Regulatory Tools to Protect Seniors from Financial Exploitation

Dec. 28, 2018

According to the SEC’s report on Elder Financial Exploitation, “Americans over the age of 50 currently account for 77 percent of financial assets in the United States.”  At the end of 2017, retirement assets reached $28.2 trillion.   Unfortunately, this concentration of assets attracts criminals with intent on exploiting vulnerable and elderly adults out of savings they have accumulated over a lifetime.  Often, perpetrators of such exploitation are victimizing members of their own family, neighbors or friends.  Each year in the U.S., some 5 million seniors are victims of financial exploitation or abuse, resulting in an estimated $36 billion in lost wealth.

 

In order to address this growing problem, numerous new regulations have been introduced in recent years, including Minnesota’s Safe Seniors Financial Protection Act, the $afe Senior Act, FINRA Rule 4512, and FINRA Rule 2165.  Below is a high-level overview of the differences between these various regulations, followed by additional details on each regulation in narrative form.

 

 

Minnesota’s Safe Seniors Financial Protection Act

$afe Senior Act (federal)

FINRA Rule 4512, “Customer Account Information”

FINRA Rule 2165, “Financial Exploitation of Specified Adults

Applies to

Broker-dealers and investment advisers

Broker dealers; investment advisers; credit unions; depository institutions; insurance companies; insurance agencies (and individuals who work at any of the above institutions)

Broker-dealers

 

Broker-dealers

 

Permits delay of transactions

Yes

No

No

Yes

Requires/Incentivizes asking clients for a trusted contact

Yes

No

Yes

No

Incentivizes notifying trusted contacts of suspected exploitation

Yes

No

No

Yes (notification required if a covered firm delays a disbursement)

Incentivizes reporting suspected exploitation/abuse to regulators

Yes

Yes

No

No

Provides civil and administrative immunity from potential liability arising from taking certain actions to address financial exploitation/abuse

Yes

Yes

No

No (though this rule serves a safe harbor from certain other FINRA rules if a broker-dealer delays a disbursement)

 

This article will discuss the details of the various measures above that have been advanced to protect and prevent seniors from financial exploitation.

 

Minnesota’s Safe Seniors Financial Protection Act

 

Summary

 

Made effective on August 1, 2018, Minnesota’s Safe Seniors Financial Protection Act provides financial professionals with the opportunity to partner with the Commerce Department and Minnesota’s Adult Protective Services Unit (“APS”) to identify and take measures to prevent and address financial exploitation.  The new enables state-registered broker-dealers and investment advisers to report suspected financial exploitation against a senior or vulnerable adult client to the Commerce Department and the Minnesota Adult Abuse Reporting Center.  If the senior client has designated a trusted third party, then the broker-dealer or advisor may disclose information to them as well.  Finally, the law permits financial professionals to delay disbursements from client accounts if the professional has a reasonable belief that financial exploitation has occurred, is occurring, or may occur.  The law provides the financial professional taking any of the above actions immune from civil or administrative liability arising from those actions.

 

The Details

 

Disclosures to Government

“If a broker-dealers or investment adviser reasonably believes that financial exploitation of an eligible adult may have occurred, may have been attempted, or is being attempted, the broker-dealer or investment adviser may promptly notify the [Department of Commerce and APS]” and any entity responsible for receiving reports relating to the exploitation of vulnerable adults.” (H.F. No. 3833) 

 

Immunity for Governmental Disclosures

Broker-dealers and investment advisers who report such disclosures to the appropriate entities in good faith are “immune from administrative or civil liability that might otherwise arise from the disclosure…” (Minn. Stat. 45A.03).  Broker-dealers and investment advisers may also be immune from liability if they cooperate with civil or criminal investigation of financial exploitation of an eligible adult or if they testify about alleged financial exploitation in a judicial or administrative proceeding.  (Id.).

 

Third-Party Disclosures

Once a broker-dealer or investment adviser reasonably believes financial exploitation of an eligible adult either may have occurred, may have been attempted, or may be in the process of being attempted, they may notify a third party reasonably associated with the eligible adult or any person permitted under state or federal law or rule, rules of a self-regulating organization, or customer agreement.  Such disclosures should not be made to the individual the broker-dealer or investment adviser suspects of the financial exploitation. 

 

Immunity for Third-Party Disclosures

If a broker-dealer or investment adviser discloses in good faith suspected financial abuse to a client’s trusted third-party, then they will be immune from administrative or civil liability that would have otherwise arisen from such disclosure.

 

Delaying Disbursements

Under the Act, broker-dealers or investment advisers must delay a disbursement or put a hold on a transaction if the commissioner of commerce, a law enforcement agency, or prosecuting attorney’s office provides information to the broker-dealer or investment adviser that creates a reasonable belief that financial exploitation of an eligible adult may have occurred, may have been attempted, or is being attempted. 

 

A broker-dealer or investment adviser may delay a disbursement from or place a hold on a transaction involving an account of an eligible adult or an account on which an eligible adult is a beneficiary if certain conditions are met.  

 

  • Reasonable belief, after an internal review, that the requested disbursement or transaction may result in financial exploitation of an eligible adult; and

  • The broker-dealer or investment adviser must, within two business days of the delayed disbursement or transaction, provide written notification of the delay or hold and the reason to all parties authorized to transact business on the account, unless the party is reasonably believed to have engaged in the suspected or attempted financial exploitation of the eligible adult; and

  • The broker-dealer must provide documentation and updates regarding internal reviews to the commissioner, investigative agency, law enforcement agency, or prosecuting attorney’s office upon request; and

 

If a delay or hold on a disbursement is placed, it can expire upon the occurrence of any of the following:

 

  • Broker-dealer or investment adviser reasonably believes the disbursement or transaction will not result in financial exploitation of the eligible adult if the broker-dealer or investment adviser initiated the delay of disbursement or hold on the transaction;

  • The commissioner, a law enforcement agency, lead investigative agency, or a prosecuting attorney’s office determines the disbursement or transaction will not result in financial exploitation of the eligible adult; or

  • Fifteen (15) days after the first date of the delay or hold on the disbursement of the funds, unless the commissioner, law enforcement agency, lead investigative agency, or prosecuting attorney’s office request that the delay or hold be extended; in which case the delay or hold will expire no more than 25 days after the initial date of the delay or hold on the transaction.

 

Immunity for Delaying Disbursements

The statute provides a broker-dealer or investment adviser acting in good faith in compliance with Minn. Stat. 45A.06 or the commissioner of commerce, law enforcement agency, or prosecuting attorney’s office will be immune from administrative or civil liability that might otherwise arise from the delay in disbursement or placing a hold on the transaction in accordance with the statute. 


Senior $afe Act

 

Summary

 

At the federal level, Congress passed the Senior $afe Act earlier in 2018.  This law encourages covered financial institutions to train staff to recognize signs of financial exploitation and to report suspected financial exploitation of their older clients to state or federal law enforcement authorities.  The law provides civil and administrative immunity for liability arising out of such reports, so long as the individual making the report has received training meeting the requirements of the law.  This law only applies to reports regarding account holders that are age 65 or older. 

 

The Details

 

First, the Act defines exploitation as the “fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual, including a caregiver or a fiduciary that:”

 

  • Uses the resources of a senior citizen for monetary or personal benefit, profit, or gain; or

  • Results in depriving a senior citizen of rightful access to or use of benefits, resources, belongings, or assets.

 

Covered institutions under this Act include credit union depository institutions, investment advisors, broker/dealers, insurance companies and agencies, and transfer agents.  Such institutions will only qualify for immunity under the Act if the employees have been trained on how to identify and report suspected exploitation of senior citizens internally, and how to report suspected exploitation to government officials or law enforcement authorities as appropriate.  The training must include the common signs to look for that indicate financial exploitation of senior citizens. 

 

Furthermore, the Act does not provide a blanket immunity to any employee of a covered institution.  The immunity provisions of the Act only apply if reports are made by  qualified employees, such as supervisors, registered representatives of an institution, and individuals in compliance or legal roles who have been specifically trained on the proper reporting procedures and warning signs of possible financial exploitation of customers age 65 or older.

 

FINRA Rules

 

Summary

 

On February 5, 2018, two FINRA rules took effect which enabled brokerage firms to respond quickly to protect customers from suspected elder financial exploitation. Specifically, the new rules require FINRA member firms to obtain from clients contact information for a trusted third party and permit members to delay disbursements of funds to help prevent exploitation from occurring.

 

The Details

 

Delaying Disbursements

FINRA Rule 2165, “Financial Exploitation of Specified Adults” allows broker-dealers to place a temporary hold on disbursements of funds or securities accounts of certain qualifying customers, aka Specified Adults, if the broker-dealer reasonably believes that financial exploitation has occurred, is occurring, or will occur as a result of the disbursement.  Under this rule, the Specified Adults are not only customers who are age 65 or older, but also those who are 18 or older and who, the broker-dealer reasonably believes, have a mental or physical impairment that prevents them from protecting their own interests. 

 

Within two business days after the temporary hold has been placed, the broker-dealer must provide notification orally or in writing of the temporary hold and the reason for the same.  The notice needs to be provided to all parties authorized to transact business on the account, with the exception of an individual authorized on the account that the broker-dealer reasonably believes has engaged, is engaging in, or will engage in the financial exploitation of the Specified Adult.  The broker-dealer is likewise required to immediately initiate an internal review of the facts and circumstances which led the broker-dealer to believe that financial exploitation has occurred, is occurring, or will occur. 

 

Like the Minnesota Act, the hold will expire no later than 15 business days after the date the hold was placed on the transaction.  It may be extended or terminated by a statute regulator or agency in the state in which the suspect transaction was initiated.

 

Obtaining Designated Third-Party Information

FINRA Rule 4512 – “Customer Account Information requires a broker-dealer to maintain certain information about each client, including the name and contact information for a trusted contact person age 18 or older who can be contacted about the customer’s account, except where the account is an institutional account.

 

In the context of Rule 4512, an “institutional account” means any one of the following:

  • A bank, savings and loan association, insurance company or registered investment company;

  • An investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions); or

  • Any person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million. 

 

Next Steps

It is important for covered individuals and firms to educate themselves on each of the above regulations and to train staff on how to recognize and address financial exploitation of vulnerable adults.  Doing so will enable covered entities to take full advantage of the incentives (and meet the requirements) of each of the above regulations and, most importantly, help prevent and address financial exploitation of their elderly or vulnerable clients.   For specific information or guidance, investment advisers and broker-dealers should contact counsel.  Avisen Legal’s Brian Edstrom has experience assisting broker-dealers and investment advisors with navigating the complex compliance issues they face. 


Minnesota’s Safe Seniors Financial Protection Act $afe Senior Act (federal) FINRA Rule 4512, “Customer Account Information” FINRA Rule 2165, “Financial Exploitation of Specified Adults Applies to Broker-dealers and investment advisers Broker dealers; investment advisers; credit unions; depository institutions; insurance companies; insurance agencies (and individuals who work at any of the above institutions) Broker-dealers Broker-dealers Permits delay of transactions Yes No No Yes Requires/Incentivizes asking clients for a trusted contact Yes No Yes No Incentivizes notifying trusted contacts of suspected exploitation Yes No No Yes (notification required if a covered firm delays a disbursement) Incentivizes reporting suspected exploitation/abuse to regulators Yes Yes No No Provides civil and administrative immunity from potential liability arising from taking certain actions to address financial exploitation/abuse Yes Yes No No (though this rule serves a safe harbor from certain other FINRA rules if a broker-dealer delays a disbursement)

Written By:
Brian Edstrom

Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen seven years of experience working for federal and state regulators.

Rachell Henning is a third-year student in the Mitchell Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow who enjoys spending time with her husband and two young daughters when she is not working or studying.

E-mail Brian

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