With the aging of the baby boom generation, a growing number of our nation’s investors

 
 
 
 
 
 
 
 
PROTECTING SENIOR INVESTORS: 
REPORT OF EXAMINATIONS OF SECURITIES FIRMS  
PROVIDING “FREE LUNCH” SALES SEMINARS
 
 
 
 
 
 
 
 
BY THE  
 
 OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS 
SECURITIES AND EXCHANGE COMMISSION 
 
NORTH AMERICAN SECURITIES ADMINISTRATORS 
ASSOCIATION 
 
FINANCIAL INDUSTRY REGULATORY AUTHORITY  
 
 
 
 
 
 
 
 
SEPTEMBER 2007 
 
 
 
 
 
 

I. INTRODUCTION AND SUMMARY  
 
With the aging of the baby boom generation, a growing number of our nation’s investors 
are at or near retirement age.  Indeed, data presented at the first “Seniors Summit” held by 
the Securities and Exchange Commission (SEC) in July 2006 indicated that 75% of the 
nation’s consumer financial assets, valued at $16 trillion, are held by households headed 
by someone who is 50 or older.  Within the next 20 years, 75 million people will have 
celebrated their 60
th
 birthday.  Because these “senior investors” are a growing segment of 
investors, financial services firms are increasingly focusing their marketing and sales of 
investment products towards the senior investor or those investors nearing retirement age.  
Within this broader context, securities regulators are concerned about the possibility of 
unscrupulous and abusive sales practices and investment frauds targeted towards senior 
investors.  In fact, some data indicates that although individuals aged 60 or older make up 
15% of the U.S. population, they account for 30% of fraud victims.
1
 
In response to this concern, in May 2006, the SEC and the North American Securities 
Administrators Association (NASAA) announced a coordinated national initiative 
designed to protect seniors from investment fraud and sales of unsuitable securities.
2
  
Working together with the NASD and the NYSE Member Regulation Inc. (now 
consolidated as the Financial Industry Regulatory Authority, or FINRA), the SEC and 
NASAA initiative includes three components: active investor education and outreach to 
seniors and those nearing retirement age; targeted examinations to detect abusive sales 
tactics aimed at seniors; and aggressive enforcement of securities laws in cases of fraud 
against seniors.  This joint and collaborative initiative by securities regulators is designed 
to build on the existing efforts that each regulator had underway, toward a shared mission 
to protect senior investors. This initiative is active and ongoing. 
 
As part of this effort to protect senior investors, regulators initiated a series of 
coordinated on-site examinations of broker-dealers, investment advisers and other 
financial services firms that offer so-called “free lunch” sales seminars.  These seminars 
are widely offered by financial services firms seeking to sell financial products, and they 
often include a free meal for attendees.  Sales seminars are often advertised in local 
newspapers, through mass-mailed invitations, mass-email, and on websites.  While 
specific data is not available regarding the actual number of sales seminars being 
conducted, regulators believe that the number of sales seminars has increased in recent 
years, as financial services firms are increasingly seeking to provide advice to seniors and 
those approaching retirement. 
 
                                                
 
1
    “NASAA Survey Shows Senior Investment Fraud Accounts for Nearly Half of all Complaints 
Received  by State Securities Regulators,” (July 17, 2006), available at 
  
http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4998.cfm. 
 
2
      “Securities and Exchange Commission and North American Securities Administrators Association 
 Launch Program to Protect Senior Investors,” (May 8, 2006), joint SEC and NASAA press 
 release available at 
http://www.sec.gov/news/press/2006/2006-65.htm. 
 
 
2

Examinations were targeted in areas of the country that have large populations of retirees.  
Examinations were conducted in Florida, California, Texas, Arizona, North Carolina, 
Alabama and South Carolina by state securities regulators in those states, NASD and the 
NYSE Member Regulation Inc. (now FINRA) and the SEC.  This report summarizes the 
results of these examinations and was prepared by the SEC’s Office of Compliance 
Inspections and Examinations, NASAA and FINRA (collectively, referred to in this 
Report as regulators or examiners).
3 
 
The purpose of the examinations was to review firms that offer sales seminars targeted to 
seniors and retirees for compliance with securities laws and rules (federal, state and self- 
regulatory organization (SRO) rules) designed to protect investors.  Specifically, the 
examinations reviewed: 
 
• Advertisements, seminar materials, and sales literature for any 
misrepresentations, exaggerations, or omissions of material information; 
 
• Customer transactions engendered by these seminars to evaluate the suitability 
of investment recommendations that were made; and 
 
• Supervisory systems, policies, and procedures used to detect and prevent 
violations of the securities laws for adequacy. 
 
We conducted 110 examinations between April 2006 and June 2007.  While each of our 
findings is described in greater detail in this report, in sum, we found that: 
 
• Sponsors of “free lunch” sales seminars offer attractive inducements to 
attend.  The seminars are commonly held at upscale hotels, restaurants, 
retirement communities and golf courses.  In addition to providing a free meal, 
the firms and individuals that conduct these seminars often use other incentives 
(e.g., door prizes, free books, and vacation deals) to encourage attendance. 
 
• Often, the target attendees are seniors.  Many of the “free lunch” sales 
seminars are designed to solicit seniors.  They are advertised with names like 
“Seniors Financial Survival Seminar” or “Senior Financial Safety Workshop,” 
and offer “free” advice by “experts” on how to attain a secure retirement, or offer 
financial planning or inheritance advice.  The advertisements used to solicit 
attendees often imply that there is an urgency to attend.  For example, invitations 
include phrases such as “limited seating available” or “call now to reserve a seat.” 
Some illustrative examples of advertisements used for sales seminars can be 
found in Appendix A to this report. 
 
                                                
 
3
      This report includes examination findings of the SEC’s staff, FINRA’s staff and the staff of the 
individual states regulatory authorities, which are not findings or conclusions of the Securities and 
Exchange Commission, FINRA or NASAA.  This report includes findings from examinations 
conducted by NASD and NYSE Regulation Inc, now FINRA. 
                  
 
3

• Seminars are designed to sell.  Many sales seminars were advertised as 
“educational,” “workshops,” and “nothing will be sold at this workshop,” and 
many advertisements did not mention any investment products.  Nonetheless, the 
seminars were intended to result in the attendees’ opening new accounts with the 
sponsoring firm and, ultimately, in the sales of investment products, if not at the 
seminar itself, then in follow-up contacts with the attendees.  To the extent that 
participants may attend a seminar in order to obtain educational insights and 
information, they should be aware that the primary goal of the sponsors of these 
“free lunch” seminars is to obtain new customers and sell investment products.  
Examiners found that the most commonly discussed products at the sales 
seminars were variable annuities, real estate investment trusts, equity indexed 
annuities, mutual funds, private placements of speculative securities (such as oil 
and gas interests) and reverse mortgages. 
 
• Some firms had particular compliance and supervisory controls that 
appeared to be effective.  And, during a small number of the examinations (5 
examination or 4% of those conducted), regulators found no problems or 
deficiencies.  During examinations, regulators identified specific compliance and 
supervisory practices that appeared to be effective in ensuring compliance with 
the securities laws and rules.  For example, one broker-dealer required its 
employees to forward all materials to its home office for a supervisory and 
compliance review prior to using the materials at sales seminars.  Another broker-
dealer utilized checklists to aid supervisors with the approval process for seminars 
and seminar materials.  More detailed examples of these practices are set forth in 
Appendix B to this report.  
 
• Half of the examinations found that firms used advertising and sales 
materials that may have been misleading or exaggerated or included 
seemingly unwarranted claims (in 63 of 110 examinations, or 57%).  Many 
broker-dealer firms did not submit their sales material to NASD (now 
FINRA) for review, as required by NASD advertising rules.  The most 
common types of apparently misleading statements appeared on mailers and 
advertisements for the sales seminars, and involved statements about the safety, 
liquidity or anticipated rates of return.  Statements included, for example: 
“Immediately add $100,000 to your net worth,” “How to receive a 13.3% return,” 
and “How $100K can pay 1 Million Dollars to Your Heirs.”  Additionally, some 
sales materials made comparisons between dissimilar investments or services, 
included representations about the expertise or credentials of the registered 
representative that may have been misleading or confusing, or involved 
testimonials that may have been misleading.   
 
• Individuals attending the sales seminars may not understand that the 
seminar is sponsored by an undisclosed company with a financial interest in 
product sales.  The mailers and advertisements for the sales seminars often 
focused on the individuals who would be conducting the seminar, and often 
included the name of the registered representative or investment adviser, a 
 
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photograph and information about his/her background as an expert in providing 
investment advice, and his/her history in the local community.  Individuals who 
attend the seminars or who are considering attending are not always provided with 
the name of the firm sponsoring the seminar, and may not be aware that product 
sponsors (e.g., mutual fund companies and insurance companies) may provide 
funding for the seminars with the expectation that investment professionals will 
sell their products.  In these situations, seminar attendees may not have known 
that the financial adviser speaking at the seminar was not unbiased in making 
product recommendations. 
 
• Many examinations found indications that firms had poorly supervised these 
sales seminars.  Examiners found indications of weak supervisory practices in 65 
of the 110 examinations (or 59% of the examinations conducted).  For example, a 
common finding was that firms had inadequate supervisory procedures or had not 
implemented their procedures with respect to sales seminars held by their 
employees.   
 
• Some examinations found indications that registered representatives or 
investment advisers holding the sales seminars had recommended 
investments that did not appear to be suitable for the individual customers.  
In 25 of the 110 examinations (or 23% of examinations conducted), examiners 
found indications that unsuitable recommendations to purchase investments were 
made at the sales seminars, or following the seminar when an attendee opened an 
account.  The investments appeared to be unsuitable in light of the customers’ 
investment objectives or time horizon – e.g., a risky investment was 
recommended to an investor with a “conservative” investment objective, or an 
illiquid investment was recommended to an investor with a short-term need for 
cash. 
 
• In some instances, the sales seminars may have involved fraud.  Examiners 
found indications of possible fraudulent practices in 14 examinations (or 13% of 
the examinations conducted), that involved potentially serious misrepresentations 
of risk and return, liquidation of accounts without the customer’s knowledge or 
consent, and sales of
 fictitious investments.   
 
As a result of the examinations, most firms have received deficiency letters or letters of 
caution that outlined apparent rule violations and deficiencies and requested that the firms 
examined take corrective actions (these letters were provided to 86 firms, or 78% of all 
examinations conducted).  In addition, some examinations (25 of the 110, or 23%) are 
under review for possible further investigation or action by a state, FINRA or SEC.
4
   
 
The results of these examinations lead regulators to conclude that financial services firms 
should take steps to supervise sales seminars more closely, and specifically take steps to 
                                                 
4
      Many examinations had multiple dispositions.  For example, a deficiency letter may have been 
       provided to the firm requesting corrective action, and findings from that exam may also have been  
     referred for possible disciplinary or enforcement action. 
 
5

review and approve all advertisements and sales materials for accuracy.  In addition, 
firms should redouble efforts to ensure that the investment recommendations they make 
to seniors are suitable in light of the particular customer’s investment objectives.  
 
Regulators have compiled a list of supervisory practices that have been identified during 
examinations and that appeared to be effective, which is included in Appendix B of this 
report.  This information may assist firms in considering their own supervisory practices 
with respect to sales seminars.  Regulators further urge financial services firms to take 
steps to assure that supervisory procedures with respect to sales seminars are being 
implemented effectively.
  Regulators participating in these examinations will continue to 
focus examination, enforcement and regulatory efforts on the use of sales seminars 
targeted to seniors.  
 
In addition, regulators conclude that, because seniors are targeted as attendees for sales 
seminars, ongoing investor education efforts for seniors should provide education with 
respect to “free lunch” sales seminars.  Specifically, senior investors should understand 
that these are sales seminars -- that is, they are intended to result in the sales of financial 
products, and they may be
 sponsored by an undisclosed company with a financial interest 
in product sales.  Investor education efforts should emphasize that, despite the claims of 
urgency that are sometimes made by sponsors of sales seminars, and in light of the 
possibility of misleading or exaggerated statements or claims about investment products 
or the expertise of the financial adviser, investors should take time to research the firm, 
the financial adviser as well as the product being offered before opening an account or 
making a purchase.  Regulators make a variety of tools available to investors to assist 
them in understanding investment products and investigating a broker or other financial 
professional before investing, and many of these tools are listed in Appendix C to this 
report.  
 
II. BACKGROUND: RISK ASSESSMENT AND SELECTION OF FIRMS 
FOR EXAMINATION 
 
As a threshold matter, regulators focused on geographic areas with high populations of 
seniors.  Thus, examinations were first initiated in Florida by the Florida Office of 
Financial Regulation, NASD and NYSE (now FINRA), and SEC staff.  The examinations 
were then expanded to include other states in geographic areas that had large 
concentrations of senior citizens.  Based on census data, some of the states with the 
highest senior populations were Florida, California and Texas, among others.  In addition, 
census information reflected a high concentration of retirees in the states of Arizona, 
North Carolina, Alabama and South Carolina.
5
  Regulators in each of these states and 
examiners from the NASD, the NYSE and the SEC commenced coordinated 
examinations during 2006 and 2007. 
 
To identify firms for examination, regulators collected publicly available information 
including advertisements, invitations and websites that sought to target seniors for “free 
                                                
 
5
      U.S. Census Bureau, Current Population Reports, 65+ in the United States (Washington, D.C.: 
U.S. Government Printing Office, 2005), 23-209. 
 
6

lunch” seminars.  Examiners then developed a risk assessment model to identify the firms 
that appeared to present the highest risk of possible violations.  R
egulators considered the 
following factors in conducting this risk assessment:  
 
• Whether the advertisements and/or sales literature appeared to target senior 
citizens; 
 
• Whether the advertisements and/or sales literature appeared to have 
exaggerated, misleading and/or fraudulent representations, including 
testimonials;   
 
• Whether the advertisements and/or sales literature discussed or referred to 
securities that appeared to be of high risk to the average senior citizen; 
 
• Whether the entities/individuals identified in the advertisements and/or sales 
literature were appropriately registered to sell the securities discussed or 
referenced in the advertisements and/or sales literature; 
 
• Whether the entities and/or individuals identified in the advertisements and/or 
sales literature had any prior disciplinary history and/or customer complaints 
within the last year; 
 
• Whether the advertisements and/or sales literature, when used by a broker-
dealer, were filed with and reviewed by NASD pursuant to NASD’s 
advertising rules; and 
 
• Whether the advertisements and/or sales literature offered any incentives to 
attend the seminars (e.g., prizes, trips, or books). 
 
The regulators then evaluated the risk assessment data and selected firms for 
examination.  Frequent communication among the regulators helped to ensure a 
consistent approach to examinations, and prevented any duplication in examinations.  
 
The NASD’s Department of Advertising Regulation was an integral part of the 
examination process.  For broker-dealer firms, all advertisements and seminar sales 
literature were reviewed by NASD personnel to determine if the literature was in 
compliance with NASD’s advertising rules.  NASD’s staff then provided each regulator 
conducting the examination with information about any areas of apparent non-
compliance. 
 
Each regulator conducted examinations.  Some examinations were conducted jointly by 
state regulators and the NYSE or the SEC.  Examinations included interviews with firm 
employees and reviews of records maintained by the firm.  In their examination process, 
state regulators attended some sales seminars to ascertain what was being said during 
seminar presentations.  Regulators followed their own protocols for examination process 
and disposition.  Upon completion, some examination findings were referred to the most 
 
7

appropriate regulatory authority to handle the matter based on the types of potential 
violations identified.  
 
Most of the firms examined were registered as broker-dealers, and many were also 
registered as investment advisers with a state or with the SEC.  Some firms were 
registered as investment advisers, but not as broker-dealers.  Employees of the firms 
examined were often licensed as registered representatives with NASD, and may also 
have been advisory representatives with the state, or advisers registered with the SEC.  A 
small number of firms were not required to be registered under state or federal securities 
laws, and were examined by state regulators.  The firms examined ranged in size and type 
-- from independent contractors at small firms to large firms with branch offices across 
the country -- although most were small local or regional firms.  Many examinations 
were conducted at branch offices. 
 
III. KEY SECURITIES LAWS AND REGULATIONS  
APPLICABLE TO SALES SEMINARS
6
 
Registration:  Sales seminars may be conducted by a registered representative, 
investment adviser or an unregistered person.  Absent any exception or exemption, any 
firm that sells securities (as defined by the Securities Exchange Act of 1934, e.g., stocks, 
bonds) must be registered as a broker-dealer.  In addition, in order to discuss securities at 
a seminar sponsored by a broker-dealer, the presenter must be a licensed registered 
representative (under NASD Rule IM-1031 and NYSE Rule 345
7
).  Investment advisers 
provide investment advice to purchase or sell securities for compensation and as part of a 
regular business.  Investment advisers also sponsor sales seminars, and they may be 
required to be registered either with a state or with the SEC.  Many sales seminars are 
designed to sell non-securities products (e.g., insurance).  Only firms selling or advising 
the purchase or sale of securities products are required to be registered. 
 
Sales Literature:  The materials used or distributed by broker-dealers at seminars are 
considered “sales literature” and are subject to the supervisory approval and record-
keeping requirements under NASD and NYSE rules.  In addition, these rules apply to any 
communications that are used to promote the seminars, such as advertisements in print, 
on the web or by radio or television broadcast.
8
  Under these rules, sales literature must 
be approved by a registered principal prior to the seminar; the firm must maintain all 
sales literature in a separate file for three years; and the file must include the name of the 
registered principal that approved the seminar and the materials distributed at the seminar 
                                                
 
6
            Individual states’ securities laws also apply. 
 
7
            NASD and NYSE rules are separately cited in this report, as a common FINRA rulebook has not 
              yet been developed. 
 
8
      Specifically, each advertisement, market letter, sales literature or other similar type of 
communication which is generally distributed or made available by a member firm to customers or 
to the public must be approved in advance by an allied member, supervisory analyst, or qualified 
person (under NYSE Rule 342(b)(1)). 
 
 
8

(under NASD Rule 2210(b) and NYSE Rule 472(d)).  The broker-dealer must also 
maintain information concerning the source of any illustrative data used in the seminar 
(under NASD Rule 2210(b)(2)(B)).  
 
Seminars are public appearances, as are radio or television interviews or other speaking 
activities (under NASD Rule 2210 and NYSE Rule 472(1)).  NASD and NYSE rules 
require that: “all member communications with the public shall be based on principles of 
fair dealing and good faith, must be fair and balanced, and must provide a sound basis for 
evaluating the facts in regard to any particular security or type of security, industry or 
service” (under NASD Rule 2210(d)(1)(A) and NYSE Rule 472(i)).  These standards also 
apply to registered representatives’ participation at seminars.   
 
Anti-Fraud Rules:  Federal and state securities laws and SRO rules prohibit making any 
untrue statement of a material fact, or omitting to state a material fact that is necessary to 
make the statements that are made not misleading (e.g., under Section 17(a) of the 
Securities Act of 1934, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 
206 of the Investment Advisers Act of 1940). 
 
Investment advisers (whether registered with the SEC or state or not) also have a 
fiduciary duty to provide full and fair disclosure of all material facts to their clients and 
their prospective clients.  All advertising materials and other materials distributed at a 
seminar by an adviser are subject to these restrictions, including any representations 
about the adviser, its business and investment advice, such as performance data, 
investment strategies, education, background and experience (under Section 206 of the 
Advisers Act).  
 
It is fraudulent for an SEC-registered adviser to distribute advertisements that contain or 
refer to testimonials or past specific recommendations that were profitable (under Rule 
206(4)-1 under the Advisers Act).  In addition, SEC-registered advisers cannot use 
advertisements that imply that a graph, chart, or formula will enable investors to make 
their own investment decisions without disclosing the limitations or difficulties of the 
approach (under Rule 206(4)-1 under the Advisers Act and various state securities 
statutes). Advisers may also not falsely promise to provide free services (Rule 206(4)-1 
under the Advisers Act). 
 
Broker-dealers may not make exaggerated or misleading endorsements of investments, 
and unwarranted predictions or projections of investment performance are also prohibited 
(under NASD Rules 2210(d)(1)(B), (d)(1)(d) and NYSE Rule 472(i)).  In addition, 
broker-dealer testimonials must also include certain information: (1) the fact that the 
testimonial may not be representative of the experience of other customers; (2) the fact 
that the testimonial is not indicative of future performance or success; and (3) if more 
than a nominal sum is paid, the fact that it is a paid testimonial (under NASD Rule 
2210(d)(2)(A) and NYSE Rule 472(j)(7)). 
 
To prohibit potentially misleading advertisements and to ensure that communications are 
fair and balanced, NASD rules require that broker-dealers provide certain sales literature 
 
9

to its Department of Advertising Regulation for review.  For example, advertisements and 
sales literature concerning mutual funds and variable annuities must be submitted to the 
FINRA for approval within 10 days of the time it is first used or published (under NASD 
Rule 2210(c)(2)(A)).  Firms may also voluntarily submit other material for FINRA 
review and must pre-file other advertisements in some cases. 
 
Duty to Recommend Securities that are Suitable:  A broker-dealer may only recommend 
a security to a customer that it has determined is suitable for that customer in light of that 
customer’s particular age, financial situation, risk tolerance, and investment objectives 
(e.g., under NASD Rule 2310 and IM 2310-2 and NYSE Rule 405).  Broker-dealers must 
obtain the customer’s name, tax identification number, address, telephone number, date 
of birth, employment status, annual income, net worth, and investment objectives for 
each retail customer account (under Exchange Act Rule 17a-3(a)(17)(i)(A)).  As a 
fiduciary, an adviser has an obligation to deal fairly with its clients and to act in their best 
interests (under Section 206 of the Advisers Act).  
    
Supervisory Requirements:  Broker-dealers must establish, maintain, and enforce written 
supervisory procedures to supervise the types of business in which they engage and to 
supervise the activities of registered representatives, registered principals, and other 
associated persons (under Section 15(b) of the Exchange Act and NASD Rule 3010(b) 
and NYSE Rule 342)).  Similarly, investment advisers must adopt and implement written 
policies and procedures reasonably designed to prevent violations of the Advisers Act by 
the adviser or any of its supervised persons (Section 206 of the Investment Advisers Act 
and Rule 206(4)-7(a) thereunder). 
 
IV.       EXAMINATION       FINDINGS       
 
• Sponsors of “free lunch” sales seminars often offer attractive inducements to 
attend.  
 
We found that sales seminars are commonly held at upscale hotels, restaurants, retirement 
homes, golf courses and other locations.  A few were held at the offices of the firm 
sponsoring the seminar.  Invitees were from the local community.  Generally, the 
seminars were free.  In some cases, in addition to providing a free meal, the firms and 
individuals that conducted these seminars used other incentives such as door prizes, free 
books (“A Free Tax Payer Awareness Guide”), free portfolio reviews and one even 
offered a $250 discount on a nursing home protection planning session.  To further 
encourage attendance, some advertisements offered seminar attendees eligibility to win 
prizes such as tote bags, gift certificates or even a 3 night/4 day cruise for two. 
 
• Often, the target attendees are seniors.   
   
We found that many of the seminars were designed to appeal specifically to seniors. 
Some seminars also targeted religious affinities or associated groups such as the military.  
Many sales seminars were advertised in local newspapers or attendees were solicited to 
 
10

attend via mass invitations sent through the mail or via email.  Many solicitations 
targeted seniors. Samples of advertisements can be found in Appendix A to this report. 
 
 The seminars had titles such as: “Senior Financial Survival Seminar,” “Senior Citizen 
Tax Specialist,” “Senior Financial Safety Workshop,” and “Senior Citizen Retirement 
and Asset Protection Education Workshop.”  Some communications explicitly stated that 
attendance was limited to those between, e.g., 60 and 85 years of age, or over 70 years of 
age.  In the advertisements and/or invitations, the seminar sponsors often claim to offer 
advice on how to attain a secure retirement, financial planning, inheritance advice, and 
even “nursing home asset protection.”  Often, the ads and mailers featured photographs 
of happy and attractive seniors – perhaps to suggest that an attendee could achieve 
financial security or prosperity by attending the seminar. 
 
Seminar sponsors appeared to target seniors, and to seek to limit attendance by the non-
target attendees.  Some ads and mailers were explicit in excluding attendance by advisers, 
attorneys, accountants, agents or brokers, or otherwise discouraged attendance by these 
professionals by charging them a costly attendance fee (as much as $1,000).   
 
The ads and mailers often implied urgency, and that time was of the essence.  
They said things like: “Act Now!” “If you are over 60, you cannot afford to miss 
this seminar” “Seating is Limited!” “Reservations Required” “This is a time-
sensitive offer!” “There is a financial storm brewing”  “This is a Must Attend!” or 
“Startling presentation reveals costly mistakes that can ruin your finances.”   
 
Some ads and mailers used tactics to scare seniors into thinking that they might not be 
using the right investment professional, or to question their current investments.  For 
example, they say, “If you’re retired, 
YOU’RE A TARGET and you cannot afford to 
miss this workshop!” “How to Protect your Nest Egg from The Retirement Vultures,” 
“Will you cause your family to split up and argue at your passing when your will or trust 
is read?  Would you like to know how to prevent the possible breakup of your family?” 
and “Seniors, did you know that costly mistakes can tarnish your golden years?”  These 
statements appear to be designed to scare vulnerable senior investors, and may help to 
open the door for seminar sponsors to sell unsuitable investments.  
 
• Seminars are designed to sell.  
 
While many sales seminars were advertised as “educational,” “workshops,” “educational 
dining seminar” and “nothing will be sold at this workshop,” and many advertisements 
did not mention any investment products, all of the seminars were intended to result in 
product sales.  They were intended ultimately to result in the attendees’ opening new 
accounts with the sponsoring firm, and the sale of securities and other financial products.   
To the extent that participants may attend the seminar in order to obtain educational 
insights and information, they should be aware that the primary goal of the sponsors of 
the “free lunch” seminars is to obtain new customers and sell financial products. 
 
 
11

Typically at a seminar, the seniors arrive at the restaurant or hotel and are shown to a 
private room, and to a seat.  At the outset, they are usually given a questionnaire or 
contact card to fill out with their name, address, telephone number, and interests in 
particular investments or financial goals and are asked to return the card to the host.  A 
slide show or power point presentation usually follows as drinks are served.  Examiners 
found that the most commonly discussed products at the sales seminars were variable 
annuities, equity indexed annuities, real estate investment trusts, mutual funds, private 
placements and reverse mortgages.  The food is usually not served until after the 
presentation is complete and the host has collected the contact information from the 
attendees.  To ensure the attendees stay until the presentation is over, the door prizes are 
given last.  The financial adviser speaking at the seminar also evaluates individual 
attendees’ level of interest in opening an account and/or purchasing products.
9
  
 
Following the seminar, seminar attendees can expect to receive additional solicitations 
from the firm to purchase investment products.  Attendees are generally contacted by the 
financial adviser by telephone at least one or more times, using the contact information 
that the attendee provided at the seminar, and are solicited to schedule a further meeting 
with the financial professional and/or to open an account and purchase securities or other 
products.  Typically, the attendee will also be added to the firm’s mailing list of potential 
customers, and will receive additional sales materials in the mail following the sales 
seminar.   
 
• Some firms had particular compliance and supervisory controls that 
appeared to be effective.  And, at a small number of firms (5 examinations, 
or 4% of the firms examined), regulators found no problems or deficiencies. 
 
Some examinations found that firms had specific compliance and supervisory practices 
that appeared to be effective in ensuring compliance with the securities laws and rules.  
These practices were in writing and were implemented.  Particularly effective practices 
were those that facilitated a supervisor’s advance review of the materials to be used in 
connection with sales seminars.   
 
For example, one broker-dealer required its employees to forward all materials to its 
home office for a supervisory and compliance review prior to using them at sales 
seminars.  Another broker-dealer utilized checklists to aid supervisors with the approval 
process for seminars and seminar materials.  Another firm used what it called “mystery 
shoppers” (who were current firm employees) to attend seminars randomly to identify 
potential disclosure and compliance weaknesses and report back to their supervisor.  
These, and additional examples of effective compliance and supervisory practices found 
during examinations can be found in Appendix B to this report. 
                                                
 
9
  At one firm, registered representatives kept a record of those who attended the seminars that 
included a notation of the attendees who made appointments to meet with the registered 
representatives after the seminar to discuss opening an account.  The record also referred to those 
attendees who did not schedule a follow-up appointment and apparently only attended the seminar 
for the free lunch as “clowns.” 
 
 
12

• Half of the examinations found that firms used advertising and sales 
materials that may have been misleading or exaggerated or included 
apparently unwarranted claims. 
  
The most common deficiency involved the use of potentially misleading advertising and 
sales literature in connection with the sales seminars.  Examiners found deficiencies in 63 
of the 110 examinations conducted (or 57% of the examinations conducted).  Most 
frequently, these potentially misleading statements appeared in mailers and 
advertisements for the sales seminars, and involved statements about the safety, liquidity 
or anticipated returns of products.  Additionally, some sales materials made comparisons 
between dissimilar investments or services, included representations about the expertise 
or credentials of the registered representative that appeared to be misleading or 
confusing, or involved testimonials that appeared to be misleading, or provided 
inaccurate or confusing information about the sponsoring firm.
10
  Examples are described 
below.   
 
⇒  Claims about Safety, Liquidity or Returns 
 
Some seminar sponsors used what appeared to be misleading or exaggerated promises to 
lure attendees to sales seminars.  For example, one advertisement for a sales seminar, 
called the “Senior Citizen's Retirement & Asset Protection Educational Seminar,” stated, 
“Learn how you can earn 2-3 times more interest than what banks currently offer...While 
keeping your money liquid!”  The following additional examples were found in various 
advertisements: 
 
“If you are between the ages of 65-85 join me for the most fascinating hour of 
your LIFE and I will show you how to immediately earn as much as $100,000, 
$200,000 or $300,000 . . . or more with the stroke of a pen,” and “How to 
guarantee your IRA will 
never run out, regardless of market fluctuations.” 
 
“Learn how to pass all of your assets on to your heirs while making sure 
the IRS gets only what you want them to have.” 
 
“Immediately add $100,000 to your net worth” 
 
“You’ll learn how to generate returns starting at 40% while your capital is 
held in an FDIC insured account.” 
 
 “How to receive a 13.3% return” 
 
                                                 
10
      Specifically, in 41 of the 110 examinations (or 37%), firms may have made false, misleading, 
       exaggerated or  unwarranted statements or claims; and in 29 examinations (or 26%), the firm did 
not appear to provide a sound basis for evaluating the statements that were made.  In addition, two 
firms appear to have made exaggerated or unwarranted claims, opinions, or forecasts related to the 
performance of securities, and an additional seven made comparisons in their advertisements 
and/or sales literature between investments or services, but did not disclose material differences 
between the investments or services.  
 
13

“How $100K can pay 1 Million Dollars to Your Heirs” 
 
“Get double digit growth potential with no risk of loss and no fees” 
 
“Your deposit plus all gains are insured 100% without limit.” 
 
Advertisements like these seemed designed to attract attention by using 
exaggerated and potentially misleading claims.  Examiners noted that seminar 
sponsors may be competing with each other for attendees, particularly in local 
areas with large populations of retirees, and may use hyperbolic and exaggerated 
ads in order to “stand out” from other seminar sponsors. 
 
⇒ Use of Testimonials 
                                    
Examiners found that some firms used testimonials from satisfied customers as part of 
their sales materials and presentations at sales seminars.  Examiners observed that firms 
sometimes used testimonials by seniors who attested to the quality of service or the 
investments offered by the firm in their marketing efforts to other seniors as prospective 
customers.   
 
As described above in this report, to protect investors from being misled by testimonials, 
broker-dealers must prominently disclose that the testimonial may not be representative 
of the experience of other customers, the testimonial may not be indicative of future 
performance or success, and if more than a nominal sum is paid, broker-dealers must 
disclose that it is a paid testimonial (under NASD Conduct Rule 2210(d)(2)(A) and 
NYSE Rule 472(i)(7)).  Investment advisers registered with the SEC may not use 
testimonials at all (under Rule 206(4)-1 under the Advisers Act). 
 
Examinations found that some firms did not fully comply with these requirements.  For 
example, one broker-dealer firm employed an older gentleman on a part-time basis to 
help with public relations.  He also held accounts with the firm.  His job was to attend 
seminars, state that he was a current customer of the firm, and stand up and give 
unsolicited testimonials as to the quality of the firm and its investment management.  He 
did not disclose that he was paid to provide the testimonial, that his experience may not 
be representative of other customers’ experience, and is not indicative of future 
performance or success (as required under SRO rules). 
  
The same firm invited its current customers to its sales seminars -- to receive a free meal 
-- and to provide impromptu testimonials to other attendees, e.g.: “I am happy with the 
account and the returns” and “It feels like being part of a family.”  These testimonials did 
not include disclosures that these customers’ experience may not be representative of 
other customers’ experience, and is not indicative of future performance or success (as 
required under SRO rules). 
 
 
 
 
14

Other testimonials identified in the examinations included: 
  
 “The [broker-dealer] puts client’s best interest first.” 
  
 “You can trust [the broker-dealer].” 
  
 “[I] like the approach to asset allocation which leads to broad diversification.” 
 
⇒ Representations about the Expertise of the Financial Adviser 
 
Often, the advertising for sales seminars has a personal appeal and focuses on the 
individual person who is presenting the seminar.  The advertisements frequently include a 
photograph of the seminar host and a description of that individual’s background as an 
expert in providing financial advice, as well as highlighting his/her involvement in the 
local community.  While examiners did not investigate the accuracy of all of the 
representations made about the background or expertise of the persons presenting the 
seminars, we found a few indications that information provided about the experience or 
the expertise of the presenter could be confusing or misleading to an attendee. 
For example, two individuals distributed sales literature during a seminar that included a 
“team profile” of themselves as hosts of the seminar.  The profile stated that one of the 
representatives used technical knowledge to develop an advanced mutual fund selection 
system combining various services and numerous data bases.  Examination staff 
discovered that an off-the-shelf software program was used to identify potential mutual 
fund investments.   
In other cases, individuals presenting seminars called themselves a “Certified Senior 
Advisor,” or “Elder Care Asset Protection Specialist” or “Chartered Retirement Planning 
Counselor” -- terms that suggest that the financial professional has some type of special 
credential or certification from a regulatory authority, when in fact there is no regulatory 
qualification or registration that recognizes such special expertise.
11
  The use of these 
titles may be confusing or misleading to the public. 
 
 
 
                                                 
11
      Regulators have warned that seniors may be confused by designations that imply some expertise 
 in providing services to seniors.  NASAA’s Investor Alert is available at 
        
http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4028.cfm.  The SEC has 
    provided information on professional designations, available at 
    http://www.sec.gov/investor/pubs/senior-profdes.htm.  Additionally, FINRA provides a list of  
    professional designations and describes them for informational purposes only – without 
recommending or endorsing any designation.  This information is available at 
    
http://apps.finra.org/DataDirectory/1/prodesignations.aspx.   
 
 
15

• Individuals attending the sales seminars may not understand that the 
seminar is sponsored by an undisclosed company with a financial interest in 
product sales.   
 
As described above, the mailers and advertisements for the sales seminars often focused 
on the individual person who conducted the seminar, and often included the name, 
photograph and background information of the individual registered representative or 
investment adviser that is scheduled to speak at the seminar.  Members of the public who 
attended the seminars or considered attending were not always provided with the name of 
the firm that was sponsoring the seminar, and may not be aware that product sponsors 
(e.g., mutual fund companies and insurance companies) provide funding for these 
seminars.  
 
Examiners found that advertising and sales material provided to prospective attendees at 
the seminars did not always disclose the name of the broker-dealer or the investment 
adviser firm that was sponsoring the seminar.  In fact, in 12 of the 110 examinations (or 
11% of the examinations conducted), firms used sales literature that provided the name of 
the individual who presented the seminar, but not the name of the firm where the 
individual worked.
12
  In 7 of these instances, the registered representatives used 
alternative names to do business and used these names in their advertising or sales 
literature, but did not also reflect the name of the broker-dealer firm that they worked for 
and that was offering the products or services.  Providing the name of the firm would 
allow a prospective attendee to better research the sponsoring firm in deciding whether to 
attend a sales seminar. 
 
In addition, seminar attendees and those who considered attending likely did not know 
that some seminars were paid for (in part or in whole) by product sponsors.  This 
information is not required to be disclosed in advertisements or mailers for sales 
seminars.  Mutual fund firms and insurance companies often reimburse broker-dealers or 
investment advisers for expenses when they hold sales seminars to solicit investors to 
purchase the mutual funds or insurance products.  In these examinations, examiners 
found that mutual funds, insurance companies and limited partnership sponsors 
frequently reimbursed broker-dealers or investment advisers for the costs of putting on 
the sales seminars (e.g., rental of space, the food and beverages provided, publications, 
advertising expenses and other free items provided to attendees).  Attendees likely did not 
know that the sponsors of the products discussed at the seminar had paid for the costs of 
the seminar.  In these situations, seminar attendees may not have known that the financial 
adviser speaking at the seminar was not unbiased in making product recommendations. 
 
                                                
 
12
      Broker-dealers are required to reflect the name of the firm offering products and services in any 
          advertisements or sales literature offering products or services.  The name of the member must be 
         prominently disclosed, and may also include a fictional name by which the member is commonly 
          recognized or which is required by any state or jurisdiction (under NASD Conduct Rule 
          2210(d)(2)(c)(i) and (iii)).   
 
 
16

While seminar attendees and those considering whether to attend likely were not aware 
that the seminar may have been paid for by a product sponsor, if a person attending a 
seminar purchases a security, they are required to receive relevant disclosure.  Broker-
dealers and investment advisers are required to disclose certain basic terms of the 
transaction to the customer or client, such as any payments they receive from third 
parties.
13
  Most frequently, these disclosures are contained in the prospectus for the 
mutual fund or other product, or in the investment adviser’s brochure (or in its Form 
ADV).
14
 
Examinations found that, when customers purchased a security as a result of a seminar, 
firms provided disclosure that they received compensation from a product sponsor in the 
prospectus, in a statement of additional information, or in a separate disclosure form.  
However, in 8 examinations, the disclosure that firms provided in the prospectus stated 
that the firm “may” receive compensation from product sponsors based on assets under 
management, when, in fact the firm had actually received and was receiving such 
payments and reimbursements for seminar costs.   
For example, examinations found that two broker-dealers had agreements with insurance 
companies under which the insurance companies paid the broker-dealers to sell their 
products (often called “revenue-sharing agreements”).  With respect to one of these 
broker-dealers, most of its overall yearly sales were of the variable annuity products of a 
small number of insurance companies.  It maintained compensation agreements with 
those insurance companies based on the sales that it made, and its customers’ variable 
annuity assets that were held in their accounts with the broker-dealer for a certain length 
of time.  The firm disclosed to investors that it “may” receive additional payments based 
on assets under management; however, it actually received over $1 million a year from 
these insurance companies, a significant amount of money for the firm based on its size.  
Examinations also identified an instance of double-billing -- a registered representative 
obtained reimbursement for the same sales seminar expenses from multiple mutual funds.  
The registered representative had submitted the same restaurant bill to multiple mutual 
fund companies and received full payment from each of them.  
 
   
                                                
 
13
           Broker-dealers must disclose the source and amount of any remuneration received or to be 
              received from third parties in connection with a transaction under Rule 10b-10 under the 
               Exchange Act.  Advisers must make similar disclosures, generally under Section 206 of the 
               Advisers Act, and in Form ADV Part II. 
 
14
      “[I]n the case of offerings registered under the Securities Act of 1933, the final prospectus 
delivered to the customer should generally set forth the information required by the proviso with 
respect to source and amount of remuneration. . . . In such situations the information specified in 
the proviso need not be separately set forth in the confirmation.” Exchange Act Release No. 13508 
(May 5, 1977) at n. 41. 
 
17

• Many broker-dealer firms did not submit sales materials to NASD for review 
as required. 
 
As described earlier in this report, to help ensure that communications by broker-dealers 
to the public are fair, balanced and not misleading, broker-dealers must provide certain 
sales material to NASD’s Department of Advertising Regulation for review (now, this 
function is performed by FINRA’s Department of Advertising Regulation).  
Advertisements and sales literature concerning mutual funds and variable annuities must 
be submitted for review within 10 business days of first use or publication (NASD Rule 
2210(c)(2)(A)).   
 
These examinations found that many firms did not submit materials to NASD as required.  
Specifically, NASD’s Advertising Regulation Department reviewed all the 
advertisements and sales literature collected in these examinations that were used by 
NASD member firms or their associated persons.  This review found that 31 broker-
dealer firms had failed to submit their advertising and sales literature to NASD as 
required.  If these materials had been submitted for review, it is likely that the firms 
would have been advised of potentially misleading or exaggerated statements or other 
concerns.  
 
• Many examinations found indications that firms had poorly supervised these 
sales seminars.    
 
One of the most frequent deficiencies cited during the examinations was inadequate 
supervision of employees who held sales seminars.  Examiners found weak supervision 
during 65 of the 110 (or 59%) examinations conducted.
 
 In the other 45 examinations, 
firms appeared to have implemented adequate supervisory controls over sales seminars. 
 
During the 65 examinations in which deficiencies were found, examiners identified 102 
instances in which firms did not appear to have supervised their employees in a manner 
that was consistent with supervisory requirements under the securities laws and SRO 
rules.  A frequently found problem was that firms had either not established supervisory 
procedures, or had established procedures but did not put systems in place to properly 
supervise their employees who held sales seminars consistent with those procedures (in 
44 of the 110 examinations, or 40%). 
 
Examinations found deficiencies in several areas.  These included: (1) a lack of written 
policies and procedures to address compensation received by the firm or its employees 
from issuers for selling the issuers’ products; (2) a lack of written policies and procedures 
relating to the sales literature used at sales seminars; (3) not reviewing or approving 
materials provided to potential investors at sales seminars; (4) not reviewing incoming 
and outgoing correspondence; and (5) not adequately supervising branch managers who 
themselves sold securities to customers, and held sales seminars.  Some examples follow. 
 
 
 
 
18

⇒ Lack of Policies and Procedures with Respect to Sales Seminars 
 
Examinations revealed many instances in which firms did not have specific policies and 
procedures with respect to sales seminars and/or communications with the public.  Some 
firms did not require that all materials used to advertise the sales seminars, or used at the 
sales seminars be reviewed and approved by a supervisor prior to use.  While it is 
impossible to determine what the outcome would have been had these firms had 
supervisory procedures in place, because these firms lacked supervisory procedures, it 
appears they did not provide adequate supervision over sales seminars.  This lack of 
supervision may have allowed potentially exaggerated claims and misrepresentations to 
be made (which are described elsewhere in this report), and to go undetected by the 
firm’s supervisors.    
 
For example, a firm did not have procedures to monitor effectively the activities of 
employees in its branch offices concerning their communications with the public. 
Although the firm’s managers knew that employees were conducting seminars, the firm 
did not have procedures that required that supervisors receive and approve in advance all 
of the sales literature that its employees distributed to the public.  Other examples follow: 
 
• A branch office did not maintain documentation evidencing approval for its 
registered representatives to hold sales seminars, or approval of the materials 
used.  Dozens of sales seminars were held. 
 
• A branch manager who maintained his own customer accounts (aka, a 
“producing” branch manager) conducted and approved his own seminars, and did 
not obtain review or approval by his supervisor. 
 
• A firm’s advertisement touted a 38% rate of return without any risk.  When 
examiners requested a copy of the firm’s approval of the advertisement, it could 
not be provided, suggesting a lack of supervision.  
 
In a number of instances, examiners found deficiencies relating to the supervisory review 
of correspondence.
15
  For example, at one broker-dealer firm, examiners found that 2 
letters from customers authorizing the transfer of securities and funds had been altered.  
Specifically, the account numbers had been changed without evidence of customer 
approval.  This could have been indicative of a possible attempt at theft.  A registered 
principal had reviewed the correspondence, but failed to do anything about the alteration 
or even request an explanation as to why it was altered.  
                                                 
15
    In addition to the general requirement to establish, maintain, and enforce written supervisory 
       procedures, broker-dealers must also establish procedures for the review and endorsement by a 
      registered principal, of incoming and outgoing written and electronic correspondence of its 
       registered representatives with the public (NASD Rule 3010(d)(1)).  These procedures must be in  
       writing and be designed to reasonably supervise each registered representative.  Firms’ processes 
must include methods of control over receipt and delivery of hard copy correspondence, 
communications received through facsimile transmissions and email (NYSE Rule 342.16 and 
342.17 also address the review and approval of communications with the public). 
 
 
19

⇒ Problems with Supervision of Employees’ “Outside Business Activities” 
 
At the outset of these examinations, regulators were concerned about the possibility that 
registered representatives or investment advisers may be holding sales seminars and 
selling products outside of their firms’ supervisory controls.  Thus, examiners paid 
particular attention to this issue.  
 
To help ensure that broker-dealer firms can provide adequate supervision for the 
protection of investors, SRO rules address the business activities that can be performed 
by firm employees “outside” of their employment with a broker-dealer.  These rules 
require that the employee provide notice to the firm, and the firm may also require 
approval of the employees’ outside business activities (NASD Rule 3030 and NYSE Rule 
346(b)).  
 
Investment advisers registered with the SEC must implement policies and procedures 
reasonably designed to prevent violations of the Advisers Act by any of the adviser’s 
supervised persons, including partners, officers, directors or employees of the investment 
adviser, or other person who provides investment advice on behalf of the investment 
adviser and is subject to the supervision and control of the investment adviser (under 
Rules 206(4)-7 and 202(a)(25) of the Advisers Act). 
 
Most of the broker-dealer firms examined had procedures in place that addressed the 
outside business activities of employees.  However, some firms had not actually 
implemented their own policies and procedures.  For example, one firm required all of its 
registered representatives to complete a questionnaire on an annual basis disclosing their 
outside business activities.  Its policies then required supervisory follow-up on certain 
outside business activities.  In practice, however, the firm did not conduct any follow-up 
after its employees provided information about their outside activities. 
 
Examinations also found a number of instances in which registered representatives and 
investment advisers hosted sales seminars and were ultimately selling investment 
products to the attendees of the seminars without their firms’ knowledge of the seminars 
themselves.  The registered representatives and investment advisers incorrectly 
considered these seminars to be “outside business activities,” and thus outside the 
supervision and compliance controls of the firms.  At one firm, for example, a registered 
representative, who was also a mortgage broker, hosted seminars on the subject of 
mortgages and then also sold securities products to the seminar attendees.  These 
seminars were not supervised by his firm.  
 
• 
Some examinations found indications that registered representatives or 
investment advisers holding the sales seminars had recommended 
investments that did not appear to be suitable for the individual 
customers/clients.   
 
As described in this report, sales seminars are often used to attract new customers and 
clients. When opening a new account, customers complete a new account form with a 
 
20

broker-dealer, or sign an investment advisory contract with an investment adviser.  As 
part of this process, a broker-dealer or investment advisory firm will obtain information 
about the customer/client and his/her investment objectives, risk tolerance, time horizon 
for investments, and overall investment needs.  This information assists the firm in 
ensuring that the recommendations made are suitable for the particular customer or client 
in light of their age, income, net worth, investment experience and risk tolerance.  The 
determination about whether a particular investment product is suitable is based on the 
particular investor and his or her individual investment objectives.   
 
During each examination, examiners reviewed account documents and other information 
maintained by the firm about a sample of customers to evaluate whether the investments 
that were recommended to customers appeared to be suitable.  Examiners’ primary focus 
was on accounts that were opened by attendees at the seminars, though examiners also 
reviewed other accounts when appropriate. 
 
In some examinations, examiners found indications that apparently unsuitable 
recommendations to purchase investments were made at the sales seminars, or following 
the seminars, when an attendee opened an account.  
Examiners had concerns about the 
suitability of products recommended in 25 of the 110 exams conducted, or in 23% of the 
examinations conducted.   
 
Examiners noted concern that some firms may not be adequately considering the 
individual needs and circumstances of each customer when determining whether a 
product was suitable for that customer.  For example, at one broker-dealer, examiners 
noted that the same investment objective was identified on almost every new account 
form in one branch.  Despite differences in the customers’ ages, net worth, income levels 
and investment experience, almost every new account form indicated that the customers 
had “growth” and “growth with income” as their investment objectives.  Almost every 
customer was invested in the same annuity product, and in the same three sub-accounts.  
These investments suggest that all customers were treated the same way when the firm 
was recommending investments, instead of in accordance with their unique needs in light 
of the variances in their ages, net worth, incomes, and investment experiences.  At 
another broker-dealer, examiners noted four senior investors whose stated incomes and 
net worth did not meet the requirements of the products they were sold. 
 
Examiners also found situations in which specific products and types of accounts were 
recommended to individual seniors, which may have been unsuitable or inappropriate for 
these particular customers.  We note that these products and accounts are suitable and 
appropriate for some investors, but are not suitable and appropriate for others in light of 
their investment objectives, the time horizon for investment, or the risk involved.  
Examples follow. 
 
⇒ Variable Annuities 
 
Variable annuities are generally considered long-term investment vehicles, and therefore, 
the investor’s time horizon for holding the investment and the investor’s liquidity needs 
 
21

are particularly relevant in determining whether it is a suitable investment.  Also relevant 
is whether the investor already holds a variable annuity investment, and whether the 
various features and costs make the product suitable in light of the investors’ existing 
holdings.  In particular, firms are required to ensure that a new variable annuity is 
suitable when recommending that an existing variable product be “exchanged” for a new 
one.  A replacement that doesn’t improve the customer’s existing position, and that is 
designed merely to generate new sales commissions, would be prohibited by NASD rules 
(Rule IM-2310.2).
16
 
At one firm, a review of account records for a sample of customers who had purchased a 
variable annuity based on the firm’s recommendations indicated that 66% of the 
customers had sold a variable annuity in order to purchase a new one, and that most of 
the customers had investment time horizons of 3-5 years or less (including some with 
horizons of 1-3 years).  Because of the significant surrender fees that are charged to 
customers who sell their variable annuities within a certain time-frame (usually within 
seven years of purchase), these products did not appear to be suitable for these customers.   
 
At another firm, a registered representative recommended that a customer invest 
approximately 80% of his stated net worth in variable annuities.  To finance the purchase 
of these variable annuities, the registered representative recommended that the customer 
sell his existing investments that were providing greater diversification, liquidity and 
annual income to his portfolio.  The customer’s previous portfolio holdings also included 
a variable annuity with a death benefit valued at over $30,000, income-producing 
investments such as investment grade corporate bonds, preferred stock, and money 
market funds.  Based on the customer’s other diversified portfolio holdings, and the 
customer’s investment objectives of growth and income, the recommendation to sell 
virtually all of the customer’s assets and purchase a variable annuity appeared to be 
unsuitable. 
 
⇒ Real Estate Investment Trusts  
 
At one firm, examiners found that registered representatives recommended that 
customers with a conservative investment objective and risk tolerance invest in a real 
estate investment trust, which was an illiquid and speculative investment.  The prospectus 
for the investment stated that “these investments entail a high degree of risk, are long 
term investments and are suitable if investors have no immediate need for liquidity or can 
bear the complete loss of the investment.”  Because of the lack of liquidity, high degree 
of risk and long term nature of the investment, these investments appeared to be 
unsuitable for customers with conservative investment objectives. 
 
                                                
 
16
      “NASD Regulation Reminds Members And Associated Persons That Sales of Variable Contracts 
Are  Subject to NASD Suitability Requirements” (Oct. 1989) NASD Notice to Members 96-86, 
available at: 
http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p004697.pdf   
              FINRA has proposed a new rule that would create requirements for recommendations, review by         
 a principal, and supervisory and training requirements tailored specifically to transactions in 
 deferred variable annuities (proposed Rule 2821). 
 
22

⇒ Low-rated Municipal Bonds 
 
 At one firm, a registered representative recommended that two senior investors with 
conservative investment objectives purchase non-rated and low-rated municipal bonds.  
One investor purchased multiple issues that subsequently went into default or that failed 
to pay interest.  The non-rated municipal bonds represented approximately 80% of her 
stated liquid net worth.  In another instance, a retired over 70 year old investor with a 
primary objective of income and a liquid net worth of between $25,000 and $49,999 had 
the majority of his liquid net worth invested in non-investment grade speculative bonds. 
These investments may not have been suitable for these customers. 
 
⇒ Collateralized Mortgage Obligations  
 
At one firm, several registered representatives had recommended that customers with 
conservative investment objectives purchase certain collateralized mortgage obligations 
(CMOs) with high degrees of risk (based on the particular tranches being sold).  In some 
cases, the customer accounts used high percentages of margin to purchase the securities.  
In addition, these CMO positions were being actively traded in the customer accounts, 
generating significant commissions for the registered representatives involved.  These 
transactions appeared to be unsuitable for the particular customers involved. 
 
⇒ Fee-Based Accounts 
 
Financial services firms offer different types of accounts to customers.  In particular, in 
recent years, fee-based accounts have become a popular account choice, and have been 
offered by broker-dealers and investment advisers.  In a fee-based account, a customer 
pays a fee based on the amount of assets in the account.  In a commission-based account, 
a customer pays a commission charge on each transaction.
17
  
 
Prior to opening a fee-based account for a customer, a broker-dealer must have 
reasonable grounds to believe that such an account is appropriate for that particular 
customer (under NASD NTM 03-68 and NYSE Rule 405A).  In addition, broker-dealers 
must disclose all material components of the fee-based program to the customer, 
including the fee schedule, the services provided and the fact that the program may cost 
more than paying for the services separately (under NASD NTM 03-68).  It may be 
inappropriate to place a customer in an account with a fee structure that reasonably can 
be expected to result in a greater cost than an alternative account offered by the firm 
(under NASD NTM 03-68, NYSE Rule 405A). 
 
 
                                                
 
17
      In a recent decision, the Court of Appeals for the District of Columbia Circuit vacated Rule 
               202(a)(11)-1 under the Advisers Act, which provided, among other things, that fee-based  
               brokerage accounts were not advisory accounts and were thus not subject to the Advisers Act.  
              
 Financial Planning Ass'n v. SEC, 2007 U.S. App. LEXIS 7356, 482 F.3d 481 (D.C. Cir. 
               2007).  
       
 
23

Examiners found indications that fee-based accounts may have been recommended to 
customers for whom they may not have been appropriate.  At one firm, a registered 
representative recommended a fee-based account to a senior investor.  The account 
charged a fee of 1.838% of assets under management.  This customer’s account had no 
transactions, and held three variable annuities, which had separate, total internal 
management costs of approximately 3% of the assets.  The customer was being charged 
two levels of fees on the same assets, once by the insurance company for management 
fees and again by the broker-dealer for the account fee.  This type of account may not 
have been appropriate for this particular customer, in light of her investment objectives 
and the portfolio holdings. 
 
⇒ Recommendations that Customers Use Equity from their Homes 
 
Regulators have urged caution about recommendations that investors, especially senior 
investors, obtain loans on their homes in order to finance the purchase of securities.  By 
doing so, customers may suffer investment losses that could result in their inability to pay 
off the loans on their homes, and ultimately, risk the loss of their homes altogether.
18
 
In one examination, an investment adviser had recommended that senior investors obtain 
mortgages or refinance their homes and liquidate their existing retirement accounts, in 
order to purchase equity-indexed universal life insurance (EIUL) policies.  This 
investment strategy speculated that the rate of return earned on the EIUL policy would 
exceed the cost of the new mortgage on the client’s home.  Dozens of senior investors 
followed this advice and effectively mortgaged 100% of the value of their homes.  This 
type of investment strategy may not have been suitable for individuals on a fixed income 
because if the market index failed to perform, the policy provided a low return, and the 
client remained responsible for the annual mortgage cost and insurance premiums 
associated with the EIUL policy.  In addition, the adviser’s seminar materials only 
provided a positive analysis of potential returns that could be earned by clients and did 
not appear to offer discussion of any risk factors in using this investment strategy.  This 
may have been an unsuitable high-risk investment strategy for these clients.   
  
• In some instances, the sales seminars may have involved fraud.  
 
Examiners found indications of possible fraudulent practices in 14 examinations (or 13% 
of the examinations conducted).  These involved potentially egregious misrepresentations 
of risk and return, liquidation of accounts without the customer’s knowledge or consent, 
and sales of
 fictitious investment notes.  Some instances of apparent fraud are described 
below.  In total, 25 of the 110 examinations (or 23%) are under review for possible 
further investigation or action by a state, FINRA or SEC.
19
  
                                                 
18
      See NASD Investor Alert, Betting the Ranch: Risking Your Home to Buy Securities (March 15, 
 2004), available at 
 
http://www.finra.org/InvestorInformation/InvestorAlerts/MarginandBorrowing/BettingtheRanchRi
 skingYourHometoBuySecurities/P005961; NASD Notice to Members 04-89, available at 
 
http://www.finra.org/RulesRegulation/NoticestoMembers/2004NoticestoMembers/P012715. 
 
19
      Many examinations had multiple dispositions.  For example, a deficiency letter may have been 
 
24

It is important to note that the types of potentially fraudulent conduct identified in these 
examinations are not limited to sales seminars; rather, the types of potential frauds 
described below are similar to the types of fraud perpetuated against seniors and other 
types of investors through means other than sales seminars.  Indeed, securities regulators 
have brought numerous enforcement actions involving these types of frauds.
20
  
 
⇒ Possible Misrepresentations about Risk and Expected Returns 
 
Several examinations uncovered instances where registered representatives or investment 
advisers may have overstated the potential benefits of a product or failed to disclose 
important risks for investors.  In one instance, for example, the firm’s seminar 
advertisement indicated that customers could earn up to a 38% rate of return without any 
risk, and incorrectly implied that fixed annuities were guaranteed by the government. 
 
⇒ Liquidating Accounts Without Investor Knowledge or Consent 
 
In another examination, examiners found that an investment adviser had liquidated 
clients’ investments and used the proceeds to purchase potentially unsuitable investments 
apparently without the client’s knowledge or consent.  The investment adviser conducted 
seniors-only seminars at hotels, offering retirees free breakfast and financial advice.  He 
used marketing materials that claimed to teach seniors how to eliminate taxes on IRA 
accounts, reduce or eliminate taxes on social security income, and increase yields on 
investments from 20% to 300%.  After the seminars, the investment adviser scheduled 
one-on-one meetings with interested individuals on the pretext of preparing a financial 
plan for them.  During these meetings, the investment adviser may have misled seniors 
into signing several blank authorization forms, claiming that he needed the forms to 
obtain additional financial information.  Instead, the financial plans appear not to have 
                                                                                                                                                 
       provided to the firm requesting corrective action, and findings from that exam may also have been  
     referred for possible disciplinary or enforcement action. 
 
20
  See, e.g., SEC v. C. Wesley Rhodes, Jr., et al., SEC Lit. Rel. No. 20144 (June 5, 2007) (defendants 
allegedly defrauded seniors of $38 million by misrepresenting stock and bond purchases); 
SEC v. 
One Wall Street, Inc, et al, SEC Lit. Rel. No. 20123 (May 22, 2007) (defendants allegedly 
defrauded seniors of at least $1.6 million through false and misleading statements regarding 
investment risks);
 SEC v. Empire Development Group, et al., SEC Lit. Rel. No. 20122 (May 18, 
2007) (defendants allegedly defrauded unsuspecting senior investors with limited means of nearly 
$2 million through the sale of unregistered securities in bogus real estate development companies); 
Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading 
Documents and Inadequate Disclosure in Retirement Seminars, Meetings for BellSouth 
Employees, FINRA News Release (June 6, 2007), available at 
http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P019240; NASD Investor 
Alert Warns Workers About Early Retirement Investment Pitches, FINRA News Release (Sept. 14, 
2006), available at 
http://www.finra.org/PressRoom/NewsReleases/2006NewsReleases/P017386; 
Kenneth Edward Stephens, Decision 06-216, 2006 WL 3900166 (N.Y.S.E. Hearing Board 
December 13, 2006) (defendant allegedly defrauded seniors of over $1.3 million through 
unauthorized trading); David A. Noyes & Co., Inc., Decision 05-98, 2005 WL 3439785 (N.Y.S.E. 
Hearing Panel November 9, 2005) (defendant allegedly made unsuitable sales of variable annuities 
to unsuspecting seniors resulting in a loss of approximately $375,000). 
 
 
25

been created, and it appears that the investment adviser later completed the forms in order 
to liquidate the clients’ existing portfolios and purchase equity-indexed annuities, without 
the knowledge, authorization, or consent of each of the clients.  
 
⇒ Possible Fraud in the Sale of Oil and Gas Partnerships 
 
At one firm, examiners discovered that the broker-dealer was involved in an apparent 
scheme that targeted elderly investors by selling unsuitable, unregistered oil and gas 
partnerships.  The partnerships were sold through sales seminars.  As part of this scheme, 
it appears that investors’ funds may have been misappropriated.  It also appears that the 
broker-dealer may have made misrepresentations regarding the risks involved with these 
partnerships, stating that they were safe investments that would generate an income of 
10-12%, with minimal risk.  It appears that approximately $10 million was raised from 
dozens of elderly retired investors.  This registered representative may have made 
material misrepresentations and omissions to investors concerning the value, nature 
and/or disposition of their purported investments by reflecting the market value of these 
partnerships as the original principal invested.  The market value was not ascertainable 
because a ready market did not exist for such securities. 
 
⇒ Sales of Fictitious “Notes” 
 
At another firm, examiners found indications that a registered representative, who 
conducted business out of a retirement community, may have sold a non-existent 
investment to a senior investor for approximately $10,000.  The investor was told that her 
money would be loaned to real estate developers, when the money may have been used 
for personal expenses of the registered representative, mostly to repay trading losses he 
had incurred years prior, as well as interest on those losses. 
 
V.        CONCLUSION         
 
The results of these examinations lead regulators to conclude that financial services firms 
should take steps to supervise sales seminars more closely, and specifically take steps to 
review and approve all advertisements and sales materials for accuracy and to ensure that 
they do not contain exaggerated or misleading claims.  In addition, firms should redouble 
efforts to ensure that the investment recommendations they make to seniors are suitable 
in light of the particular customer’s investment objectives.  With the growing senior 
demographic, firms might consider specific training for their registered representatives 
and investment advisers regarding sales to senior investors. 
 
Regulators have compiled a list of supervisory practices that have been identified during 
examinations and that appeared to be effective, which is included in Appendix B of this 
report.  This information may assist firms in considering their own supervisory practices 
with respect to sales seminars.  Regulators further urge financial services firms to take 
steps to assure that supervisory procedures with respect to sales seminars are being 
implemented effectively.  
 
26

Regulators participating in these examinations will continue to focus examination, 
enforcement and regulatory efforts on the use of sales seminars targeted to seniors.  
 
In addition, regulators conclude that, because seniors are targeted as attendees for sales 
seminars, ongoing investor education efforts for seniors should provide education with 
respect to “free lunch” sales seminars.  Specifically, senior investors should understand 
that these are sales seminars -- that is, they are intended to result in the sales of financial 
products, and they may be
 sponsored by an undisclosed company with a financial interest 
in product sales.  
Investor education efforts should emphasize that, despite the claims of 
urgency that are sometimes made by sponsors of sales seminars, and in light of the 
possibility of misleading or exaggerated statements or claims about investment products 
or the expertise of the financial adviser, investors should take time to research the firm, 
the financial adviser as well as the product being offered before opening an account or 
making a purchase.  Regulators make a variety of tools available to investors to assist 
them in understanding investment products and investigating a broker or other financial 
professional before investing, and many of these tools are listed in Appendix C to this 
report.  
 
### 
 
 
 
 
 
27

APPENDIX A 
 
SAMPLE ADVERTISEMENTS 
 
 
This appendix contains a sample of advertisements (many of which appeared in local 
newspapers and mass-mailed invitations) soliciting attendance at sales seminars.  They 
are included as illustrative examples of the types of advertisements commonly used.  
Including them in this report does not indicate that they contain either accurate or 
inaccurate statements.  The names of the sponsors, addresses, telephone numbers and 
other identifying information have been redacted. 
 
 
 
 
28

 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
29

 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
30

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
31

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
33

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
34

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
35

 
 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
36

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
37

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
38

 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
39

 
 
 This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
40

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
41

 
 
 
This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 
of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 
and other identifying information have been redacted.
 
42

APPENDIX B
 
EFFECTIVE COMPLIANCE and SUPERVISORY PRACTICES 
 
During examinations of securities firms that provided “free lunch” sales seminars and in 
other examinations, examiners took note of several supervisory and compliance practices 
that appeared to be effective in ensuring adequate supervisory oversight and compliance 
with the securities laws with respect to sales seminars.  These practices are described 
below.  While these practices are not specifically mandated by the securities laws, 
individually or in combination they may be helpful to consider as securities firms are 
reviewing their supervisory and compliance practices in these areas. 
 
Supervision of Seminars and Advertising  
 
Regulators noted the following practices that were used in supervising individual 
registered representatives/investment advisers who held sales seminars and for reviewing 
and approving advertising materials for the seminars: 
 
™ The process for reviewing and approving proposed seminars and the advertising 
and other materials for the seminars was centralized, and included a dedicated 
compliance person with knowledge of the securities laws and rules with respect to 
advertising materials.  The firm’s policies and procedures clearly set forth the 
process for proposing seminars and advertising materials, and they were made 
known to all firm employees.  Supervisory reviews of advertising and sales 
materials generally identified disclosure mistakes and potential problem areas that 
were corrected prior to the time the advertising materials were to be used.   
 
™ Policies and procedures for submitting proposals for sales seminars included 
specific timeframes for supervisory review and approval.  For example, the 
approval and review process for seminar and advertising material required 
submissions of all materials three to four weeks prior to the seminar date.  This 
allowed adequate time for supervisors to review and correct disclosure issues and 
any other issues identified prior to the seminar.   
 
™ All advertising material was forwarded to the home office for review and 
approval prior to use.  This firm required information on seminar guest speakers 
to be forwarded and approved as well. 
 
™  One firm had two levels of supervisory approval for seminars and all sales 
materials and advertisements to be used at those seminars.  The branch manager 
review was the first level of approval.  The materials were then sent to the main 
office to be reviewed and approved by the compliance department.  
 
™ Written guidance was provided to all individuals who may be involved in sales 
seminars – the registered representatives who conduct sales seminars, the branch 
office manager and other supervisors who review and approve the seminars and 
 
43

sales materials as well as any compliance staff who may also review the sales 
seminars and materials prior to use.  The guidance provided clear explanations of 
what was permissible and what was not permissible, both in terms of compliance 
with the securities laws, and compliance with the firm’s own policies. 
 
™ Written checklists were used to aid firm employees in reviewing and approving 
sales seminar advertisements and sales literature to ensure that the materials used 
complied with regulatory requirements and the firm’s policies. 
 
™ One firm’s procedures required that supervisors or compliance staff make written 
edits to proposed sales seminar materials or advertising, and required that this 
marked-up draft be provided along with a final copy of the materials (showing 
that the changes had been made) to the reviewing official for the permanent file.  
 
™ Standardized, pre-approved materials and advertisements were used for sales 
seminars.  The firm’s procedures required that all marketing materials be created 
at a central level; individual registered representatives were not involved in 
creating their own seminar materials or advertisements.  Registered 
representatives also used a standard outline for seminars.  
 
™ Materials for sales seminars were maintained in a centralized location. A 
complete package of seminar and advertising materials were filed and maintained 
in one place, including a copy of the request to host the seminar with indications 
of approval by the branch office manager and any other authorized approving 
official.  The file included the title of the seminar, date, location, speaker, any 
guest speakers, the company they represent, the date the approval was given and 
the list of people who were invited to attend the seminar.  The file also contained 
a list of attendees, whether they were a client or prospect, a photocopy of the 
actual seminar ad that ran in the newspaper, the approved marketing pieces that 
were distributed at the seminar, approved copies of the slide presentation and any 
other information given to attendees. 
 
™ Branch managers were expected to attend a percentage of the sales seminars 
presented by the sales people they supervised.  
 
™ “Mystery shoppers” (who were firm employees) were utilized on a random basis 
to attend sales seminars and to identify potential disclosure and compliance 
weaknesses, and report any issues back to the direct supervisors of the seminar 
hosts. 
 
™ All registered representatives were required to certify to their branch manager 
each month that they had provided all advertisements, sales literature, and 
correspondence items used during the month.  
 
 
 
 
44

General Supervisory Practices 
 
™ Procedures explicitly addressed the review and monitoring of communications 
with clients and prospective clients.  For example, monitoring systems were in 
place to effectively detect problematic communications by registered 
representatives in e-mail communications.  
 
™ The supervising principal actively reviewed correspondence, made frequent   
inquiries and provided feedback to the employed representative.  This 
involvement appeared to enhance the firm’s ability to identify and prevent any 
sales practice issues that may exist, and also provided supervised persons with 
individual training and guidance through active supervisory feedback on their 
communications. 
 
™ Annual training programs provided thorough and clear information about 
compliant and non-compliant practices.  Training did not simply recite rule 
requirements, but included examples that were relevant to the nature of the work 
performed by the employees being trained.   
 
 
 
 
 
 
 
 
45

APPENDIX C 
 
RESOURCES FOR SENIORS 
 
o The SEC provides important information for senior investors including 
explanations of different products, asset allocation and risk.  You can also get 
information on affinity fraud, “senior specialists” and investment advisers and 
what to look for to identify and steer clear of potential frauds.    
http://www.sec.gov/investor/seniors.shtml  
 
o FINRA also provides important information for senior investors.  Its website  has 
such items as Broker Check – that gives you the ability to look up the history of 
your investment professional to see if they have prior complaints or problems: 
http://www.finra.org/InvestorInformation/InvestorProtection/ChecktheBackgroun
dofYourInvestmentProfessional/index.htm
FINRA’s website also has tools and resources to protect senior investors and help 
them make informed investment decisions, including “Investor Alerts” that 
provide timely information on steering clear of investment scams and problems 
instead of just dealing with their aftermath.  Subjects of recent alerts include 
“Look Before You Leave:  Don't Be Misled by Early Retirement Investment 
Pitches That Promise Too Much,” Annuities and Senior Citizens: Senior Citizens 
should be Aware of Deceptive Sales Practices when Purchasing Annuities,” and 
“Seniors Beware: What you should know About Life Settlements.” 
http://www.finra.org/InvestorInformation/InvestorAlerts/index.htm
o The North American Securities Administrators Association (NASAA) also has 
helpful information available for seniors on its website: 
http://www.nasaa.org/Investor_Education/Senior_Investor_Resource_Center/  
Resources include: a quick checklist of questions to ask before you invest, 10 tips 
to protect your nest egg and guidance on where to turn for help.  
 
o Regulators have warned that seniors may be confused by designations that imply 
some expertise in helping seniors.  Information regarding professional 
designations is available through NASAA’s Investor Alert is at 
www.nasaa.org, 
the SEC’s information on professional designations at 
http://www.sec.gov/investor/pubs/senior-profdes.htm and NASD’s professional 
designation database found at 
http://apps.finra.org/DataDirectory/1/prodesignations.aspx. 
 
 
46

PROTECTING SENIOR INVESTORS: 
REPORT OF EXAMINATIONS OF SECURITIES FIRMS  

PROVIDING “FREE LUNCH” SALES SEMINARS 
 
 
 
 
 

 
 

BY THE  
 

 OFFICE OF COMPLIANCE INSPECTIONS AND EXAMINATIONS 
SECURITIES AND EXCHANGE COMMISSION 

 
NORTH AMERICAN SECURITIES ADMINISTRATORS 

ASSOCIATION 
 

FINANCIAL INDUSTRY REGULATORY AUTHORITY  
 
 
 
 
 
 
 
 

SEPTEMBER 2007 
 
 
 
 
 
 



I. INTRODUCTION AND SUMMARY  
 
With the aging of the baby boom generation, a growing number of our nation’s investors 
are at or near retirement age.  Indeed, data presented at the first “Seniors Summit” held by 
the Securities and Exchange Commission (SEC) in July 2006 indicated that 75% of the 
nation’s consumer financial assets, valued at $16 trillion, are held by households headed 
by someone who is 50 or older.  Within the next 20 years, 75 million people will have 
celebrated their 60th birthday.  Because these “senior investors” are a growing segment of 
investors, financial services firms are increasingly focusing their marketing and sales of 
investment products towards the senior investor or those investors nearing retirement age.  
Within this broader context, securities regulators are concerned about the possibility of 
unscrupulous and abusive sales practices and investment frauds targeted towards senior 
investors.  In fact, some data indicates that although individuals aged 60 or older make up 
15% of the U.S. population, they account for 30% of fraud victims.1

 
In response to this concern, in May 2006, the SEC and the North American Securities 
Administrators Association (NASAA) announced a coordinated national initiative 
designed to protect seniors from investment fraud and sales of unsuitable securities.2  
Working together with the NASD and the NYSE Member Regulation Inc. (now 
consolidated as the Financial Industry Regulatory Authority, or FINRA), the SEC and 
NASAA initiative includes three components: active investor education and outreach to 
seniors and those nearing retirement age; targeted examinations to detect abusive sales 
tactics aimed at seniors; and aggressive enforcement of securities laws in cases of fraud 
against seniors.  This joint and collaborative initiative by securities regulators is designed 
to build on the existing efforts that each regulator had underway, toward a shared mission 
to protect senior investors. This initiative is active and ongoing. 
 
As part of this effort to protect senior investors, regulators initiated a series of 
coordinated on-site examinations of broker-dealers, investment advisers and other 
financial services firms that offer so-called “free lunch” sales seminars.  These seminars 
are widely offered by financial services firms seeking to sell financial products, and they 
often include a free meal for attendees.  Sales seminars are often advertised in local 
newspapers, through mass-mailed invitations, mass-email, and on websites.  While 
specific data is not available regarding the actual number of sales seminars being 
conducted, regulators believe that the number of sales seminars has increased in recent 
years, as financial services firms are increasingly seeking to provide advice to seniors and 
those approaching retirement. 
 

                                                 
1    “NASAA Survey Shows Senior Investment Fraud Accounts for Nearly Half of all Complaints 

Received  by State Securities Regulators,” (July 17, 2006), available at 
  http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4998.cfm. 
 
2      “Securities and Exchange Commission and North American Securities Administrators Association 
 Launch Program to Protect Senior Investors,” (May 8, 2006), joint SEC and NASAA press 
 release available at http://www.sec.gov/news/press/2006/2006-65.htm. 

 

 2

http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4998.cfm
http://www.sec.gov/news/press/2006/2006-65.htm


Examinations were targeted in areas of the country that have large populations of retirees.  
Examinations were conducted in Florida, California, Texas, Arizona, North Carolina, 
Alabama and South Carolina by state securities regulators in those states, NASD and the 
NYSE Member Regulation Inc. (now FINRA) and the SEC.  This report summarizes the 
results of these examinations and was prepared by the SEC’s Office of Compliance 
Inspections and Examinations, NASAA and FINRA (collectively, referred to in this 
Report as regulators or examiners).3 

 
The purpose of the examinations was to review firms that offer sales seminars targeted to 
seniors and retirees for compliance with securities laws and rules (federal, state and self- 
regulatory organization (SRO) rules) designed to protect investors.  Specifically, the 
examinations reviewed: 
 

• Advertisements, seminar materials, and sales literature for any 
misrepresentations, exaggerations, or omissions of material information; 

 
• Customer transactions engendered by these seminars to evaluate the suitability 

of investment recommendations that were made; and 
 

• Supervisory systems, policies, and procedures used to detect and prevent 
violations of the securities laws for adequacy. 

 
We conducted 110 examinations between April 2006 and June 2007.  While each of our 
findings is described in greater detail in this report, in sum, we found that: 
 

• Sponsors of “free lunch” sales seminars offer attractive inducements to 
attend.  The seminars are commonly held at upscale hotels, restaurants, 
retirement communities and golf courses.  In addition to providing a free meal, 
the firms and individuals that conduct these seminars often use other incentives 
(e.g., door prizes, free books, and vacation deals) to encourage attendance. 

 
• Often, the target attendees are seniors.  Many of the “free lunch” sales 

seminars are designed to solicit seniors.  They are advertised with names like 
“Seniors Financial Survival Seminar” or “Senior Financial Safety Workshop,” 
and offer “free” advice by “experts” on how to attain a secure retirement, or offer 
financial planning or inheritance advice.  The advertisements used to solicit 
attendees often imply that there is an urgency to attend.  For example, invitations 
include phrases such as “limited seating available” or “call now to reserve a seat.” 
Some illustrative examples of advertisements used for sales seminars can be 
found in Appendix A to this report. 

 

                                                 
3      This report includes examination findings of the SEC’s staff, FINRA’s staff and the staff of the 

individual states regulatory authorities, which are not findings or conclusions of the Securities and 
Exchange Commission, FINRA or NASAA.  This report includes findings from examinations 
conducted by NASD and NYSE Regulation Inc, now FINRA. 

                  

 3



• Seminars are designed to sell.  Many sales seminars were advertised as 
“educational,” “workshops,” and “nothing will be sold at this workshop,” and 
many advertisements did not mention any investment products.  Nonetheless, the 
seminars were intended to result in the attendees’ opening new accounts with the 
sponsoring firm and, ultimately, in the sales of investment products, if not at the 
seminar itself, then in follow-up contacts with the attendees.  To the extent that 
participants may attend a seminar in order to obtain educational insights and 
information, they should be aware that the primary goal of the sponsors of these 
“free lunch” seminars is to obtain new customers and sell investment products.  
Examiners found that the most commonly discussed products at the sales 
seminars were variable annuities, real estate investment trusts, equity indexed 
annuities, mutual funds, private placements of speculative securities (such as oil 
and gas interests) and reverse mortgages. 

 
• Some firms had particular compliance and supervisory controls that 

appeared to be effective.  And, during a small number of the examinations (5 
examination or 4% of those conducted), regulators found no problems or 
deficiencies.  During examinations, regulators identified specific compliance and 
supervisory practices that appeared to be effective in ensuring compliance with 
the securities laws and rules.  For example, one broker-dealer required its 
employees to forward all materials to its home office for a supervisory and 
compliance review prior to using the materials at sales seminars.  Another broker-
dealer utilized checklists to aid supervisors with the approval process for seminars 
and seminar materials.  More detailed examples of these practices are set forth in 
Appendix B to this report.  

 
• Half of the examinations found that firms used advertising and sales 

materials that may have been misleading or exaggerated or included 
seemingly unwarranted claims (in 63 of 110 examinations, or 57%).  Many 
broker-dealer firms did not submit their sales material to NASD (now 
FINRA) for review, as required by NASD advertising rules.  The most 
common types of apparently misleading statements appeared on mailers and 
advertisements for the sales seminars, and involved statements about the safety, 
liquidity or anticipated rates of return.  Statements included, for example: 
“Immediately add $100,000 to your net worth,” “How to receive a 13.3% return,” 
and “How $100K can pay 1 Million Dollars to Your Heirs.”  Additionally, some 
sales materials made comparisons between dissimilar investments or services, 
included representations about the expertise or credentials of the registered 
representative that may have been misleading or confusing, or involved 
testimonials that may have been misleading.   

 
• Individuals attending the sales seminars may not understand that the 

seminar is sponsored by an undisclosed company with a financial interest in 
product sales.  The mailers and advertisements for the sales seminars often 
focused on the individuals who would be conducting the seminar, and often 
included the name of the registered representative or investment adviser, a 

 4



photograph and information about his/her background as an expert in providing 
investment advice, and his/her history in the local community.  Individuals who 
attend the seminars or who are considering attending are not always provided with 
the name of the firm sponsoring the seminar, and may not be aware that product 
sponsors (e.g., mutual fund companies and insurance companies) may provide 
funding for the seminars with the expectation that investment professionals will 
sell their products.  In these situations, seminar attendees may not have known 
that the financial adviser speaking at the seminar was not unbiased in making 
product recommendations. 

 
• Many examinations found indications that firms had poorly supervised these 

sales seminars.  Examiners found indications of weak supervisory practices in 65 
of the 110 examinations (or 59% of the examinations conducted).  For example, a 
common finding was that firms had inadequate supervisory procedures or had not 
implemented their procedures with respect to sales seminars held by their 
employees.   

 
• Some examinations found indications that registered representatives or 

investment advisers holding the sales seminars had recommended 
investments that did not appear to be suitable for the individual customers.  
In 25 of the 110 examinations (or 23% of examinations conducted), examiners 
found indications that unsuitable recommendations to purchase investments were 
made at the sales seminars, or following the seminar when an attendee opened an 
account.  The investments appeared to be unsuitable in light of the customers’ 
investment objectives or time horizon – e.g., a risky investment was 
recommended to an investor with a “conservative” investment objective, or an 
illiquid investment was recommended to an investor with a short-term need for 
cash. 

 
• In some instances, the sales seminars may have involved fraud.  Examiners 

found indications of possible fraudulent practices in 14 examinations (or 13% of 
the examinations conducted), that involved potentially serious misrepresentations 
of risk and return, liquidation of accounts without the customer’s knowledge or 
consent, and sales of fictitious investments.   

 
As a result of the examinations, most firms have received deficiency letters or letters of 
caution that outlined apparent rule violations and deficiencies and requested that the firms 
examined take corrective actions (these letters were provided to 86 firms, or 78% of all 
examinations conducted).  In addition, some examinations (25 of the 110, or 23%) are 
under review for possible further investigation or action by a state, FINRA or SEC.4   
 
The results of these examinations lead regulators to conclude that financial services firms 
should take steps to supervise sales seminars more closely, and specifically take steps to 
                                                 
4      Many examinations had multiple dispositions.  For example, a deficiency letter may have been 
       provided to the firm requesting corrective action, and findings from that exam may also have been  
     referred for possible disciplinary or enforcement action. 

 5



review and approve all advertisements and sales materials for accuracy.  In addition, 
firms should redouble efforts to ensure that the investment recommendations they make 
to seniors are suitable in light of the particular customer’s investment objectives.  
 
Regulators have compiled a list of supervisory practices that have been identified during 
examinations and that appeared to be effective, which is included in Appendix B of this 
report.  This information may assist firms in considering their own supervisory practices 
with respect to sales seminars.  Regulators further urge financial services firms to take 
steps to assure that supervisory procedures with respect to sales seminars are being 
implemented effectively.  Regulators participating in these examinations will continue to 
focus examination, enforcement and regulatory efforts on the use of sales seminars 
targeted to seniors.  
 
In addition, regulators conclude that, because seniors are targeted as attendees for sales 
seminars, ongoing investor education efforts for seniors should provide education with 
respect to “free lunch” sales seminars.  Specifically, senior investors should understand 
that these are sales seminars -- that is, they are intended to result in the sales of financial 
products, and they may be sponsored by an undisclosed company with a financial interest 
in product sales.  Investor education efforts should emphasize that, despite the claims of 
urgency that are sometimes made by sponsors of sales seminars, and in light of the 
possibility of misleading or exaggerated statements or claims about investment products 
or the expertise of the financial adviser, investors should take time to research the firm, 
the financial adviser as well as the product being offered before opening an account or 
making a purchase.  Regulators make a variety of tools available to investors to assist 
them in understanding investment products and investigating a broker or other financial 
professional before investing, and many of these tools are listed in Appendix C to this 
report.  
 
II. BACKGROUND: RISK ASSESSMENT AND SELECTION OF FIRMS 

FOR EXAMINATION 
 

As a threshold matter, regulators focused on geographic areas with high populations of 
seniors.  Thus, examinations were first initiated in Florida by the Florida Office of 
Financial Regulation, NASD and NYSE (now FINRA), and SEC staff.  The examinations 
were then expanded to include other states in geographic areas that had large 
concentrations of senior citizens.  Based on census data, some of the states with the 
highest senior populations were Florida, California and Texas, among others.  In addition, 
census information reflected a high concentration of retirees in the states of Arizona, 
North Carolina, Alabama and South Carolina.5  Regulators in each of these states and 
examiners from the NASD, the NYSE and the SEC commenced coordinated 
examinations during 2006 and 2007. 
 
To identify firms for examination, regulators collected publicly available information 
including advertisements, invitations and websites that sought to target seniors for “free 
                                                 
5      U.S. Census Bureau, Current Population Reports, 65+ in the United States (Washington, D.C.: 

U.S. Government Printing Office, 2005), 23-209. 

 6



lunch” seminars.  Examiners then developed a risk assessment model to identify the firms 
that appeared to present the highest risk of possible violations.  Regulators considered the 
following factors in conducting this risk assessment:  
 

• Whether the advertisements and/or sales literature appeared to target senior 
citizens; 

 
• Whether the advertisements and/or sales literature appeared to have 

exaggerated, misleading and/or fraudulent representations, including 
testimonials;   

 
• Whether the advertisements and/or sales literature discussed or referred to 

securities that appeared to be of high risk to the average senior citizen; 
 

• Whether the entities/individuals identified in the advertisements and/or sales 
literature were appropriately registered to sell the securities discussed or 
referenced in the advertisements and/or sales literature; 

 
• Whether the entities and/or individuals identified in the advertisements and/or 

sales literature had any prior disciplinary history and/or customer complaints 
within the last year; 

 
• Whether the advertisements and/or sales literature, when used by a broker-

dealer, were filed with and reviewed by NASD pursuant to NASD’s 
advertising rules; and 

 
• Whether the advertisements and/or sales literature offered any incentives to 

attend the seminars (e.g., prizes, trips, or books). 
 
The regulators then evaluated the risk assessment data and selected firms for 
examination.  Frequent communication among the regulators helped to ensure a 
consistent approach to examinations, and prevented any duplication in examinations.  
 
The NASD’s Department of Advertising Regulation was an integral part of the 
examination process.  For broker-dealer firms, all advertisements and seminar sales 
literature were reviewed by NASD personnel to determine if the literature was in 
compliance with NASD’s advertising rules.  NASD’s staff then provided each regulator 
conducting the examination with information about any areas of apparent non-
compliance. 
 
Each regulator conducted examinations.  Some examinations were conducted jointly by 
state regulators and the NYSE or the SEC.  Examinations included interviews with firm 
employees and reviews of records maintained by the firm.  In their examination process, 
state regulators attended some sales seminars to ascertain what was being said during 
seminar presentations.  Regulators followed their own protocols for examination process 
and disposition.  Upon completion, some examination findings were referred to the most 

 7



appropriate regulatory authority to handle the matter based on the types of potential 
violations identified.  
 
Most of the firms examined were registered as broker-dealers, and many were also 
registered as investment advisers with a state or with the SEC.  Some firms were 
registered as investment advisers, but not as broker-dealers.  Employees of the firms 
examined were often licensed as registered representatives with NASD, and may also 
have been advisory representatives with the state, or advisers registered with the SEC.  A 
small number of firms were not required to be registered under state or federal securities 
laws, and were examined by state regulators.  The firms examined ranged in size and type 
-- from independent contractors at small firms to large firms with branch offices across 
the country -- although most were small local or regional firms.  Many examinations 
were conducted at branch offices. 
 
III. KEY SECURITIES LAWS AND REGULATIONS  

APPLICABLE TO SALES SEMINARS6

 
Registration:  Sales seminars may be conducted by a registered representative, 
investment adviser or an unregistered person.  Absent any exception or exemption, any 
firm that sells securities (as defined by the Securities Exchange Act of 1934, e.g., stocks, 
bonds) must be registered as a broker-dealer.  In addition, in order to discuss securities at 
a seminar sponsored by a broker-dealer, the presenter must be a licensed registered 
representative (under NASD Rule IM-1031 and NYSE Rule 3457).  Investment advisers 
provide investment advice to purchase or sell securities for compensation and as part of a 
regular business.  Investment advisers also sponsor sales seminars, and they may be 
required to be registered either with a state or with the SEC.  Many sales seminars are 
designed to sell non-securities products (e.g., insurance).  Only firms selling or advising 
the purchase or sale of securities products are required to be registered. 
 
Sales Literature:  The materials used or distributed by broker-dealers at seminars are 
considered “sales literature” and are subject to the supervisory approval and record-
keeping requirements under NASD and NYSE rules.  In addition, these rules apply to any 
communications that are used to promote the seminars, such as advertisements in print, 
on the web or by radio or television broadcast.8  Under these rules, sales literature must 
be approved by a registered principal prior to the seminar; the firm must maintain all 
sales literature in a separate file for three years; and the file must include the name of the 
registered principal that approved the seminar and the materials distributed at the seminar 

                                                 
6            Individual states’ securities laws also apply. 
 
7            NASD and NYSE rules are separately cited in this report, as a common FINRA rulebook has not 
              yet been developed. 
 
8      Specifically, each advertisement, market letter, sales literature or other similar type of 

communication which is generally distributed or made available by a member firm to customers or 
to the public must be approved in advance by an allied member, supervisory analyst, or qualified 
person (under NYSE Rule 342(b)(1)). 

 

 8



(under NASD Rule 2210(b) and NYSE Rule 472(d)).  The broker-dealer must also 
maintain information concerning the source of any illustrative data used in the seminar 
(under NASD Rule 2210(b)(2)(B)).  
 
Seminars are public appearances, as are radio or television interviews or other speaking 
activities (under NASD Rule 2210 and NYSE Rule 472(1)).  NASD and NYSE rules 
require that: “all member communications with the public shall be based on principles of 
fair dealing and good faith, must be fair and balanced, and must provide a sound basis for 
evaluating the facts in regard to any particular security or type of security, industry or 
service” (under NASD Rule 2210(d)(1)(A) and NYSE Rule 472(i)).  These standards also 
apply to registered representatives’ participation at seminars.   
 
Anti-Fraud Rules:  Federal and state securities laws and SRO rules prohibit making any 
untrue statement of a material fact, or omitting to state a material fact that is necessary to 
make the statements that are made not misleading (e.g., under Section 17(a) of the 
Securities Act of 1934, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 
206 of the Investment Advisers Act of 1940). 
 
Investment advisers (whether registered with the SEC or state or not) also have a 
fiduciary duty to provide full and fair disclosure of all material facts to their clients and 
their prospective clients.  All advertising materials and other materials distributed at a 
seminar by an adviser are subject to these restrictions, including any representations 
about the adviser, its business and investment advice, such as performance data, 
investment strategies, education, background and experience (under Section 206 of the 
Advisers Act).  
 
It is fraudulent for an SEC-registered adviser to distribute advertisements that contain or 
refer to testimonials or past specific recommendations that were profitable (under Rule 
206(4)-1 under the Advisers Act).  In addition, SEC-registered advisers cannot use 
advertisements that imply that a graph, chart, or formula will enable investors to make 
their own investment decisions without disclosing the limitations or difficulties of the 
approach (under Rule 206(4)-1 under the Advisers Act and various state securities 
statutes). Advisers may also not falsely promise to provide free services (Rule 206(4)-1 
under the Advisers Act). 
 
Broker-dealers may not make exaggerated or misleading endorsements of investments, 
and unwarranted predictions or projections of investment performance are also prohibited 
(under NASD Rules 2210(d)(1)(B), (d)(1)(d) and NYSE Rule 472(i)).  In addition, 
broker-dealer testimonials must also include certain information: (1) the fact that the 
testimonial may not be representative of the experience of other customers; (2) the fact 
that the testimonial is not indicative of future performance or success; and (3) if more 
than a nominal sum is paid, the fact that it is a paid testimonial (under NASD Rule 
2210(d)(2)(A) and NYSE Rule 472(j)(7)). 
 
To prohibit potentially misleading advertisements and to ensure that communications are 
fair and balanced, NASD rules require that broker-dealers provide certain sales literature 

 9



to its Department of Advertising Regulation for review.  For example, advertisements and 
sales literature concerning mutual funds and variable annuities must be submitted to the 
FINRA for approval within 10 days of the time it is first used or published (under NASD 
Rule 2210(c)(2)(A)).  Firms may also voluntarily submit other material for FINRA 
review and must pre-file other advertisements in some cases. 
 
Duty to Recommend Securities that are Suitable:  A broker-dealer may only recommend 
a security to a customer that it has determined is suitable for that customer in light of that 
customer’s particular age, financial situation, risk tolerance, and investment objectives 
(e.g., under NASD Rule 2310 and IM 2310-2 and NYSE Rule 405).  Broker-dealers must 
obtain the customer’s name, tax identification number, address, telephone number, date 
of birth, employment status, annual income, net worth, and investment objectives for 
each retail customer account (under Exchange Act Rule 17a-3(a)(17)(i)(A)).  As a 
fiduciary, an adviser has an obligation to deal fairly with its clients and to act in their best 
interests (under Section 206 of the Advisers Act).  
    
Supervisory Requirements:  Broker-dealers must establish, maintain, and enforce written 
supervisory procedures to supervise the types of business in which they engage and to 
supervise the activities of registered representatives, registered principals, and other 
associated persons (under Section 15(b) of the Exchange Act and NASD Rule 3010(b) 
and NYSE Rule 342)).  Similarly, investment advisers must adopt and implement written 
policies and procedures reasonably designed to prevent violations of the Advisers Act by 
the adviser or any of its supervised persons (Section 206 of the Investment Advisers Act 
and Rule 206(4)-7(a) thereunder). 
 
IV. EXAMINATION FINDINGS 

 
• Sponsors of “free lunch” sales seminars often offer attractive inducements to 

attend.  
 

We found that sales seminars are commonly held at upscale hotels, restaurants, retirement 
homes, golf courses and other locations.  A few were held at the offices of the firm 
sponsoring the seminar.  Invitees were from the local community.  Generally, the 
seminars were free.  In some cases, in addition to providing a free meal, the firms and 
individuals that conducted these seminars used other incentives such as door prizes, free 
books (“A Free Tax Payer Awareness Guide”), free portfolio reviews and one even 
offered a $250 discount on a nursing home protection planning session.  To further 
encourage attendance, some advertisements offered seminar attendees eligibility to win 
prizes such as tote bags, gift certificates or even a 3 night/4 day cruise for two. 
 

• Often, the target attendees are seniors.   
   

We found that many of the seminars were designed to appeal specifically to seniors. 
Some seminars also targeted religious affinities or associated groups such as the military.  
Many sales seminars were advertised in local newspapers or attendees were solicited to 

 10



attend via mass invitations sent through the mail or via email.  Many solicitations 
targeted seniors. Samples of advertisements can be found in Appendix A to this report. 
 
 The seminars had titles such as: “Senior Financial Survival Seminar,” “Senior Citizen 
Tax Specialist,” “Senior Financial Safety Workshop,” and “Senior Citizen Retirement 
and Asset Protection Education Workshop.”  Some communications explicitly stated that 
attendance was limited to those between, e.g., 60 and 85 years of age, or over 70 years of 
age.  In the advertisements and/or invitations, the seminar sponsors often claim to offer 
advice on how to attain a secure retirement, financial planning, inheritance advice, and 
even “nursing home asset protection.”  Often, the ads and mailers featured photographs 
of happy and attractive seniors – perhaps to suggest that an attendee could achieve 
financial security or prosperity by attending the seminar. 
 
Seminar sponsors appeared to target seniors, and to seek to limit attendance by the non-
target attendees.  Some ads and mailers were explicit in excluding attendance by advisers, 
attorneys, accountants, agents or brokers, or otherwise discouraged attendance by these 
professionals by charging them a costly attendance fee (as much as $1,000).   
 
The ads and mailers often implied urgency, and that time was of the essence.  
They said things like: “Act Now!” “If you are over 60, you cannot afford to miss 
this seminar” “Seating is Limited!” “Reservations Required” “This is a time-
sensitive offer!” “There is a financial storm brewing”  “This is a Must Attend!” or 
“Startling presentation reveals costly mistakes that can ruin your finances.”   
 
Some ads and mailers used tactics to scare seniors into thinking that they might not be 
using the right investment professional, or to question their current investments.  For 
example, they say, “If you’re retired, YOU’RE A TARGET and you cannot afford to 
miss this workshop!” “How to Protect your Nest Egg from The Retirement Vultures,” 
“Will you cause your family to split up and argue at your passing when your will or trust 
is read?  Would you like to know how to prevent the possible breakup of your family?” 
and “Seniors, did you know that costly mistakes can tarnish your golden years?”  These 
statements appear to be designed to scare vulnerable senior investors, and may help to 
open the door for seminar sponsors to sell unsuitable investments.  
 

• Seminars are designed to sell.  
 
While many sales seminars were advertised as “educational,” “workshops,” “educational 
dining seminar” and “nothing will be sold at this workshop,” and many advertisements 
did not mention any investment products, all of the seminars were intended to result in 
product sales.  They were intended ultimately to result in the attendees’ opening new 
accounts with the sponsoring firm, and the sale of securities and other financial products.   
To the extent that participants may attend the seminar in order to obtain educational 
insights and information, they should be aware that the primary goal of the sponsors of 
the “free lunch” seminars is to obtain new customers and sell financial products. 
 

 11



Typically at a seminar, the seniors arrive at the restaurant or hotel and are shown to a 
private room, and to a seat.  At the outset, they are usually given a questionnaire or 
contact card to fill out with their name, address, telephone number, and interests in 
particular investments or financial goals and are asked to return the card to the host.  A 
slide show or power point presentation usually follows as drinks are served.  Examiners 
found that the most commonly discussed products at the sales seminars were variable 
annuities, equity indexed annuities, real estate investment trusts, mutual funds, private 
placements and reverse mortgages.  The food is usually not served until after the 
presentation is complete and the host has collected the contact information from the 
attendees.  To ensure the attendees stay until the presentation is over, the door prizes are 
given last.  The financial adviser speaking at the seminar also evaluates individual 
attendees’ level of interest in opening an account and/or purchasing products.9  
 
Following the seminar, seminar attendees can expect to receive additional solicitations 
from the firm to purchase investment products.  Attendees are generally contacted by the 
financial adviser by telephone at least one or more times, using the contact information 
that the attendee provided at the seminar, and are solicited to schedule a further meeting 
with the financial professional and/or to open an account and purchase securities or other 
products.  Typically, the attendee will also be added to the firm’s mailing list of potential 
customers, and will receive additional sales materials in the mail following the sales 
seminar.   
 

• Some firms had particular compliance and supervisory controls that 
appeared to be effective.  And, at a small number of firms (5 examinations, 
or 4% of the firms examined), regulators found no problems or deficiencies. 

 
Some examinations found that firms had specific compliance and supervisory practices 
that appeared to be effective in ensuring compliance with the securities laws and rules.  
These practices were in writing and were implemented.  Particularly effective practices 
were those that facilitated a supervisor’s advance review of the materials to be used in 
connection with sales seminars.   
 
For example, one broker-dealer required its employees to forward all materials to its 
home office for a supervisory and compliance review prior to using them at sales 
seminars.  Another broker-dealer utilized checklists to aid supervisors with the approval 
process for seminars and seminar materials.  Another firm used what it called “mystery 
shoppers” (who were current firm employees) to attend seminars randomly to identify 
potential disclosure and compliance weaknesses and report back to their supervisor.  
These, and additional examples of effective compliance and supervisory practices found 
during examinations can be found in Appendix B to this report. 

                                                 
9  At one firm, registered representatives kept a record of those who attended the seminars that 

included a notation of the attendees who made appointments to meet with the registered 
representatives after the seminar to discuss opening an account.  The record also referred to those 
attendees who did not schedule a follow-up appointment and apparently only attended the seminar 
for the free lunch as “clowns.” 

 

 12



• Half of the examinations found that firms used advertising and sales 
materials that may have been misleading or exaggerated or included 
apparently unwarranted claims. 

  
The most common deficiency involved the use of potentially misleading advertising and 
sales literature in connection with the sales seminars.  Examiners found deficiencies in 63 
of the 110 examinations conducted (or 57% of the examinations conducted).  Most 
frequently, these potentially misleading statements appeared in mailers and 
advertisements for the sales seminars, and involved statements about the safety, liquidity 
or anticipated returns of products.  Additionally, some sales materials made comparisons 
between dissimilar investments or services, included representations about the expertise 
or credentials of the registered representative that appeared to be misleading or 
confusing, or involved testimonials that appeared to be misleading, or provided 
inaccurate or confusing information about the sponsoring firm.10  Examples are described 
below.   
 

⇒  Claims about Safety, Liquidity or Returns 
 

Some seminar sponsors used what appeared to be misleading or exaggerated promises to 
lure attendees to sales seminars.  For example, one advertisement for a sales seminar, 
called the “Senior Citizen's Retirement & Asset Protection Educational Seminar,” stated, 
“Learn how you can earn 2-3 times more interest than what banks currently offer…While 
keeping your money liquid!”  The following additional examples were found in various 
advertisements: 
 

“If you are between the ages of 65-85 join me for the most fascinating hour of 
your LIFE and I will show you how to immediately earn as much as $100,000, 
$200,000 or $300,000 . . . or more with the stroke of a pen,” and “How to 
guarantee your IRA will never run out, regardless of market fluctuations.” 

 
“Learn how to pass all of your assets on to your heirs while making sure 
the IRS gets only what you want them to have.” 

 
“Immediately add $100,000 to your net worth” 

 
“You’ll learn how to generate returns starting at 40% while your capital is 
held in an FDIC insured account.” 
 

 “How to receive a 13.3% return” 
 
                                                 
10      Specifically, in 41 of the 110 examinations (or 37%), firms may have made false, misleading, 
       exaggerated or  unwarranted statements or claims; and in 29 examinations (or 26%), the firm did 

not appear to provide a sound basis for evaluating the statements that were made.  In addition, two 
firms appear to have made exaggerated or unwarranted claims, opinions, or forecasts related to the 
performance of securities, and an additional seven made comparisons in their advertisements 
and/or sales literature between investments or services, but did not disclose material differences 
between the investments or services.  

 13



“How $100K can pay 1 Million Dollars to Your Heirs” 
 
“Get double digit growth potential with no risk of loss and no fees” 
 
“Your deposit plus all gains are insured 100% without limit.” 

 
Advertisements like these seemed designed to attract attention by using 
exaggerated and potentially misleading claims.  Examiners noted that seminar 
sponsors may be competing with each other for attendees, particularly in local 
areas with large populations of retirees, and may use hyperbolic and exaggerated 
ads in order to “stand out” from other seminar sponsors. 
 

⇒ Use of Testimonials 
   

Examiners found that some firms used testimonials from satisfied customers as part of 
their sales materials and presentations at sales seminars.  Examiners observed that firms 
sometimes used testimonials by seniors who attested to the quality of service or the 
investments offered by the firm in their marketing efforts to other seniors as prospective 
customers.   
 
As described above in this report, to protect investors from being misled by testimonials, 
broker-dealers must prominently disclose that the testimonial may not be representative 
of the experience of other customers, the testimonial may not be indicative of future 
performance or success, and if more than a nominal sum is paid, broker-dealers must 
disclose that it is a paid testimonial (under NASD Conduct Rule 2210(d)(2)(A) and 
NYSE Rule 472(i)(7)).  Investment advisers registered with the SEC may not use 
testimonials at all (under Rule 206(4)-1 under the Advisers Act). 
 
Examinations found that some firms did not fully comply with these requirements.  For 
example, one broker-dealer firm employed an older gentleman on a part-time basis to 
help with public relations.  He also held accounts with the firm.  His job was to attend 
seminars, state that he was a current customer of the firm, and stand up and give 
unsolicited testimonials as to the quality of the firm and its investment management.  He 
did not disclose that he was paid to provide the testimonial, that his experience may not 
be representative of other customers’ experience, and is not indicative of future 
performance or success (as required under SRO rules). 
  
The same firm invited its current customers to its sales seminars -- to receive a free meal 
-- and to provide impromptu testimonials to other attendees, e.g.: “I am happy with the 
account and the returns” and “It feels like being part of a family.”  These testimonials did 
not include disclosures that these customers’ experience may not be representative of 
other customers’ experience, and is not indicative of future performance or success (as 
required under SRO rules). 
 
 
 

 14



Other testimonials identified in the examinations included: 
  
 “The [broker-dealer] puts client’s best interest first.” 
  
 “You can trust [the broker-dealer].” 
  
 “[I] like the approach to asset allocation which leads to broad diversification.” 
 

⇒ Representations about the Expertise of the Financial Adviser 
 
Often, the advertising for sales seminars has a personal appeal and focuses on the 
individual person who is presenting the seminar.  The advertisements frequently include a 
photograph of the seminar host and a description of that individual’s background as an 
expert in providing financial advice, as well as highlighting his/her involvement in the 
local community.  While examiners did not investigate the accuracy of all of the 
representations made about the background or expertise of the persons presenting the 
seminars, we found a few indications that information provided about the experience or 
the expertise of the presenter could be confusing or misleading to an attendee. 

For example, two individuals distributed sales literature during a seminar that included a 
“team profile” of themselves as hosts of the seminar.  The profile stated that one of the 
representatives used technical knowledge to develop an advanced mutual fund selection 
system combining various services and numerous data bases.  Examination staff 
discovered that an off-the-shelf software program was used to identify potential mutual 
fund investments.   

In other cases, individuals presenting seminars called themselves a “Certified Senior 
Advisor,” or “Elder Care Asset Protection Specialist” or “Chartered Retirement Planning 
Counselor” -- terms that suggest that the financial professional has some type of special 
credential or certification from a regulatory authority, when in fact there is no regulatory 
qualification or registration that recognizes such special expertise.11  The use of these 
titles may be confusing or misleading to the public. 

 
 
 

                                                 
11      Regulators have warned that seniors may be confused by designations that imply some expertise 

 in providing services to seniors.  NASAA’s Investor Alert is available at 
        http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4028.cfm.  The SEC has 

    provided information on professional designations, available at 
    http://www.sec.gov/investor/pubs/senior-profdes.htm.  Additionally, FINRA provides a list of  
    professional designations and describes them for informational purposes only – without 

recommending or endorsing any designation.  This information is available at 
    http://apps.finra.org/DataDirectory/1/prodesignations.aspx.   

 

 15

http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/4028.cfm
http://www.sec.gov/investor/pubs/senior-profdes.htm
http://apps.finra.org/DataDirectory/1/prodesignations.aspx


• Individuals attending the sales seminars may not understand that the 
seminar is sponsored by an undisclosed company with a financial interest in 
product sales.   

 
As described above, the mailers and advertisements for the sales seminars often focused 
on the individual person who conducted the seminar, and often included the name, 
photograph and background information of the individual registered representative or 
investment adviser that is scheduled to speak at the seminar.  Members of the public who 
attended the seminars or considered attending were not always provided with the name of 
the firm that was sponsoring the seminar, and may not be aware that product sponsors 
(e.g., mutual fund companies and insurance companies) provide funding for these 
seminars.  
 
Examiners found that advertising and sales material provided to prospective attendees at 
the seminars did not always disclose the name of the broker-dealer or the investment 
adviser firm that was sponsoring the seminar.  In fact, in 12 of the 110 examinations (or 
11% of the examinations conducted), firms used sales literature that provided the name of 
the individual who presented the seminar, but not the name of the firm where the 
individual worked.12  In 7 of these instances, the registered representatives used 
alternative names to do business and used these names in their advertising or sales 
literature, but did not also reflect the name of the broker-dealer firm that they worked for 
and that was offering the products or services.  Providing the name of the firm would 
allow a prospective attendee to better research the sponsoring firm in deciding whether to 
attend a sales seminar. 
 
In addition, seminar attendees and those who considered attending likely did not know 
that some seminars were paid for (in part or in whole) by product sponsors.  This 
information is not required to be disclosed in advertisements or mailers for sales 
seminars.  Mutual fund firms and insurance companies often reimburse broker-dealers or 
investment advisers for expenses when they hold sales seminars to solicit investors to 
purchase the mutual funds or insurance products.  In these examinations, examiners 
found that mutual funds, insurance companies and limited partnership sponsors 
frequently reimbursed broker-dealers or investment advisers for the costs of putting on 
the sales seminars (e.g., rental of space, the food and beverages provided, publications, 
advertising expenses and other free items provided to attendees).  Attendees likely did not 
know that the sponsors of the products discussed at the seminar had paid for the costs of 
the seminar.  In these situations, seminar attendees may not have known that the financial 
adviser speaking at the seminar was not unbiased in making product recommendations. 
 

                                                 
12      Broker-dealers are required to reflect the name of the firm offering products and services in any 
          advertisements or sales literature offering products or services.  The name of the member must be 
         prominently disclosed, and may also include a fictional name by which the member is commonly 
          recognized or which is required by any state or jurisdiction (under NASD Conduct Rule 
          2210(d)(2)(c)(i) and (iii)).   
 

 16



While seminar attendees and those considering whether to attend likely were not aware 
that the seminar may have been paid for by a product sponsor, if a person attending a 
seminar purchases a security, they are required to receive relevant disclosure.  Broker-
dealers and investment advisers are required to disclose certain basic terms of the 
transaction to the customer or client, such as any payments they receive from third 
parties.13  Most frequently, these disclosures are contained in the prospectus for the 
mutual fund or other product, or in the investment adviser’s brochure (or in its Form 
ADV).14

 
Examinations found that, when customers purchased a security as a result of a seminar, 
firms provided disclosure that they received compensation from a product sponsor in the 
prospectus, in a statement of additional information, or in a separate disclosure form.  
However, in 8 examinations, the disclosure that firms provided in the prospectus stated 
that the firm “may” receive compensation from product sponsors based on assets under 
management, when, in fact the firm had actually received and was receiving such 
payments and reimbursements for seminar costs.   

For example, examinations found that two broker-dealers had agreements with insurance 
companies under which the insurance companies paid the broker-dealers to sell their 
products (often called “revenue-sharing agreements”).  With respect to one of these 
broker-dealers, most of its overall yearly sales were of the variable annuity products of a 
small number of insurance companies.  It maintained compensation agreements with 
those insurance companies based on the sales that it made, and its customers’ variable 
annuity assets that were held in their accounts with the broker-dealer for a certain length 
of time.  The firm disclosed to investors that it “may” receive additional payments based 
on assets under management; however, it actually received over $1 million a year from 
these insurance companies, a significant amount of money for the firm based on its size.  

Examinations also identified an instance of double-billing -- a registered representative 
obtained reimbursement for the same sales seminar expenses from multiple mutual funds.  
The registered representative had submitted the same restaurant bill to multiple mutual 
fund companies and received full payment from each of them.  

 

   

                                                 
13           Broker-dealers must disclose the source and amount of any remuneration received or to be 
              received from third parties in connection with a transaction under Rule 10b-10 under the 
               Exchange Act.  Advisers must make similar disclosures, generally under Section 206 of the 
               Advisers Act, and in Form ADV Part II. 

 
14      “[I]n the case of offerings registered under the Securities Act of 1933, the final prospectus 

delivered to the customer should generally set forth the information required by the proviso with 
respect to source and amount of remuneration. . . . In such situations the information specified in 
the proviso need not be separately set forth in the confirmation.” Exchange Act Release No. 13508 
(May 5, 1977) at n. 41. 

 17



• Many broker-dealer firms did not submit sales materials to NASD for review 
as required. 

 
As described earlier in this report, to help ensure that communications by broker-dealers 
to the public are fair, balanced and not misleading, broker-dealers must provide certain 
sales material to NASD’s Department of Advertising Regulation for review (now, this 
function is performed by FINRA’s Department of Advertising Regulation).  
Advertisements and sales literature concerning mutual funds and variable annuities must 
be submitted for review within 10 business days of first use or publication (NASD Rule 
2210(c)(2)(A)).   
 
These examinations found that many firms did not submit materials to NASD as required.  
Specifically, NASD’s Advertising Regulation Department reviewed all the 
advertisements and sales literature collected in these examinations that were used by 
NASD member firms or their associated persons.  This review found that 31 broker-
dealer firms had failed to submit their advertising and sales literature to NASD as 
required.  If these materials had been submitted for review, it is likely that the firms 
would have been advised of potentially misleading or exaggerated statements or other 
concerns.  
 

• Many examinations found indications that firms had poorly supervised these 
sales seminars.    

 
One of the most frequent deficiencies cited during the examinations was inadequate 
supervision of employees who held sales seminars.  Examiners found weak supervision 
during 65 of the 110 (or 59%) examinations conducted.  In the other 45 examinations, 
firms appeared to have implemented adequate supervisory controls over sales seminars. 
 
During the 65 examinations in which deficiencies were found, examiners identified 102 
instances in which firms did not appear to have supervised their employees in a manner 
that was consistent with supervisory requirements under the securities laws and SRO 
rules.  A frequently found problem was that firms had either not established supervisory 
procedures, or had established procedures but did not put systems in place to properly 
supervise their employees who held sales seminars consistent with those procedures (in 
44 of the 110 examinations, or 40%). 
 
Examinations found deficiencies in several areas.  These included: (1) a lack of written 
policies and procedures to address compensation received by the firm or its employees 
from issuers for selling the issuers’ products; (2) a lack of written policies and procedures 
relating to the sales literature used at sales seminars; (3) not reviewing or approving 
materials provided to potential investors at sales seminars; (4) not reviewing incoming 
and outgoing correspondence; and (5) not adequately supervising branch managers who 
themselves sold securities to customers, and held sales seminars.  Some examples follow. 
 
 
 

 18



⇒ Lack of Policies and Procedures with Respect to Sales Seminars 
 

Examinations revealed many instances in which firms did not have specific policies and 
procedures with respect to sales seminars and/or communications with the public.  Some 
firms did not require that all materials used to advertise the sales seminars, or used at the 
sales seminars be reviewed and approved by a supervisor prior to use.  While it is 
impossible to determine what the outcome would have been had these firms had 
supervisory procedures in place, because these firms lacked supervisory procedures, it 
appears they did not provide adequate supervision over sales seminars.  This lack of 
supervision may have allowed potentially exaggerated claims and misrepresentations to 
be made (which are described elsewhere in this report), and to go undetected by the 
firm’s supervisors.    
 
For example, a firm did not have procedures to monitor effectively the activities of 
employees in its branch offices concerning their communications with the public. 
Although the firm’s managers knew that employees were conducting seminars, the firm 
did not have procedures that required that supervisors receive and approve in advance all 
of the sales literature that its employees distributed to the public.  Other examples follow: 

 
• A branch office did not maintain documentation evidencing approval for its 

registered representatives to hold sales seminars, or approval of the materials 
used.  Dozens of sales seminars were held. 
 

• A branch manager who maintained his own customer accounts (aka, a 
“producing” branch manager) conducted and approved his own seminars, and did 
not obtain review or approval by his supervisor. 
 

• A firm’s advertisement touted a 38% rate of return without any risk.  When 
examiners requested a copy of the firm’s approval of the advertisement, it could 
not be provided, suggesting a lack of supervision.  

 
In a number of instances, examiners found deficiencies relating to the supervisory review 
of correspondence.15  For example, at one broker-dealer firm, examiners found that 2 
letters from customers authorizing the transfer of securities and funds had been altered.  
Specifically, the account numbers had been changed without evidence of customer 
approval.  This could have been indicative of a possible attempt at theft.  A registered 
principal had reviewed the correspondence, but failed to do anything about the alteration 
or even request an explanation as to why it was altered.  
                                                 
15    In addition to the general requirement to establish, maintain, and enforce written supervisory 
       procedures, broker-dealers must also establish procedures for the review and endorsement by a 
      registered principal, of incoming and outgoing written and electronic correspondence of its 
       registered representatives with the public (NASD Rule 3010(d)(1)).  These procedures must be in  
       writing and be designed to reasonably supervise each registered representative.  Firms’ processes 

must include methods of control over receipt and delivery of hard copy correspondence, 
communications received through facsimile transmissions and email (NYSE Rule 342.16 and 
342.17 also address the review and approval of communications with the public). 

 

 19



⇒ Problems with Supervision of Employees’ “Outside Business Activities” 
 
At the outset of these examinations, regulators were concerned about the possibility that 
registered representatives or investment advisers may be holding sales seminars and 
selling products outside of their firms’ supervisory controls.  Thus, examiners paid 
particular attention to this issue.  
 
To help ensure that broker-dealer firms can provide adequate supervision for the 
protection of investors, SRO rules address the business activities that can be performed 
by firm employees “outside” of their employment with a broker-dealer.  These rules 
require that the employee provide notice to the firm, and the firm may also require 
approval of the employees’ outside business activities (NASD Rule 3030 and NYSE Rule 
346(b)).  
 
Investment advisers registered with the SEC must implement policies and procedures 
reasonably designed to prevent violations of the Advisers Act by any of the adviser’s 
supervised persons, including partners, officers, directors or employees of the investment 
adviser, or other person who provides investment advice on behalf of the investment 
adviser and is subject to the supervision and control of the investment adviser (under 
Rules 206(4)-7 and 202(a)(25) of the Advisers Act). 
 
Most of the broker-dealer firms examined had procedures in place that addressed the 
outside business activities of employees.  However, some firms had not actually 
implemented their own policies and procedures.  For example, one firm required all of its 
registered representatives to complete a questionnaire on an annual basis disclosing their 
outside business activities.  Its policies then required supervisory follow-up on certain 
outside business activities.  In practice, however, the firm did not conduct any follow-up 
after its employees provided information about their outside activities. 
 
Examinations also found a number of instances in which registered representatives and 
investment advisers hosted sales seminars and were ultimately selling investment 
products to the attendees of the seminars without their firms’ knowledge of the seminars 
themselves.  The registered representatives and investment advisers incorrectly 
considered these seminars to be “outside business activities,” and thus outside the 
supervision and compliance controls of the firms.  At one firm, for example, a registered 
representative, who was also a mortgage broker, hosted seminars on the subject of 
mortgages and then also sold securities products to the seminar attendees.  These 
seminars were not supervised by his firm.  

 
• Some examinations found indications that registered representatives or 

investment advisers holding the sales seminars had recommended 
investments that did not appear to be suitable for the individual 
customers/clients.   

 
As described in this report, sales seminars are often used to attract new customers and 
clients. When opening a new account, customers complete a new account form with a 

 20broker-dealer, or sign an investment advisory contract with an investment adviser.  As 
part of this process, a broker-dealer or investment advisory firm will obtain information 
about the customer/client and his/her investment objectives, risk tolerance, time horizon 
for investments, and overall investment needs.  This information assists the firm in 
ensuring that the recommendations made are suitable for the particular customer or client 
in light of their age, income, net worth, investment experience and risk tolerance.  The 
determination about whether a particular investment product is suitable is based on the 
particular investor and his or her individual investment objectives.   
 
During each examination, examiners reviewed account documents and other information 
maintained by the firm about a sample of customers to evaluate whether the investments 
that were recommended to customers appeared to be suitable.  Examiners’ primary focus 
was on accounts that were opened by attendees at the seminars, though examiners also 
reviewed other accounts when appropriate. 
 
In some examinations, examiners found indications that apparently unsuitable 
recommendations to purchase investments were made at the sales seminars, or following 
the seminars, when an attendee opened an account.  Examiners had concerns about the 
suitability of products recommended in 25 of the 110 exams conducted, or in 23% of the 
examinations conducted.   
 
Examiners noted concern that some firms may not be adequately considering the 
individual needs and circumstances of each customer when determining whether a 
product was suitable for that customer.  For example, at one broker-dealer, examiners 
noted that the same investment objective was identified on almost every new account 
form in one branch.  Despite differences in the customers’ ages, net worth, income levels 
and investment experience, almost every new account form indicated that the customers 
had “growth” and “growth with income” as their investment objectives.  Almost every 
customer was invested in the same annuity product, and in the same three sub-accounts.  
These investments suggest that all customers were treated the same way when the firm 
was recommending investments, instead of in accordance with their unique needs in light 
of the variances in their ages, net worth, incomes, and investment experiences.  At 
another broker-dealer, examiners noted four senior investors whose stated incomes and 
net worth did not meet the requirements of the products they were sold. 
 
Examiners also found situations in which specific products and types of accounts were 
recommended to individual seniors, which may have been unsuitable or inappropriate for 
these particular customers.  We note that these products and accounts are suitable and 
appropriate for some investors, but are not suitable and appropriate for others in light of 
their investment objectives, the time horizon for investment, or the risk involved.  
Examples follow. 
 

⇒ Variable Annuities 
 

Variable annuities are generally considered long-term investment vehicles, and therefore, 
the investor’s time horizon for holding the investment and the investor’s liquidity needs 

 21



are particularly relevant in determining whether it is a suitable investment.  Also relevant 
is whether the investor already holds a variable annuity investment, and whether the 
various features and costs make the product suitable in light of the investors’ existing 
holdings.  In particular, firms are required to ensure that a new variable annuity is 
suitable when recommending that an existing variable product be “exchanged” for a new 
one.  A replacement that doesn’t improve the customer’s existing position, and that is 
designed merely to generate new sales commissions, would be prohibited by NASD rules 
(Rule IM-2310.2).16

 
At one firm, a review of account records for a sample of customers who had purchased a 
variable annuity based on the firm’s recommendations indicated that 66% of the 
customers had sold a variable annuity in order to purchase a new one, and that most of 
the customers had investment time horizons of 3-5 years or less (including some with 
horizons of 1-3 years).  Because of the significant surrender fees that are charged to 
customers who sell their variable annuities within a certain time-frame (usually within 
seven years of purchase), these products did not appear to be suitable for these customers.   
 
At another firm, a registered representative recommended that a customer invest 
approximately 80% of his stated net worth in variable annuities.  To finance the purchase 
of these variable annuities, the registered representative recommended that the customer 
sell his existing investments that were providing greater diversification, liquidity and 
annual income to his portfolio.  The customer’s previous portfolio holdings also included 
a variable annuity with a death benefit valued at over $30,000, income-producing 
investments such as investment grade corporate bonds, preferred stock, and money 
market funds.  Based on the customer’s other diversified portfolio holdings, and the 
customer’s investment objectives of growth and income, the recommendation to sell 
virtually all of the customer’s assets and purchase a variable annuity appeared to be 
unsuitable. 

 
⇒ Real Estate Investment Trusts  

 
At one firm, examiners found that registered representatives recommended that 
customers with a conservative investment objective and risk tolerance invest in a real 
estate investment trust, which was an illiquid and speculative investment.  The prospectus 
for the investment stated that “these investments entail a high degree of risk, are long 
term investments and are suitable if investors have no immediate need for liquidity or can 
bear the complete loss of the investment.”  Because of the lack of liquidity, high degree 
of risk and long term nature of the investment, these investments appeared to be 
unsuitable for customers with conservative investment objectives. 
 
                                                 
16      “NASD Regulation Reminds Members And Associated Persons That Sales of Variable Contracts 

Are  Subject to NASD Suitability Requirements” (Oct. 1989) NASD Notice to Members 96-86, 
available at: 
http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p004697.pdf   

           FINRA has proposed a new rule that would create requirements for recommendations, review by         
 a principal, and supervisory and training requirements tailored specifically to transactions in 
 deferred variable annuities (proposed Rule 2821). 

 22

http://www.finra.org/web/groups/rules_regs/documents/notice_to_members/p004697.pdf


⇒ Low-rated Municipal Bonds 
 

 At one firm, a registered representative recommended that two senior investors with 
conservative investment objectives purchase non-rated and low-rated municipal bonds.  
One investor purchased multiple issues that subsequently went into default or that failed 
to pay interest.  The non-rated municipal bonds represented approximately 80% of her 
stated liquid net worth.  In another instance, a retired over 70 year old investor with a 
primary objective of income and a liquid net worth of between $25,000 and $49,999 had 
the majority of his liquid net worth invested in non-investment grade speculative bonds. 
These investments may not have been suitable for these customers. 

 
⇒ Collateralized Mortgage Obligations  

 
At one firm, several registered representatives had recommended that customers with 
conservative investment objectives purchase certain collateralized mortgage obligations 
(CMOs) with high degrees of risk (based on the particular tranches being sold).  In some 
cases, the customer accounts used high percentages of margin to purchase the securities.  
In addition, these CMO positions were being actively traded in the customer accounts, 
generating significant commissions for the registered representatives involved.  These 
transactions appeared to be unsuitable for the particular customers involved. 
 

⇒ Fee-Based Accounts 
 
Financial services firms offer different types of accounts to customers.  In particular, in 
recent years, fee-based accounts have become a popular account choice, and have been 
offered by broker-dealers and investment advisers.  In a fee-based account, a customer 
pays a fee based on the amount of assets in the account.  In a commission-based account, 
a customer pays a commission charge on each transaction.17  
 
Prior to opening a fee-based account for a customer, a broker-dealer must have 
reasonable grounds to believe that such an account is appropriate for that particular 
customer (under NASD NTM 03-68 and NYSE Rule 405A).  In addition, broker-dealers 
must disclose all material components of the fee-based program to the customer, 
including the fee schedule, the services provided and the fact that the program may cost 
more than paying for the services separately (under NASD NTM 03-68).  It may be 
inappropriate to place a customer in an account with a fee structure that reasonably can 
be expected to result in a greater cost than an alternative account offered by the firm 
(under NASD NTM 03-68, NYSE Rule 405A). 

 
 

                                                 
17  In a recent decision, the Court of Appeals for the District of Columbia Circuit vacated Rule 
               202(a)(11)-1 under the Advisers Act, which provided, among other things, that fee-based  
               brokerage accounts were not advisory accounts and were thus not subject to the Advisers Act.  
               Financial Planning Ass'n v. SEC, 2007 U.S. App. LEXIS 7356, 482 F.3d 481 (D.C. Cir. 
               2007).  
       

 23



Examiners found indications that fee-based accounts may have been recommended to 
customers for whom they may not have been appropriate.  At one firm, a registered 
representative recommended a fee-based account to a senior investor.  The account 
charged a fee of 1.838% of assets under management.  This customer’s account had no 
transactions, and held three variable annuities, which had separate, total internal 
management costs of approximately 3% of the assets.  The customer was being charged 
two levels of fees on the same assets, once by the insurance company for management 
fees and again by the broker-dealer for the account fee.  This type of account may not 
have been appropriate for this particular customer, in light of her investment objectives 
and the portfolio holdings. 
 

⇒ Recommendations that Customers Use Equity from their Homes 
 
Regulators have urged caution about recommendations that investors, especially senior 
investors, obtain loans on their homes in order to finance the purchase of securities.  By 
doing so, customers may suffer investment losses that could result in their inability to pay 
off the loans on their homes, and ultimately, risk the loss of their homes altogether.18

 
In one examination, an investment adviser had recommended that senior investors obtain 
mortgages or refinance their homes and liquidate their existing retirement accounts, in 
order to purchase equity-indexed universal life insurance (EIUL) policies.  This 
investment strategy speculated that the rate of return earned on the EIUL policy would 
exceed the cost of the new mortgage on the client’s home.  Dozens of senior investors 
followed this advice and effectively mortgaged 100% of the value of their homes.  This 
type of investment strategy may not have been suitable for individuals on a fixed income 
because if the market index failed to perform, the policy provided a low return, and the 
client remained responsible for the annual mortgage cost and insurance premiums 
associated with the EIUL policy.  In addition, the adviser’s seminar materials only 
provided a positive analysis of potential returns that could be earned by clients and did 
not appear to offer discussion of any risk factors in using this investment strategy.  This 
may have been an unsuitable high-risk investment strategy for these clients.   

  
• In some instances, the sales seminars may have involved fraud.  

 
Examiners found indications of possible fraudulent practices in 14 examinations (or 13% 
of the examinations conducted).  These involved potentially egregious misrepresentations 
of risk and return, liquidation of accounts without the customer’s knowledge or consent, 
and sales of fictitious investment notes.  Some instances of apparent fraud are described 
below.  In total, 25 of the 110 examinations (or 23%) are under review for possible 
further investigation or action by a state, FINRA or SEC.19  
                                                 
18      See NASD Investor Alert, Betting the Ranch: Risking Your Home to Buy Securities (March 15, 
 2004), available at 
 http://www.finra.org/InvestorInformation/InvestorAlerts/MarginandBorrowing/BettingtheRanchRi
 skingYourHometoBuySecurities/P005961; NASD Notice to Members 04-89, available at 
 http://www.finra.org/RulesRegulation/NoticestoMembers/2004NoticestoMembers/P012715. 
 
19      Many examinations had multiple dispositions.  For example, a deficiency letter may have been 

 24

http://www.finra.org/InvestorInformation/InvestorAlerts/MarginandBorrowing/BettingtheRanchRiskingYourHometoBuySecurities/P005961
http://www.finra.org/InvestorInformation/InvestorAlerts/MarginandBorrowing/BettingtheRanchRiskingYourHometoBuySecurities/P005961
http://www.finra.org/RulesRegulation/NoticestoMembers/2004NoticestoMembers/P012715


It is important to note that the types of potentially fraudulent conduct identified in these 
examinations are not limited to sales seminars; rather, the types of potential frauds 
described below are similar to the types of fraud perpetuated against seniors and other 
types of investors through means other than sales seminars.  Indeed, securities regulators 
have brought numerous enforcement actions involving these types of frauds.20  
 

⇒ Possible Misrepresentations about Risk and Expected Returns 
 

Several examinations uncovered instances where registered representatives or investment 
advisers may have overstated the potential benefits of a product or failed to disclose 
important risks for investors.  In one instance, for example, the firm’s seminar 
advertisement indicated that customers could earn up to a 38% rate of return without any 
risk, and incorrectly implied that fixed annuities were guaranteed by the government. 
 

⇒ Liquidating Accounts Without Investor Knowledge or Consent 
 

In another examination, examiners found that an investment adviser had liquidated 
clients’ investments and used the proceeds to purchase potentially unsuitable investments 
apparently without the client’s knowledge or consent.  The investment adviser conducted 
seniors-only seminars at hotels, offering retirees free breakfast and financial advice.  He 
used marketing materials that claimed to teach seniors how to eliminate taxes on IRA 
accounts, reduce or eliminate taxes on social security income, and increase yields on 
investments from 20% to 300%.  After the seminars, the investment adviser scheduled 
one-on-one meetings with interested individuals on the pretext of preparing a financial 
plan for them.  During these meetings, the investment adviser may have misled seniors 
into signing several blank authorization forms, claiming that he needed the forms to 
obtain additional financial information.  Instead, the financial plans appear not to have 

                                                                                                                                                 
       provided to the firm requesting corrective action, and findings from that exam may also have been  
     referred for possible disciplinary or enforcement action. 
 
20  See, e.g., SEC v. C. Wesley Rhodes, Jr., et al., SEC Lit. Rel. No. 20144 (June 5, 2007) (defendants 

allegedly defrauded seniors of $38 million by misrepresenting stock and bond purchases); SEC v. 
One Wall Street, Inc, et al, SEC Lit. Rel. No. 20123 (May 22, 2007) (defendants allegedly 
defrauded seniors of at least $1.6 million through false and misleading statements regarding 
investment risks); SEC v. Empire Development Group, et al., SEC Lit. Rel. No. 20122 (May 18, 
2007) (defendants allegedly defrauded unsuspecting senior investors with limited means of nearly 
$2 million through the sale of unregistered securities in bogus real estate development companies); 
Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading 
Documents and Inadequate Disclosure in Retirement Seminars, Meetings for BellSouth 
Employees, FINRA News Release (June 6, 2007), available at 
http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P019240; NASD Investor 
Alert Warns Workers About Early Retirement Investment Pitches, FINRA News Release (Sept. 14, 
2006), available at http://www.finra.org/PressRoom/NewsReleases/2006NewsReleases/P017386; 
Kenneth Edward Stephens, Decision 06-216, 2006 WL 3900166 (N.Y.S.E. Hearing Board 
December 13, 2006) (defendant allegedly defrauded seniors of over $1.3 million through 
unauthorized trading); David A. Noyes & Co., Inc., Decision 05-98, 2005 WL 3439785 (N.Y.S.E. 
Hearing Panel November 9, 2005) (defendant allegedly made unsuitable sales of variable annuities 
to unsuspecting seniors resulting in a loss of approximately $375,000). 

 

 25

http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P019240
http://www.finra.org/PressRoom/NewsReleases/2006NewsReleases/P017386


been created, and it appears that the investment adviser later completed the forms in order 
to liquidate the clients’ existing portfolios and purchase equity-indexed annuities, without 
the knowledge, authorization, or consent of each of the clients.  

 
⇒ Possible Fraud in the Sale of Oil and Gas Partnerships 

 
At one firm, examiners discovered that the broker-dealer was involved in an apparent 
scheme that targeted elderly investors by selling unsuitable, unregistered oil and gas 
partnerships.  The partnerships were sold through sales seminars.  As part of this scheme, 
it appears that investors’ funds may have been misappropriated.  It also appears that the 
broker-dealer may have made misrepresentations regarding the risks involved with these 
partnerships, stating that they were safe investments that would generate an income of 
10-12%, with minimal risk.  It appears that approximately $10 million was raised from 
dozens of elderly retired investors.  This registered representative may have made 
material misrepresentations and omissions to investors concerning the value, nature 
and/or disposition of their purported investments by reflecting the market value of these 
partnerships as the original principal invested.  The market value was not ascertainable 
because a ready market did not exist for such securities. 
 

⇒ Sales of Fictitious “Notes” 
 

At another firm, examiners found indications that a registered representative, who 
conducted business out of a retirement community, may have sold a non-existent 
investment to a senior investor for approximately $10,000.  The investor was told that her 
money would be loaned to real estate developers, when the money may have been used 
for personal expenses of the registered representative, mostly to repay trading losses he 
had incurred years prior, as well as interest on those losses. 

 
V. CONCLUSION  

 
The results of these examinations lead regulators to conclude that financial services firms 
should take steps to supervise sales seminars more closely, and specifically take steps to 
review and approve all advertisements and sales materials for accuracy and to ensure that 
they do not contain exaggerated or misleading claims.  In addition, firms should redouble 
efforts to ensure that the investment recommendations they make to seniors are suitable 
in light of the particular customer’s investment objectives.  With the growing senior 
demographic, firms might consider specific training for their registered representatives 
and investment advisers regarding sales to senior investors. 
 
Regulators have compiled a list of supervisory practices that have been identified during 
examinations and that appeared to be effective, which is included in Appendix B of this 
report.  This information may assist firms in considering their own supervisory practices 
with respect to sales seminars.  Regulators further urge financial services firms to take 
steps to assure that supervisory procedures with respect to sales seminars are being 
implemented effectively.  

 26



Regulators participating in these examinations will continue to focus examination, 
enforcement and regulatory efforts on the use of sales seminars targeted to seniors.  
 
In addition, regulators conclude that, because seniors are targeted as attendees for sales 
seminars, ongoing investor education efforts for seniors should provide education with 
respect to “free lunch” sales seminars.  Specifically, senior investors should understand 
that these are sales seminars -- that is, they are intended to result in the sales of financial 
products, and they may be sponsored by an undisclosed company with a financial interest 
in product sales.  Investor education efforts should emphasize that, despite the claims of 
urgency that are sometimes made by sponsors of sales seminars, and in light of the 
possibility of misleading or exaggerated statements or claims about investment products 
or the expertise of the financial adviser, investors should take time to research the firm, 
the financial adviser as well as the product being offered before opening an account or 
making a purchase.  Regulators make a variety of tools available to investors to assist 
them in understanding investment products and investigating a broker or other financial 
professional before investing, and many of these tools are listed in Appendix C to this 
report.  
 
### 
 
 
 
 

 27



APPENDIX A 
 

SAMPLE ADVERTISEMENTS 
 
 

This appendix contains a sample of advertisements (many of which appeared in local 
newspapers and mass-mailed invitations) soliciting attendance at sales seminars.  They 
are included as illustrative examples of the types of advertisements commonly used.  
Including them in this report does not indicate that they contain either accurate or 
inaccurate statements.  The names of the sponsors, addresses, telephone numbers and 
other identifying information have been redacted. 

 
 

 

 28



 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 29



 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 30



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 31



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 32



 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 33



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 34



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 35



 

 
 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 36



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 37



 

 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 38



 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 39



 
 

 This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 40This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 41



 
 
 

This appendix contains a sample of advertisements (many of which appeared in local newspapers and 
mass-mailed invitations) soliciting attendance at sales seminars.  They are included as illustrative examples 

of the types of advertisements commonly used.  Including them in this report does not indicate that they 
contain either accurate or inaccurate statements.  The names of the sponsors, addresses, telephone numbers 

and other identifying information have been redacted.

 42



APPENDIX B
 

EFFECTIVE COMPLIANCE and SUPERVISORY PRACTICES 
 

During examinations of securities firms that provided “free lunch” sales seminars and in 
other examinations, examiners took note of several supervisory and compliance practices 
that appeared to be effective in ensuring adequate supervisory oversight and compliance 
with the securities laws with respect to sales seminars.  These practices are described 
below.  While these practices are not specifically mandated by the securities laws, 
individually or in combination they may be helpful to consider as securities firms are 
reviewing their supervisory and compliance practices in these areas. 
 
Supervision of Seminars and Advertising  

 
Regulators noted the following practices that were used in supervising individual 
registered representatives/investment advisers who held sales seminars and for reviewing 
and approving advertising materials for the seminars: 

 
 The process for reviewing and approving proposed seminars and the advertising 

and other materials for the seminars was centralized, and included a dedicated 
compliance person with knowledge of the securities laws and rules with respect to 
advertising materials.  The firm’s policies and procedures clearly set forth the 
process for proposing seminars and advertising materials, and they were made 
known to all firm employees.  Supervisory reviews of advertising and sales 
materials generally identified disclosure mistakes and potential problem areas that 
were corrected prior to the time the advertising materials were to be used.   

 
 Policies and procedures for submitting proposals for sales seminars included 

specific timeframes for supervisory review and approval.  For example, the 
approval and review process for seminar and advertising material required 
submissions of all materials three to four weeks prior to the seminar date.  This 
allowed adequate time for supervisors to review and correct disclosure issues and 
any other issues identified prior to the seminar.   

 
 All advertising material was forwarded to the home office for review and 

approval prior to use.  This firm required information on seminar guest speakers 
to be forwarded and approved as well. 

 
  One firm had two levels of supervisory approval for seminars and all sales 

materials and advertisements to be used at those seminars.  The branch manager 
review was the first level of approval.  The materials were then sent to the main 
office to be reviewed and approved by the compliance department.  

 
 Written guidance was provided to all individuals who may be involved in sales 

seminars – the registered representatives who conduct sales seminars, the branch 
office manager and other supervisors who review and approve the seminars and 

 43



sales materials as well as any compliance staff who may also review the sales 
seminars and materials prior to use.  The guidance provided clear explanations of 
what was permissible and what was not permissible, both in terms of compliance 
with the securities laws, and compliance with the firm’s own policies. 

 
 Written checklists were used to aid firm employees in reviewing and approving 

sales seminar advertisements and sales literature to ensure that the materials used 
complied with regulatory requirements and the firm’s policies. 

 
 One firm’s procedures required that supervisors or compliance staff make written 

edits to proposed sales seminar materials or advertising, and required that this 
marked-up draft be provided along with a final copy of the materials (showing 
that the changes had been made) to the reviewing official for the permanent file.  

 
 Standardized, pre-approved materials and advertisements were used for sales 

seminars.  The firm’s procedures required that all marketing materials be created 
at a central level; individual registered representatives were not involved in 
creating their own seminar materials or advertisements.  Registered 
representatives also used a standard outline for seminars.  

 
 Materials for sales seminars were maintained in a centralized location. A 

complete package of seminar and advertising materials were filed and maintained 
in one place, including a copy of the request to host the seminar with indications 
of approval by the branch office manager and any other authorized approving 
official.  The file included the title of the seminar, date, location, speaker, any 
guest speakers, the company they represent, the date the approval was given and 
the list of people who were invited to attend the seminar.  The file also contained 
a list of attendees, whether they were a client or prospect, a photocopy of the 
actual seminar ad that ran in the newspaper, the approved marketing pieces that 
were distributed at the seminar, approved copies of the slide presentation and any 
other information given to attendees. 

 
 Branch managers were expected to attend a percentage of the sales seminars 

presented by the sales people they supervised.  
 

 “Mystery shoppers” (who were firm employees) were utilized on a random basis 
to attend sales seminars and to identify potential disclosure and compliance 
weaknesses, and report any issues back to the direct supervisors of the seminar 
hosts. 

 
 All registered representatives were required to certify to their branch manager 

each month that they had provided all advertisements, sales literature, and 
correspondence items used during the month.  

 
 
 

 44



General Supervisory Practices 
 

 Procedures explicitly addressed the review and monitoring of communications 
with clients and prospective clients.  For example, monitoring systems were in 
place to effectively detect problematic communications by registered 
representatives in e-mail communications.  

 
 The supervising principal actively reviewed correspondence, made frequent   

inquiries and provided feedback to the employed representative.  This 
involvement appeared to enhance the firm’s ability to identify and prevent any 
sales practice issues that may exist, and also provided supervised persons with 
individual training and guidance through active supervisory feedback on their 
communications. 

 
 Annual training programs provided thorough and clear information about 

compliant and non-compliant practices.  Training did not simply recite rule 
requirements, but included examples that were relevant to the nature of the work 
performed by the employees being trained.   

 
 

 
 
 
 

 

 45



APPENDIX C 
 

RESOURCES FOR SENIORS 
 

o The SEC provides important information for senior investors including 
explanations of different products, asset allocation and risk.  You can also get 
information on affinity fraud, “senior specialists” and investment advisers and 
what to look for to identify and steer clear of potential frauds.    
http://www.sec.gov/investor/seniors.shtml  

 
o FINRA also provides important information for senior investors.  Its website  has 

such items as Broker Check – that gives you the ability to look up the history of 
your investment professional to see if they have prior complaints or problems: 
http://www.finra.org/InvestorInformation/InvestorProtection/ChecktheBackgroun
dofYourInvestmentProfessional/index.htm

FINRA’s website also has tools and resources to protect senior investors and help 
them make informed investment decisions, including “Investor Alerts” that 
provide timely information on steering clear of investment scams and problems 
instead of just dealing with their aftermath.  Subjects of recent alerts include 
“Look Before You Leave:  Don't Be Misled by Early Retirement Investment 
Pitches That Promise Too Much,” Annuities and Senior Citizens: Senior Citizens 
should be Aware of Deceptive Sales Practices when Purchasing Annuities,” and 
“Seniors Beware: What you should know About Life Settlements.” 
http://www.finra.org/InvestorInformation/InvestorAlerts/index.htm

o The North American Securities Administrators Association (NASAA) also has 
helpful information available for seniors on its website: 
http://www.nasaa.org/Investor_Education/Senior_Investor_Resource_Center/  

Resources include: a quick checklist of questions to ask before you invest, 10 tips 
to protect your nest egg and guidance on where to turn for help.  

 
o Regulators have warned that seniors may be confused by designations that imply 

some expertise in helping seniors.  Information regarding professional 
designations is available through NASAA’s Investor Alert is at www.nasaa.org, 
the SEC’s information on professional designations at 
http://www.sec.gov/investor/pubs/senior-profdes.htm and NASD’s professional 
designation database found at 
http://apps.finra.org/DataDirectory/1/prodesignations.aspx. 

 

 46

http://www.sec.gov/investor/seniors.shtml
http://www.finra.org/InvestorInformation/InvestorProtection/ChecktheBackgroundofYourInvestmentProfessional/index.htm
http://www.finra.org/InvestorInformation/InvestorProtection/ChecktheBackgroundofYourInvestmentProfessional/index.htm
http://www.finra.org/InvestorInformation/InvestorAlerts/index.htm
http://www.nasaa.org/Investor_Education/Senior_Investor_Resource_Center/
http://www.nasaa.org/
http://www.sec.gov/investor/pubs/senior-profdes.htm
http://apps.finra.org/DataDirectory/1/prodesignations.aspx