SEC exams will be focusing on RIAs serving a significant number of seniors after finding "significant weaknesses" in advisors' policies for protecting elderly clients, an agency official said.

“Over the last six to nine months, we’ve examined roughly 200 advisors and over a third had policies and procedures in place for working with senior accounts, but half were not written policies and half hadn’t implemented them,” Charles Koretke, assistant director of the SEC’s Office of Compliance Inspections and Examinations, said late last week.

Koretke, speaking at the IAWatch compliance event in Washington, D.C., said “staff did find some significant weaknesses” in senior policies during the exams.

With the number of seniors expected to double in the next three decades, the SEC said it is scrutinizing firms that have higher numbers of senior investors and senior assets.

“Our focus is on examining advisors with considerable senior investor bases,” Koretke said. “For our purposes, we’re defining senior clients as those age 62 or over, because that is when investors become eligible for Social Security benefits.

These, according to Koretke, are among the questions the SEC will be asking advisors: How do you address diminished capacity and changes in power of attorney and trustees? What happens when your client transitions to retirement? How are you dealing with communications to senior clients? What happens upon the death of a client?

The SEC found that with some RIAs that had policies for protecting senior citizens, “staff said advisors didn’t address how to handle situations” of diminished capacity or possible fraud.

For instance, firms had policies that required advisors to get a notarized signature from spouses when account changes are made, but didn’t specify how red flags would be monitored or supervised, Koretke said

Many firms also failed to create policies that were tailored to their business models with regard to products, product rollovers and fees, he added.

“One thing I think you should know is we’ll continue to look at high-risk products, variable annuities, target-date funds, their fee disclosures and how fees are being charged. We see this as being integral in protecting investors and seniors in particular,” Koretke said.

Dan Kahl, deputy director of the SEC’s Office of Compliance Inspections and Examinations, said when it comes to fees charged to seniors “we are very frequently finding problems—not necessarily a fraudulent area, but it’s lack of controls, lack of attention to your billing practices."

SEC was able to examine a record level of 17 percent of all advisor in 2018.  While the government shutdown may make repeating that level doubtful in 2019, the agency is leveraging technology to target RIAs’ senior investor policies and practices.

Wendy Vasquez, chief compliance officer of Cypress Capital in Nashville, Tenn., said her firm’s RIA underwent a remote SEC exam in July and was subsequently notified by SEC staff that the firm “didn’t have adequate procedures in place to protect vulnerable senior clients.”

Vasquez, speaking at the IA Compliance meeting, said seniors’ assets make up about 13 percent of Cypress’s total assets under management.

Vasquez said SEC staff wanted the firm to create written policies and practices to address the following situations:

- Clients who are nearing retirement or who have already retired.
- Clients who engage third parties to act under power of attorney.
- Clients who engage third parties to act as trustee.
- The death of clients.

“So we determined to develop a vulnerable seniors’ policy that helps advisors identify red flags and describes the escalation process for reporting red flags to us and to government agencies,” said Vasquez, who is in the process of drafting the policies and practices with legal counsel now.

“We are also adding a request for seniors’ trusted contacts, so the firm can notify a contact if we see anything unusual,” she said.

“Once you call a trusted client’s contact and say, ‘Mr. Jones is exhibiting signs of dementia’ or ‘his adult child may be stealing from him,’ that’s a bell that is hard to unring. ... So we have been very careful in drafting steps for staff to follow,” Vasquez said.

The policies are also being drafted to be specific about the limited information that can be disclosed to contacts and authorities “because we want to avoid any liability issues or privacy law violations,” she added.

To make sure the policies will be implemented by advisors and staff, Vasquez said she is implementing quarterly training. “It does us no good to have policies in place to protect seniors if staff isn’t trained to use these tools,” she added.

Training is not only critical, but a requirement to avoiding liability, regulators said.

The “Senior Safe Act” went into effect last May to give advisors immunity from liability if they report senior impairment or financial abuse to authorities, but it requires that all relevant firm employees be trained annually in safe senior practices.

“Your primary regulator needs to be able to verify that the training has occurred, so document it well in case you need to avail yourself of civil immunity,” said Valerie Mirko, general counsel of the North American Securities Administrators Association.