(The pdf for the issue in which this article appears is available for download: (Bifocal, Vol. 36, Issue 5).)
New Initiative Led by the North American Securities Administrators Association Aims to Protect Seniors Through Model Legislation, Best Practices, and Education
Americans are turning 65 at the rate of 10,000 people per day. Within 10 years, nearly 20% of this nation’s population will be over 65. State securities regulators realize that this growing demographic also is a growing target for fraudsters. Each state has a securities regulator whose primary goal is to protect the investing public by overseeing the offer and sale of securities within their jurisdiction. State securities regulators work together to encourage investing and to protect the integrity of the securities industry throughout the country. Currently, state securities regulators report that at least one-third of their enforcement actions involve senior investors. This percentage will rise as this population, which holds the bulk of this country’s savings according to Georgia State University’s Center for Mature Consumer Studies, continues to age. Clearly, investors are an important category in our aging population and financial exploitation against a senior investor can have devastating consequences.
The following example involves a uniformed law enforcement officer who opened an account at a well-known securities firm for his almost 80-year-old grandmother-in-law. The officer presented a notarized financial power of attorney form, told the broker at the securities firm that his grandmother-in-law owned a large farm, and said he would be transacting business and making withdrawals from the account on his grandmother-in-law’s behalf to help get the farm ready to sell.
The account was opened, investments valued at nearly $500,000 were transferred into the new account from the grandmother-in-law’s previous brokerage firm, and the new broker began taking instructions from the grandson-in-law pursuant to the power of attorney form he had presented. The investment portfolio, which originally consisted primarily of fixed income investments such as certificates of deposit, with a small portion in mutual funds and dividend paying blue chip stocks, appeared appropriate for the elderly woman. Almost immediately upon opening the account, however, the officer began withdrawing funds from the account, precipitating the need for the liquidation of the account’s holdings to cover the continuous withdrawing of funds from the account.
Over the course of the next 18 months, the grandson-in-law withdrew nearly 95% of the account for his own personal use, using margin loans. Unlike her previous account where she only had a “cash account,” a “margin account” allowed her grandson-in-law to borrow money from her account using her holdings as collateral for the money borrowed. In addition to margin privileges, the grandmother-in-law’s account also included check-writing privileges.
The grandson-in-law told the broker that his grandmother-in-law was in frail health at the time the account was opened. While her health was actually stable, she had been formally diagnosed with dementia. She has since died.
The law enforcement officer’s scheme ended after one of the victim’s children (not the officer’s spouse) discovered what was happening and notified the state securities regulator. Investigators determined that in addition to withdrawing nearly all of the money from the account, the law enforcement officer had also forged the grandmother-in-law’s signature on the power of attorney form.
The Red Flags
There were a lot of red flags in this case—things the salesperson should have questioned. Among the red flags:
- The salesperson was in a perfect position to look into the health and capacity of the grandmother-in-law. Had he taken the time to assess the relationship between the law enforcement officer and his grandmother-in-law, he might have been able to ask her about her investment objectives. Instead, he never met her.
- Knowing the authority that comes with a power of attorney and that it can be easily used for improper purposes (coupled with the fact that abuse commonly occurs at the hands of family members), the salesperson could have explored the availability of other family members to verify his observations about the law enforcement officer and the victim.
- The salesperson could have asked why the investor suddenly was motivated to move her assets from income generating securities to a margin loan and ultimate liquidation of most of the portfolio, which was such a departure from her previous investment behavior.
- The salesperson could have escalated any resulting concerns to his supervisor.
The Action Plan
Over the past decade, state securities regulators have focused on addressing financial abuse against older investors through the efforts of the North American Securities Administrators Association (NASAA), the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
The NASAA Board of Directors formed the Senior Issues and Diminished Capacity Committee (the Committee) in July 2014. It immediately established an Advisory Council comprised of representatives from the securities industry, the insurance industry, law enforcement, regulators, consumer groups, legal professionals, service organizations, and medical professionals. With input from the Advisory Council, the Committee is currently working in three areas in regards to senior protection with plans to broaden its focus in the future.
Model Legislation Working Group
The Model Legislation Working Group of the Committee is drafting model legislation to address issues faced by firms when there are senior and diminished capacity issues. As an example, the state of Washington adopted the Abuse of Vulnerable Adults Act (RCW 74.34), which permits financial services professionals to report their concerns when there is reason to believe a vulnerable adult is being or has been abandoned, abused, financially exploited or neglected, to state or local authorities; permits the sharing of records with the Washington Department of Human Services, law enforcement and prosecutors when there are such concerns; freezes assets of suspected exploiters or victims; requires training on elder and vulnerable adult financial exploitation for employees of financial institutions; and allows financial firms and employees to avoid civil liability when acting in good faith.
Best Practices Working Group
The Best Practices Working Group of the Committee is holding discussions with securities and other industry groups to identify best practices for broker-dealer and investment adviser firms to prevent and detect the exploitation of seniors and individuals with diminished capacity. The Best Practices Working Group is currently looking closely at best practices involving the use of power of attorney forms, financial directives being put in place by an account holder when an account is opened, and methodologies to identify suspicious or unusual patterns of activity in senior accounts.
Outreach Working Group
The Outreach Working Group is building on existing NASAA resources to educate investors through a public outreach campaign called ServeOurSeniors. As part of the outreach campaign, NASAA is developing a resource-rich website for seniors, caregivers, regulators and securities industry professionals, a training program for regulators on issues related to diminished capacity, and an outreach program to help front-line financial workers detect the red flags of elder financial exploitation and where to report suspicions of fraud.
The goal is to stop people like the uniformed law enforcement officer from exploiting a senior. With the right combination of laws, best practices, and education, NASAA and the securities industry hopes to help protect your parents, your siblings, your neighbors, even you, from senior financial exploitation. ■