RIA Compliance Blog
An independent insurance agent, Glenn Neasham, was convicted on a felony-theft charge in March for selling a complex indexed annuity to an 83-year old client in a California court. He was sentenced to spend ninety days in jail. Prosecutors claimed that Mr. Neasham’s client had exhibited signs of dementia and was not capable of consenting to the transaction.
This case has stirred fear among insurance and securities agents. The state’s then-insurance commissioner stated in 2010, after Mr. Neasham’s arrest, that agents “who steal from vulnerable seniors will not get away with their shameful tricks.” Agents are attracted to indexed annuities because they receive high commissions, which can be 12% or more of the invested amount. As a result of this case and heightened regulatory scrutiny, agents will have to think twice before selling indexed annuities to the elderly. The $14,000, or 8%, commission that Mr. Neasham received was a factor used against him to prove his criminal intent.
Mr. Neasham adamantly claims that his client was not confused at all when the transaction took place; however, the bank manager at the bank where his client withdrew money believed that she appeared to be confused and influenced by her boyfriend. As a result, the bank manager notified California’s adult protection officials.
One issue presented by this case is whether agents, who have no medical background, should be responsible to diagnose problems such as dementia. All agents must reasonably know their clients, and if a reasonable person would know that a specific elderly person is exhibiting signs of dementia, then the agent is going to be held accountable. Rachel Ableson, the Lake County Senior Deputy District Attorney, said “there was sufficient evidence presented at trial to show that [the victim] was not capable of consenting to the transaction in question and evidence showed that Mr. Neasham knew that at the time.”
This case also shows authorities’ continuing discomfort with indexed annuities. We previously posted a blog in February when the Financial Industry Regulatory Authority (FINRA) released a regulatory notice that called for heightened supervision of complex products. The notice stated, “Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.” There is even more concern for elderly people with illnesses, who are incapable of completely understanding the transaction. The notice also notes that a firm or registered representative must perform a reasonable basis suitability test before recommending it to the investor. In this situation, these illiquid investments may not be suitable for elderly clients who have a need for the income. If Mr. Neasham’s had decided to withdraw her money in the first year, she would have had to pay a penalty equal to 12.5% of the principal.
The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA) view the protection of senior investors as a top priority. In March 2008, NASAA adopted the NASAA Model Rule on the use of Senior-Specific Certifications and Professional Designations, which 19 states have already adopted. Two other states already had rules to protect seniors prior to the creation of the Model Rule. SEC, FINRA and NASAA released a joint report in 2010 relating to protecting senior investors. It provides additional practices that should be used by firms and agents to help protect senior investors. These practices include:
- Communicating effectively with senior investors;
- Training and educating firms employees on senior-specific issues;
- Establishing an internal process for escalating issues and taking next steps;
- Obtaining information at account opening;
- Ensuring appropriateness of investments; and
- Conducting senior-focused supervision, surveillance and compliance reviews.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.