Finra Submits New Rule For Sec Approval To Protect Seniors And Other Vulnerable Adults From Financial Exploitation And Fraud

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Posted on: Nov 3 2016

On October 20, 2016, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities Exchange Commission (“SEC”) for approval that are intended to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers. If approved, the proposed rules would allow member firms to temporarily halt the disbursement of funds or securities from their customers’ accounts if they believe the customer is being financially exploited, and to notify a person identified by the customer of the hold and suspected wrongdoing.

Elder Abuse and Financial Exploitation Defined

Elder abuse is a serious and growing problem that affects millions of seniors each year. Financial exploitation is the most common form of elder abuse.

There is no single definition of elder abuse or financial exploitation. Because financial exploitation can occur in many ways (see below), FINRA has taken a broad view of the types of conduct that fall within its scope. Consequently, the proposed rules define “financial exploitation” to include: “(A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.”

The Problem of Elder Abuse and Financial Exploitation

Financial exploitation often occurs by those entrusted with the responsibility to protect a senior’s assets, such as children and family members, attorneys, accountants, guardians, and investment brokers and financial advisors. As such, financial exploitation is often manifested by: 1) the unauthorized appropriation, sale or transfer of property; 2) the unauthorized taking of personal assets; 3) the misappropriation, misuse or transfer of monies from a personal or joint account; or 4) the failure to use a senior’s income and assets for required support and maintenance.

Financial exploitation tends to be underreported. Often, the victim feels ashamed or embarrassed that it happened. Its financial impact can be devastating, especially for seniors who are living on fixed incomes and who have no financial ability to offset the economic losses caused by the exploitation or recover the funds once they leave the account.

Federal and State Attempts to Address the Problem

For some time, the federal government has been trying to adopt legislation and programs to detect and prevent the incidence of elder abuse. Below is a brief overview of the government’s more recent efforts.

In 2010, as part of the Patient Protection and Affordable Care Act, Congress enacted the Federal Elder Justice Act (“EJA”). The EJA is designed to strengthen federal and state efforts to prevent and deal with financial exploitation and abuse.

In June 2015, Senators Richard Blumenthal and Kelly Ayotte introduced the Robert Matava Elder Abuse Victims Act of 2015. The proposed legislation was intended to protect, serve, and advance the rights of victims of elder abuse and financial exploitation by, among other things, encouraging states and other qualified entities to hold offenders accountable and enhance the capacity of the justice system to investigate, pursue, and prosecute elder abuse cases.

In December 2015, the White House Conference on Aging issued a report devoted to, among other things, ensuring that “elder abuse and financial exploitation are more fully recognized as a serious public health challenge and addressed accordingly and effectively.”

On the state level, most states protect seniors (and vulnerable adults) through guardianships, Adult Protective Services, and criminal actions and penalties. Only four states specifically target the financial exploitation of seniors. As noted by FINRA, those states – Delaware, Missouri, Washington and Indiana – permit financial institutions, including broker-dealers, to place temporary holds on “disbursements” or “transactions” if the firm suspects the financial exploitation of covered persons.

Additionally, the North American Securities Administrators Association (“NASAA”) drafted model legislation in 2015 that requires qualified individuals to report suspected financial exploitation to the state’s Adult Protective Services, the state securities regulator, and trusted third parties designated by the senior investor (the “Model Act”). So far, only two states – Alabama and Indiana – have enacted the Model Act into law. Additionally, Vermont has adopted the Model Act by regulation, and Louisiana has passed legislation that protects voluntary disclosures.

The new rules proposed by FINRA are, for the most part, consistent with the Model Act. In the text accompanying the proposed rules, FINRA explained that even though the proposed rules and the Model Act are not identical, “FINRA and NASAA … worked together to achieve consistency where possible and appropriate.”

FINRA’s Experience with Financial Exploitation and The Proposed Rule Changes

In recent years, fighting the financial exploitation of elderly investors has been a high priority for regulators, such as FINRA and the Consumer Financial Protection Bureau. In April 2015, for example, FINRA launched its Securities Helpline for Seniors, which was intended to be a “‘go-to’ resource for senior investors with securities-related questions and concerns.” (See December 2015 Report, here.) As explained by Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, “Since its launch in April 2015, the helpline has received calls highlighting some of the issues firms are facing when it comes to senior investors, including how firms respond when they suspect a senior customer is being exploited.”

Approximately six months later, in October 2015, FINRA issued Regulatory Notice 15-37, in which it sought public comment on the rules that it has now submitted to the SEC. The proposed rules submitted to the SEC are, for the most part, unchanged from those set forth in Regulatory Notice 15-37.

The proposed rules require member firms to “make reasonable efforts to obtain the name of contact information for trusted” individuals who are designated by senior and vulnerable adult account holders (the “Trusted Contact Person”). The Trusted Contact Person must be 18 years or older, such as a close friend and family member, and cannot be “authorized to transact business on behalf of the account.” As noted by FINRA in Notice 15-37, the Trusted Contact Person is intended to “be a resource for the firm in administering the customer’s account and in responding to possible financial exploitation.”

Under the proposed rules, the member firm is required to notify the Trusted Contact Person if financial exploitation is suspected (e.g., when a customer tries to change his/her Trusted Contact Person “from an immediate family member to a previously unknown third party .…”). If the Trusted Contact Person is not available or the firm reasonably believes that he/she has engaged, is engaged or will engage in the financial exploitation of the senior or vulnerable account holder, then the firm must contact an immediate family member, unless the firm reasonably believes that the family member has engaged, is engaged or will engage in the financial exploitation of the account holder. Under those circumstances, the proposed rules allow the firm to conclude that the Trusted Contact Person “was not available” and “use the temporary hold provision” to protect the senior or vulnerable account holder.

Additionally, the proposed rules permit a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring. As noted in the press release, “[c]urrently, FINRA’s rules do not explicitly permit firms to contact a non-account holder or to place a temporary hold on disbursements of funds or securities where there is a reasonable belief of financial exploitation of a senior or other vulnerable adult.”

When a member places a temporary hold on the account, the proposed rules require the firm to immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. In addition, as noted, the proposed rules require the member to provide notification of the hold and the reason for the hold to the Trusted Contact Person, if available, as well as all parties authorized to transact business on the account.

While the proposed rules do not establish an affirmative requirement to withhold funds, it creates a safe harbor for firms that do so when: (1) there is reason to suspect financial exploitation; (2) the Trusted Contact Person has been notified of the hold, as well as all parties authorized to transact business on the account; and (3) the firm undertakes an immediate review of the facts and circumstances necessitating the hold. The temporary hold would last up to 15 business days, unless extended by a state regulator or agency or court of competent jurisdiction. If, after conducting the internal review, and the member firm reasonably believes that financial exploitation has occurred or is occurring (or has or will be attempted), the member firm can extend the hold for up to another 10 business days.

The proposed rule changes are not effective until approved by the SEC. Notably, the SEC staff can decline to adopt the proposed changes or request changes or amendments to the rule proposal.

Takeaway:

FINRA’s effort to implement rules that empower member firms to detect and prevent the financial exploitation of seniors and other vulnerable adults is laudable. Having a trusted person to contact when financial exploitation is suspected and allowing a temporary hold on account activity will ensure that senior account holders do not fall victim to the financial exploitation by others.

Regardless of whether the SEC adopts the proposed rules, FINRA’s efforts should be held as an industry best practice that member firms should strive to achieve.

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