"Free Lunch" Investment Seminar Examinations Uncover Widespread Problems

During a Seniors Summit held at the Securities and Exchange Commission, securities regulators released a joint report summarizing the results of their examinations of "free lunch" investment seminars.

The year-long examination was conducted by the SEC, the Financial Industry Regulatory Authority (FINRA) and state securities regulators (members of NASAA, the North American Securities Administrators Association). The regulators scrutinized 110 securities firms and branch offices that sponsor sales seminars and offer a free lunch to entice attendees.

The report's key findings include:

• 100% of the "seminars" were instead sales presentations.

While many sales seminars were advertised as "educational," "workshops," and "nothing will be sold," they were intended to result in the attendees' opening new accounts and, ultimately, in the sales of investment products, if not at the seminar itself, then in follow-up contacts with the attendees.

• 59% reflected weak supervisory practices by firms.

While some exams found effective supervisory practices, many examinations found indications that firms had poorly supervised these sales seminars, including failure to review seminar presentations or materials as required.

• 50% featured exaggerated or misleading advertising claims.

Examples included "Immediately add $100,000 to your net worth," "How to receive a 13.3% return," and "How $100K can pay 1 Million Dollars to Your Heirs."

• 23% involved possibly unsuitable recommendations.

In 25 of the 110 examinations, examiners found indications that unsuitable recommendations were made, for example, a risky investment recommended to an investor with a "conservative" investment objective, or an illiquid investment recommended to an investor with a short-term need for cash.

• 13% appeared to be fraudulent and have been referred to the most appropriate regulator for possible enforcement or disciplinary action.

Examiners found indications of possible fraudulent practices in 14 examinations that involved apparent serious misrepresentations of risk and return, possible liquidation of accounts without the customer's knowledge or consent, and possible sales of fictitious investments.

Free lunch sales seminars are routinely targeted at senior citizens and are commonly held at upscale hotels, restaurants, retirement communities and golf courses. FINRA Investor Education Foundation research has found that 78 percent of seniors received a free lunch seminar invitation and 60 percent received six or more invitations in the past three years.

Free lunch seminars often have names like "Seniors Financial Survival Seminar" or "Senior Financial Safety Workshop," and offer "free" advice by "experts" on how to attain a secure retirement, or offer financial planning or inheritance advice. The advertisements often imply that there is an urgency to attend: "limited seating available" or "call now to reserve a seat."

The examinations were conducted between April 2006 and June 2007 in areas of the country that have large populations of retirees: Florida, California, Texas, Arizona, North Carolina, Alabama and South Carolina.