The Ontario Securities Commission is looking for members for its new Seniors Expert Advisory Committee. These experts will advise staff "on issues impacting older investors and help to OSC develop tailored solutions." The OSC is looking for people with legal, academic, industry and medical backgrounds, as well as seniors advocates.
Investment issues involving seniors are a major concern for the OSC and other regulators. As I noted in a previous column, about a third of disciplinary cases reviewed by the Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) involve seniors.
I like the idea of having medical professionals and lawyers work together on the committee because competency -- loosely defined as the mental ability to manage one's own affairs -- has gradations. It would be a major breakthrough if the regulators came up with a way of determining when an older person -- or anyone for that matter -- doesn't have the competency to make investment decisions and what advisors should do in such cases. I expect the OSC will accomplish this the year after the Toronto Maple Leafs next win the Stanley Cup.
Near term, in my opinion, the OSC already has enough information on issues impacting older investors and enough regulations and rules to deal with advisors and firms that abuse seniors financially or fail to recognize that some investments aren't suitable for seniors.
A case in point is Exempt Dealers - 101, an April 2014 document on its website authored by members of the OSC's dealer team.
While it refers to exempt market dealers and compliance deficiencies, some of the information contained specifically deals with senior investors and suitability.
It notes that seniors, as a vulnerable group:
- Are becoming a larger part of the population;
- Rely on investments for financial security in retirement;
- Have a reduced investment time horizon to recover from financial loss;
- Have possible diminished mental capacity and physical illness;
- Are susceptible to financial abuse.
Until the Seniors Expert Advisory Committee starts reporting, I suggest that the regulators continue to promote what some investment firms are already doing: Discouraging advisors, through compliance reviews, from recommending to seniors trades in securities whose high risks and timeframes almost certainly make them unsuitable for people who are or will soon be out of the work force.
Along these lines, many dealers no longer permit their salespeople to sell mutual funds to seniors on a deferred sales charge basis, simply because the declining redemption fee schedules are longer than seniors' investment time horizons.
Also, until the OSC has its committee in place and has the information from it that it needs to develop tailored solutions, it should, in concert with other regulators, review all complaints and disciplinary actions taken in situations involving older investors, and look for common threads that can be addressed.
One problem area as I see it pertains to the collection of data by an advisor regarding a client's willingness to accept risk. In my view, when dealing with seniors, an advisor should also look at the client's ability to accept risk. In simple terms, this could be whether the client will have to eat pet food if the advisor's recommendation tanks and the client loses all his or her money.
In more complex terms, it will look at the tax implications of recommended sales purchases and the ability of senior clients to meet specific income needs. Also, an advisor is obligated to explain to a client the risks. But if a client has diminished capacity can he or she understand the risks and their implications on his or her finances? I think not.
Providing extra protection for seniors can be justified. Several years ago I attended a couple of meetings of First Leaside investors who collectively lost several hundred million dollars. About 100 people were in attendance -- predominantly seniors. I suspected that most were collecting old age security not just because of their age but because in many cases their retirement savings were wiped out with their First Leaside investments. Some had invested all their savings believing they were secure.
As I wrote at the time, two First Leaside entities sold the securities. They were First Leaside Securities Inc., an investment dealer regulated by IIROC, and F.L. Securities Inc., an exempt-market dealer regulated by the OSC. Securities regulators are supposed to protect investors from unfair, improper or fraudulent practices. I wonder whether any regulators ever reviewed any of the know-your-client forms at First Leaside sales entities against the securities purchased and information about the securities that was available.
The OSC is reaching out to seniors as part of Ontario Seniors' Month. Its efforts include a province-wide teletownhall on June 9 for seniors about recognizing investment frauds and scams.
Of course, helping seniors recognize and avoid investment frauds and scams is important. But just as important would be helping seniors recognize unsuitable investments that are legitimately offered under provincial securities laws and exemptions.
