AAII Investor Update
The Financial Industry Regulatory Authority (FINRA) released new proposal to protect seniors from financial fraud. The rules will allow financial companies to respond to situations in which there is a reasonable belief that financial fraud is occurring. If fully implemented, financial firms would be able to place a hold on the dispersal of funds for up to 15 business days. The temporary hold could be extended for an additional 15 business days under certain circumstances. Note the use of “business days"; conceivably, a person could be denied access to his or her assets for up to six calendar weeks. In addition, financial firms would be required to ask customers for a trusted contact to be reached in cases where fraud is suspected.
The proposal will be covered in the November AAII Journal, which we sent to the printer yesterday. Since a digital format gives more flexibility in terms of space than a print format does, I’m going to expand on what you will read in next month’s issue.
The rules are being proposed for a few reasons. The regulator says that the experience with its Securities Helpline for Seniors (844-57-HELPS) has highlighted issues related to financial exploitation. Financial firms have been in need of regulatory guidance on this matter, and the proposed rules give them a safe harbor they can cite as acting under if legal action by a customer is brought against them. Legislators have been slow to react to the problem of financial fraud among elders; only three states—Delaware, Missouri and Washington—have rules permitting financial institutions to place temporary holds on disbursements and transactions if financial exploitation is suspected.
As some of you may recall, last year I discussed the struggles the industry was having in trying to address the issue of cognitive impairment and financial fraud. These rules are the result of discussions on how to best to respond. My assumption is that the financials services industry’s response to the problem will evolve over time.
The rules will apply to what FINRA labels as “specified adult” customers. A specified adult is a person who is 65 or older. A specified adult can also be someone who is age 18 or older and is reasonably believed by the financial firm to have a mental or physical impairment that renders the individual unable to protect his or her own interests.
In cases where there is a reasonable belief that financial exploitation is occurring, has been attempted or will be attempted, financial firms would be allowed to postpone dispersing funds for up to 15 business days. The trusted contact must be notified of the hold and reason for it within two business days. If the trusted contacted cannot be contacted or is believed to be the person engaging in the financial exploitation, an immediate family member should be contacted. If the immediate family member is reasonably suspected of committing, attempting to or intending to attempt financial exploitation, then the firm does not have to contact that person. If neither the trusted contact nor the immediate person can be reached, the financial firms can place or maintain a temporary hold on all withdrawals. Though the rules do not explain what would happen next in such situations, it is my belief that the financial firms would likely contact law enforcement if they haven't already.
The trusted contact is defined as a person who will be a “resource for the firm in administering the customer’s account and in responding to possible financial exploitation.” This person must be at least age 18 and “not be authorized to transact business on behalf of the account.” Financial firms will be required to ask for the name and contact information of the trusted contact at the time an account is opened, the account information is being updated or “when there is a reason to believe that there has been a change” in a customer’s situation. You will not be required to list a trusted contact. It is a good idea to do so, but pay attention to the “not be authorized to transact business on behalf of the account” language. Depending on how your accounts are titled and estate documents are written, the language could conceivably add a layer of unintended complexity. If you have questions, I would suggest contacting an estate lawyer to best determine how your various accounts should be titled and your estate documents written.
The safe harbor provision is potentially an important one for the industry. Due to the lack of federal and state laws (with the exception of the three aforementioned states), financial firms have faced a quandary. If they prevent seniors from withdrawing funds, they are technically committing the equivalence of theft. If they don’t intervene when fraud is suspected, they are essentially an accomplice to fraud. FINRA is a regulatory body, not a legislative one, so it will be interesting to see how the courts rule if a financial institution is sued over these rules.
The full proposal can be read on FINRA’s website. FINRA is seeking public comments through November 30, 2015, and has a list of questions they specifically would like to get feedback on (see page 7 of the proposal). You can give FINRA your feedback either by sending an email to pubcom@finra.org or by sending a postal letter to:
Marcia E. AsquithOffice of the Corporate SecretaryFINRA1735 K Street, NWWashington, DC 20006-1506
As is the case with the new rules regarding mutual funds and ETFs, I encourage you to share your opinions and concerns with the regulators.
Yesterday, the Internal Revenue Service announced the annual inflation adjustments for 2016. You may find CCH’s summary easier to read. We’ll include the data in our annual tax guide, which will be updated to include the 2016 data in the December AAII Journal.
John Bajkowski posted his latest “From the President” commentary on the AAII Blog. In it, he provides insights into the small-cap stock premium and why it makes sense to stick with small-cap stocks over the long run. I think you will enjoy reading it.
More on AAII.comThe Week AheadMy colleague, Wayne Thorp, will be speak to our Atlanta Chapter and our Birmingham Chapter on Tuesday and Thursday about how to determine a stock’s true worth. AAII has more than 50 local chapters across the country.
More than 170 members of the S&P 500 will report earnings in what will be one of the busiest weeks for third-quarter earnings. Included in this group are Dow Jones industrial average components Apple (AAPL), E.I. Du Pont (DD), Merk (MRK) and Pfizer (PFE) on Tuesday and Chevron (CVX) and Exxon Mobil (XOM) on Friday.
September new home sales will be the first economic report of note, scheduled for release on Monday. Tuesday will feature September durable goods orders, the August Case-Shiller home price index and the Conference Board’s October consumer confidence survey. The minutes from the October Federal Open Market Committee meeting will be released on Wednesday. Thursday will feature the first estimate of third-quarter GDP and the September pending home sales index. September personal income and spending, the final October University of Michigan consumer sentiment survey, the third-quarter employment cost index and the October Chicago PMI will be released on Friday.
The Treasury Department intends to postpone the two-year note auction originally scheduled for Tuesday. Treasury officials are concerned that debt ceiling constraints would prevent the settlement of the auction. The Treasury Department still plans on auctioning $35 billion of five-year notes and $15 billion of floating two-year notes on Wednesday and $29 billion of seven-year notes on Thursday.
What’s Trending on AAII- Why Buy Bonds If Interest Rates Will Rise?
- How Interest Rate Changes Affect the Price of Bonds
- How to Use the CAN SLIM Approach to Screen for Growth Stocks
For the first time since the market’s correction occurred, more than 40% of individual investors describe their short-term outlook for stocks as being "neutral," according to the latest AAII Sentiment Survey. Pessimism fell further, while optimism edged up slightly.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 0.7 percentage points to 34.8%. Even with the modest increase, optimism remains below its historical average of 39.0% for a record 33rd consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 2.4 percentage points to 41.2%. Neutral sentiment was last higher on August 6, 2015 (44.0%). The increase keeps neutral sentiment above its historical average of 31.0% for a sixth consecutive week and the 40th week this year.
Bearish sentiment, expectations that stock prices will fall over the next six months, declined 3.1 percentage points to 24.0%. The historical average is 30.0%.
Neutral sentiment is back to an unusually high level. (Readings above 39.6% are more than one standard deviation above the historical mean.) Such readings have previously been correlated with above-median returns for the S&P 500. (There is no guarantee that history will repeat, however.)
Even though there is optimism on the part of some individual investors that a bottom in the market has been set, sentiment overall remains mixed. Some AAII members bought on the dips while others increased their cash positions. Impacting AAII members’ six-month outlook for stocks are global and international events (particularly China and global economic weakness), U.S. monetary policy, technical factors (seasonal trends, the recent correction or the chance of further price declines occurring), U.S. politics and the pace of U.S. economic growth.
This week’s special question asked AAII members if a market-related factor or if a fiscal policy-related matter has a greater impact on their six-month outlook for stocks. Nearly two-thirds of respondents (64%) said market-related factors, particularly citing monetary policy, earnings and valuations. Less than a third of respondents (31%) said that a fiscal matter has a greater impact. These members particularly cited the debt ceiling, the debt, the deficit and the budget standoff.
Here is a sampling of the responses:
- “Market factors are more important. The federal budget and the debt ceiling will eventually take care of themselves.”
- “Earnings and the lack of Fed direction.”
- “Stock valuations, earnings, free cash flow and price movement. The ineffectiveness of Congress matters less.”
- “Fiscal policy events could have quick, large negative market reactions.”
- “For the next six months, I suspect political matters will reign.”
This week’s Sentiment Survey results:
Bullish: 34.8%, up 0.7 pointsNeutral: 41.2%, up 2.4 pointsBearish: 24%, down 3.1 pointsHistorical averages:
Bullish: 39.0%Neutral: 31.0%Bearish: 30.0%Take the Sentiment Survey.Local Chapter MeetingsAAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!
