Investor Protection Priorities of Securities Regulators Revealed In Continuing Education Topics

By James Eccleston

he Securities Industry/Regulatory Council on Continuing Education (the "CE Council") recently published its Firm Element Advisory to "highlight current regulatory and sales practice issues" for financial services firms to consider incorporating into their continuing education programs for financial advisers. All in all, the CE Council has identified 14 areas for study, and its website (www.cecouncil.com) contains helpful web links and references to fully explore those areas. Let's examine the more critical ones for investors to know.

First, the CE Council addresses the area of communications with customers. Among the topics discussed are concerns related to the "proliferation of professional designations, including those that require no meaningful training or specialized knowledge but suggest an expertise in retirement planning or financial services for seniors." The CE Council cites to several helpful publications by both NASAA (the North American Securities Administrators Association) and FINRA (the Financial Industry and Regulatory Authority). Likewise, the publication discusses "free lunch" seminars, noting that regulatory examinations have uncovered the fact that, "often times the seminars are not necessarily educational, but are in fact sales pitches." Finally, the CE Council states that FINRA is concerned that some financial advisers are "misrepresenting their investment acumen by using ghostwritten communications that mislead investors."

Second, the CE Council addresses the area of insurance and annuities, particularly life settlements. These involve the sale of existing life insurance policies to third parties. Given that such sales "have grown exponentially in recent years" and that the trend is expected to continue, the publication reminds financial services firms that life settlements involving variable insurance policies fall within the investor protections of the securities laws (versus the more lax insurance laws).

Third, the CE Council devotes much attention to the areas of sales practices and supervision. Among the numerous topics discussed, the publication discusses auction rate securities, and cites to several helpful publications by FINRA and the Municipal Securities Rulemaking Board (MSRB). Specifically, the CE Council states, "In light of downgrades of municipal bond insurers, other short-term liquidity concerns creating extreme market volatility for municipal and other auction rate securities, and an unprecedented number of 'failed auctions', FINRA and MSRB have issued several notices pertaining to disclosures, margin, complaint reporting, and suitability requirements as well as guidance regarding the allocation of redemptions in a partial redemption of an auction rate security and other securities." On a related note, the CE Council also discusses illiquid investments, citing FINRA Regulatory Notice 08-30 (which provides guidance to financial services firms regarding their obligations in connection with customer requests to sell generally illiquid securities).

Additionally, the CE Council covers sales and supervision of new products (including equity indexed annuities and special purpose acquisition companies). Noting that an "increasing number of complex products are being introduced to the market in response to the demand for higher returns or yields", regulators have issued several communications discussing "the proactive approach firms should take to review and improve their procedures for developing and vetting these new products." The CE Council also addresses sales and supervision of variable annuities. Importantly, since May, 2008, financial services firms have had to comply with more stringent suitability and training requirements aimed at better protecting investors.

Last but not least, the CE Council addresses sales and supervision associated with senior investors. The publication states, "Firms are urged to review and, where warranted, enhance their policies and procedures for complying with FINRA sales practice rules, as well as other applicable laws, regulations and ethical principles, in light of the special issues that are common to many senior investors."

In conclusion, the Firm Element Advisory details important issues for financial services firms to understand, in order to better protect investors. Let's hope that they learn their (continuing education) lessons!

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.