Senior investors represent a disproportionate share of the nation’s wealth. An estimated 10,000 baby boomers reach the age of 65 each day, and scams by third parties preying on vulnerable investors are becoming more prevalent. Congress, state lawmakers, and FINRA have responded by implementing new laws and regulations to enable the financial industry to curtail bad conduct by third parties. To avoid adverse action by securities regulators, broker-dealers must become familiar with the new and evolving rules and maintain effective programs to safeguard vulnerable customers.
With these issues in mind, the Self-Regulatory Organizations (SRO) Subcommittee of the ABA Securities Litigation Committee recently hosted a Regulatory Forum on Senior Investor Issues in New York City. Securities regulators, in-house counsel for broker-dealers, and outside counsel provided their unique perspectives on legal developments impacting vulnerable investors and the challenge of compliance. This article gives a brief overview of new legal protections for vulnerable investors and the core pillars of a successful program to protect senior investors.
New Legal Protections for Vulnerable Investors
Many states have developed their own laws aimed at preventing financial exploitation (or are in the process of doing so), with some based on or influenced by NASAA’s Model Act. In addition to complying with individual state laws, broker-dealers must comply with the Senior Safe Act, FINRA Rule 2165, and recently amended FINRA Rule 4512.
- The Senior Safe Act. In May 2018, President Trump signed the Senior Safe Act into law. A significant purpose of the act is to encourage a collaborative effort among regulators, firms and legal organizations to assist in prevention of senior financial abuse by providing immunities for reporting under bank privacy laws and encouraging education and training at financial institutions. The immunities are granted if financial institutions provide training programs to help with the identification and prevention of elder financial exploitation. See Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
- FINRA Rule 2165. In February 2018, FINRA adopted Rule 2165 (Financial Exploitation of Specified Adults), which permits firms to place a temporary hold (15 business days) on disbursements from the accounts of (1) individuals aged 65 or older; and (2) individuals aged 18 or older whom firms reasonably believe have a mental or physical impairment that prevents them from protecting their own interests (a “specified adult”). The rule permits a temporary hold if the firm has a reasonable belief that financial exploitation of the specified adult has or is occurring or attempted, notifies a trusted contact person (see below) and all individuals authorized to transact business on the account, and begins an internal review. See FINRA Rule 2165.
- FINRA Rule 4512. In February 2018, FINRA also amended Rule 4512 (Customer Account Information) to require firms to make reasonable efforts to obtain the name and contact information of a trusted contact person for a customer’s account. See FINRA Rule 4512.
Tips for Compliance
Broker-dealers face the threat of financial exploitation of their vulnerable customers on a daily basis. To stop financial exploitation (and avoid adverse action by regulators), broker-dealers should consider these four pillars of a robust compliance program:
- Organization. To protect clients and comply with this quickly changing area of the law, form a centralized team that (1) understands the applicable rules and regulations impacting senior and vulnerable investors and (2) takes appropriate action to escalate instances of potential exploitation both internally and externally. Lack of coordination and a “silo” approach likely will impede effectiveness of the program.
- Consistency. Adopt clear procedures to ensure that financial exploitation matters are handled in a consistent and well-documented manner. A consistent process facilitates predictability, fairness, and compliance with legal requirements.
- Training. Provide robust training to employees. Successful programs educate the field about financial exploitation as often as possible, e.g., at the time of hire, during annual compliance training, through the use of online modules, and through in-person sessions. Training programs should educate employees about the tell-tale signs of financial exploitation, as well as the firm’s escalation procedures in the event an employee suspects financial exploitation of a customer. Effective training also provides employees with useful tools for communicating with vulnerable investors.
- Surveillance. Firms must have proper surveillance programs in place to detect potential exploitation, including contact management systems and systems that flag suspicious transactions.
This list is not exhaustive, but illustrates the core aspects of a successful program designed to protect vulnerable clients.
Going forward, the legal protections for senior and vulnerable investors will undoubtedly evolve. For example, should FINRA’s new “temporary hold” rule extend beyond disbursements to impose limitations on the purchase and sale of securities if financial exploitation is suspected? Additional states are likely to adopt laws designed to protect seniors from financial exploitation. Broker-dealers (and their counsel) must keep abreast of these changes in laws and regulations impacting vulnerable customers and firms must modify their compliance programs as needed.
Heather K. Murphy is with Bressler, Amery, & Ross, P.C., in New York City, New York.
The Regulatory Forum on Senior Investor Issues was moderated by Andrew Sidman (Bressler, Amery & Ross, P.C.) and David C. Boch (Morgan, Lewis & Bockius, LLP). Panelists included James Wrona (Vice President and Associate General Counsel, FINRA) and Jonathan Zweig (Assistant Attorney General, Office of the New York Attorney General). Addressing the issues from the industry perspective were Thomas Mierswa (Executive Director, Morgan Stanley); Melissa Shea (Vice President and Associate General Counsel, Fidelity Investments); and Patricia Solfaro (Bressler, Amery & Ross, P.C.).