical policy and fraud-fighting initiatives and facilitating research by providing seed funding and connecting funding opportunities to interested researchers. More information is available at the Center's website at fraudresearchcenter.org.

 

Understanding Professional Designations Database

As explained more fully in Regulatory Notice 11-52, FINRA rules require brokerage firms to have, at a minimum, supervisory procedures in place that are reasonably designed to prevent their registered representatives from using a senior designation in a manner that is unethical or misleading. Firms and registered representatives are also prohibited from making false, exaggerated, unwarranted or misleading statements or claims in communications with the public—and this prohibition includes referencing nonexistent or self-conferred degrees or designations or referencing legitimate degrees or designations in a misleading manner.

 

To help investors make sense of the dozens of credentials securities industry professional might use, FINRA created a Professional Designations Tool, which currently provides objective data on more than 140 designations and credentials. The tool allows investors to better understand what education and experience requirements are necessary for a designation—and to determine whether the granting organization mandates continuing education, offers a public disciplinary process, provides a means to check a professional's status and otherwise ensures that a professional designation is more than just a string of letters. The tool is available on FINRA's website at www.finra.org/designations.

 

Conclusion

We appreciate the opportunity to submit this statement for the record of the Committee's hearing on preventing elder financial abuse. FINRA and the FINRA Investor Education Foundation are committed to expanding the knowledge and confidence of all Americans wishing to build a more secure financial future through saving and investing, and we share your interest in protecting those savings and investments.