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From Securities Regulation Daily, July 10, 2014

Chair White updates rules pipeline as SEC’s investor panel tackles elder fraud

By Mark S. Nelson, J.D. and Jacquelyn Lumb

SEC Chair Mary Jo White this morning briefed the Investor Advisory Committee (IAC) on the status of its recommendations to the Commission. She also congratulated Kurt Schact, the managing director of the CFA Institute, on his election at the last meeting to chair the IAC, and welcomed new member Joseph Carcello, an accounting professor at the University of Tennessee.

Schact asked about the status of the money market reform rules. White said the SEC is actively engaged in finalizing the rules in the near-term and expressed confidence that the final rules will be robust. Schact’s question, without naming a specific news outlet, addressed media reports this week that the SEC would soon issue new money market rules.

Since the IAC’s last meeting, White noted that the Office of the Investor Advocate has issued its inaugural report to Congress. She thanked Rick Fleming, the head of the office, for recommending that Congress provide additional funding for the examination of investment advisers, an area of critical need that has also been eyed by the IAC.

Rules on tap. White reported that the comment period for the SEC’s crowdfunding proposal has closed, and that the staff is reviewing the comments and developing recommendations for final rules for the Commission’s consideration. White assured the IAC that its recommendations are being fully considered and the SEC’s response to the recommendations will be reflected in the final rules.

The IAC also made recommendations about whether broker-dealers should adhere to fiduciary duties when providing investment advice, universal proxy ballots, and data tagging. White said that Commission’s briefings on universal ballots and data tagging have been completed. She urged the IAC’s officers and its subcommittee chairs to get an update from the staff on the SEC’s structured data initiatives.

The SEC asked for more comments on its target date funds proposal to obtain views on the IAC’s recommendation to include a glide path illustration based on a standardized measure of fund risk. White said the SEC received 29 comment letters. Commenters generally favored tailoring the disclosure requirements for target date fund marketing materials, she said, but some were concerned that standardized measures could confuse or mislead investors.

White noted that the Department of Labor (DOL) has also proposed amendments to require a glide path illustration for target date funds that are subject to ERISA. The comment period on DOL’s proposal closed earlier this month. White said the SEC will coordinate with DOL on their respective initiatives.

White acknowledged the IAC’s effort to implement a tick size pilot to widen the quoting and trading increments for smaller companies’ securities. The SEC subsequently directed the exchanges and FINRA to submit a national market system plan to implement a one-year pilot. The pilot should provide valuable data to the Commission, according to White. The SROs’ plans are due to the SEC by late August, after which comments will be sought before the pilot is approved.

Among the other commissioners who addressed the IAC at the start of its meeting, Kara Stein said she would like to see progress on the universal proxy ballot recommendation, which is relatively straightforward, in her view.

IAC member Damon Silvers, the associate general counsel for the AFL-CIO, asked White about demands for change in the corporate governance area emanating from the issuer community. He said the objective appears to be to lower costs by providing less information to investors. White replied that she is not interested in providing less useful information to investors. The goal is to provide more meaningful information, which some have construed as less information. One approach is to remove some of the redundancies in SEC filings, she explained.

Battling elder fraud. One of the morning panels asked how the SEC can renew its commitment to protect elderly investors against financial abuse. Commissioner Luis A. Aguilar said in his opening remarks that most experts say the problem of elder abuse is worsening. He cited recent data showing that one in five persons age 65 or older are fraud victims. Aguilar said the elderly are easy targets because they have amassed significant wealth over their lifetimes.

Aguilar also said the SEC can take a few key steps to help elderly investors. Specifically, he said the Commission should think of the elderly in its rulemakings. Aguilar also said the SEC could set up a permanent working group on elder abuse issues, host an annual conference on the elderly, do more outreach on elder abuse issues with other regulators and the SROs, and gather more data on tips and complaints about elder abuse.

Commissioner Daniel M. Gallagher agreed with Aguilar that elder fraud is an important topic for the SEC. Gallagher said that the SEC’s efforts had fallen behind since the 2008 financial crisis and the SEC needs to do more.

Special guest Kathy Greenlee, Administrator of the Administration for Community Living and Assistant Secretary for Aging, U.S. Department of Health & Human Services (HHS), made the case for the SEC and other federal regulators to become more involved in protecting elderly investors. Greenlee said the “unarticulated” truth is that elder financial abuse is about old age, not just money.

According to Greenlee, financial exploitation of the elderly is the fastest growing part of elder abuse and, depending on the data viewed, may be a factor in 10 to 20 percent of cases. She said two risk factors account for this growth: loss of cognitive function and social isolation. Greenlee said social isolation can occur because a person’s world tends to shrink as he ages, but this type of isolation is not the same as living alone.

The Elder Justice Coordinating Council (EJCC), created by the Elder Justice Act of 2009 (part of the Affordable Care Act), makes recommendations to improve the federal government’s efforts to combat all forms of elder abuse. The Elder Justice Interagency Working Group, in which the SEC is a member, also seeks to coordinate the federal response to elder abuse. Greenlee said the EJCC has made eight recommendations focused on the federal government’s ability to prevent and respond to elder abuse.

The IAC’s elder fraud discussion came just a day after the DOJ announced a new plan to reign-in elder abuse, including financial schemes that target the elderly. The Elder Justice Roadmap is the centerpiece of a plan backed by the DOJ and HSS.

Greenlee said in a DOJ statement on the roadmap that the rapidly aging baby boomers and the fast-growing over 85 populations will pose a challenge to regulators and law enforcement for many years. “Stemming the tide of abuse will require individuals, neighbors, communities, and public and private entities to take a hard look at how each of us encounters elder abuse—and commit to combat it.”

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