[Senate Hearing 110-301]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-301

 ADVISING SENIORS ABOUT THEIR MONEY: WHO IS QUALIFIED--AND WHO IS NOT?

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                           SEPTEMBER 5, 2007

                               __________

                           Serial No. 110-13

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html


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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware           MEL MARTINEZ, Florida
BILL NELSON, Florida                 LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     ARLEN SPECTER, Pennsylvania
                     Debra Whitman, Staff Director
            Catherine Finley, Ranking Member Staff Director

                                  (ii)






























                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator David Vitter........................     2
Opening Statement of Senator Claire McCaskill....................     3
Opening Statement of Senator Norm Coleman........................     4
Opening Statement of Senator Bob Casey...........................     5
Opening Statement of Senator Ken Salazar.........................     7
Opening Statement of Senator Gordon H. Smith.....................     8

                                Panel I

Christopher Cox, chairman, U.S. Securities and Exchange 
  Commission, Washington, DC.....................................     9

                                Panel II

Lori Swanson, Attorney General, State of Minnesota, St. Paul, MN.    29
William Galvin, secretary of the Commonwealth, Boston, MA........    45
Joseph Borg, president, North America Securities Administration 
  Association, Washington, DC....................................    52
Nicholas Nicolette, president, Financial Planning Association, 
  Washington, DC.................................................    61
Sandy Praeger, insurance commissioner, Topeka Kansas; on behalf 
  of the National Association of Insurance Commissioners.........    69

                               Panel III

Gary Bhojwani, president and CEO, Allianz Life Insurance of North 
  America, Minneapolis, MN.......................................    84
Edwin Pittock, president, Society of Certified Senior Advisors, 
  Denver, CO.....................................................   101

                                APPENDIX

Responses to Senator Kohl's Questions from Secretary Galvin......   123
Responses to Senator Smith's Questions from Secretary Galvin.....   124
Responses to Senator Kohl's Questions from Joseph Borg...........   129
Responses to Senator Smith's Questions from Joseph Borg..........   130
Responses to Senator Kohl's Questions from Nicholas Nicolette....   138
Responses to Senator Smith's Questions from Nicholas Nicolette...   139
Responses to Senator Kohl's Questions from Sandy Praeger.........   142
Responses to Senator Smith's Questions from Sandy Praeger........   143
Responses to Senator Kohl's Questions from Gary Bhojwani.........   170
Responses to Senator Smith's Questions from Gary Bhojwani........   171
Responses to Senator Smith's Questions from Edwin Pittock........   177
Letter submitted by Frank Keating, president and CEO of the 
  American Council of Life Insurers..............................   178
Letter submitted by Brian K. Atchinson, president and CEO, 
  Insurance Markeplace Standards Association (IMSA)..............   180
Statement submitted on behalf of CEASE, Coalition to End Elder 
  Financial Abuse................................................   185
Statement submitted from the National Association of Insurance 
  and Financial Advisors (NAIFA).................................   189

                                 (iii)

  
Testimony submitted from Certfied Financial Planner Board of 
  Standards, Inc.................................................   193
Statement submitted by Walt Woerheide, Ph.D., CFP, vice president 
  of Academics and Dean, The American College....................   199
Statement submitted by James Kendzel MPH, SPHR, executive 
  director, National Organization for Competency Assurance (NOCA)   205
Testimony of Steven R. McCarty and Jeffrey S. Kopitz, chairman 
  and president of the National Ethics Bureau....................   217
Reply to the National Ethics Bureau's Testimony from the director 
  of the Massachusetts Securities Division.......................   222
Statement submitted by the National Association for Fixed 
  Annuities (NAFA)...............................................   225
Letter submitted by the Old Mutual Financial Network (OMFN)......   229





























 
 ADVISING SENIORS ABOUT THEIR MONEY: WHO IS QUALIFIED--AND WHO IS NOT?

                              ----------                              --



                      WEDNESDAY, SEPTEMBER 5, 2007

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 3:05 p.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl, Salazar, Casey, McCaskill, Smith, 
Coleman, and Vitter.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon. We welcome you all this 
afternoon to today's hearing. We particularly want to thank our 
witnesses for taking time out of their busy schedules to be 
here with us.
    Today, we intend to examine the nationally growing problem 
of poorly trained ``senior investment specialists'' and take 
the first step toward much-needed reform. Many seniors are 
discovering that their life savings will not see them through 
their Golden Years, and they are turning to investments to 
increase their retirement income.
    With the intent of investing wisely and knowledgably, older 
Americans often turn to financial advisors. An investigation 
conducted by this Committee has found that many seniors are 
losing their retirement income and savings by placing their 
trust in so-called ``advisors'' who, in many cases, may not 
deserve that moniker.
    More and more individuals are representing themselves as 
certified ``senior'' investment specialists when they often 
have limited or no education, no experience in extremely 
complicated financial matters. It is estimated that there are 
thousands of individuals holding themselves out as ``senior'' 
specialists. Although some may have legitimate credentials, 
oftentimes they do not.
    We know that an attorney must go to school for 3 years and 
pass a State Bar Exam. A CPA must have a college degree, an 
additional year of study, and must also pass a national exam. 
Neither can offer their professional services without these 
credentials.
    Seniors should be able to trust the people who invest their 
money. They should not be worried that the title after their 
advisor's name is oftentimes scarcely more than a marketing 
ploy, and that it was not earned through sufficiently rigorous 
financial education or financial training.
    You can see from the poster that we have here today, there 
are many different designations, and they all sound very 
official. These are just a handful of those being marketed 
today.
    You would be very surprised to know that, in order to 
obtain some of them, all it takes is a weekend and as many 
cracks at an open book, multiple-choice exam that is needed. We 
can't tell the difference between the more legitimate titles 
and those with less rigorous standards.
    We can't tell. Can you? More importantly, can our seniors?
    During this hearing, we will also take a look at how some 
of these so-called ``senior advisors'' and other inadequately 
trained sales agents are placing seniors' money in investments 
unsuitable for their needs. We want to make it clear at the 
outset that we are not taking any position on the benefits or 
relative value of any financial products.
    However, some investment products are extremely complex and 
require a trained expert to explain their costs and their 
benefits. Unfortunately, many seniors are not receiving these 
clear and unbiased explanations when they receive financial 
advice.
    To be fair and to gain as wide a perspective as possible, 
we have invited a number of financial and insurance-related 
organizations to provide their written views on these issues, 
and we have made those statements available.
    While it is true that many financial advisors hold 
reputable designations, far too many do not. More importantly, 
having too many designations and certifications out there can 
only serve to confuse our seniors.
    Older Americans need to know whom they can trust. To 
address this problem, we intend to develop legislation that 
will provide a uniform standard for the accreditation of senior 
financial advisors.
    In the months to come, we will also be working with the 
financial and investment industries to reform the use of 
designations. We are pleased that increasing concern 
surrounding this issue has already caused a number of companies 
to ban or limit the use of ``Senior Specialist'' designations 
by their employees.
    So once again, we thank all of our witnesses for being 
willing to take part in this Committee's work. With that, I 
would like to call upon the Members here today to make whatever 
opening comments they would like. We would start with the first 
one who arrived, David Vitter.

           OPENING STATEMENT OF SENATOR DAVID VITTER

    Senator Vitter. Thank you, Mr. Chairman. I want to thank 
you and Ranking Member Smith for calling this hearing. It is a 
very serious issue and, therefore, a very necessary and 
important hearing.
    I just want to briefly say on my opening statement that I 
know from personal conversations and visits, I know that this 
is a very real problem in Louisiana, as elsewhere. In fact, 
given events and circumstances over the last couple of year, 
particularly the hurricanes, I think it may be even more 
challenging in Louisiana.
    The hurricanes Katrina and Rita have put enormous burdens 
on all of our citizens, including so many seniors. It has also 
put enormous strains on the criminal justice system, and that 
has meant less ability to look at these sorts of fraud issues 
and cases versus violent crime.
    At the same time, the latest census data shows that 
Louisiana has over 370,000 households with one or more seniors 
in them. This problem and this challenge hasn't abated simply 
because all of those other challenges are there.
    So it is very real problem that I have heard about 
directly, and I certainly look forward to the hearing, and look 
forward to being part of constructive solutions.
    Thank you.
    The Chairman. Thank you very much, Senator Vitter.
    Senator McCaskill.

         OPENING STATEMENT OF SENATOR CLAIRE MCCASKILL

    Senator McCaskill. Thank you, Mr. Chairman.
    This is an incredibly important topic, and I am glad that 
we have several panels. I want to apologize. At my pay grade, 
Mr. Chairman, I have to go preside, and so I have to leave the 
hearing at 4 and will not be here for some of the----
    So I want to bring to the attention of the other Members of 
the Committee that might be here how important it is, I think, 
to talk to the certified senior advisors witness. Because, in 
looking at the marketing materials that this group puts out, 
let me read just a couple of things for--and particularly for 
our first witness, because I think it is relevant to his job, 
certainly.
    Basically, one of the things said to a group of seniors 
that were asked to come have lunch, ``Wall Street, stocks, 
bonds, mutual funds. Tired of losing money? Learn how to invest 
in the stock market without risk to your principal.'' 
``Retirees are doing this in record numbers.'' ``How to grow in 
a volatile stock market without giving back your gains.'' ``How 
to take advantage of an automatic strategy indicating when to 
buy and when to sell.'' Now, the interesting thing is, when you 
go to the marketing for CSA--and why someone should come and 
pay $1,195 to get this certification--they talk about 
marketing, and marketing, and marketing and marketing. In fact, 
if you look at the list of things they learn about, very few of 
the chapters involve any kind of financial expertise 
whatsoever.
    I think maybe the most telling part of their marketing is 
they list the group of people that should buy this $1,195 
course, over the Internet, to become a certified senior 
advisor. They say--they list all the people that can benefit 
from it, clergy, CPAs, doctors, nurses, pharmacists. Perhaps 
the one that is most telling about how low they may be willing 
to go, gravesite managers.
    I just think that there are people taking advantage here, 
and I think there are things we can do without interfering in 
solid business practices for many financial planners that are 
out there. I know the certified financial planner designation 
is a serious and significant one. I know it is a very difficult 
exam. I know it involves serious study.
    So I want to make sure that we don't paint too broad a 
brush here and indict good, hardworking people that are 
knowledgeable, that are trying to help seniors with--and so 
that is the delicate balance we have got to find, Mr. Chairman, 
is how can we ferret out people who are willing to take 
advantage because they are trying to make more money, and those 
who are really trying to get educated so that they can advise 
seniors in the most serious and responsible way.
    I am glad you are having this hearing. I hope I have an 
opportunity to stay for as much of it as possible. Thank you 
for giving me an opportunity to open with a few comments.
    The Chairman. Thank you, Senator McCaskill.
    Senator Coleman.

           OPENING STATEMENT OF SENATOR NORM COLEMAN

    Senator Coleman. Thank you, Mr. Chairman. I come to this 
hearing not just as a Senator, but as the son of a senior 
parent. We all care deeply about--others in my generation about 
their parents' well-being. These kind of issues become very 
personal.
    I would like to note the Minnesota presence at today's 
hearing. Chairman Cox, who was born in my home city of St. 
Paul, the Minnesotas Attorney General, Lori Swanson, and Gary 
Bhojwani, who is the president of Golden Valley, Minnesota-
based Allianz Life Insurance. So Minnesota is well represented.
    Mr. Chairman, as more and more seniors seek to preserve and 
protect their savings for their Golden Years, they have turned 
increasingly to financial products such as annuities, and there 
is no question that these annuities can play a positive role in 
a senior's financial well-being. But in certain circumstances, 
they also serve as financial deathtraps to seniors.
    We have had a lot of media interest in this issue, legal 
developments, which highlight some questionable, if not 
illegal, practices. I am troubled by what I see is, in some 
instances, a betrayal of trust.
    We have titles. They are very fancy-sounding, but what is 
behind them? For a senior, what do they think that they are 
getting with this, which should be a trust relationship?
    My State, Mr. Chairman, provides strong protection for 
consumers in terms of performance suitability, licensing and 
exam requirements, but my State has also seen its share of 
problems.
    Just last month, the State's Department of Commerce, which 
regulates insurance companies, levied a $1.4 million fine, the 
third largest fine in history, on American Investors Life 
Insurance Company and two of its subsidiaries, AmerUs Life and 
Senior Benefit Services, for practices relating to the sale of 
annuities. As many as 5,000 Minnesotans were affected by the 
sales, according to the Department.
    Just last year, the same Department imposed the largest 
fine ever, in the amount of $2.5 million, on Conseco Life 
Insurance for illegal practices relating to their sale of 
insurance products, including annuities.
    These are troubling. I would argue that it is in the 
bottom-line interest of the industry to do its part to inspire 
trust and confidence. In the end, no one wins when consumers 
are hurt and trust is lost in important and worthwhile 
financial products.
    In the end, there is a trust issue here. There are good 
products out there, but I think everyone is a loser. We 
continue to have these issues of a lack of trust and a lack of 
confidence.
    I was struck by a comment made last month to our Star-
Tribune, the Minneapolis-based Statewide paper, by the 
Department of Commerce Chief Examiner, Paul Hanson. He said, 
``There is less abuse of annuities today, but the practice 
still goes on.''
    I would say, ``Mr. Chairman, that that is unacceptable.'' 
Although I am encouraged that some in the industry appear to be 
seeking to address the concerns and problems that have been 
raised by seniors and policymakers, we must do more, and I 
think this hearing is a reflection of that.
    I thank the Chairman for holding the hearing. I look 
forward to hearing from the witnesses as to how further abuses 
can be prevented from happening again, and then what we as 
policymakers need to do to provide greater trust and greater 
confidence and greater security for our seniors in this very 
important area.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Coleman.
    At this time we will turn to our first panel, and we are 
very pleased to have Chris Cox, who is Chairman of the 
Securities and Exchange Commission, as our individual here.
    Chairman Cox has served as the SEC Chairman since August of 
2005 and, before that, he was a distinguished Member of the 
House of Representatives for many years. So, we welcome you 
back to the Hill, Chairman Cox. We look forward to your 
testimony.
    Just before you speak, we will ask the two distinguished 
Senators who just arrived to make some comments, if they wish, 
Senator Salazar and Senator Casey.

             OPENING STATEMENT OF SENATOR BOB CASEY

    Senator Casey. Mr. Chairman, thank you very much, and I 
appreciate Senator Salazar letting me go ahead of him. I was in 
the door 1 minute before him, so I made it under the line.
    Thank you, Mr. Chairman, for calling this hearing. It is 
important that we focus on this issue, for a whole variety of 
reasons.
    We appreciate the witnesses who will be here. Chairman Cox 
is our first witness. Thank you for your service in the 
Congress, as well as now in a different position in the Federal 
Government.
    I come from a State where we have just about--we are either 
second or third now in the percent of Pennsylvanians over the 
age of 65 compared to every other State. We have got a little 
more than 15.5 percent of our population over 65, 1.9 million 
Pennsylvanians.
    We know that in Pennsylvania, the highest--or I should say 
the fastest-growing population are those over age 85 and up, so 
this is a major challenge for all of us. We all know some of 
the terminology that is applied to people sometimes who have 
very little experience, may have taken a very limited course, 
maybe 4 hours on the Internet, and all of a sudden they are 
supposed to be an expert to advise older Americans on highly 
complex matters.
    I am going to submit my whole statement for the record. But 
I know that one of our witnesses will speak about Arthur Moyer, 
a former machinist from Pennsylvania who is now deceased, who 
was tragically misled by an individual who presented himself as 
a senior ``expert,'' and induced Mr. Moyer into investing 
$500,000 in a deferred annuity that Mr. Moyer could not touch 
for a period of 10 years. Mr. Moyer was 79 years old at the 
time he received this.
    To say it is misinformed is an understatement. Terribly 
misinformed advice. It certainly was not in the best interest 
of Mr. Moyer, nor would it be for any American.
    Less than a year after this, Mr. Moyer died, and his family 
claims the stress and the impact of this incident contributed 
to his decline, his health decline, and his death. Yet, the 
financial ``expert'' who induced Mr. Moyer to take these 
actions, is still in business.
    So this is serious business. This isn't just an academic 
hearing. It is a hearing about how unscrupulous and unethical 
people have an impact on people's lives. Sometimes their life 
physically, but certainly financially.
    So with that, I am grateful to have this opportunity to 
learn more about this and to question our witnesses. Mr. 
Chairman, I thank you for calling the hearing.
    [The prepared statement of Senator Casey follows:]

             Prepared Statement of Senator Robert P. Casey

    Thank you, Chairman Kohl, for holding this very important 
hearing. The issue we are here to discuss is extremely 
disturbing and one that has received too little attention. I'm 
grateful we have this opportunity to shed some increased light 
on this issue today and examine the potential solutions.
    Prior to being elected to the Senate, I spent 10 years as a 
public servant in Pennsylvania, as Auditor General and 
Treasurer. During this time, I fought numerous battles for the 
safety and protection of our older citizens. As our population 
lives longer, the number of older individuals is increasing--
last year, there were more than 37 million citizens age 65 and 
older. Pennsylvania has the third largest population of older 
citizens in the country--1.9 million. Nothing is more important 
to me on the domestic front than ensuring that our seniors do 
not fall prey to unscrupulous, unethical or even fraudulent 
practices like the type we are here today to examine.
    Specifically, we are addressing the issue of so-called 
senior financial ``experts'' who may have had as little as a 
four-hour course on the internet to prepare them for advising 
seniors on highly complex financial investment decisions. Yet, 
with such minimal--practically non-existent--training, they 
wield impressive titles like ``Certified Senior Advisor.'' They 
engage in practices such as ``free lunches'' to draw in 
retirees, provide them fancy written materials to further 
establish professional credibility and then induce seniors into 
what have often turned out to be unwise and even disastrous 
financial investments. These ``Certified Senior Advisors'' get 
hefty commissions. In return, our older citizens may lose their 
life savings to unwise investments that they often cannot touch 
for long periods of time--in some cases up to 10 or 15 years--
without incurring enormous penalties.
    Even those of us who are not grappling with the challenges 
of growing older can be mystified by the many available options 
for financial investments. Everywhere you look there are 
advertisements for financial investment assistance. For an 
individual seeking financial assistance with retirement and 
living expenses and perhaps facing limited income options, a 
professional with the title ``Certified Senior Advisor'' sounds 
pretty credible and reliable. Apparently that is exactly what 
these ``experts'' are hoping they will believe. According to 
the AARP, seniors control more than $14 trillion in assets--
they are an attractive target for unscrupulous schemes.
    Mr. Arthur Moyer, a former machinist from PA--now 
deceased--was tragically misled by an individual who presented 
himself as a senior ``expert'' and induced Mr. Moyer into 
investing $500,000 in a deferred annuity that Mr. Moyer then 
could not touch for a period of ten years. Mr. Moyer was 79 at 
the time he received this extremely misinformed advice. It 
certainly was not in his best interests. Less than a year 
later, Mr. Moyer died. His family claims the stress and upset 
from this incident contributed to his health decline and death. 
Yet the financial ``expert'' who induced Mr. Moyer is still in 
business.
    I know seven states are releasing the results of 
investigations into these practices and I look forward to 
learning the results of these investigations and continuing 
such examinations in other states. The bottom line is that this 
kind of practice should not be happening and we need to protect 
our older citizens. There are legitimate financial advisors out 
there--who are doing their jobs and looking out for the 
interests of their clients but there are far too many 
unqualified individuals who are not. I am glad to see that the 
Securities and Exchange Commission is sponsoring a Summit next 
week on this issue and that I look forward to other testimony 
concerning efforts underway in the states. I look forward to 
working with you all to ensure that our older citizens get the 
education and assistance they need to be safe from these 
practices in the future. Thank you.

    The Chairman. Thank you, Senator Casey.
    Senator Salazar.

            OPENING STATEMENT OF SENATOR KEN SALAZAR

    Senator Salazar. Thank you very much, Chairman Kohl, for 
holding this hearing on this very important issue. Let me just 
say thank you as well to the witnesses who are here today. I 
have a statement for the record that I will submit for the 
record, and I will just supplement that, Mr. Chairman, with a 
couple of comments.
    First, during my 6-year tenure as Colorado Attorney 
General, one of the things that I tried to focus on was to make 
sure that we were doing everything we could to protect our 
seniors from financial exploitation. That financial 
exploitation comes in many dresses and many forms.
    It comes in sweepstakes fraud. It comes in contractor 
fraud. It comes in a whole host of ways in which seniors are 
victimized in every single community and every single State 
across our Nation.
    I always found it to be a frontal assault to one of the 
values that we ought to hold dear as Americans, and that is the 
value of respecting our elders. It was in that regard that I 
joined with AARP as Attorney General in forming a program 
called AARP Elder Watch, which was an effort to try to educate 
seniors with respect to the things that they ought to be 
watching out for so that their life would not end up in the 
kind of victimization and tragedy that we will hear recounted 
here today, I am sure, from witnesses.
    So I would hope that one of the things, Mr. Chairman, that 
comes out of this Committee is that we can help our Congress, 
our Nation, figure out ways of honoring that value, of 
respecting our elders and protecting seniors from the financial 
exploitation that often victimizes many seniors across America.
    I would venture to say that there is not a person alive who 
has not watched seniors in their own family be victimized, 
whether it is through charitable fraud, whether it is through 
sweepstakes fraud, or whether it is through the kind of 
financial exploitation and consulting practices that we will 
hear about more today.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Salazar.
    Our distinguished Ranking Member has just arrived, Senator 
Smith, and we would love to hear from you.

   OPENING STATEMENT OF SENATOR GORDON SMITH, RANKING MEMBER

    Senator Smith. Thank you, Mr. Chairman. So appreciate your 
convening this hearing on this important topic.
    Recently, the Wall Street Journal indicated that $12 
trillion suits in U.S. investment and insurance accounts 
earmarked for retirement. In the next 40 years, boomers are 
poised to inherit $7 trillion from their parents. With that 
kind of money at stake, it is clearly easy to see why many 
would be targeting it for fraud.
    Again this backdrop, states report a marked increase in the 
number of complaints relating to the use of professional 
designations that claim to provide expertise in the area of 
seniors' finances. Many States, including my own State of 
Oregon, have issued consumer alerts warning investors about 
financial advisors who hold themselves out as senior 
specialists.
    That in mind, Mr. Chairman, I recently charged several of 
my staffers on the Aging Committee to take the exam, to see 
what it took to qualify themselves as specialists. One of them 
took the CSA exam.
    She read all the material in 1 hour. She sat for a 3-hour 
exam and, in 1\1/2\ hours, she obtained a passing score of 82 
percent. I wonder how much of a specialist she really is in 
that, even though I know her to be a very brilliant person. 
Wonder if the standard is high enough to establish her as a 
specialist?
    Misuse of specialist designations, lack of transparency in 
investment transactions and the Nation's declining savings rate 
have created a perfect storm for financial exploitation of 
America's seniors.
    Therefore, it is no surprise to hear that complaints are on 
the rise. I hope that today's witnesses can shed some light on 
the legitimacy and utility of specialist designations. 
Ultimately, I hope the message emerges that, while we must 
combat investment scams and other types of financial fraud and 
abuse, we must ensure that we do not discourage Americans from 
saving and investing in their future.
    To the contrary, our country needs to save and invest more. 
So I will do my part, Mr. Chairman, to help increase the 
financial literacy of seniors, and I am working on all kinds of 
bills to that effect with Democratic colleagues on the Finance 
Committee, to make sure that the investment community that is 
out there is safe for seniors to go into so they can prepare 
for their retirements.
    To that end, I am developing, along with Democratic 
colleagues on the Finance Committee, a bill that is targeted 
toward improving financial literacy. So I look forward to 
hearing from our witnesses, their recommendations for 
additional assistance that Congress might be able to provide, 
to prevent fraud among investors and to help victims recover 
their assets.
    So thank you, Mr. Chairman, for this hearing.
    The Chairman. Thank you, Senator Smith.
    At this time, we do turn to Chris Cox for your testimony. 
We appreciate your being here.

  STATEMENT OF CHRISTOPHER COX, CHAIRMAN, U.S. SECURITIES AND 
              EXCHANGE COMMISSION, WASHINGTON, DC

    Mr. Cox. Thank you very much, Chairman Kohl, Ranking Member 
Smith, and Members of the Committee. I am pleased to be here 
today to discuss the important work that the SEC is doing to 
protect our Nation's senior citizens.
    Financial fraud against the elderly is a topic that I, my 
fellow SEC Commissioners, and every professional staff member 
at the SEC care deeply about. That is why, since I became 
Chairman, I have made protecting senior citizens and their 
investments one of our top priorities at the Commission.
    Some Census numbers that were released earlier this year 
will add to what you have already elucidated in your opening 
statements about the magnitude of this issue. In 2006 there 
were over 37 million Americans age 65 and older. That accounts 
for 12 percent of the population. That is as if the entire 
State of California, every man, woman and child, were over 65 
in the largest State, most populous State, in our country.
    In addition, longevity is increasingly the norm in our 
country. In the 21st century, Americans are going to be living 
increasingly longer, significantly longer than their parents, 
and significantly longer than most of them planned for when 
they were planning their retirements.
    It is estimated that Americans 65 and older currently hold 
over $15 trillion in assets. That already is an all-time 
record. Yet nearly a third of that group say that they don't 
have enough money even to meet their basic living needs.
    Those who do have sufficient funds to invest may be tempted 
to take greater risks with their investments because they have 
to achieve higher returns in order to make their savings 
stretch out and last over a longer period than they or anyone 
else expected. That makes them prime targets for scam artists 
and securities swindlers, and that is why the SEC is so deeply 
interested in this.
    It is a tragic fact that investment fraud hurts older 
Americans more than any other group because, when a senior 
citizen loses his or her life savings, they lose everything for 
good. They simply don't have enough years left to make it back, 
to earn once again that nest egg for a safe and secure 
retirement.
    Taking care of my own parent's finances, I have grappled 
with these issues very directly. Before my mother died a few 
years ago, she was pestered by a seemingly endless barrage of 
annuity schemes and mortgage offers.
    Despite the fact that she was suffering from throat cancer 
and could barely speak, she received repeated, unsolicited 
telephone pitches, over the phone and even in person. Even 
though my father was suffering from Alzheimer's disease, the 
brokers hit on him, as well.
    The products that these brokers were pushing weren't just 
unsuitable, but affirmatively harmful to anyone in my parents' 
circumstances. Both during my time in Congress and since I have 
become Chairman of the SEC, I have heard hundreds of similar 
stories from constituents and from colleagues.
    It is heartbreaking to see a loved one ripped off by 
underhanded tactics that may comply with the letter, but 
certainly not the spirit, of the law. That is why at the 
Securities and Exchange Commission we are always doing our best 
to protect all investors as if they were our own parent or 
relative.
    Since I have become Chairman, we have been attacking the 
problem from all angles, from investor education to targeted 
examinations to aggressive enforcement efforts. We have 
partnered with other organizations, many of whom you have 
invited here as your witnesses today, such as the AARP, the 
Financial Industry Regulatory Authority, and the North American 
Securities Administrators Association, as well as regulators in 
the 50 States on seniors-related initiatives.
    Working with all of these partners, the SEC held our first-
ever Seniors Summit last summer in 2006 to coordinate our 
Nation's efforts to protect older Americans from investment 
fraud and abuses. At the 2007 Seniors Summit, which will be 
held next week on September 10, we will gather together even 
more of the Nation's resources to protect seniors.
    One important part of that event, which by the way is open 
to the public, will be a ``Lunch and Learn'' program focused on 
how to combat investment fraud by understanding the persuasion 
tactics most often used by fraudsters to prey upon senior 
investors. We will kick off this year's event with a 
presentation on the findings of the SEC's examination of ``free 
lunch'' sales seminars aimed a seniors. This has been a joint 
effort among the SEC and State law enforcement.
    We will also discuss the best ways to educate seniors about 
the latest investments pitfalls, and we will hear about recent 
SEC and State enforcement efforts that are going after fraud on 
seniors.
    At the SEC, we are also arming senior investors with 
information that they can use to identify and avoid potentially 
fraudulent schemes. We are giving them tools to deal with 
aggressive sales tactics and to assess the financial products 
that are being offered to them.
    These efforts, I should point out, aren't just aimed at 
seniors. They are also intended to reach caregivers, including 
children, grandchildren, and trusted loved ones. They are 
designed for younger workers who are just now beginning to plan 
for their retirement strategies and getting ready to deal with 
contingencies later in life.
    In the last year we have placed significant emphasis on 
investor education initiatives directed toward older Americans. 
We have partnered with other regulators and with consumer 
organizations, including AARP, to sponsor over 40 events to 
educate seniors across the United States. So far, over 50,000 
senior citizens have attended these events.
    We have also devoted a significant portion of the SEC's 
website to the unique issues facing senior investors. Since not 
all seniors are Web-savvy, or perhaps they once were but now 
they can no longer read the fine print on computer screens, we 
have also packaged all of our online seniors materials into a 
single hard copy senior's guide with large, easy-to-read fonts 
that we will make available to anyone by mail upon request.
    Last year as part of our new initiative to help protect 
senior investors, our Office of Compliance Inspections and 
Examinations joined together with State securities regulators, 
as well as with the NASD and the New York Stock Exchange, in a 
coordinated series of examinations of financial firms that 
sponsor free lunch sales seminars, often at local restaurants 
and hotels. The final and complete results of these exams will 
be released at the second Senior Summit next week.
    But even at this point it is clear that we were right to 
identify these free lunch seminars as posing special risks to 
senior investors. Our examinations have found that, despite 
being advertised as educational, or touting the claim that 
nothing will be sold, the purpose of these seminars is usually 
to convince anyone who shows up to open new accounts with the 
sponsoring firm and, ultimately, to sell them financial 
products.
    Over the past 2 years alone, the SEC's Division of 
Enforcement has brought over 40 enforcement actions involving 
fraud against seniors. A good example of these kinds of cases 
to protect seniors is SEC against D.W. Heath & Associates, 
where the SEC worked with the Riverside County District 
Attorney's office to crack down on a $145 million Ponzi scheme 
that lured elderly victims in Southern California to workshops 
with the promise of free food. After providing them with a nice 
meal, they then proved the truth of the old adage that there 
is, in fact, no such thing as a free lunch by bilking these 
older investors out of their retirement money in exchange for 
what they said were safe and guaranteed notes.
    In just the past 2 months, we have brought three 
significant enforcement actions targeting seniors, two of which 
were emergency actions, to halt ongoing activities. The first 
of these was in July, when we filed the emergency action 
against AmeriFirst and their principals.
    Our complaint alleged that AmeriFirst sales agents lured 
elderly investors and others saving for their retirement with 
advertisements for relatively high-yielding FDIC-insured 
Certificates of Deposit. Then, using the tried-and-true bait-
and-switch, they convinced the investors to purchase instead 
so-called Secured Debt Obligations, or SDOs.
    Fortunately the SEC was able to get preliminary injunctions 
and asset freezes. But, as in too many cases like this, much of 
the money was spent before we got there.
    In another case this July, SEC against Earthly Mineral 
Solutions, we sued two Nevada companies and their officers for 
allegedly convincing a number of senior investors, some who 
were saving for their retirements, others who were seniors, to 
liquidate their personal IRAs and invest in what the company 
said were completely safe mining interests.
    A few weeks ago, in SEC against Secure Investment Services, 
we took emergency action to shut down an alleged $25 million 
father-daughter Ponzi scheme that targeted hundreds of senior 
and other investors nationwide. The father-daughter team in 
this case pocketed over $700,000 of the investor's money for 
their own personal use.
    Each of these cases is different, of course, but they all 
have in common that the victims are older Americans whose few 
remaining years don't allow them enough time to ever recover 
from securities fraud. What we are increasingly finding through 
our examination sweeps of investment advisors and brokers who 
market their wares to seniors is that the fraud artists and 
swindlers among them who prey on older investors often have the 
same MO.
    They call themselves ``Senior Experts'' in order to gain 
the victim's trust. They use fancy designations, such as 
``Certified Senior Investment Planner,'' or ``Registered Senior 
Investment Advisor'' to give the impression that they have 
older investors' best interests at heart. But all too often 
these are just clever marketing ploys to bait the hook so that 
they can reel in another sucker. They sound like genuine 
designations that require months or years of study and rigorous 
examinations. But in reality, they may be issued by some fly 
by-night operator on the Internet, or they might be the pure 
invention of the broker or the investment advisor.
    Mr. Chairman, I have long believed that there is a special 
place in Hell for those who would swindle older Americans out 
of their life savings. That is why I am so pleased that this 
Committee has focused on this issue of senior professional 
designations. It is why the SEC is working hard to forge a 
national solution to this urgent problem.
    At our Seniors Summit next week, we will tackle this 
problem with our fellow regulators from the States, some of 
whom you will hear from on your next panel. This is an issue 
you are very properly highlighting in this hearing, and I 
commend you for doing so. We need to do everything that we can 
to ensure that seniors are well informed about the experience, 
the background and the expertise of those who are advising them 
about their investments.
    Mr. Chairman, these are important issues that will only 
become more important in the years ahead. We are facing now the 
biggest demographic wave in our Nation's history; some 76 
million Americans will soon retire. We can be sure that the 
fraud artists, following the Willie Sutton Principle, will go 
where the money is.
    Men and women who have worked all their lives, saved for 
their retirement, just as they should have, and now need to 
rely on trustworthy investment advisors and brokers to help 
them manage their savings through their retirement years, 
deserve better than that. It is up to all of us to work to see 
to it that their life savings are protected.
    So thank you again for the national attention that you are 
bringing to this issue, and for the opportunity that you have 
given me to testify today.
    I would be happy to take your questions.
    The Chairman. Thank you very much, Chairman Cox.
    In your testimony, you state that you are looking into 
whether the SEC State regulators and/or Congress should be 
doing more to address the growing problems associated with 
``Senior Professional Designations,'' the multiplicity of them 
and, in many cases, the inadequacy of what it is that they know 
and what they are trying to do.
    Can you tell us a little bit more about some of the 
potential solutions that you may well be considering?
    Mr. Cox. Yes. Thank you, Mr. Chairman.
    Just as you and this Committee are concerned about this 
issue, so are State legislatures, the securities regulators in 
the States, and the Securities & Exchange Commission.
    What we have is a cacophony. There is a lot of alphabet 
soup, and it is very confusing. You don't have to be long in 
the tooth, and perhaps have a difficult time reading the fine 
print or perhaps be a little forgetful, to run into problems 
trying to understand what you are dealing with here.
    It is just plain confusing to anybody, and so it cries out 
for something a little bit more consumer-friendly. This is true 
for consumers of any age.
    Part of the problem is that there are so many different 
organizations, even legitimate organizations, issuing 
legitimate designations.
    So one question that I think we should all ask ourselves 
is, ``Is this a case where there is need for uniformity?'' Is 
this a case where a national approach and a Federal solution 
might contribute something? Is this a case, if not that, where 
some model form of regulation would make sense?
    I think you will hear shortly from the president of the 
North American Securities Administrators Association, Joe Borg, 
that that is in the works.
    At our Seniors Summit next week, we are going to focus our 
attention on this issue. We will bring the SEC, the State 
regulators and others together in a meeting to try and hammer 
out some more solutions to this. We have talked about it before 
in the past, and I think, working with you and the Congress, we 
should be able to make short work of this.
    The Chairman. Thank you very much.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman.
    Chris, good to see you again. Thank you for being here, and 
the job that you are doing at the SEC.
    Chris, like the Chairman, I wonder if we are doing enough 
to increase financial literacy as people retire. I was struck 
recently by something I read that showed that the basic 
understanding of financial literacy was about 1 percent.
    One percent of investors understand basic investing 
principles. The survey said an astounding 43 percent would take 
the bait of ``you can't lose'' investment scams. Sixty-six 
percent would meet with a financial advisor without checking 
his or her credentials. Only 33 percent who have used a 
financial planner have actually checked the planner's 
background. Forty seven percent of investors do not have a 
financial planner to determine how much to save and invest for 
retirement.
    I wonder if you have any additional ideas you would like us 
to turn into legislation for how we can increase financial 
literacy among seniors. I do have a bill that would require the 
Social Security Administration to provide for someone, when 
they become eligible to Social Security, a handbook, a 
pamphlet, the basic financial terms so that they can be better 
informed.
    I hope I am not just adding to all the mail that they get 
in their mailbox. But I wonder if there is some way we can 
break through this because, otherwise, this problem the 
Committee's addressing today is just simply going to grow.
    Mr. Cox. Well, you are very right to focus on this issue. 
At the Securities and Exchange Commission, because we 
understand that investor education is such an important part of 
success in this area, we have recently announced a significant 
expansion of our Office of Investor Education and Advocacy.
    We have created within that office a dedicated director for 
the Office of Investor Education, and we are going to give that 
director more resources to focus directly on this effort.
    As I mentioned during my formal testimony, we participate 
in a great number of activities across the country. Just in the 
senior area, we have had over 50,000 attendees at the events 
that we are sponsoring or participating in, and we are going to 
continue to do that. But it is a big country, and trying to 
reach 300 million people with a consistent message and trying 
to get people to pay attention when they are very busy and, 
ironically, trying to earn a living--where they will earn the 
money that we are hoping that they will wisely save----
    Senator Smith. The Seniors Conference you are doing, is 
that in Washington?
    Mr. Cox. Yes, it is here.
    Senator Smith. Do you take those around the country?
    Mr. Cox. Yes. This is meant to draw a lot of attention, and 
also put together a lot of expertise so we can truly forge a 
solution here.
    Senator Smith. Who is invited to it?
    Mr. Cox. First of all, all of us who are responsible for 
securities regulation at the Federal and the State levels. 
Second, private sector nonprofit organizations and for-profit 
organizations, and the public who are concerned and interested.
    Senator Smith. You heard my description of my staffer who I 
had take this test to certify as a specialist. She would tell 
you, if she were here, that she is not a specialist, but read 
the materials provided. She did it in an hour and she took the 
exam in half the time that was allocated, and got a B on the 
test.
    What do you think of that? Do we need to strengthen that 
standard for what is required to become a specialist?
    Mr. Cox. Absolutely. Seventy years ago, the Congress 
decided that uniform national regulation of our securities 
markets was an important national objective.
    Now, I think we have long since gotten over the question of 
whether or not there is a role here for the Federal Government. 
There is. It is very, very important in this case for there to 
be some consistency, uniformity and, ultimately, a standard 
against which you can enforce.
    We have very broad authority at the SEC already to bring 
fraud charges, and I outlined just some of the cases. We 
brought another case involving seniors just this morning, and a 
big one. We are going to continue to do that.
    What you just described might not quite make it to the 
point where we could say that is garden-variety securities 
fraud, but it makes you uncomfortable. So one of the things 
that we might do is tighten up in this area so there is a 
bright line that you can enforce against.
    Senator Smith. Is that something you can do without an act 
of Congress?
    Mr. Cox. I don't know. One of the things that we are going 
to be focused on at the Seniors Summit is whether an act of 
Congress is something that we should be seeking. But we hope to 
have an answer for you on that very soon.
    Senator Smith. I would appreciate learning what you find 
out.
    Mr. Chairman, maybe we can pursue it. Thank you.
    The Chairman. Very good. Thank you very much, Senator 
Smith.
    Senator McCaskill.
    Senator McCaskill. I notice in the testimony of the 
individual who is going to testify after I leave, from the 
Society of Certified Senior Advisors, that he represents in 
this that, in fact, your representatives have gone through 
their training, and represents that the training is adequate.
    The other interesting thing he represents in here, that 
``The Society of Certified Senior Advisors is not a company 
that qualifies or certifies anyone as a specialist in senior 
investments.'' Now, then you go down the page, and it 
references over and over again ``Certified Seniors Advisors'' 
after he has said within the same document that they are not 
certifying anyone on financial investment. So you think, 
``Well, what are they certified in'' if they are saying it is 
not financial investments?
    Now, the interesting part is you get down the same page, 
and it says, ``Finally, beginning January 1, 2008, any 
Certified Senior Advisor who is not currently using 
disclosure'' that he references, that they don't certify 
anyone, ``Is going to be required to provide the disclosure 
prior to the completion of a transaction.''
    So clearly embodied in this is the idea that there are 
transactions going on, and most of the transactions that are 
even tangentially touched upon in the book they have are 
financial. So it is a bunch of double-speak, and I think that 
we are going to have to be much more aggressive than we have 
been, and I know a lot of States have. I know in our State, 
just a month ago or so, there was a cease-and-desist order 
against someone using this designation, inappropriately 
marketing insurance products, telling people to switch 
investments.
    I just want--do you feel comfortable pushing the SEC to go 
further in going after these designations that they admit don't 
certify anything in terms of financial advice, but yet they 
want them to disclose that prior to the completion of a 
transaction?
    Mr. Cox. Absolutely. That is why we are so happy to be here 
today as part of this hearing that you are putting together, 
and it is why we are so happy to be here as part of a group of 
people you have called together who, coincidentally, are many 
of the same people that will be working together at the Seniors 
Summit next week.
    This is an issue that the SEC and the State regulators have 
been focused on for some time. Now, there has been some good 
work that has been done in this area. Some States have been 
enacting reforms, but I think it is time that we take a look at 
this from a national perspective.
    Senator McCaskill. The other thing I might talk about just 
for a minute before I go is the education of seniors. In this 
testimony and some of the other testimony this morning, and 
even in your testimony, there is talk about the websites.
    Well, I think--I know that I have finally gotten my mother 
to the point that she will play bridge and e-mail, and she is 
probably going to be furious that I said that out loud. But she 
is e-mailing, and now she is beginning to use Google a little 
bit.
    But this was a push, and it took a lot. I think most 
seniors that are going to be victimized by this, they are not 
the seniors that are on the Web. Do you have any suggestions as 
to ways we could use the Social Security Administration or 
other senior organizations, or administration officials that 
touch seniors on a daily basis?
    Maybe it is through the Medicare program. Maybe it is 
through Social Security, but some way that we can at least put 
a warning out, a simple warning, ``Beware of Designations. Do 
not rely on designations unless your Secretary of State's 
office in your State indicates to you that it is a valid 
certification in terms of financial advice.''
    Mr. Cox. Well, first I think you are very right to be 
sensitive to the notion that not all seniors, and indeed not 
all people of any age, have facility with the Internet. That is 
obviously changing. We can imagine where people that are 8, 9, 
and 10 years old today will be when they are 75. They will 
probably be quite proficient.
    Senator McCaskill. Our kids will be great.
    Mr. Cox. They will be behind in some other technologies, 
however, that will have overtaken what we have today.
    It might well be, as I mentioned earlier, that someone 
formerly proficient with computers, for whatever reason can't 
do it anymore, and so we have to make sure that we are reaching 
people in any number of ways, including the old-fashioned way, 
in writing.
    But, also, we want to make sure that we recognize the 
opportunity that we have with older Americans to touch the 
caregiver, the person that they trust, that they talk to about 
their investments. Sometimes that is a child. Sometimes that is 
another relative. Sometimes it is a trusted friend of the 
family.
    Sometimes, in addition, we find that those very people are 
the source of fraud against seniors. All too often, the child 
is the one ripping off the parent. I wish I weren't here as 
Chairman of the SEC to highlight that now well-known fact, but 
that is also something we have to work around.
    So no single way of doing this is ever going to be right, 
and creative solutions such as the one that you have suggested 
are things we have to be open to.
    Senator McCaskill. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator McCaskill.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman.
    First of all, thank you, Chris, for all of your leadership 
on this and other issues. I have enormous confidence in it 
based on your service in the House, among other things.
    This poster obviously gets to pretty much the central 
question of this discussion. We have been dancing around it a 
little bit. What are your thoughts about what the best solution 
is? Specifically, let us start with the obvious question. Do we 
need one or more titles and sets of criteria embodied in 
Federal law?
    Mr. Cox. That is the right question to ask, or one of the 
right questions to ask. Even though that is the topic of this 
hearing, even though the SEC and our staff have been working on 
this for a long time, as have the men and women from the State 
law enforcement and securities regulatory agencies who are here 
with us today, I don't know that the answer to that question is 
definitively yes or no. But I am absolutely certain that there 
is a role for the Federal Government here.
    I am very encouraged by the fact that there is model 
regulation being considered and developed. In fact I am 
encouraged by the general notion that that is possible. There 
are, after all, a number of private organizations that 
legitimately issue these designations, and there is an awful 
lot of complexity in the financial markets.
    Being an expert in one product may be worth the 
designation, and we don't want to step on that necessarily by 
saying there is going to be one size that fits all, and thus 
underserve consumers.
    But we will be very particular and careful about it. I 
think what you should ask of us is that, without wasting too 
much more time--not that we have wasted any at all, but with 
alacrity--that we come back to you with a sturdy recommendation 
and an answer to that very question.
    Senator Vitter. OK. As sort of a preview to that process, 
what would some of the obvious alternatives be? One is what I 
just said. I mean, one obvious alternative is one or more 
Federal--one or more titles and sets of criteria embodied in 
Federal law.
    Short of that, I guess there could be model State 
legislation, model regulation short of legislation. What is the 
sort of menu of options that we are likely to consider?
    Mr. Cox. Well, a very standard Federal approach is to 
recognize some, one or more reliable, trusted arbiters who 
could be State regulators, private organizations, self-
regulatory organizations, who keep abreast of this constantly, 
and to say that this is the source of reliability and truth and 
accuracy in this area. For this purpose, that will satisfy SEC 
requirements.
    Another approach would be to be even more free-form about 
it and let not only States but private organizations develop, 
as they will, these designations, but require some basic 
methodology for accrediting a certification so that you could 
be certified in something we can't even imagine right now. But, 
if you are so certified, you would have gone through a rigorous 
training program that must include this much time in and so on, 
to deal with Senator Smith's concern that this is 5 minutes and 
you are finished.
    Senator Vitter. OK, and another inquiry, in terms of your 
enforcement actions.
    We could quadruple your budget, and obviously the SEC would 
still only be able to touch a relatively small percentage of 
the bad actors out there. So in that context, seems to me 
important that the penalties are very meaningful, not cost of 
doing business. do you think the penalties available to you are 
adequate now in that context?
    Mr. Cox. Yes. Since Congress passed the Remedies Act, the 
SEC has had abundant authority in this area. Particularly when 
it comes to making the people who are responsible for the 
wrongdoing and the fraud pay and pay dearly, the law gives SEC 
law enforcement that authority.
    Senator Vitter. Right.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Vitter.
    Senator Casey.
    Senator Casey. Thank you, Mr. Chairman.
    I wanted to pick up on the enforcement questions. In 
particular, Chairman Cox, in your testimony you talk about 40 
enforcement actions involving fraud on seniors in the last 2 
years. Is that correct?
    Mr. Cox. Yes, over that. Over 40.
    Senator Casey. You are satisfied with the regulatory or 
legal authority you have? You think it is ample enough, the 
authority itself?
    Mr. Cox. Well, that is a broad question, and we actually do 
seek additional authorities in a variety of areas, and ask our 
authorizing committees in the House and Senate for it annually. 
So I don't want to suggest that there aren't improvements 
possible. But, with respect to going after fraud in this space, 
absolutely. We have abundant authority to go after garden-
variety fraud.
    Senator Casey. I realize a lot of this is you have got to 
work with, is--as I think is constructive to work with State 
regulators, State securities commissions and others, other 
State officials and offices.
    I want to understand better. When you say we filed an 
emergency action, can you tell us what that means and how it 
plays out in the--sometimes we know when a civil suit is filed 
in our system of justice, even criminal matters can take an 
awful long time. But I just want to get a sense from you what 
the process is, once you institute an emergency action, how 
that plays out.
    Mr. Cox. Well, we will rush into court and ask for a TRO, 
an asset freeze. We want to make sure, that once we realize 
that people are bleeding off the money that they said was going 
to go for one purpose and in fact it is not, it is going to pay 
for their yacht or going to other investors in a Ponzi scheme. 
We want to stop the bleeding and preserve as much of the 
investors' original money as we possibly can. Courts are 
generally sympathetic to the Federal Government coming in and 
asking for that kind of relief.
    Senator Casey. So you get injunctive relief initially?
    Mr. Cox. Exactly.
    Senator Casey. When you reach the point where you have been 
able to prosecute or pursue an action against a particular 
entity or individual, to the point where there is a judgment or 
to the point where it is resolved, what kind of penalties are 
we talking about, just to give everyone here a sense of what 
penalties can be leveled?
    I guess the follow-up to that is do you think the penalties 
that you have available to you, or the sanctions, are adequate 
to deal with this particular problem?
    Mr. Cox. Yes to the second question. The sanctions that we 
seek, and normally are successful in obtaining, include civil 
money penalties. They include what we call disgorgement, which 
is paying back any ill-gotten gains.
    Penalties are separate and on top of that. They include 
what we informally refer to as ``time-outs,'' suspensions from 
practice before the Commission, which means your professional 
opportunity to be a lawyer or an accountant or an investment 
advisor, what have you.
    In addition to suspensions, we can simply bar people. We 
can give them lifetime bars. We can make sure that they never 
serve on the Board of Directors of a public company or as an 
officer. So we have a variety of sanctions that go directly to 
the person and, in totality on the civil side, I think they are 
abundantly adequate.
    We also very frequently partner with criminal authorities--
in the Federal Government, the Department of Justice, the U.S. 
Attorneys, and also in the States. It is not at all uncommon 
for us to jointly announce civil and criminal charges. Within 
the bounds of the law, we cooperate with the criminal 
authorities in bringing their cases as we bring ours, and that 
has been very successful, as well.
    Senator Casey. You referred to civil monetary penalties. 
What are those amounts, or what are the thresholds or triggers 
that would drive the amount that that individual or that entity 
is sanctioned with? Is there a way to describe how those--what 
those amounts are or what triggers a certain amount?
    Mr. Cox. Yes. In general, the penalties are tiered based 
upon the egregiousness of the conduct, and there are 
guidelines, if you will, for issuing penalties in particular 
amounts based on each occurrence of the offense. There are also 
occasions in which the penalties are intended to be tied to the 
extent of the benefit that was received by the fraud, and tied 
to the amounts of the disgorgement in those cases.
    Senator Casey. There is nothing as it pertains to those 
civil monetary penalties that you would change, or that you 
think needs more legislative action to increase or to enhance 
the civil monetary penalties?
    Mr. Cox. No. I think we have the authority that we need in 
the civil monetary penalty area.
    Senator Casey. Thank you very much.
    The Chairman. Thank you very much, Senator Casey.
    Mr. Cox, we really want to thank you for coming here today 
and talking to us, talking about all the things you know, your 
knowledge, your expertise, the plans that you have to work 
together with us at the SEC to do something significant about 
this issue. We are looking forward to working with you to get 
something done. Again, we thank you for being here today.
    Mr. Cox. Thank you very much, Mr. Chairman. We at the SEC 
appreciate your leadership on this issue and look forward to 
working with you, as well.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Cox follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    The Chairman. May we now move to the second panel? Our 
first witness on the second panel will be Lori Swanson, who is 
the attorney general of the State of Minnesota. Attorney 
General Swanson has served in that position since January, and 
previously served as Minnesota's solicitor general and deputy 
attorney general. Strong advocate, she is, for the public in 
areas, including financial fraud against the elderly, and also 
consumer protection.
    Then we will hear from William Galvin, who is secretary of 
the Commonwealth of Massachusetts. Secretary Galvin serves as 
the State's chief securities regulator. He has earned a 
national reputation for aggressively protecting investors.
    Next witness will be Joseph Borg, who is president of the 
North American Securities Administrators Association, known as 
NASAA. He is also director of the Alabama Securities 
Commission. NASAA is the oldest international organization 
devoted to investor protection. Its fundamental mission is 
protecting our consumers who purchase securities or investment 
advice.
    Then, we will have Nicholas Nicolette, who is a Certified 
Financial Planner and president of the Financial Planning 
Association (FPA). The FPA is an advocacy organization whose 
stated aim is to be a community that fosters the value of 
financial planning and advances the financial planning 
profession. Mr. Nicolette has been an SEC registered investment 
advisor since 1992, and he has substantial experience in the 
industry that we are examining today.
    Our next witness will be introduced by Senator Smith.
    Senator Smith. Thank you, Senator.
    Commissioner Sandy Praeger is our final witness, and she is 
the Commissioner of Insurance for the State of Kansas. She is 
testifying today on behalf of the National Association of 
Insurance Commissioners.
    Ms. Praeger will testify on steps necessary to provide 
training, competence and suitability standards for investment 
planners, and the NAIC's efforts to protect seniors from 
financial fraud.
    The Chairman. That is good. We thank you very much, and we 
appreciate the witnesses being here today.
    Ms. Swanson, we will take your testimony.

     STATEMENT OF LORI SWANSON, ATTORNEY GENERAL, STATE OF 
                    MINNESOTA, ST. PAUL, MN

    Ms. Swanson. Good afternoon. My name is Lori Swanson. I am 
the attorney general of the State of Minnesota, and I thank 
you, Chairman Kohl, Ranking Member Smith and the entire 
Committee for your leadership in conducting these important 
hearings today.
    When asked why he robbed banks, Jesse James once replied, 
``Because that is where the money is.'' Well, for the same 
reasons today, our senior citizens are often targeted with 
financial opportunism.
    This Committee on Aging knows the demographics well, and so 
does the insurance industry. Consider these statements by one 
company, Allianz, when training its agents on how to conduct 
sales seminars. ``The increasing number of seniors brings a 
huge market opportunity.'' ``Senior citizens represent 80 
percent of all money in U.S. savings and loan institutions, and 
own 77 percent of all financial assets in America.''
    Now, some insurance agents make very high commissions for 
selling some of these long-term deferred annuities of up to 9 
to 12 percent, plus other incentives. An agent who sells 
$100,000 annuity may receive a commission of $9,000 to $12,000 
for just a few hours of work.
    To recoup the large commission, the insurance company often 
imposes hefty and long surrender penalties that go for many 
years if a senior withdraws their money early. Our office, like 
others around the country, has seen agents using titles like 
``Certified Senior Advisor,'' ``Senior Specialist,'' ``Senior 
Counselor,'' to suggest that the agent has some type of special 
credentials as it relates to senior citizens, or is looking out 
for seniors' best interest when, in fact, these titles are 
simply nothing more than marketing gimmicks.
    Several insurance companies, including Allianz and American 
Equity, have been gold sponsors of the so-called Million Dollar 
Academy, which holds a 2-day annuity university. The 
opportunistic practices of the Million Dollar Academy have been 
profiled and exposed in the Wall Street Journal and the New 
York Times. Our office is currently trying to help, through 
pending litigation, senior citizens who became sitting ducks 
for agents trained at the Million Dollar Academy.
    This includes, for example, a 75-year-old retired teacher 
and pastor from suburban Minnesota. They attended one of these 
free dinner seminars sponsored by an agent who called himself 
an Elder Counselor, and he put $30,000 of $50,000 in liquid 
assets into a long-term annuity with surrender periods for 10 
years supposedly to shield their money if they had to go into a 
nursing home. The problem with that is the wife has cancer, 
cognitive disabilities, needs the money but can't get access to 
it without paying a hefty surrender penalty.
    In March, my office filed the lawsuit against American 
Family Prepaid Legal Corporation and Heritage Marketing 
Insurance Services. Our lawsuit--and other attorney generals 
have sued them, too--and our lawsuit alleges that these 
companies sold living trusts to senior citizens that they 
didn't need, and then used the entry of the living trust to go 
on and sell annuities.
    The person would come to their door saying that they were 
an asset preservation specialist. In fact what they were 
really--was an insurance agent, and then aggressively sold 
annuities on behalf of at least five very well known national 
insurance companies.
    A training manual from that case told its agents things 
like ``Never ask a closing question like, ``What do you 
think,'' or, ``Would you like to sign up for the plan.'' These 
are yes/no questions that never work. Remember, the prospective 
client does not want to buy anything. Questions like these 
rarely lead to sales. Instead, always assume the close.'' Then, 
it says just pick up your pen and start filling up the 
application. Don't ask the senior, ``Do you want to buy the 
annuity?''
    The manual tells agents how to mislead the senior by 
describing the annuity as ``Very similar to a savings account 
at the bank.'' Heritage even trained agents how to stop seniors 
from talking to their kids before they made a purchase.
    In January, we filed a lawsuit against Allianz Life 
Insurance Company, whose deferred annuities imposed surrender 
periods of up to 12 years and surrender fees of up to 15 
percent for early withdrawal. Our office has received over 250 
complaints about the sale of Allianz' annuities, which is a 
remarkable number since only a small fraction of aggrieved 
senior citizens ever file complaints.
    In April we filed a similar lawsuit against American Equity 
Investment Life Insurance Company, whose annuities imposed 
surrender charges of up to 25 percent and surrender periods as 
long as 16 years. Both of these insurers sold senior citizens 
long-term deferred annuities that were not suitable for their 
needs and, in many cases, misrepresented the terms of the 
annuity.
    Long-term annuities were sold to senior citizens in their 
70's and 80's even though the senior would need access to their 
very limited savings in order to meet future health and long-
term care expenses.
    For example, an 86-year-old woman from rural Minnesota 
worked as a nurse's aide before she retired. She managed to 
save up in her life $49,000 in retirement savings and, of that, 
almost all of it was put into an annuity with a 12-year 
surrender period that lasts until she is 94 years old. She 
wants to move into an assisted living facility, can't because 
her money is tied up in this long-term annuity.
    Likewise, an 86-year-old guy from rural Minnesota, he was a 
retired farm laborer, gets a little less than $500 a month from 
Social Security, lives in public housing, had the same thing 
happen to him. When he was 80, American Equity put $24,000, 
most of his liquid net worth, into an annuity with a 15-year 
surrender penalty.
    Now, the fellow had to cash it in just to pay for his 
living expenses, but he had to pay $6,800, or almost a quarter 
of his net worth, in order to cash it in just so he could 
afford to live.
    Insurance companies like these that sell unsuitable long-
term deferred annuities to senior citizens are turning a blind 
eye to, and indeed encouraging and profiting the most from the 
aggressive sales practices of their agents. Before selling a 
70- or 80-year-old an annuity that may lock up a senior 
citizen's life savings for as long as 12 to 16 years, insurance 
companies should make proper inquiry into whether the senior 
can really afford to have their money tied up that long, or 
whether the senior might instead need access to their money to 
pay for the kinds of expenses we face as we age.
    Thank you.
    [The prepared statement of Ms. Swanson follows:]

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    The Chairman. Thank you very much, Ms. Swanson.
    Mr. Galvin.

  STATEMENT OF WILLIAM GALVIN, SECRETARY OF THE COMMONWEALTH, 
                           BOSTON, MA

    Mr. Galvin. Thank you.
    Chairman Kohl and Ranking Member Smith, I am William 
Galvin. I am the secretary of the Commonwealth of 
Massachusetts. As head of the Massachusetts Securities 
Division, I am the chief securities regulator in Massachusetts.
    I want to applaud your decision to investigate the 
deceptive marketing of annuities and other financial products 
for senior citizens. This is an area of compelling concern in 
Massachusetts, and I know in other States, as well.
    Through investigations and complaints from the public, my 
office has become aware of very troubling sales tactics. A 
veritable army of alleged ``Senior Specialists'' have been 
using sophisticated marketing tools to give senior citizens the 
impression that they are acting as their unbiased and skilled 
advisors. However, the real objective is to convince them to 
purchase a specific product that the specialist offers. Often 
the product is a high-commission annuity which has been sold 
under false pretenses and which the purchaser does not fully 
understand.
    Although annuities may be a valuable tool in one's 
financial portfolio, often the annuities that we have seen sold 
to seniors are unsuitable due to lengthy lockup periods, as you 
just heard, large surrender fees, and negative tax 
implications. Many of these disadvantages are not disclosed or 
explained by the so-called senior specialists.
    In an effort to cloak themselves with legitimacy as 
financial advisors, many annuities salespersons have used 
titles such as ``Certified Elder Planning Specialist,'' which 
was conferred by an entity called Brokers Choice, which 
required nothing more than payment to Brokers Choice and 96 
hours of self-study, all done through the mail.
    Brokers Choice also created senior financial survival 
workshops, where the purported advisor gives a free financial 
planning seminar on a whole range of senior-specific topics, 
all of which were geared toward deceiving and frightening the 
elderly into purchasing annuities with exorbitant commissions.
    As another example, annuity salesmen have been using the 
Certified Senior Advisor designation to give the impression 
that they have specialized expertise in senior financial 
affairs, and that they are acting in the role of an advisor.
    For example, one agent stated in his advertising materials 
that he is the one of 7,000 Certified Senior Advisors in the 
U.S., and is therefore well trained on many issues, especially 
senior finances. However, my office's investigation into this 
designation indicated that it was primarily a marketing tool, 
and CSAs did not receive meaningful training on financial 
issues involving seniors.
    As another example, a number of salespeople are using the 
so-called ``Piece Of Pie'' sales model--I don't know if that is 
trademarked or not, but it is what they call it--which is also 
geared toward senior citizens. The Piece Of Pie seminars 
specifically try to scare seniors away from the financial 
products they currently own, or are currently involved with, 
and to cast doubt on the competence of the person's existing 
advisor.
    For example, Piece Of Pie's presentation includes slides 
warning that banks may not be safe, and that the average rate 
of return in the stock market is ``A big lie.'' In addition, 
the Piece Of Pie materials bootstrap their scare tactics to 
other concerns that seniors might have, such as bird flu, 
identity theft, retirement, long-term care, and the cost of 
prescription drugs and nursing home care.
    After gaining the client's confidence and trust through a 
series of meetings, the annuity is offered as the recommended 
solution to the client's concerns. We have also seen a 
proliferation of third-party publishing companies that provide 
agents with prewritten books, articles and newsletters, which 
are often used to give seniors the impression that the agent 
has specialized expertise that he or she does not really have.
    For example, Javelin Marketing sells a monthly series of 
SeniorFinance--that is one word--newsletters, which allow the 
agent to insert his name and picture before sending it out to 
clients, implying that he indeed has authored it. Oftentimes, 
this is a misconception that is promoted to the seniors.
    These are merely a few of the marketing tools that the 
Massachusetts Securities Division has seen. Often, the 
insurance company that underwrites the product will sponsor the 
agent's acquisition of these marketing tools from the third-
party vendors that provide them. This allows the insurance 
companies to enjoy the benefit of increasing sales while 
preserving the ability to distance themselves from any negative 
association with the marketing materials.
    I am truly alarmed at the level of deception employed 
against unsuspecting seniors who are looking for someone to 
guide them through their financial concerns. Our office has 
been flooded with countless stories of harm to seniors, and I 
could go into several examples which would only repeat some of 
the statements you have already heard, most especially taking 
advantage of people late in their years at a time when they 
need access and liquidity to their money where they are being 
deprived of it, not to mention the high fees.
    This has come across the board. It is men and women. It is 
people who have some experience in financial expertise, and 
some who have absolutely none.
    I know that the purpose of today's hearing is to discuss 
what we can do, and that is why I would like to proceed to that 
part of my testimony where it talks about what we have done in 
Massachusetts.
    We indeed have already adopted regulations that apply to 
all of our broker-dealers and financial advisors that address 
the issue of questionable credentials. The regulation that we 
have now put in place prohibits the use of senior-specific 
credentials or professional designations unless the credential 
has been accredited by a reputable national accreditation 
organization. Examples of such organizations are the American 
National Standards Institute and the National Organization of 
Competency Assurance, both of which accredit personal 
certification programs.
    During the comment period on our regulation, our rule met 
with a favorable response from industry participants, as well 
as senior citizens and consumer advocacy groups.
    I want to thank the Chairman and each Member of the 
Committee for the opportunity to appear and provide this 
testimony, and I look forward to answering any questions you 
may have and providing you with additional information you may 
request.
    I can't stress how important it is that we move promptly. I 
think we see the marketing continuing to evolve here. As 
quickly as we uncover one particular set of terms, another one 
emerges.
    I also think it is important to bear in mind as we put 
together a plan, whether it be at the State level or the 
national level, that we have to put something out that is going 
to stand the test that inevitably it is going to have in the 
courts or commercial-free speech allegations and other such 
things.
    In Massachusetts, our experience has been based on 
qualifying the material based upon our past experience, 
qualifying it based on specific accreditation. I do think you 
are going to need that flexibility in any effort, whether it be 
regulatory or legislative.
    [The prepared statement of Mr. Galvin follows:]

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    The Chairman. Very good, Mr. Galvin.
    Mr. Borg.

STATEMENT OF JOSEPH BORG, PRESIDENT, NORTH AMERICAN SECURITIES 
           ADMINISTRATORS ASSOCIATION, WASHINGTON, DC

    Mr. Borg. Chairman Kohl, Ranking Member Smith, we commend 
you for your ongoing investigation of investment fraud 
targeting our Nation's seniors. We share your outrage at the 
practices used to swindle seniors out of their hard-earned 
money that they need for a secure retirement.
    State regulators, as the first line of defense for 
investors, are at the forefront in detecting the problem of 
senior abuse and responding to it aggressively. We believe the 
most effective weapons against fraud are vigorous enforcement, 
investor education and innovative regulation. The States have 
been active in all of these areas.
    NASAA and its members have led the effort to educate the 
public about senior fraud. In 2003 NASAA created the Senior 
Investor Resource Center on our website. The fourth episode in 
our Alert Investor podcast, ``How To Talk To Your Parents About 
Senior Investment Fraud,'' was released this May. NASA members 
also partner with grassroots organizations such as AARP.
    One successful example is the Senior Sleuth checklist 
program, in which AARP volunteers attend free lunch seminars 
targeting seniors and report their findings back to State 
securities regulators.
    There are two types of senior abuse that we find especially 
troubling--the free lunch seminars and the misleading 
professional designations, and we are responding. We have all 
been invited to a free lunch or other dinner investment seminar 
that you just can't afford to miss, according to the ads. As 
you can see from the posters, there are recurrent themes in 
these enticing ads.
    A free gourmet meal, tips on how to earn great returns 
while eliminating market risk, and a warm welcome to spouses of 
the invitees. Nothing will be sold. There is no cost or 
obligation, except the high-pressure sales pitch comes with a 
call a few days later from a Senior Specialist salesman.
    The violations we see range from outright lies and the 
conversion of investor funds to more sophisticated forms of 
abuse. Often, the salesman recommends liquidating securities 
positions and using the proceeds to purchase indexed or 
variable annuity products, which are often grossly unsuitable 
for senior citizens. These recommendations also may constitute 
the dissemination of financial advice for compensation without 
an investment adviser license, a violation of State securities 
laws.
    Since 2003, State securities regulators have been actively 
investigating and bringing cases to stop the spread of abusive 
sales practices that often emanate from these events. From 
steakhouses in Arizona to country clubs in Virginia, the 
retirement savings of seniors, as well as of those nearing 
retirement, are being targeted by salesmen who put their own 
personal interests ahead of those of their clients. There is no 
such thing as a free lunch.
    For example, in June 2007, Missouri Securities took action 
against an Ozark man for misleading senior investors by 
conducting seminars targeting older investors, discussing tax 
investment issues, insurance matters, but not the facts and the 
risks about the investments--or his felony fraud conviction, 
for that matter. He took in $1.3 million over a 2-year period, 
and there is only $12,000 that remains.
    Colorado, securities and law enforcement authorities won a 
securities fraud conviction and a 20-year prison sentence of a 
con man who defrauded mostly older adults of almost $600,000 in 
retirement savings through free lunch programs at retirement 
centers.
    California, Department of Corporations charged an 
individual with fraudulently operating as an investment adviser 
after he made recommendations primarily to seniors who invested 
$15 million through seminars with free lunches at country clubs 
and high-end restaurants.
    As Chairman Cox mentioned, in 2007, seven States joined 
forces with the SEC and FINRA in examinations to detect abusive 
sales tactics aimed at seniors during the free lunch seminars. 
Our full report on these exams will be released next week, as 
the Chairman mentioned. But preliminary findings confirm that 
the seniors attending the free lunch seminars are often subject 
to fraud, misrepresentations, and other violations of the 
securities laws.
    State securities regulators continue to see the use of 
impressive sounding but often highly misleading titles and 
professional designations, many of which imply a special 
expertise in addressing the financial needs of seniors, all for 
the purpose of gaining a senior's trust. Often, these 
designations are used in conjunction with the free lunch 
seminars, or highlighted in mass mailings, business cards and 
other promotional materials.
    NASAA created a task force to address the senior 
designations problem. We found that a substantial number of our 
regulators had taken enforcement actions against individuals 
who had used the senior designation in a deceptive manner. 
Investigations, I assure you, are continuing.
    We are also responding to the problem of senior 
designations with regulatory solutions. I want to commend 
Massachusetts's secretary of the Commonwealth, Bill Galvin, for 
his leadership in addressing the problem not only through 
effective enforcement, but also through innovative rulemaking.
    The multi-front offensive launched by State and Federal 
securities regulators and today's hearing is a testament to the 
fact that senior citizens remain a target for unscrupulous 
salespersons, and further action is necessary to punish and 
deter the wrongdoing. The NASAA task force has been working on 
a model rule suitable for adoption by every NASAA member, 
which--would create a separate violation of law to use a 
designation to mislead investors. We will urge its adoption in 
every jurisdiction.
    Also, Congress should explore proposals to assist law 
enforcement, to ensure that those who take advantage of our 
Nation's elderly will be held accountable. Problems will remain 
as long as the benefits to the perpetrators outweigh the costs. 
Enhanced penalties for senior abuse, ranging from fines to jail 
terms, should help raise those costs, deter law violations and 
punish those who would exploit senior investors.
    In conclusion, this Committee's examination of investment 
fraud against the growing senior population is an important 
step in highlighting a serious problem and working toward 
solutions. The entire community of State securities regulators 
will continue to play an active role in protecting seniors 
through enforcement, education and regulation.
    Thank you again for the opportunity to appear today. I look 
forward to answering any questions you may have and providing 
any assistance that we can in the future. Thank you.
    [The prepared statement of Mr. Borg follows:]

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    The Chairman. Thank you, Mr. Borg.
    Mr. Nicolette.

STATEMENT OF NICHOLAS NICOLETTE, PRESIDENT, FINANCIAL PLANNING 
                  ASSOCIATION, WASHINGTON, DC

    Mr. Nicolette. Thank you, Chairman Kohl and Ranking Member 
Smith, for providing me the opportunity to add my voice to the 
chorus of concern raised in the testimony you have heard today.
    I am Nicholas Nicolette, president of the Financial 
Planning Association, which represents over 28,000 financial 
planning professionals. In my day job I am a partner in 
Sterling Financial Group, a small financial planning firm in 
Sparta, NJ, and I reside in Port Jervis, NY.
    FPA strongly commends this Committee for investigating the 
perplexing world of senior financial designations and shining a 
spotlight on the alphabet soup of certifications and 
designations that leaves too many elderly consumers vulnerable 
to incompetent or fraudulent financial advice. I am proud to 
lead an organization of professionals who are committed to 
adhering to the highest standards of professional competence 
and ethics.
    Our position on consumer protection is as simple as it is 
unwavering. Financial planners have a fiduciary duty to their 
clients. Put another way, we are obliged to act in the best 
interest of our clients, even if it is to our own detriment. 
There is no higher standard.
    I am also proud to say that, like most FPA members, I hold 
the Certified Financial Planner certification, or CFP. FPA 
supports the CFP mark, administered by CFP Board of Standards, 
as the highest standard for competent, ethical financial 
planners. CFP professionals have clearly demonstrated that they 
possess the four Es--Education, Examination, Experience and 
Ethics.
    CFP certification is not the only credential that can or 
should be trusted by the public, but it represents so much of 
what is missing from some of the other 100-plus designations 
and certifications this Committee has investigated. Without 
these basic criteria, rigorous education and examination, 
experience and enforceable ethics, you cannot sustain 
credibility or the public trust.
    The tragic stories we have heard so far today are all-too-
common and cast a pall over the entire financial services 
industry. I have heard from a number of our Members who have 
helped reassemble the shattered lives of senior citizens, 
victims of these pseudo-financial experts. These seniors have 
spent a lifetime working hard, raising and educating their 
children, and saving with the goal of living their retirement 
years with dignity and respect.
    One particular tragic case that came to my attention from 
an FPA member in Pennsylvania involved an elderly man who was 
victimized by an annuity salesman carrying a Senior 
Certification. You may have read about it in this morning's 
Washington Post, or as Senator Casey referenced.
    The 79-year-old man was persuaded by the salesman to sign a 
Power Of Attorney, giving the agent access to the individual's 
CDs, cash and mutual funds. The assets, not coincidentally, 
ended up in unsuitable annuities.
    When the victim learned he had been cleaned out, his family 
said that he went into a deep depression and died a few months 
later. The insurance company offered the gentleman his money 
back in a letter which arrived on the day of his funeral. His 
family buried him with the letter in his pocket.
    Sadly, this insurance salesman is still doing business 
today despite being sanctioned several times by State insurance 
officials.
    In contrast to the product-driven process employed by this 
agent, FPA supports a client-centered process. CFP 
practitioners, for example, are required by their ethics code 
to use six clearly defined steps in the planning process to 
help people achieve their life goals.
    In the case of this unfortunate victim, we would have 
created a budget plan and identified cash-flow needs for daily 
needs and emergencies before looking at strategies and possible 
product solutions for ensuring that he did not outlive his 
resources. We would be required to clearly disclose all 
conflicts of interest and, just as important, how we are paid. 
so how can we help our seniors from those who would prey on 
them? A combination of well-crafted regulation, vigorous 
enforcement action and education are the key.
    Today, individuals are required to make more financial 
decisions that impact the quality of their lives than ever 
before. We have a responsibility to create an environment in 
which they can seek guidance and make decisions with confidence 
that their interests are being put first.
    Director Borg has discussed NASAA's plans to adopt a model 
regulation that we hope will discourage the use of bogus 
credentials. We look forward to working with NASAA toward that 
end.
    Regulators must also continue to be vigilant and act 
decisively when they see early indications of fraud. In some 
ways, though, their hands are tied by an antiquated regulatory 
system that continues to permit a lower standard for advice in 
the sale of insurance products.
    State insurance laws are now only playing catch-up to 
securities laws by establishing suitability requirements in 
certain product sales. If an insurance agent, or any 
professional, uses a title or marketing materials suggesting he 
or she acts in the client's best interest, then they should be 
held to a fiduciary standard.
    Finally, we must help investors, young and old alike, to 
educate themselves about the background of the person with whom 
they are investing their assets and their trust.
    Thank you again for allowing me to testify today, and I 
will be happy to respond to your questions later.
    [The prepared statement of Mr. Nicolette follows:]

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    The Chairman. Thank you, Mr. Nicolette.
    Ms. Praeger.

STATEMENT OF SANDY PRAEGER, INSURANCE COMMISSIONER, TOPEKA, KS, 
      ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                         COMMISSIONERS

    Ms. Praeger. Thank you, Chairman Kohl and Ranking Member 
Smith. I really appreciate the opportunity to be here today 
representing the Kansas Insurance Department, but also as 
president-elect of the National Association of Insurance 
Commissioners. We really applaud you for holding this important 
hearing.
    As you know, a recent series of news articles have really 
highlighted the problems with the use of these professional 
designations, such as Certified Senior Advisor, Certified 
Retirement Financial Advisor, Chartered Senior Financial 
Planner, and Certified Financial Gerontologist--I thought a 
gerontologist was a physician, but I guess not--that imply 
expertise in providing investment advice to senior citizens.
    In the experience of State regulators, these designations 
involve very little actual training regarding the needs of this 
vulnerable population. It appears that these designations, 
which are granted by for-profit entities, serve more as 
marketing tools than as actual evidence of education or 
professional development.
    Most of the problems that have been reported with those 
using these credentials in marketing materials have dealt with 
the sale of unsuitable annuities to senior citizens. Through 
the adoption of the suitability guidelines in Kansas and our 
enforcement activities, we are beginning to see a decline in 
the number of complaints that we are dealing with in our 
department. But we have also observed that companies have 
instituted more aggressive training requirements and compliance 
efforts with the producers that are authorized to sell their 
products, and we hope this is a trend that will continue.
    The NAIC has also taken specific action to require that 
agents and companies selling annuities to senior citizens--and 
actually to all Americans, for that matter--take affirmative 
steps to ensure the suitability of the annuity for the 
consumer. In 2000, the NAIC adopted a white paper calling for 
the development of suitability standard for non-registered 
products similar to those that existed for some time under the 
Security and Exchange Commission for registered products.
    The resulting senior protection and annuities transaction 
model regulation, or the suitability model, was adopted by the 
NAIC in 2003. This new model was another tool that regulators 
could use to protect consumers from inappropriate sales 
practices in addition to the NAIC's annuity disclosure model 
regulation, which had been adopted a few years earlier, which 
provides consumers the basic questions they should ask before 
purchasing an annuity.
    Because purchasing life insurance and annuity products is 
often a complicated and confusing process for consumers of all 
ages, not just for seniors, the NAIC overwhelmingly adopted 
revisions to the suitability model in 2006 to have its 
requirements apply to all consumers, regardless of age. The 
suitability model imposes duties and responsibilities on 
insurers and insurance producers regarding the suitability of a 
sale or exchange of an annuity to a consumer.
    Specifically, in recommending to a consumer the purchase of 
an annuity or the exchange of annuity, the insurance producer 
must have reasonable grounds for believing that the 
recommendation is suitable for that consumer. Prior to the 
execution of a purchase or exchange of the recommended annuity, 
the insurance producer or insurer must make all reasonable 
efforts to obtain information concerning, (1) the consumer's 
financial status, (2) the consumer's tax status, (3) the 
consumer's investment objectives, and (4) any other information 
used or considered to be reasonable in making the 
recommendation to the consumer.
    To ensure compliance with these requirements, an insurer 
must establish and maintain a system of supervision that 
includes maintaining written procedures and conducting periodic 
reviews of its records that must be reasonably designed to 
assist in detecting and preventing violations of the 
suitability model. Should a producer or an insurer fail to meet 
their obligations under the model, the Commissioner may order 
an insurer or producer to take corrective action, and may also 
impose fines.
    Approximately 32 States have adopted the suitability model 
or similar suitability regulations. Some States, Kansas and 
Missouri for example, had already enacted laws covering all 
consumers, regardless of age, prior to the 2006 revisions. 
Other States, such as Iowa and Wisconsin, have also included 
life insurance products in the suitability standards.
    As insurance commissioner, I take my responsibility for the 
enforcement of these regulations seriously. Since taking office 
in January 2003, our department has received 506 annuity 
complaints and have recovered more than $7.3 million for 
individuals who have had problems with those annuity products. 
The complaints range from misleading advertising and marketing 
to claims handling, with the most frequent category of 
complaint being misrepresentation of the product being 
purchased.
    As demonstrated by our experience in Kansas, State 
regulators have acted diligently to ensure that injured 
consumers are made whole. My counterparts in other States have 
also been engaged on this issue. While the total number of 
complaints remains low relative to other lines of insurance, 
the complaints are still significant and show a troubling trend 
over time.
    For the States that have reported data on annuity sales to 
the NAIC, there has been a marked increase in the number of 
total complaints in the categories of suitability, agent 
handling and misrepresentation over the past 3 years. The total 
number of annuity complaints reported in these categories rose 
from approximately 1,400 in 2004 to more than 2,300 in 2006. 
The proportion of these complaints attributed to suitability 
issues has also increased each year from just over 10 percent 
in 2005 to more than 18 percent in the data reported thus far 
in 2007.
    To be clear, each and every complaint is reviewed and 
investigated by the State Department of Insurance. Since 2004, 
more than 75 percent of these annuity complaints have been--
that have been reported to State regulators and to the NAIC 
have been resolved in favor of the consumer.
    There is no doubt that abuses do exist and that State and 
Federal officials entrusted with the responsibility of 
protecting consumers must remain vigilant in their oversight of 
annuity sales. To this end, insurance commissioners have issued 
a consumer alert to warn senior citizens about abusive sales 
practices and to urge them to be sure that they fully 
understand the product they are purchasing before signing the 
contract.
    I appreciate the opportunity to testify before the 
Committee today, and thank you for your attention to this 
really important issue. I would stand ready to answer 
questions.
    [The prepared statement of Ms. Praeger follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you, Ms. Praeger.
    As you know, the hearing today is entitled, ``Advising 
Seniors About Their Money--Who Is Qualified And Who Is Not,'' 
and all the various ways you have testified on this issue. But 
in terms of that question, who is qualified and who is not, 
advising seniors about their money, I would like to ask each of 
you to tell me the one thing, or maybe the two things, that are 
most important, that we need to put in place, that we need to 
do to improve this whole area of advice that is being given to 
seniors on how to invest their money.
    How do we improve that whole thing, one or two things? Ms. 
Swanson?
    Ms. Swanson. Sure, Chairman Kohl. Again, thank you for your 
leadership in this. as we heard from the testimony, it is 
incredibly important.
    The agents who are out there are not rogue insurance 
agents. I think it is important that we recognize that none of 
these sales would happen unless there was an insurance company 
also selling the product. Insurance companies could borrow from 
the war on drugs and ``Just Say No'' when you do have an agent 
out there who is using the misrepresentations, who is out 
hustling policies, these free lunch seminars.
    Insurance companies, when the application comes in, they 
can stop it right there, and I think it is important that they 
be ultimately held accountable. They are the ones making the 
most money. I do think it is important that Congress also pass 
regulations to deal with the abuse of titles that we are 
seeing, these Certified Senior Representatives and so on, 
because those titles do lure the senior citizen into believing 
that that agent is looking out for their best interest as 
opposed to that agent's bottom line.
    Similarly, some of the abusive marketing that we have seen 
with regard to the free lunches and whatnot, I mean, senior 
citizens are lured to those, No. 1. Many are lonely. It is a 
social event for them. No. 2, many are on fixed incomes. They 
don't get to go out to lunch and dinner but for these type of 
offers. I think cracking down and reining in on those practices 
would be helpful as well.
    The Chairman. Very good.
    Mr. Galvin.
    Mr. Galvin. Mr. Chairman, I think obviously the need to 
somehow regulate the title is very important. That is why 
Massachusetts has taken action and, as you have heard from 
other speakers today, the idea is that there should be some 
requirement of something meaningful being behind the titles 
that are used.
    I would also echo what the attorney general has said, that 
I think it is important that the beneficiaries, in the sense 
those who make money out of these practices, have to pay. These 
people are, in fact, agents of larger entities that are making 
money. I certainly think that, by making sure that they pay, 
that they will certainly curtail some of the actions of their 
agents.
    Last, I think there has to be some opportunity for 
rescission. I think what we have heard, apart from the horror 
stories of individuals who have been taken advantage of, is the 
difficulty of getting rescission once this is uncovered. I 
think perhaps some national legislative effort, or some 
coordinated effort that would make it clear that, once there is 
a showing that there has been misrepresentation or fraud or 
deceit of some kind, that there should be a period that the 
individual can, or their legal representatives, can get 
rescission of the contract.
    This is particularly appropriate in the case of annuities, 
which seems to be the biggest problem here, but I think there 
could be other types of financial products. The Chairman of the 
SEC referred to some of those other products, as well.
    I think we have to keep in mind that the industry that we 
are seeking to regulate, while very dynamic and, indeed, 
beneficial to many people in our country, also has the capacity 
to morph rather regularly into new variants. So if we calibrate 
our legislative effort or our regulatory effort only to one 
particular problem, we will find that they will move on before 
we have a chance to catch up.
    So I think there has to be somehow a permanent right of 
rescission when fraud or deceptive practices is shown.
    The Chairman. That is good.
    Mr. Borg.
    Mr. Borg. Thank you, Mr. Chairman. Let me add to what 
Attorney General Swanson and Secretary Galvin said.
    A couple of things come to mind. Certainly what the FPA has 
talked about, the overall fiduciary standard. The violation of 
a fiduciary standard allows civil and criminal penalties in 
most States of some type or another. However, if you limit it 
strictly to the agent speaking and do not go up the chain, you 
are not solving the problem. So an overall fiduciary standard 
would certainly enhance civil and criminal penalties.
    Now, although that may be an end results with the civil 
penalties, let us remember what we are trying to accomplish 
here. We are all at this table putting out forest fires, and 
there are raging forest fires trying to stop these things. We 
have got to figure out who is holding the match and blow out 
the match before that forest fire starts.
    From that point of view, we have to add certain qualities. 
Up-the-chain liability, as Secretary Galvin has mentioned, is 
important. The companies need to be responsible for the actions 
of their agents.
    Further, I think education is important, but a slightly 
different twist on the education. General education that is 
disseminated across the board has limited effect.
    One of the programs we are using in my State is a special 
program that seniors watch. It is a cable TV that is called The 
Time Of Your Life. It starts with a clock that goes 60, 70, 80. 
It is a very, very popular show that is getting a lot of 
attention.
    That type of education where you have a TV show or a cable 
show, something they can watch as opposed to read, is very, 
very important. Certainly working with the AARP and other 
groups of that nature is very helpful, as well.
    I would add one more. We have to stop the problem 30 years 
from now by starting in our school system now. We have been 
advocating investor education, financial information in the 
school system now, not just for seniors, but let us face it, 
our children become seniors down the road. We have to start 
now. One of the ways to do that is mandate financial education 
as part of the curriculum, and let us get away from, 
``Teenagers who ask, how can I be out of money? I still have 
checks in my checkbook.'' That type of education, must start 
early, not only on the senior level, but----with school-aged 
children.
    Thank you very much.
    The Chairman. All right. I would like to just throw out 
another question here, and you may decide you want to comment 
or not. Our next panel is going to consist of president and CEO 
of Allianz Life Insurance of North American. Are you all 
familiar with Allianz?
    Mr. Borg. Yes.
    The Chairman. You are? They are the ones who market these 
products, have agents that market these products. I mean, you 
think they are doing a great job? You think they are doing a 
lousy job?
    If you were here sitting in this chair today--I mean, you 
have talked about getting up the food chain, you know, get to 
those people, hold them accountable. I will start with you, Ms. 
Praeger, Allianz. One of your favorite companies in the world? 
Something less? A, B, C, D, what?
    Ms. Praeger. I think the market for annuity products has 
definitely grown. There is no question. Allianz leads the--in 
the development of those products.
    But I think as seniors--as the Baby Boom generation ages, 
and we all want to--I kind of view that period from 1965 to 
1985 as another career. I want to become really good at living 
my retirement years. People are concerned about having the 
sufficient income.
    So I think the products--and we do certainly scrutinize the 
products before they go into our market--the problem really is 
the aggressive way that agents sell the products, and I think 
some of the commissions that encourage perhaps the 
inappropriate sales. So I really--and I think the titles, these 
designations which imply trust and try to garner trust, are 
really one of the problems.
    So I think the focus needs to be on where the agent and the 
consumer interact.
    The Chairman. Good.
    Mr. Nicolette.
    Mr. Nicolette. Well, I would like to address that.
    One, clearly the State commissioners are in a great 
position, and the insurance regulators, to oversee insurance 
companies. That needs to be done right up to the--at the very 
top and held them--be held accountable.
    But there is a huge impact of all this I would like to 
address because it doesn't impact just the senior, which is a 
horrible thing. It impacts their family. It impacts their 
community. It does impact our society.
    I think that is why we are all here. It is not just about 
the product sale, because that is one of the things, obviously, 
is the issue here on a big aspect.
    It is not just investments. It is not just insurance 
product. It is really, regardless of those two things, it is 
about advice.
    All of these individuals are utilizing designations and 
sales seminars and luncheons to allow people to believe that 
they are going to receive objective advice. I think that is one 
area that we can all work together, is to be able to help 
oversee and to bring together universal standards of care that 
all people who give advice will be held accountable to, not the 
sale of a product, but how you provide advice. The SEC has been 
doing a very good job in terms of how they look at that.
    As a financial planner, if I provide advice, I have a 
different set of standard than if I just sell a product. I 
think what we are seeing are people using a designation to make 
people feel they are receiving advice, that they can trust the 
person that is giving them advice, and then they are selling 
them an insurance product that is not covered by the Advisors 
Act that the SEC oversees. These commissioners and all of us 
together I think can work to make sure there is a universal 
standard that they would be held accountable, that anyone 
providing advice would be held accountable, too.
    The Chairman. All right.
    Mr. Borg, you know anything about Allianz?
    Mr. Borg. Yes, sir. I think the question was am I a fan of 
Allianz, or do I know about their products. Now, their biggest 
single product I think to date is the Allianz Master Dex 10 
product. It has, for example, features that are never explained 
to the customer, and they wouldn't understand it anyway. Half 
the time, the agents who sell it don't understand it.
    Let me give you a hypothetical on the Master Dex 10. For 
example, if you put in $100,000, at the end of 10 years it is 
worth $241,000 annuitized.
    Now, to the average investor, that means at the end of 10 
years I get my $241,000. Oh, no. It doesn't work that way.
    If you cash out any time within the 10 years, you lose all 
the bonuses. You lose all the benefits, and you have to pay a 
surrender charge that's approximately 12.5 percent.
    If you cash out at the end of 10 years, that $100,000, 
would return approximately $101,800 back to the investor. So, 
for 10 years, you made $1,800 because you cashed it out. What 
you have to do then is hold it for another 10 years and take 
out a payout over 10 years as an annuity, 10 percent each year.
    Now, there are some other factors. You can take out some up 
front, some out back. The other thing is a lot of folks don't 
annuitize. Well, what do they want to do with their money? They 
are going to leave it to their grandkids or grandchildren.
    What happens if they cash out of this product at death? 
Guess what? You have to annuitize then, too, otherwise you 
don't get the market bonus. You have to pay fees, because it 
basically has an interminable surrender charge if you cash it 
out at any time.
    So there you are--I would be happy to supply more 
information on this product to the Committee if you would so 
choose.
    The Chairman. Good. Good.
    Mr. Galvin, you want to say--you know anything about 
Allianz, because they are going to be testifying afterwards.
    Mr. Galvin. Yes, sir. Obviously they were involved--well, 
they have been involved in some of the cases. They are 
providers of some of the products we are concerned about. Our 
focus has largely been on the sales tactics.
    The Chairman. Yes.
    Mr. Galvin. Obviously the underlying products present some 
of the problems you have heard today. As I said in my earlier 
remarks, I think it is important to focus on the tactics 
because the products are going to change. The products are 
going to adjust. People are going to try to make money. We 
understand that.
    Clearly, when there is a product that has some of the 
deceptive qualities that have been just described to you, that 
presents a real problem. The fact that people, no matter how 
sophisticated they are or think they are, may not really 
understand them.
    But I do think it is important that we think about the 
sales practices, because that is where I think we can best 
protect the public.
    The Chairman. Good.
    Last comment, Ms. Swanson.
    Ms. Swanson. Chairman Kohl, I do. Allianz is a Minnesota 
company. I am in litigation with them right now, because what 
they have done is they have taken a boatload of senior citizens 
and sold them very, very unsuitable long-term annuities.
    In Minnesota we have a suitability law that applies not 
just to the agent but to the insurance company. It says that 
they need to make reasonable inquiry before the sale is made as 
to whether it is suitable, and then before it is sold, 
determine is it suitable. That has not happened with regard to 
Allianz.
    The biggest problem we have seen is misrepresentations in 
the sale of the policies, but then also just putting seniors on 
very modest incomes and very modest net worth into these 
incredibly long-term policies where they are going to need 
access to that money to pay for healthcare or prescription 
drugs or groceries.
    I suspect Allianz is going to say, ``But we make plain 
English disclosure statements to these senior citizens.'' If I 
could beg just a moment's indulgence and read your part of one, 
here is a plain English disclosure, part of a three-page 
document written in about eight or nine-point font.
    ``The cash surrender value is equal to the greater of the 
guaranteed minimum value or the accumulation value less the 
applicable surrender charge and multiplied by the market value 
adjustment. The market value adjustment is the factor by which 
the full surrender, partial surrenders are adjusted. During the 
surrender period, the market value adjustment equals A over B, 
where A is one plus the guaranteed initial rate, B is one plus 
the current new business interest rate plus .5 percent, and T 
is the number of days.'' I could go on and on.
    But, the point is, when you give this to an ordinary senior 
citizen, they are not going to understand it. Frankly, Chairman 
Kohl, I have a hard time understanding it. Insurance companies 
can stop these practices.
    There will always be insurance agents bent on making 
improper sales. The insurance companies can just say, ``We are 
not going to tolerate those products. We may lose a little 
profit, but we are not going to do it because our senior 
citizens deserve better.''
    The Chairman. OK.
    You have been a great panel. You have really added a lot to 
the very important subject, and we appreciate your being here.
    All right, last panel. First witness will be Gary Bhojwani, 
who is, believe it or not, the president and CEO of Allianz. 
They distribute individual insurance products through over 
240,000 independent agents, registered representatives and 
financial planners nationwide. Mr. Bhojwani, thank you so much 
for being here.
    Our second witness will be Edwin Pittock, who is president 
and founder of the Society of Certified Senior Advisors, which 
is a company that trains and credentials people as certified 
senior advisors, CSAs. Since the designation's creation in 
1996, approximately 25,000 people have enrolled in this 
training.
    Mr. Pittock, we are glad you are here, too.
    Mr. Pittock. Thank you, Senator Kohl.
    The Chairman. We would love to hear your testimony.
    Mr. Bhojwani, would you like to speak first?

    STATEMENT OF GARY BHOJWANI, PRESIDENT AND CEO, ALLIANZ 
          INSURANCE OF NORTH AMERICA, MINNEAPOLIS, MN

    Mr. Bhojwani. That would be great. Thank you.
    Good afternoon, Chairman Kohl. My name is Gary Bhojwani. I 
am the president and CEO of Allianz Life Insurance Company.
    I appreciate the opportunity to be here today on behalf of 
our employees, the independent agents who sell our products, 
and the consumers who hold nearly a million policies with us. 
We are very proud of the important role our annuity products 
play in providing financial security for individuals.
    Annuities play a vital role for seniors. With changing 
demographics, the decline of defined benefit pension plans and 
the challenges faced by social security, the issue of outliving 
ones assets is becoming a more acute concern for millions of 
Americans.
    Annuities can play a critical role in retirement planning 
because they are the only product that can guarantee a stream 
of income for life. They are also valuable products for tax 
planning and transfer of wealth to beneficiaries.
    We recognize the responsibility we have to the individuals 
who place their hard-earned savings with us. Our products 
provide financial peace of mind for hundreds of thousands of 
consumers.
    Our processes, including the steps we take to protect 
seniors, have earned Allianz high customer satisfaction ratings 
in the marketplace. We take great pride in our complaint ratio 
of less than one-half of 1 percent.
    Allianz Life is a market leader in fixed index annuity 
sales. We also sell variable annuities, life insurance and 
long-term care insurance. We have been an industry leader in 
developing a robust set of controls and consumer safeguards.
    We recognize that there are many factors that determine 
whether or not an annuity is suitable for an individual. Our 
processes ensure that our products are clearly described to 
consumers, and that they are purchased only when suitable.
    First, Allianz introduced the first plain English point-of-
purchase disclosure for fixed annuities, which we call a 
``Statement of Understanding,'' not because we are required to 
do so, but because we believe it is critical that individuals 
understand the products they purchase.
    In addition, 2 years ago we developed an internal 
suitability process for every fixed annuity purchase 
nationwide. The process also requires our agents to collect 
other financial data and other information so we can evaluate 
the suitability of every purchase. We will not issue a policy 
without a completed and signed disclosure and suitability form.
    Our internal review process is thorough, utilizing a 
suitability rules engine for every policy and an escalated 
review process when needed. We do not accept business that does 
not meet our rigorous suitability requirements.
    The process looks at many factors, including net worth. In 
fact, the median net worth for an Allianz policyholder age 75 
or above is $500,000 excluding their home.
    They purchase our annuities for numerous reasons, including 
tax-deferred growth, as an estate planning tool, and because 
their principal is protected. Our procedures exceed the 
requirements of any State suitability law or regulation, and we 
believe it is a best practice in the industry.
    Last year, we implemented a post-purchase survey process in 
partnership with LIMRA, an independent third-party 
organization, to help ensure that consumers understand the 
product they purchase from Allianz and to evaluate the purchase 
process itself.
    When there appears to be confusion about the product 
features or a concern about service, we follow up directly with 
the consumer. In addition, we are today announcing that we will 
institute a process by which Allianz employees will call every 
fixed annuity purchaser aged 75 or older to go through the 
features of the product with them and to be certain that those 
features are understood. As a part of these verification calls, 
we will offer refunds upon request.
    Allianz offers training to our duly licensed agents to help 
them understand our products, our practices and their 
obligation to consumers. When we determine that an agent has 
engaged in improper sales practices, we terminate the agent 
immediately.
    We are also announcing today that we are developing a list 
of approved designations that we will allow our agents to use 
when they market Allianz products. The use of designations that 
are not on this list will be prohibited in association with the 
purchase of an Allianz product.
    Finally, we are in the process of hiring a chief 
suitability officer, another first in the industry. This person 
will report directly to me and will lead our ongoing efforts to 
help ensure that any product purchased by any consumer is 
suitable for their needs. Each of these processes, and several 
others that we employ, are continually revised and improved, 
and we are committed to doing even more because we believe that 
satisfied customers are the key to our reputation and our 
sustainability.
    Chairman Kohl, thank you again for providing me with the 
opportunity to testify today. We applaud the work being 
performed by the Committee. SEC Chairman Cox has said that 
there needs to be greater coordination between Federal and 
State officials. We strongly agree, and we think that there is 
an important role for industry grounds to play, as well.
    I appreciate the opportunity to share with the Committee 
the actions that Allianz Life announced today, allowing only 
certain designations and making verification calls to customers 
above the age of 75. There are further steps that we are taking 
to ensure that customers understand and are satisfied with the 
products they purchase from us.
    I will be pleased to answer any questions that you may 
have.
    [The prepared statement of Mr. Bhojwani follows:]

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    The Chairman. Thank you so much for your testimony, and 
thank you for being here.
    Mr. Pittock.

  STATEMENT OF EDWIN PITTOCK, PRESIDENT, SOCIETY OF CERTIFIED 
                  SENIOR ADVISORS, DENVER, CO

    Mr. Pittock. Chairman Kohl, I am Ed Pittock, president of 
Society of Certified Senior Advisors, and thank you for the 
invitation to provide the Senate Special Committee on Aging 
with information about our organization and its Certified 
Senior Advisor designation training.
    My organization's purpose is to equip professionals to 
serve and benefit seniors through better communication, deeper 
understanding, greater empathy and more knowledge of the 
resources available to meet seniors' needs.
    If seniors were not different and did not face 
circumstances all their own, there would be no need for this 
Committee. But seniors are different, and that is why there is 
a need for education about aging, and education about aging is 
what my organization provides.
    America's seniors deserve to work with persons who made the 
effort to learn something about seniors and the unique 
challenges and changes aging presents. SCSA teaches realtors, 
financial planners, healthcare providers and others about those 
challenges, and they in turn use that knowledge to supplement 
their own vocational abilities.
    In the discussion of designations and credentials, that has 
been a common mistake to compare the CSA designation with 
financial designations. Such comparisons are simply inaccurate 
and unfair.
    Comparing the CSA designation to a financial designation is 
like comparing learning Spanish to getting a degree in 
business. Learning Spanish can't make you a businessperson but, 
if you are a businessperson who wants to work in the Spanish-
speaking community, it is a valuable supplement. Both are very 
useful, depending on what you want to do.
    But the fact that the business degree took more time, cost 
more money and involved more testing in no way diminishes the 
value of learning Spanish. The same principle applies to 
credentials.
    So let me emphasize this. The CSA designation is not an 
investment or a financial designation, and we do not hold 
ourselves--our training or our designation out as experts 
simply because they have our credential.
    Because of the special nature of our credential, we have 
developed a disclosure statement that clearly defines what our 
CS credential is and what it is not. It states, ``Certified 
Senior Advisors have supplemented their individual professional 
licenses, credentials and education with knowledge about aging 
and working with seniors.
    Know what those licenses, credentials and education 
signify. The CSA designation alone does not imply expertise in 
financial health or social matters.'' Details, www.csa.us.
    While our disclosure statement is clear about what a CSA, 
it can't adequately describe what one learns to become a CSA. 
Toward that end, we enthusiastically encourage any Members of 
the Senate Special Committee on Aging or its staff to go 
through our entire training, as a number of regulators and 
others have done.
    We hold CSAs to a high ethical standard and enforce it 
vigorously. Over the past 5 years, the independent CSA Board of 
Standards heard 127 cases, resulting in 33 revocations of the 
designation, and 27 suspensions.
    We continually solicit the advice of regulators and others 
about how we can better achieve our common goal of protecting 
seniors. We fully recognize the potential of any credential to 
be misused or misrepresented.
    Unscrupulous people do unscrupulous things. When someone 
crosses the line, it is more than a betrayal of trust to the 
public. It is a betrayal of trust to the schools where they 
were educated, to the companies that hired to them, to the 
agencies that license them, and to the organizations that 
credentialed them.
    We believe that the problem of persons misrepresenting 
their credentials, can be addressed with two steps. First, 
there should be a requirement of all designations to adopt a 
disclosure statement. No senior can be expected to know what 
someone's credentials mean.
    This lack of understanding makes it incumbent on 
credentialing organizations to spell out what they confer and 
what they don't. The answer is not to limit the number of 
credentials or to discourage the education behind them or to 
require that someone conceal their credentials and education.
    Full disclosure limits the ability of an unscrupulous 
person to misrepresent a credential and increases the 
consumer's ability to make informed choices about whom they 
work with. Second, as the North American Securities 
Administrators Association proposes, there should be a single 
national standard for credentials, to give clear rules of the 
road to professionals, companies credentialing organizations 
and the public.
    On behalf of Society of Certified Senior Advisors and our 
12,000-plus member CSAs and the seniors they serve, I thank you 
for your interest and commitment to our mutual goal of 
providing our Nation's seniors with attention they deserve.
    [The prepared statement of Mr. Pittock follows:]

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    The Chairman. Thank you so much.
    Mr. Bhojwani, I want to make it clear that your company is 
by no means the only firm that is alleged to have problems with 
the type of sales and marketing practices outlined by the 
Minnesota Attorney General today and by other State regulatory 
officials, and in--also in recent critical media accounts.
    Your representatives have outlined to the Committee staff 
an impressive set of written guidelines and oversight 
procedures as you have, governing the sale by your agents of 
certain complex financial products such as annuities, and your 
testimony was very impressive in that respect.
    Yet, the question is, if these rules are being followed or 
enforced so well, then why are State regulatory officials 
relating such a considerable volume of alleged abuses to us 
about your company?
    Mr. Bhojwani. Chairman Kohl, thank you for the question, 
and thank you for the acknowledgement of our efforts, as well 
as the industry issues at large.
    We take great pride in the efforts that we take. We believe 
we have a valuable product to offer. We believe we have very 
stringent processes in place. The reality is we are part of a 
much larger company and a much larger industry.
    If we look at our company solely, our parent company 
comprises the 16th largest company in the world. We have a 
dominant market share in this space. The reality of American 
business today, you are going to attract a certain number of 
problems and complaints by sheer virtue of size. I want to be 
clear that even one complaint, even one concern, is taken 
seriously, and it is unacceptable. We have a litany of 
processes that we go through, and those processes continue to 
improve every day. I would love the opportunity to share some 
of those processes with you in detail, if I may.
    The Chairman. Go ahead.
    Mr. Bhojwani. First of all, 6 years ago we introduced and 
made mandatory a Statement of Understanding. Now, what this 
statement requires is that the consumer, the purchaser of our 
product, goes through with their agent, with their 
representative, an explanation in detail in as plain English as 
can be made possible, what the product does, what some of the 
features are, what some of the problems are.
    It goes through that in a great deal of detail, and it is 
required that the consumer sign and acknowledge that. We won't 
take an application without that.
    Two years ago we introduced a detailed suitability process. 
The suitability process captures a variety of detailed 
information on what it takes to purchase our products and just 
assesses whether or not the product is suitable for that 
particular consumer. We look at things like household income, 
net worth, financial objectives, liquidity, the source of the 
annuities funds, and so on and so forth.
    If any one of those variables in that suitability process 
are out of line, each application goes through a suitability 
engine, the application is then submitted and selected for 
elevated review, where we have a panel of experts within the 
company that go through that. We have approximately 130 
applications a week that are taken to this elevated review 
process. We take the suitability issue very seriously.
    In addition to the suitability engine, we have a variety of 
training that we ask our agents to go through. We don't require 
it, but it is provided. The reality is that our best agents, 
the agents that produce the most business with us, are the ones 
who take advantage of this training.
    We have a team of 75 licensed insurance agents on our 
staff. We call it the FAST team, Fast Accurate Service Team. 
Those agents are designated to answer detailed questions for 
consumers or agents that call in. That is all they do, to make 
sure that the product is represented accurately.
    We have a post-survey process. LIMRA, an independent third 
party, reaches out to the consumers that purchase our products 
and gives us the data on the understanding of the product 
itself as well as the sales process.
    I have announced today that we will be taking the 
additional steps of calling out to any purchasers of our 
product over the age of 75 and offering refunds where it is 
appropriate.
    We have also announced today our efforts relative to 
designations. I couldn't agree more with most of the testimony 
I have heard today about the importance of making sure that 
designations that are used with our seniors are accurate and 
well understood. We firmly support that, and we have announced 
today that we will be providing that list and only allowing 
that list to be used in the marketing of our products.
    We also have announced previously the appointment of a 
chief suitability officer. This officer's job is to make sure 
that we are always mindful of the consumer perspective.
    The processes that we have implemented as early as 6 years 
ago continue to evolve. I am hopeful that the processes we will 
be talking about 2 years from now are even better than today's.
    The reality is we need to keep working at this. We take 
this very seriously. Even one complaint is unacceptable, and we 
will do everything we can to make sure the number's as close as 
possible to zero.
    The Chairman. That is very good. Thank you.
    Mr. Pittock, we appreciate your invitation to the Committee 
staff to visit your facilities, undergo your Certified Senior 
Advisor, the CSA training program, which according to your 
testimony disclaimer, seeks only to enhance knowledge of senior 
issues of various types. However, our concern today relates 
more to the actions of agents and others, because that is your 
CSA designation rather than anything you or your immediate 
staff may be doing.
    How do you oversee individuals once they have earned your 
CSA designation? How do you oversee them?
    Mr. Pittock. Thank you, Senator Kohl.
    There are several activities that take place. Each year our 
CSAs have to complete a disclosure statement that says they 
have had no regulatory or legal activities against them during 
the past year. We get reports working with regulators, and we 
also go to regulator websites to see if a CSA appears on that 
website for any action, even before the 1-year reporting comes 
up.
    Then we have self-reporting, that the CSA has to tell us 
immediately, according to our CSA Code of Professional 
Responsibility, which is 26 pages long. But if they have an 
issue, legally or with a regulator, they are to report that to 
us immediately.
    Now, when I say ``us,'' that goes to our independent CSA 
Board of Standards. That Board of Standards then will 
investigate, normally if there is a regulatory action that 
takes place, there will be an immediate suspension, 
administrative suspension, while the investigation goes along, 
and then that could lead to either a revocation or permanent 
suspension.
    The Chairman. Well, you have heard testimony today that 
State authorities, such as Secretary Galvin, consider your CSA 
designation to be very little more than a marketing tool to 
gain access to seniors' money, and not a useful educational 
credential. How do you respond to what he said?
    Mr. Pittock. Our education really builds a lot of empathy 
for seniors, and it does help for anybody that is working with 
seniors. The disclosure statement that we require makes it very 
clear that it is not a marketing device, that this designation 
is a supplement. It is a supplement to one's knowledge or 
credential or license that they hold, and the CSA designation 
alone does not imply expertise in health, financial or social 
issues.
    The Chairman. Well, when a person goes out and says to 
potential clients, ``I am a Certified Senior Advisor,'' that 
sounds pretty important, doesn't it? I mean, you--people who 
hear that, a certified senior advisor, I have been trained, I 
have gone through a program, I have a designation, I--people 
who he comes into contact with, particularly seniors, 
oftentimes might understandably look at that person as being 
someone who is very, very well qualified to assist them in 
their financial planning.
    In fact, isn't that what you are attempting? Don't you want 
your CSAs to be regarded as such? Isn't that the purpose of 
your program?
    Mr. Pittock. What we want them to be regarded as and known 
as is somebody that has gone the extra step to understand the 
issues that seniors face, and that we all face as we age.
    The Chairman. Right.
    Mr. Pittock. There are really three parts to this aging 
process. It is not just the financial or the economic.
    The Chairman. But would you describe them as real experts 
in this whole field? Your CSAs?
    Mr. Pittock. No. the CSA designation alone does not 
represent expertise in health, financial or social issues.
    The Chairman. Do you think that there is some people who 
come into contact with your CSAs who are under the impression 
that it does represent expertise?
    Mr. Pittock. If the CSA represents himself correctly, as 
our statement says they are to do, there should be no 
misunderstanding. If they do mislead or misuse the designation 
in any way, that designation will be revoked, and they won't 
have the option to use it any further.
    The Chairman. Really? How many designations are revoked all 
the time?
    Mr. Pittock. There have been 33 revoked.
    The Chairman. In what period of time?
    Mr. Pittock. That is in the past 5 years.
    The Chairman. In 5 years?
    Mr. Pittock. Yes.
    The Chairman. You have how many total CSAs?
    Mr. Pittock. There are approximately 12,000.
    The Chairman. Twelve thousand. Thirty-three have been 
revoked.
    Mr. Pittock. Yes.
    The Chairman. That is almost zero. That is close to being 
zero.
    Mr. Pittock. The number of cases----
    The Chairman. It would have to be--these must be really 
egregious violations if 33 out of 12,000.
    Mr. Pittock. Well, our code of professional responsibility 
is very clear that they can't mislead a senior in any way. They 
have got to follow the rules and the regulations of their own 
license.
    Since this hearing dealt with the financial aspects of 
licenses and so on, those people area obligated to follow the 
rules of whether it is a securities or an insurance license. If 
in any way they violate that, then the designation will be 
revoked.
    The Chairman. OK, good.
    Well, gentlemen, anything you would like to say? We 
appreciate your being here, and you have provided good 
testimony, and to--you have been frank and honest and 
informative, and it has been very good for this panel.
    But I would like to give you a chance, as I have with the 
other panelists, to say a word or two before we let you go 
today. Mr. Bhojwani, would you like to say something?
    Mr. Bhojwani. I would. Thank you, Chairman, Kohl.
    I want to emphasize what you have heard many of your 
previous panelists talk about. There is clearly a change in 
demographics. There is clearly a change in the needs of this 
country's retirees.
    Be they 59 years old, 65 years old or 75 years old, there 
is clearly a trend, where many of these retirees have a very 
real chance, a very real likelihood of outliving their assets. 
There are a variety of solutions to this. There is no one 
single solution that will solve all of these needs.
    But we believe very strongly that our products, our 
annuities, our life insurance products, have a role to play. 
Not the only role and not a one-size-fits-all role, but we have 
a role to play, and we very much look forward to being part of 
the solution as we move forward to collectively deal with these 
very real needs for our retiring Americans.
    Thank you.
    The Chairman. Thank you so much.
    Mr. Pittock.
    Mr. Pittock. Senator Kohl, I would like to say this, that 
our training benefits seniors. We give professionals the 
information they need to communicate better, understand more 
effectively and find seniors the resources that they need, 
because there are a lot of issues that we all face with aging.
    So seniors deserve to work with professionals that have 
gone the extra step to learn about the whole aging process, 
which is the health, the economic and the social aspects of 
aging. They all are important. You can't just succeed in one.
    We work closely with regulators to ensure that our efforts 
are very transparent, and we work to protect the seniors with 
the regulators. We developed a seminar, ``Nine Tips To Avoid 
Financial Fraud,'' that our members have given hundreds of 
these around the country. They are strictly to help people 
understand how to avoid financial fraud.
    So one of the reasons that we developed the disclosure 
statement was to make it clear exactly what the designation 
confers. I think every designation should approach this with 
that in mind.
    Thank you for inviting me.
    The Chairman. Well, we thank you both for being here, as 
well as all the other panelists today. Clearly, we are talking 
about a very important issue in our society, our seniors and 
what kind of information they get based--to make decisions on, 
in many cases their meager resources, and trying to make them 
last their lifetime.
    There is a lot of work to be done, and the information you 
have provided us is going to be very helpful. So again, we 
thank you for coming.
    With that, this hearing is adjourned.
    [Whereupon at 5:17 p.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              


      Responses to Senator Kohl's Questions from Secretary Galvin

    Question. Some of the senior designations' sponsors have 
represented to the Committee that their titles do not 
necessarily confer any special financial expertise. While that 
may be technically correct, isn't it also true that many sales 
agents holding these same designations represent themselves as 
financial experts to vulnerable elderly customers?
    Answer. Yes. Despite the fact that the sponsors of senior-
specific designations have recently been representing that 
their designations do not necessarily confer any special 
financial expertise, The Commonwealth of Massachusetts has seen 
many instances of sales agents using these designations to 
present themselves as financial experts to elderly customers.
    For example, one insurance agent and security broker-dealer 
representative stated in his advertising materials that he ``is 
one of 7,000 Certified Senior Advisors (CSA) in the U.S. and 
therefore is well trained in many issues especially senior 
finances.'' (emphasis added). After receiving numerous customer 
complaints, the Massachusetts Securities Division initiated an 
administrative action against this agent and his broker-dealer, 
alleging that the agent had engaged in dishonest and unethical 
business practices by presenting himself as an unbiased and 
objective advisor to seniors when he, in fact, had the primary 
objective of selling as many high-commission annuities as 
possible.\1\ Many of these products were sold without regard to 
suitability for the particular client's age, tax situation or 
cash flow needs. This agent made more than $700,000 in 
commissions selling annuities and other financial products in 
2005, one of the years that he held his CSA designation. One of 
the complainants in this case (a woman in her seventies) 
indicated that the CSA designation was instrumental in her 
decision to purchase the annuity products the agent was 
selling.
---------------------------------------------------------------------------
    \1\ In the Matter of Michael DelMonico, Workman Securities 
Corporation, Paul Maxa and Robert Vollbrecht, Docket Number E-2007-0020 
(March 6, 2007), available on the Massachusetts Securities Division's 
website (www.sec.state.ma.us/sct/sctidx.htm).
---------------------------------------------------------------------------
    Similarly, the Massachusetts Securities Division received 
another complaint regarding another annuity salesman who stated 
in his advertising materials that he ``became a Certified 
Senior Advisor, and as such, he is uniquely qualified to help 
seniors protect their assets from nursing home costs, stock 
market volatility, and probate costs through proper planning 
and diversification.'' (emphasis added).\2\ We have spoken with 
a number of customers of this ``advisor'', all of whom thought 
they were going to see a qualified investment advisor, and all 
of whom were sold annuities and other insurance products by 
that agent. In August of this year, the Division field an 
administrative complaint against this Certified Senior Advisor 
resulting from allegations by a terminally ill eighty-six-year-
old man who did not have access to sufficient cash to properly 
attend to wrapping up his estate because most of his money was 
locked up in three annuities that were sold to him by his 
agent. The victim was a World War II fighter pilot with the 
Distinguished Flying Cross and a retired banker. According to 
these allegations, the agent sold him the first annuity two 
weeks after his wife died and immediately after he had 
undergone hip-replacement surgery. One of the high-commission 
annuities sold to this man (at age 84) locked his money up for 
13 years and subjected it to an initial surrender fee of 15%. 
The victim complained to the annuity company, Allianz, but his 
complaint was denied. He recently passed away without having 
obtained the relief he requested.
---------------------------------------------------------------------------
    \2\ In the Matter of Steven Michael Anzuoni and Fairway Financial 
Insurance Agency, Inc., Docket No. E-2007-0026 (August 22, 2007).
---------------------------------------------------------------------------
    As yet another example, the Massachusetts Securities 
Division filed another administrative complaint against another 
insurance salesman that was holding himself out as an objective 
and unbiased, knowledgeable advisor.\3\ His promotional 
materials stated that he ``is a Certified Senior Advisor who 
has spent 15 years in the study, presentation and service of 
Finance and financial related products.'' (Emphasis in 
original). In fact, the only study he engaged in after college 
was the minimal study required to obtain the CSA designation. 
In the same promotional materials he listed the telephone 
number of the Society of Certified Senior Advisors, along with 
the Better Business Bureau, the Massachusetts Division of 
Insurance and Massachusetts Securities Division. The Division 
took testimony of a customer of this agent who was in her 
seventies who had expressed concern about an annuity that he 
had sold her. When the customer was attempting to determine 
whether to follow the agent's advice (and purchase the equity-
indexed annuity he was selling), she called the Society of 
Certified Senior Advisors and was informed that he checked out 
as a senior financial advisor. She testified as follows:
---------------------------------------------------------------------------
    \3\ In the Matter of John Christopher Huck, Docket Number 2006-0109 
(March 6, 2007).
---------------------------------------------------------------------------
    A. . . . There's one of these, Denver, CO, here Society of 
Senior Advisors. I told him I had contacted them about him.
    Q. What was the nature of that conversation?
    A. Well that was--see somebody gave me their name. Well 
there are the four places that he said I could call and check 
on him so I looked up that and I called them and she said that 
he had passed whatever tests or exams they take to become a 
senior financial advisor . . . She just said they had no 
problem with him. That everything that he went through with 
them was fine.
    Q. And by they you mean this Society of Senior--
    A. Society of Senior Advisors out in Denver, CO.
    In a subsequent telephone conversation with Division 
personnel, this customer indicated that she thought the agent 
had the proper state registrations to provide investment 
advice, based on her telephone conversation with the Society of 
Certified Senior Advisors--despite the fact the he was not 
registered as an investment adviser representative with the 
Division. This led her to decide to follow the agent's advice 
and purchase the annuities he was selling. The customer 
subsequently expressed concern she did not understand how the 
interest rate worked or that the product was not FDIC insured, 
and the surrender fees and lock-up period has not been 
explained to her.
    Question. I would like your recommendations on how state 
regulators and other ``continuing education'' -approving 
organizations could best modify their policies regarding 
``continuing education'' accreditation in order to limit the 
incentives that may be fueling the exponential growth in these 
senior designations. I would note that the CFP Board has 
undertaken a study of this issue in regard to its own policies, 
which is outlined in their written statement to the Committee.
    Answer. The Massachusetts Securities Division does not have 
any specific experience with the approval of continuing 
education accreditation. However, the Division believes that 
the exponential growth of bogus professional designations 
referred to in the question has directly resulted from the 
enormous commissions that can be made from selling certain 
annuity products. Those commissions, obtained by selling 
products such as variable annuities and equity-indexed 
annuities, often range between 7 and 9 percent of the amount 
invested, and might, in some instances, be higher. These larger 
commissions have fueled the quest for ever-more sophisticated--
and often deceptive--marketing tools to facilitate the sale of 
these products. Ironically, while the purported advisor has 
enormous financial incentives to sell certain high-commission 
products (as opposed to other, lower commission products) and 
to put a large amount of elderly person's money into those 
products (because the commission is based on the amount of the 
product sold), the professional designations are often used to 
give the impression that the so-called advisor is acting 
objectively, independently and for the benefit of the elderly 
client.
                                ------                                


      Responses to Senator Smith's Questions from Secretary Galvin

    Accreditation Standards
    Question 1. In Secretary Galvin's statement, he suggests 
that one level of assurance regarding the credibility of a 
specialty designation is accreditation by a national 
organization, such as the National Commission for Certifying 
Agencies. It is my understanding that CSA currently is 
undergoing that very accreditation process. If SCSA is able to 
obtain accreditation for the CSA designation, will that assuage 
your concerns about the CSA designation?
    Answer. Under the new Massachusetts regulations, a 
credential or professional designation that indicates or 
implies special certification or training in advising or 
servicing senior investors cannot be used by broker-dealer 
agents or investment adviser representatives unless the entity 
granting the credential has been accredited by a nationally-
recognized accreditation organization.\1\
---------------------------------------------------------------------------
    \1\ The newly-adopted regulations and the administrative record 
supporting those regulations are available on the Massachusetts 
Securities Division's website (www.sec.state.ma.us/sct/sctidx.htm).
---------------------------------------------------------------------------
    According to information submitted by the Society of 
Certified Senior Advisors (``SCSA'') to the Massachusetts 
Securities Division, SCSA has not officially applied for 
accreditation with any recognized accreditation organization, 
but has had communications with the National Commission for 
Certifying Agencies (``NCCA'') indicating that it intends to 
submit an application in the near future. Assuming that the 
SCSA were to successfully obtain accreditation, the designation 
could then be used by broker-dealer agents and investment-
adviser representatives in The Commonwealth of Massachusetts 
without violating the new regulations.
    The new regulations do not limit the Commonwealth's 
authority under existing provisions of law to address 
dishonest, unethical or fraudulent conduct if such a situation 
were to arise.
    Question 2. Does the accreditation process really provide 
sufficient assurances regarding the credibility and utility of 
a specialty designation?
    Answer. Information received by the Massachusetts 
Securities Division from the American National Standards 
Institute (``ANSI'') and the National Commission for Certifying 
Agencies (``NCAA'') indicates that they have rigorous 
accreditation process that could not be met by a sponsor of the 
designation unless the designation had rigorous training, 
testing, disciplinary and recertification processes.
    ANSI is a 501(c)(3) nonprofit organization based in 
Washington, DC. It accredits personnel certifications programs 
that satisfy the requirements set forth in its ``Policy and 
Procedures for Accreditation of Personnel Certification 
Programs''. These principles require certification programs to 
demonstrate high level of integrity and technical and 
administrative quality, to serve the public interest and to 
have a tangible value. Applicants for accreditation are 
required to submit an application providing detailed 
information regarding the applicant's organizational structure 
and credentialing programs. ANSI reviews these materials and 
also conducts an on-site audit. ANSI will often identify 
deficiencies and require corrective actions to be taken prior 
to granting accreditation. ANSI has accredited a number of 
designations in a variety of disciplines, such as, for example, 
the Board of Certified Safety Professionals' ``Certified Safety 
Professional'' designation and the Construction Manager 
Certification Institute's ``Certified Construction Manager'' 
designation.
    NOCA is a 501(c)(3) nonprofit organization based in 
Washington, DC. NCCA, which is NOCA's separately governed 
accreditation arm, accredits certification programs that 
satisfy its ``Standards for the Accreditation of Certification 
Programs''. The mission of NCAA is to ``ensure the health, 
welfare, and safety of the public through the accreditation of 
a variety of certification programs/organizations that assess 
professional competency''. NCCA uses a peer review process to 
establish accreditation standards, evaluate compliance with the 
standards, recognize organizations/programs which demonstrate 
compliance and serve as a resource on quality certification. 
NCCA's standards address the structure and governance of the 
certifying agency, the characteristics of the certification 
program, the information required to be available to 
applicants, certificants and the public, and the 
recertification initiatives of the certifying agency. 
Applicants for accreditation are required to submit an 
application providing detailed information regarding the 
applicant's organizational structure and credentialing programs 
and must explain how they comply or will comply with NCAA's 
standards for accreditation. NCCA has accredited a number of 
designations in a variety of disciplines, such as, for example, 
the American Association of Medical Assistants' ``Certified 
Medical Assistant'' designation, the American College of Sports 
Medicine's ``Certified Personal Trainer'', ``Exercise 
Specialist'' and ``Health/Fitness Instructor'' designations, 
and many others, including the Certified Financial Planner 
Board of Standards, Inc.'s ``Certified Financial Planner'' 
designation.
    Complaint Data
    Question 3. In preparation for this hearing I asked several 
state and federal entities to provide my staff with data on the 
number of investment fraud complaints received, and the amount 
of money lost to investment scams. Most entities were not able 
to provide particularly specific or useful data. This concerns 
me, because federal and state partners can't craft intelligent 
solutions to address investment fraud if they can't even 
adequately define the magnitude of the problem. Can you please 
explain what type of complaint data your organization collects?
    Answer. Each year, the Massachusetts Securities Division 
compiles information on the number of complaints received, 
inquiries opened and closed, investigations opened and closed 
types of violations, products used in connection with 
defrauding investors, the amount of money returned to 
investors, fines and penalties imposed and the number of 
administrative hearings held.
    Question 4. With what entities is this information shared, 
e.g., with which federal and/or state law enforcement partners?
    Answer. The Massachusetts Securities Division shares the 
information described in response 3 above with the North 
American Securities Administrators Association and would share 
such information with any state or federal enforcement partner 
that requested it.
    Question 5. In as much detail as possible, please provide 
the Committee with all relevant data and trend analysis on 
investment fraud complaints received and/or investigated by 
your organization for years 2003 through 2007.
    Answer. In 2006, the Massachusetts Securities Division 
responded to approximately 5,400 investor complaints via our 
toll-free hotline. It opened 250 inquiries and closed 241 
inquires, opened 106 investigations and closed 92 
investigations, returned $2,700,300,000 to investors, imposed 
fines in the aggregate amount of $6,257,356, and held 10 
administrative hearings. The enforcement actions that were 
successfully concluded involved fraud, unlicensed individuals 
or entities, unregistered securities, failure to supervise, 
unsuitability, unauthorized trading, books and records and 
abuse of senior citizens. Abuse of senior citizens factored 
into approximately 37 percent of enforcement actions. Products 
involved in the enforcement actions we have undertaken include 
variable annuities, equity-indexed annuities, certificates of 
deposited or similar bank-related products and other products. 
The products used to defraud seniors included traditional 
stocks and bonds, unregistered securities and variable of 
equity-indexed annuities.
    These figures are comparable to figures for other calendar 
years.
    Question 6. Do you have any estimates regarding how much 
money investors lose each year to investment fraud?
    Answer. The Massachusetts Securities Division does not have 
any estimates regarding how much money investors lose each year 
to investor fraud.

    Mandatory Sales Disclosures
    Question 1. Under state and federal law, what point-of-sale 
disclosures must agents, brokers, producers, advisors, etc. 
make to investors?
    Answer. Regulations promulgated under the Massachusetts 
Uniform Securities Act set forth principles to ensure integrity 
in client communications, which would include point-of-sale 
disclosures to investors. For example, 950 Code of 
Massachusetts Regulations (``CMR''), Section 12.205(9)(c)(8) 
lists certain dishonest and unethical practices for investment 
advisers. Included in this list is:
    Misrepresenting to any advisory client, or prospective 
advisory client, the qualifications of the adviser, its 
representatives or any employees, or misrepresenting the nature 
of the advisory services being offered or fees to be charged 
for such services, or omitting to state a material fact 
necessary to make the statements made regarding qualifications, 
services or fees, in light of the circumstances under which 
they are made not misleading.
    Similarly, 950 CMR Section 12.204(1)(a)(18) lists certain 
dishonest and unethical sales practices for broker-dealer 
agents. Included in the list is ``making any advertising or 
sales presentation, either in written or oral form, in such a 
fashion as to be deceptive or misleading.''
    In addition, FINRA Rule 2210 (``Standards Applicable to All 
Communications with the Public'') sets forth the guiding 
principles for customer communications by broker dealers and 
investment advisers. These principles are further refined by 
interpretive releases published by FINRA, such as IM-2210-1 
(``Guidelines to Ensure That Communications With the Public Are 
Not Misleading'') and IM-2210-2 (``Communications with the 
Public About Variable Life Insurance and Variable Annuities''). 
For example, one of the guidelines in IM-2210-1 states: 
``Members must consider the nature of the audience to which the 
communication will be directed. Different levels of explanation 
or detail may be necessary depending on the audience to which a 
communication is directed.'' Massachusetts has incorporated 
Rule 2210 into its regulations covering securities broker 
dealers and investment advisers.
    Massachusetts also has certain specific disclosure 
obligations. For example, 950 CMR Section 12.205(8)(e) requires 
investment advisors to disclose, before the purchase or sale of 
a security with respect to which investment advice has been 
rendered, the total amount of sales commission or other fees to 
be charged. Similarly, FINRA has certain rules providing 
disclosure requirements for certain products. For example, 
FINRA's new rule, Rule 2821, pertaining to sales of variable 
annuities, includes the requirements that the customer be 
informed of various features of deferred variable annuities, 
such as the potential surrender periods and surrender charges, 
potential tax penalties for early redemption, mortality and 
expense fees, advisory fees and potential charges for and 
features of riders.
    Question 2. It is my understanding that there are various 
model documents circulating in the industry that establish 
point of sale disclosures that must be made to prospective 
investors. While many of these documents seem to provide useful 
information regarding the investment product, I am troubled 
that consumers don't seem to have easy access to information 
that would help them determine whether their sales agent has 
improper motives or conflicts of interest, for example, sales 
commission structures. It seems that transparency in investment 
transactions is a key element to preventing fraud. Therefore, 
should state and federal regulators impose more stringent and 
comprehensive disclosure requirements on agents, brokers, 
producers, advisors, etc.?
    Answer. The Massachusetts Securities Division has received 
a number of complaints, and has initiated and adjudicated a 
number of administrative proceedings, involving purported 
advisors to senior citizens who have consistently steered those 
citizens to high-commission annuity products. Often the product 
is unsuitable to the senior citizen due to lengthy lock-up 
periods and large surrender fees. Time and time again we have 
heard from seniors that they were not aware that the agent had 
received such a high commission on the product, which 
commissions can range from 7 to 9 percent of the amount 
invested, and might, in some instances, be higher. Rather, the 
senior is told that the advisor's services will not cost the 
senior citizen anything.
    We have seen that these enormous commissions often strongly 
influence that chose of products the so-called senior advisor 
recommends. For many annuity products, there appears to be a 
correlation between size of the commission and certain 
characteristics of the product that are disadvantageous to the 
consumer, such as lengthy lock-up periods, high surrender fees, 
low interest rates or, for equity-indexed annuities, a low 
participation in the increase of the equity index that the 
annuity is tied to. In many instances, we have seen purported 
advisors putting almost every senior that comes to them for 
advice into the same high commission products, as a one-size-
fits-all approach that does not properly factor in the 
specifics of the customer's circumstances.
    Accordingly, I believe that up front, point-of-sale 
disclosure of the commissions the agent stands to receive on 
the various products recommends or sold would make those 
transactions (and the motives underlying them) more 
transparent.
    In addition, the Massachusetts Securities Division has seen 
many instances of seniors purchasing annuities based on initial 
teaser interest rates, which rates fall precipitously after the 
first year and remain low for the lengthy remainder of the 
annuity's lock-up period. Recently, we have heard from many 
senior citizens who have found themselves locked into an 
annuity product which ties up their money for many years but 
which pays an annual interest rate that is a full two 
percentage points less than a CD that would tie up their money 
for one year. Seniors are also often wooed by an up front 
``bonus'' that, in fact, is only collectable if the product is 
held for a very long period of time. The true nature of these 
interest rates and bonuses, should be clearly disclosed.
    The disclosures described above should be in a stand-alone, 
easy to read format, because if they are buried in fifty pages 
of dense fine print, they will not be meaningful. The customer 
should sign the disclosure to indicate that the customer has, 
in fact read the disclosure. Of course, it should be remembered 
that the risk of the disclosure-based approach is that the 
agent could quickly gloss over the documents when making the 
sale, have the trusting senior sign the document on the agent's 
representation that it is just paperwork, and then the agent 
would have the signed disclosure in the file as a defense if 
the consumer were to complain in the future.
    Question 3. What are the most important pieces of 
information that investors should obtain to determine whether 
their sales agent has improper motives or conflicts of 
interest, and from what sources can they obtain this 
information?
    Answer. Please see response to question 2, immediately 
above.
    Question 4. Under state and federal law, what recourse do 
consumers have if misled in the sale of an investment product, 
for example, does current law provide for rescission rights?
    Answer. Under Massachusetts law, any person who offers and 
sells a security by means of any untrue statement of a material 
fact or by omitting a material fact is liable in a private 
action to the buyer of the security. Analogously, under federal 
law, there is a private right of action under Section 10(b) of 
the Securities Exchange Act of 1934 and SEC Rule 10b-5.
    In addition, in many of the enforcement actions brought by 
the Massachusetts Securities Division involving misleading and 
deceptive sales practices, the Division seeks restitution for 
investors. For example, in its recently-settled case against 
Investors Capital Corporation (``ICC''),\1\ the Division had 
alleged that this broker-dealer had not properly supervised its 
many agents. Those agents, who were not registered or properly 
qualified as investment advisers, were using such titles as 
``Certified Senior Advisor'' to hold themselves out as 
investment advisers and convincing senior citizens to sell 
financial products and purchase high-commission equity-indexed 
and other annuities. In many instances, the annuity product was 
unsuitable for senior citizens due to lengthy lock-up periods, 
high surrender fees and potentially disadvantageous tax 
consequences. In its ultimate settlement with the Division, ICC 
agreed to reimburse purchasers of those annuities in 
Massachusetts who chose to surrender the annuities all early 
withdrawal penalties, in an amount such that they would 
receive, at a minimum, their principal amount invested plus 3 
percent annual interest.
---------------------------------------------------------------------------
    \1\ In the Matter of Investors Capital Corp. & Investors Capital 
Holdings, Ltd., Consent Order, Docket Nos. E-2005-0190 & E-2006-0060 
(December 19, 2006).
---------------------------------------------------------------------------
    Differences in Regulation of Securities Compared to 
Insurance Products
    Question 5. In Mr. Nicolette's statement, he indicates that 
regulators' hands are ``tied by an antiquated regulatory system 
that continues to permit a lower standard for advice in the 
sale of insurance products'' as compared to securities. Do you 
agree with this assessment, that is, is the regulatory system 
antiquated?
    Answer. I am not the principal regulator of insurance 
products in The Commonwealth of Massachusetts. However, I will 
note that a number of enforcement actions that the 
Massachusetts Securities Division has initiated have involved 
insurance agents using sham professional designations to cloak 
themselves as senior specialists and to misleadingly hold 
themselves out as investment advisors and advising senior 
citizens to purchase fixed annuities and other insurance 
products. Those annuities are often unsuitable to the senior 
citizen client due to high surrender fees, lengthy lock-up 
periods and potentially disadvantageous tax consequences.
    Question 6. Are insurance products under-regulated?
    Answer. Please see response to question number 5 
immediately above.
    Question 7. Notwithstanding the current legislative and 
regulatory landscape, what ideally should be the SEC's role in 
authenticating, regulating, and/or conscripting use of 
specialty designations, i.e., should SEC assume primary 
enforcement responsibility, is enforcement responsibility best 
left to state regulators, or should federal and state 
regulators share enforcement responsibilities?
    Answer. The Massachusetts Securities Division believes that 
the SEC and state governments should work together to address 
the problem of deceptive or misleading professional 
designations geared towards senior citizens. The Massachusetts 
Securities Division has initiated a number of enforcement 
actions against purported senior specialists using 
sophisticated and misleading marketing tools (including senior-
specific professional designations) to convince senior citizens 
to purchase unsuitable annuity products. Based on conversations 
with regulators in other states, it is our understanding that 
these abusive marketing tactics have been replicated in many 
states. We believe that a coordinated approach with the SEC and 
other states would lead to a stronger and more uniform attack 
on these deceptive marketing platforms nationwide.
    In addition, Massachusetts has recently adopted a 
regulation prohibiting broker-dealer agents and investment 
adviser representatives from using a purported credential or 
professional designation that indicates or implies that a 
broker-dealer agent has special certification or training in 
advising or servicing senior investors, unless such credential 
or professional designation has been accredited by a reputable 
national accreditation organization (such as the National 
Commission for Certifying Agencies or the American National 
Standards Institute).\2\ We are hopeful that this regulation 
will become a nationwide model and that the SEC would work with 
the states to help coordinate enforcement of this rule.
---------------------------------------------------------------------------
    \2\ The newly-adopted regulations and the administrative record 
supporting those regulations are available on Massachusetts Securities 
Division's website (www.sec.state.ma.us/sct/sctidx.htm).
---------------------------------------------------------------------------
      

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     Responses to Senator Kohl's Questions from Nicholas Nicolette

    Question. What are you and your colleagues prepared to do 
to protect the credibility of legitimate designations and 
separate them from those that do not?
    Answer. I don't believe this question is applicable to a 
voluntary membership organization such as the Financial 
Planning Association. However, we would encourage state and 
federal regulators to do the utmost possible to protect what is 
probably the most vulnerable consumer segment in response to 
abusive marketing and sales practices.
    Question. In your view, how many of the hundreds of 
designations are worthy of credibility with seniors?
    Answer. I believe that each designation, specialty or 
broad-based, is best left to the discretion of state and 
federal regulators in terms of evaluating abusive or misleading 
marketing and sales practices. FPA does not have the resources 
to properly evaluate the hundreds of designations available in 
the marketplace, other than it has always supported the CFP 
designation as an appropriate means of delivering competent and 
ethical financial planning advice to the public.
    We elaborate on a possible solution to the question of how 
to determine the credibility of a designation--irrespective of 
abusive marketing practices--in response to Question 7 by 
Ranking Member Smith.
    Question. You've mentioned that the insurance industry 
seems to have a lesser regulatory burden than in the securities 
arena. What else needs to be done here to make what you'd 
regard as a level playing field to fully protect the interests 
of our seniors?
    Answer. I believe that an appropriate standard of care with 
respect to advice offered on insurance products is 
conspicuously lacking in the present scheme of state 
regulation. Insurance regulation, in my view, has always been 
focused on monitoring the solvency of insurance companies, 
i.e., actuarial data applied to a company's ability to pay out 
claims, not on how to effective oversee abusive sales or 
marketing practices. To complicate matters, there are gaps in 
regulation between insurance and securities regulators in the 
sale of hybrid products, and sometimes overlap in products. For 
example, equity index annuities are insurance products that are 
often marketed as providing policy holders the ability to 
participate in stock market returns without the risks. However, 
there is risk in losing money in these complex products, mostly 
from churning practices, and there is typically a cap on the 
rate of return that doesn't mirror the full return of their 
benchmarks in the stock market. We believe these products do 
hold risk to policyholders and should be subject to oversight 
by securities regulators. Conversely, variable annuities are 
regulated by both insurance and federal regulators, but contain 
elements of both an investment and annuity product. Both equity 
index and variable annuity products can serve the same purpose 
of providing income to a senior in retirement. Why should they 
be subject to different standards of care?
    As mentioned above, the challenge for Congress is 
addressing the old regulatory framework that permits insurance 
products and advice to be the responsibility of state insurance 
regulators, and securities products and investment advice the 
jurisdiction of state and federal securities regulators. In 
addition, retirement advice is regulated by the U.S. Department 
of Labor, and falls under separate congressional committee 
oversight than for securities and banking regulators. None of 
these areas of product sales and advice are harmonized so that 
seniors and other investors receive level standards of 
protection.
    Since many insurance and securities firms are delivering 
vastly different product solutions to address the same client 
needs, there is a critical need for regulation to be harmonized 
and applied in a uniform manner so that seniors better 
understand their options across industry sectors. Eliminating 
bias in the sales process and applying uniform standards to 
advice-givers would thus require an act of Congress and major 
regulatory reform. To fully protect our seniors, and for that 
matter, all Americans, the level playing field in regulation 
should ideally center not on standards applied to individual 
product solutions, but on the delivery of integrated financial 
advice covering all aspects of a person's financial objectives. 
The individuals holding out as experts, with the implication 
that they are providing objective advice--whether in regard to 
the specific needs of a retirement person, or broad financial 
solutions at any stage in life--should be held to a fiduciary 
standard, be subject to relevant standards of competency, and 
always be required to disclose conflicts of interest.

     Responses to Senator Smith's Questions from Nicholas Nicolette

    Accreditation Standards
    Question 1. In Secretary Galvin's statement, he suggests 
that one level of assurance regarding the credibility of a 
specialty designation is accreditation by a national 
organization, such as the National Commission for Certifying 
Agencies. It is my understanding that CSA currently is 
undergoing that very accreditation process. If SCSA is able to 
obtain accreditation for the CSA designation, will that assuage 
your concerns about the CSA designation?
    Answer. Referring to written comments by the Financial 
Planning Association to the Massachusetts Securities Division, 
FPA is on record supporting the Division's proposal to limit 
the use of designations to those that meet a commonly 
understood baseline, such as accreditation by the National 
Commission for Certifying Agencies (NCCA). Whether such a 
baseline is appropriate for all designations may depend on 
whether the individual holds other credentials that provide an 
appropriate framework of competency and knowledge in which to 
apply the learning from a specialty designation. In the case of 
the CSA, for example, if the individual also holds the CFP 
designation, which is accredited by the NCCA and serves as a 
solid foundation to provide personal financial advice, 
additional accreditation may not be needed in order to further 
one's knowledge about a specific area of practice, as long as 
the specialty designation meets a baseline educational 
standard. In general, per my testimony, we believe that 
rigorous education, examination, enforceable ethical standards, 
and experience are all basic criteria that should be applied to 
any designation. Without these, you cannot sustain credibility 
or the public trust.
    Question 2. Does the accreditation process really provide 
sufficient assurances regarding the credibility and utility of 
a specialty designation?
    Answer. I would refer back to my previous comment that in 
order for any accreditation process to be truly effective, the 
four `E's are needed with any designation: rigorous education, 
examination, ethics and experience requirements.

    Complaint Data
    Question 3. In preparation for this hearing I asked several 
state and federal entities to provide my staff with data on the 
number of investment fraud complaints received, and the amount 
of money lost to investment scams. Most entities were not able 
to provide particularly specific or useful data. This concerns 
me, because federal and state partners can't craft intelligent 
solutions to address investment fraud if they can't even 
adequately define the magnitude of the problem. Can you please 
explain what type of complaint data your organization collects?
    Answer. FPA collects only complaint data that it receives, 
or that comes to its attention, regarding members of the 
association. We do not maintain any specific categories of 
complaints such as senior fraud.
    Question 4. With what entities is this information shared, 
e.g., with which federal and/or state law enforcement partners?
    We do not share this information with federal or state 
authorities unless we believe a crime has been committed that 
has been previously unreported, or unless such information is 
requested from a regulatory body.
    Question 5. In as much detail as possible, please provide 
the Committee with all relevant data and trend analysis on 
investment fraud complaints received and/or investigated by 
your organization for years 2003 through 2007.
    Answer. FPA is a voluntary membership organization with no 
authority to investigate fraud complaints from the public 
except in connection with ethics complaints against its own 
members.
    Question 6. Do you have any estimates regarding how much 
money investors lose each year to investment fraud?
    Answer. We do not maintain such statistics.

    Mandatory Sales disclosures
    Question 1. Under state and federal law, what point-of-sale 
disclosures must agents, brokers, producers, advisors, etc. 
make to investors?
    Answer. Point-of-sale disclosure rules vary by state, by 
industry, and under federal law. These rules apply to 
registrants under those jurisdictions in their capacities as 
licensed agents, brokers, or advisers. Financial planners are 
not per se regulated by federal or state authorities. However, 
many carry licenses as securities and insurance brokers, and 
investment advisers. In addition, FPA requires individual 
members to comply with a strict code of ethics, which requires 
disclosure of conflicts of interests and all sources of 
compensation in their role as financial planners. The code of 
ethics largely mirrors that of the CFP Board of Standards for 
CFP certificants.
    Question 2. It is my understanding that there are various 
model documents circulating in the industry that establish 
point of sale disclosures that must be made to prospective 
investors. While many of these documents seem to provide useful 
information regarding the investment product, I am troubled 
that consumers don't seem to have easy access to information 
that would help them determine whether their sales agent has 
improper motives or conflicts of interest, for example, sales 
commission structures. It seems that transparency in investment 
transactions is a key element to preventing fraud.Therefore, 
should state and federal regulators impose more stringent and 
comprehensive disclosure requirements on agents, brokers, 
producers, advisors, etc.?
    Answer. I would draw a distinction between comprehensive 
and meaningful disclosure. Consumers can receive extensive 
disclosure in fine print, and ignore it. More important than 
simply requiring additional disclosure is subjecting the 
adviser to a fiduciary duty that requires him or her to 
effectively disclose these conflicts, and to remedy potential 
problems so that these are resolved in the interest of the 
client.
    Question 3. What are the most important pieces of 
information that investors should obtain to determine whether 
their sales agent has improper motives or conflicts of 
interest, and from what sources can they obtain this 
information?
    Answer. The most important pieces of information that 
investors should obtain from their sales agent or adviser are 
about qualifications (learning and experience); disciplinary 
history; business and personal relationships that may pose 
conflicts; sources of compensation; scope of engagement; and 
responsibilities of each party to undertake the recommendations 
of the adviser/agent.
    Question 4. Under federal and state law, what recourse do 
consumers have if misled in sale of investment products? Does 
current law provide for rescission rights?
    Answer. I cannot provide a comprehensive response to 
consumer recourse for injury under all financial services laws. 
Under the Investment Advisers Act of 1940, you have a right to 
sue the firm and/or individual in court unless there is a 
binding arbitration agreement. The law, as I understand it, 
provides only for a rescission of fees paid to the adviser 
under certain conditions, not for investor losses.
    Differences in Regulation of Securities Compared to 
Insurance Products.
    Question 5. In Mr. Nicolette's statement, he indicates that 
regulators' hands are ``tied by an antiquated regulatory system 
that continues to permit a lower standard for advice in the 
sale of insurance products'' as compared to securities. Do you 
agree with this assessment, that is, is the regulatory system 
antiquated?
    Answer. N/A, since you are inviting opinion on FPA's 
assessment regarding the need for reform of insurance 
regulation.
    Question 6. Are insurance products under-regulated?
    Answer. Insurance regulators traditionally have focused on 
solvency of insurance companies and their ability to pay out 
for losses and their ability to provide income streams through 
the life of a fixed annuity policy. Insurance products are 
under-regulated in the areas of sales practices and advice on 
insurance products. Prior to the consolidation of financial 
services firms under one roof offering a variety of services 
and products, the average consumer understood the role of the 
insurance agent. Today, the average life insurance agent no 
longer holds out in that manner. Caveat emptor is no longer a 
way to provide the consumer with fair warning that there is an 
inherent and obvious conflict. If the consumer is confused or 
uncertain over the standard of care to be applied in the 
relationship, and the agent is unqualified to give advice or 
unwilling to disclose conflicts of interest or act in the 
client's best interest, then the laws should be reformed, and 
new ways of enforcement considered. Presently there is no 
blanket fiduciary duty or transparency in the sale of insurance 
products, although insurance regulators in recent years have 
begun to move in that direction by imposing limited suitability 
standards.
    Question 7. Notwithstanding the current legislative and 
regulatory landscape, what ideally should be the SEC's role in 
authenticating, regulating, and/or conscripting use of 
specialty designations, i.e., should SEC assume primary 
enforcement responsibility, is enforcement responsibility best 
left to state regulators, or should federal and state 
regulators share enforcement responsibilities?
    Answer. I believe there is an opportunity for a shared 
private sector and public responsibility in the review of 
specialty designations, and such a review should be approached 
in a balanced way that preserves fundamental guarantees to the 
right of commercial speech, but at the same time protection for 
the public from abusive marketing practices. Preferably, a 
group of peers on a professional regulatory board, independent 
and free of conflicts of interest, accountable to a public 
agency, such as the SEC or a state authority, and with the 
appropriate expertise and knowledge, should have the ability to 
respond quickly and effectively in reviewing specialty 
designations, and be able to make objective, authoritative 
recommendations to the appropriate enforcement authority with 
regard to any discrepancies in the curriculum, exam content, 
and any experience requirements.
    It would then be up to the appropriate enforcement 
authority to go through a three-step process. First, determine 
whether to accept the recommendations of the professional peer 
group in evaluating the intrinsic value of the specialty 
designation, and second, if it is a legitimate designation, 
determine whether any private sector ethics procedures are in 
place and working effectively to protect the public. If the 
regulator finds that there is an inadequate disciplinary 
process, and a systemic problem with fraud and deceit in the 
marketplace, then appropriate enforcement measures obviously 
should be taken to eliminate fraud and deceit. Further, the 
regulator should also work with the peer review body to 
determine whether any changes are needed to the educational, 
testing, ethics and disciplinary requirements associated with 
the designation.
    FPA does not have a position on whether this authority 
should be left primarily to the SEC, to the states, or should 
be a shared authority. Our primary concern is that because many 
firms in the four primary regulated areas of financial 
services--insurance, banking, securities and investment 
advisers--are offering many of the same services, that uniform 
standards for the delivery of advice (not the sale of products, 
necessarily) should apply to all advice-givers.

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       Responses to Senator Smith's Questions from Edwin Pittock

    Question. One of my staff members recently sat for the 
proctored CSA certification exam. She has no specialty training 
or academic background on the topics covered in your exam. Yet 
with only 1 hour of preparation, she completed your 3 hour exam 
in 1\1/2\ hours and obtained a passing score of 82 percent. No 
disrespect to my staffer, but I am troubled by the ease with 
which she passed your exam. Are you?
    Answer. No. Almost one-fourth of persons who take the exam 
fail it. It is not surprising at all that a highly educated 
person immersed in senior issues and qualified to serve an 
important staff role on the Senate Special Committee on Aging 
would be able to pass an exam that measures general, broad 
knowledge of issues facing seniors.
    Question. In response to the concerns raised at the 
hearing, do you anticipate making changes to your certification 
process to make it more rigorous? If yes, please describe.
    Answer. Yes. It is unclear at this point exactly how the 
emerging regulation envisioned by the North American Securities 
Administrators Association pertaining to so-called ``senior'' 
designations will affect our certification process. We intend 
to meet or exceed whatever requirements and standards come out 
of NASAA's efforts in this regard.
    Question. Under state and federal law, what point-of-sale 
disclosures must agents, brokers, producers, advisors, etc. 
make to investors?
    Answer. In addition to following all applicable state and 
federal laws and company regulations, CSAs must provide this 
disclosure in writing to clients before the completion of a 
transaction: Certified Senior Advisors (CSA) have supplemented 
their individual professional licenses, credentials and 
education with knowledge about aging and working with seniors. 
Know what those licenses, credentials and education signify. 
The CSA designation alone does not imply expertise in 
financial, health or social matters. Details: www.csa.us.
    Question. What are the most important pieces of information 
that investors should obtain to determine whether their sales 
agent has improper motives or conflicts of interest, and from 
what sources can they obtain this information?
    Answer. Although we believe that disclosure is inherently 
helpful and that all designations should have a disclosure 
statement, we are not an investment designation and therefore 
would not claim to be qualified to answer this question. In 
general, we believe appropriate regulators are the best neutral 
source of information about any industry.
    Question. Under state and federal law, what recourse do 
consumers have if misled in the sale of an investment product, 
for example, or does current law provide for rescission rights?
    Answer. As an education company focused on people instead 
of products or professions, we are not qualified to answer.
    Question. In Mr. Nicollete's statement, he indicates that 
regulators' hands are ``tied by an antiquated regulatory system 
that continues to permit a lower standard for advice in the 
sale of insurance products'' as compared to securities. Do you 
agree with this assessment, that is, is the regulatory system 
antiquated?
    Answer. We are not part of the insurance industry, do not 
endorse any products and are not well-versed in the regulations 
of various industries, so we are not qualified to answer.
    Question. Are insurance products under-regulations?
    Answer. It appears to us, as one who is exposed to 
insurance products only peripherally and as they pertain to 
various regulatory actions taken against Certified Senior 
Advisors, that there is considerable friction between the 
securities industry and the insurance industry over the extent 
to which certain annuity products should be regulated and who 
should be allowed to sell them. Whether the problem is the 
products themselves or some aspect of regulation, we do not 
know. However, the independent CSA Board of Standards will hold 
all CSAs to the highest standards and regulations promulgated.
    Question. Notwithstanding the current legislative and 
regulatory landscape, what ideally should be the SEC's role in 
authenticating, regulating, and/or conscripting use of 
specialty designations, i.e., should SEC assume primary 
enforcement responsibility, is enforcement responsibility best 
left to state regulators, or should federal and state 
regulators share enforcement responsibilities?
    Answer. We agree with Chairman Cox's observation that any 
regulation should take into account Constitutional protections 
of commercial speech and would refer the Committee to Peel v. 
Attorney Registration and Disciplinary Commission of Illinois, 
496 U.S. 91 (1990) and Ibanez v. State of Florida, Board of 
Accountancy (1994).

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