FINRA Proposes Update to Temper Expungement and Elder Abuse

Friday, October 16, 2015

FINRA’s Board of Governors recently voted to move ahead with two key initiatives for broker-dealers. One initiative would amend codes of arbitration to make it tougher for brokers to erase black marks from their public record. The proposal, which will be submitted to the SEC for approval, would incorporate existing guidance and best practices into the rules. The guidance reminds arbitrators that expungement is “an extraordinary remedy that should be recommended only under appropriate circumstances” and that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Ultimately, FINRA is trying to strike the right balance between transparency and eliminating information in a report about a broker that is either unfair or false.

The other initiative is meant to enhance protection for senior investors. The rule would require firms to obtain the name and contact information of a trusted person for the customer's account and allow firms to freeze funds in accounts of investors 65 and older when there is “reasonable belief” of financial exploitation. The proposal does not indicate precisely what constitutes a “reasonable belief” of exploitation.

Non-Traded Real Estate Investment Trusts (REITS): Danger for Retail Investors!

Friday, October 9, 2015

Are some investments so risky that they are virtually always unsuitable -- they should never be recommended -- to typical retail investors, regardless of risk tolerance?   Yes.  The purpose of this post is not to generate a list, but to focus on one particular investment that seems to fall into this category: non-traded real estate investment trusts (REITS).

According to a recent article, Fiduciary Duty and Non-Traded REITS by Craig McCann, non-traded REITS performed about as well over the past 25 years as "investing in short and intermediate term U.S. Treasury securities"  but, unlike U.S. Treasury securities non-traded REITS are illiquid and much more risky.  Not only that, non-traded REITS underperformed their traded REIT cousins.  McCann writes, "Investors in the 41 non-traded REITs that became traded REITS or were cashed out suffered $24.25 billion in underperformance."  "Non-traded REITS underperform traded REITS by approximately 6.8 percent annually."

What else is of concern about non-traded REITS? Investors pay a substantial up front fee, averaging 13.2%  This compares with mutual funds, which charge fees topping out at about 5%. 

McCann found that institutional investors tend to stay away from non-traded REITS.  He writes, "institutional investors almost never own material stakes in non-traded REITS." For retail (and institutional) investors interested in real estate there are ready alternatives, including a wide variety of mutual funds.

Non-traded REITS face the triple-whammy of being illiquid, expensive and performing poorly.  According to McCann, "Brokers and investment advisors may have a good-faith basis for recommending that a client make a focused real estate investment, but they cannot justify a recommendation to purchase a non-traded REIT."

Tips from the Guide for Legal Professionals: Elder Investment Fraud & Financial Exploitation

Tuesday, October 6, 2015

I offer helpful information from the "Pocket Guide for Legal Professionals, Elder Investment Fraud & Financial Exploitation" published and distributed by the Maine Office of Securities.

Asking About Financial Capacity -- Conservation Starters:
  • Do you feel confident making financial decisions on your own?
  • Who manages y our money day to day?  How is that going?
  • Are you having any trouble paying your bills?
  • Is anyone pressuring you to give them money?
  • Do you receive a lot of solicitations by phone or mail?

Red Flags for Financial Exploitation:
  • Senior moves away from existing relations and toward new associations with other "friends" or strangers
  • Sudden appearance of previously uninvolved relatives claiming their rights to senior's affairs and possessions
  • Abrupt changes to financial documents, such as POA, account beneficiaries, wills and trusts, or deeds
  • Senior is accompanied by an overly protective caregiver who dominates the client
  • Changes in the senior's behavior; suspicious, fearful, emotionally labile, or secretive
  • Senior displays unexplained or unusual excitement over a financial windfall or prize check; may be reluctant to discuss details
  • Noticeable neglect or decline in appearance or hygiene or the senior's basic needs are not being met
Vulnerability/ Risk Factors:
  • Social isolation
  • Bereavement
  • Dependence on another to provide care
  • Financial responsibility for an adult child or spouse
  • Alcohol or drug abuse
  • Depression or mental illness