1. Selling Investments to and Advising Senior Citizens Andrew Davitt, Esq. awdavitt@mdwcg.com Direct Dial: 215-575-2679 Rachael Luken, Esq. rmluken@mdwcg.com Direct Dial: 215-575-2766 Marshall, Dennehey, Warner, Coleman & Goggin 1845 Walnut Street, 17 th Floor Philadelphia, PA 19103

2. Purposes of this Presentation Selling investments to and advising senior citizens 1. Discuss evolving issues the investment and financial services industry face in dealing with "senior citizens" in light of the regulatory environment and initiatives. 2. How "senior citizen" is being defined. 3. Actions some state and federal agencies and S.R.O.s have taken to protect "senior citizens" as well as consumers overall.

3. Purposes of this Presentation 4. Discuss some areas of regulatory concern, such as:  Seminars designed to target senior citizens  Professional designations targeting senior citizens  Advice as to early retirement recommendations  Advice as to retirement asset rollovers and allocations  Allocations and reallocations  Specific products (E.I.A., D.P.P., V.A.)

4. Purposes of this Presentation 5. To provide you with some "Best Practice" ideas as to how you may be able to keep yourself out of the regulatory limelight or diminish your likelihood of exposure.

5. Statistically Speaking  The U.S. population age 65 and older will double in size within the next 25 years.  By 2030, 1 in 5 Americans, or approximately 72 million people, will be 65 and older.  The age group of individuals 85 and older is the fastest growing segment of the U.S. population.

6. Statistically Speaking  23% - percentage of American families that currently have pensions  61% - percentage of Americans that think they have pensions coming to them  30% - percentage of companies that currently offer pensions  Year 2018 – year in which Social Security will have a negative cash flow  25 million – the number of Baby Boomers that have ZERO retirement savings  $88,000 – average amount that the Baby Boomers who have saved for retirement have put away  50% - percentage chance that, of a couple currently age 65, one will live to age 92

7. Statistics on Senior Investment Fraud Investment fraud involving senior citizens accounts for approximately 50% of all investor complaints. Approximately one third of all enforcement actions initiated by state regulators involves senior investment fraud.

8. Regulatory Concern Regulators are concerned about the potential for fraud involving senior citizens and the investment professional.  Sample areas of particular concern: 1. Seminars targeting senior citizens 2. Designations used by investment and insurance professionals 3. Early retirement recommendations and advices

9. How is a "senior citizen" defined? It depends on whom you ask.  Pennsylvania and New Jersey: anyone age 60 and over.  Delaware, Connecticut, and Nebraska: anyone 65 and over.  Conclusion: You need to know the laws of each of the states in which you conduct business

10. What are regulators and the S.R.O.s doing to protect senior citizens? Protection under legislative acts (laws) such as Securities, Insurance and Consumer Protection Acts Protection under Senior Protection in Annuity Transactions Acts Consider:  NASD Notice to Members 05-50  NASD D.P.P. proposals  NASD Rule 2821 Educational outreach to senior citizens Enforcement actions

11. What is NASD Proposed Rule 2821? Entitled: "Members Responsibilities Regarding Deferred Variable Annuities" 4 th Amended Proposal  March 5, 2007: Proposed Variable Annuity Sales Practice and Supervisory Standards Rule

12. NASD Proposed Rule 2821 If adopted with its current text, the proposed Rule would set forth recommendation requirements (suitability criteria), principal review and approval criteria, supervisory procedures and training obligations designed specifically to address variable annuity transactions.

13. What does the proposed Rule entail? Multiple prongs of responsibility I. Registered Representative II. Registered Principal III. Member Firms

14. Prong I: The Registered Representative "Reasonable basis" to believe the annuity is suitable Inform customer of the various features of the product Will the customer benefit from the transaction and the product?

15. Prong I: The Registered Representative If the recommendation involves an exchange, will there be surrender charges or increased costs? Has the customer exchanged an annuity in the past 36 months? Document the suitability determination

16. Prong II: The Registered Principal Responsibilities of the Registered Principal:  Review the registered representative's suitability determinations  Perform own analysis for purposes of suitability approval  Do so before the application is transmitted to the company; no later than 7 days after the customer signs the application

17. Prong III: Firm Obligations Firm must establish and maintain specific written supervisory procedures "reasonably" designed to achieve compliance with the standards and obligations contained in the proposed Rule 2821 as well as other applicable NASD rules and laws.

18. Prong III: Firm Obligations Firm must implement surveillance procedures in order to determine if its registered representatives have levels or rates of engaging in deferred V.A. exchanges that may raise an issue, and hence possibly a review, of whether such volume of exchanges may reflect conduct which is noncompliant or inconsistent with the proposed Rule's provisions, S.R.O. rules and other applicable laws.

19. Prong III: Firm Obligations Policies and procedures "reasonably" designed to implement corrective measures to address both inappropriate exchanges and the registered representative who engaged in the inappropriate exchanges.

20. NAIC Model Senior Protection in Annuity Transactions Act Proposed Rule 2821 is similar in objective to the NAIC's Model Senior Protection in Annuity Transactions Act (MSPAT) Some states, such as Nebraska, Delaware and Connecticut have passed Acts similar to MSPAT

21. What the states are doing to protect "senior citizens" We will use Delaware, New Jersey and Pennsylvania as examples. We encourage you to educate yourself about the laws of the states in which you conduct business.

22. Delaware Senior Protection in Annuity Transactions Act  Insurance regulation  No private cause of action  Gives the regulator the right to take corrective action Consumer Fraud Act  Provides for private cause of action  Applies to securities transactions  Allows for treble damages

23. New Jersey New Jersey Senior Citizen Investment Protection Act  Insurance regulation  Limits how long surrender charges may be imposed  Actual, or deemed, maturity date is the later of age 70 or the tenth anniversary of the contract Consumer Fraud Act  Provides for private cause of action  Applies to securities transactions

24. Pennsylvania Securities Act  Higher enforcement penalties for violations against senior citizens Unfair Trade Practices and Consumer Protection Law  Treble damages  Attorneys' fees

25. Regulatory "Hot Topics" Seminars targeting senior citizens Professional designations directed towards senior citizens Early retirement recommendations, rollovers and allocations Sales through bank channels D.P.P. products

26. Professional Designations Over 90 designations, titles, degrees, affiliations NASD, SEC, state regulators each concerned about misuse of designations Regulators are concerned that designations are being misused or misrepresented to inspire trust and confidence in customers

27. NASD Conduct Rule 2210 Prohibits firms and associated persons from referencing nonexistent or self-conferred degrees or misrepresenting legitimate degrees

28. NASD's Explanation of Professional Designations NASD offers explanations of Professional Designations on its website, including:  Pre-requisites  Educational requirements  Issuing organization  Investor complaint process

29. What are some states doing with regard to professional designations? Nebraska prohibits use of senior designations Massachusetts proposes regulations requiring advisors to prove they have special senior expertise Pennsylvania has issued Cease and Desist Orders against at least one "senior specialist"

30. Senior Seminars Regulators concerned about the "free meal" lure Regulators concerned about "free estate planning" and "asset transfer" seminars What have we seen?

31. Senior Seminars SEC/NASAA Initiative to Protect Senior Citizens  Intent to attend "free meal" seminars unannounced  Enforcement proceedings  Investor education and outreach States are also concerned  Pennsylvania Attorney General offers advice to senior citizens on its website about senior seminars and recommendations to senior citizens  Pennsylvania Securities Commission issues brochures and does commercials on the radio aimed at educating and protecting senior citizens

32. Early Retirement Pitches Regulators' concern:  Free seminars  Encouragement to retire early  Roll over pension and/or 401(k) Plan in lump sum into IRA  Recommend purchase of unsuitable securities or allocations  What can Member Firms do?

33. Early Retirement Pitches: Recent Incidents Enforcement actions and customer arbitrations: – Member broker/dealers lost customer-initiated arbitrations and were ordered to pay millions by NASD arbitration panels and then fined by NASD Enforcement Division. Brokers had offered free seminars and/or advices to long-term employees and persuaded some of those employees to retire early, cash out their company- sponsored 401(k) and/or pension plans, and reinvest the rollover proceeds in accounts managed by the registered representatives associated with the firms. The brokers then placed these customers into investment products the brokers recommended and allegedly made representations that their monthly income from these investments would match the salary they'd been earning. In other words, the registered representatives allegedly assured the retirees that, in retirement, they could safely withdraw an amount equivalent to their salary.

34. Investment sales via bank channels Big business! Perception of regulations: Older customers who are bank clients are generally savers, not investors Regulators concerned because senior citizens are involved. Regulators concerned about these customers' ability to understand complex products and assume product and market risks

35. What can you, the Member Firm, do? Suggested "Best Practice" tips You know your sales force best:  Educate the sales force  Educate home office staff  Educate the supervisors

36. What can you, the Member Firm, do? Consider:  Training associated persons on these topics  Issuing written bulletins to associated persons informing them of these issues  Making sure home office and associated persons know the regulators' concerns

37. What can you, the Member Firm, do? Consider:  Written notice to sales force reminding of regulatory concerns regarding: Senior citizen issues Advising on early retirement Advising on rollover versus guaranteed pension Advising on allocation of rollover assets Use of projections "72(t)"

38. What can you, the Member Firm, do? Provide the sales force with practice tips such as... 1. Encourage note taking by client 2. Have client fill out forms in their own handwriting 3. Client must sign documentation 4. Keep an organized file of client notes and documentation 5. Manage client expectations

39. What can you, the Member Firm, do? For your registered representatives that conduct seminars geared towards senior citizens:  Seminar materials must be pre-approved and not changed or strayed from at the presentation stage  NASD Rules require fair and balanced communications with the public  Be clear as to designation (if allowed by member firm)

40. Additional tips for conducting seminars: If associated persons are soliciting a product, make sure they are appropriately registered Make attendees pre-register, fill out basic information (such as employer... i.e., Securities Commission) and ask for I.D. at the door.

41. Selling Investments to and Advising Senior Citizens Andrew Davitt, Esq. awdavitt@mdwcg.com Direct Dial: 215-575-2679 Rachael Luken, Esq. rmluken@mdwcg.com Direct Dial: 215-575-2766 Marshall, Dennehey, Warner, Coleman & Goggin 1845 Walnut Street, 17 th Floor Philadelphia, PA 19103