Heads I Win, Tails You Lose: Elder Financial Management

31 Aug Heads I Win, Tails You Lose: Elder Financial Management

Posted at 21:17h in Securities Litigation & Regulation by

Recent regulatory initiatives by state and financial industry regulators have added to the mushrooming legislation designed to protect elders from financial abuse.  The latest of these, a Model Act to protect seniors, adopted in February 2016 by the 67 members of the North American Securities Administrators Association, the umbrella group for the 50 state securities commissioners and their counterparts in Mexico, Canada, Puerto Rico the U.S. Virgin Islands and the District of Columbia, allows brokerage houses and investment advisory firms to obtain the name of a trusted person the client authorizes the firm to call in a circumstance where it believes the client might be the victim of financial abuse.    It also empowers the firm to prevent disbursement of cash or securities from the client’s account for up to 15 days where possible abuse is suspected.  A similar initiative has been proposed by the Financial Industry Regulatory Authority.    These recent initiatives follow the adoption of Adult Protective Services laws by all 50 states and elder abuse statutes in many states, including California.

All these efforts are laudable, and undoubtedly useful.  But, do they run the risk of imposing burdens on businesses that end up hurting the very people they are intended to benefit?  Might adoption of heightened rules and standards discourage firms from doing business with the elderly?  This concern has been raised in the ongoing discourse concerning the U.S. Department of Labor’s adoption earlier this year of a “best interest” standard of conduct for brokers and investment advisers.   In that debate, the issue is whether DOL’s decision to require brokers and advisers who serve clients investing their retirement funds to adhere to a heightened standard of care will result in fewer firms being willing to work with the elderly and retirees, particularly those with smaller nest eggs.

The new DOL rule elevates a broker’s traditional obligation to make suitable recommendations to a standard that requires the broker to act in the client’s “best interest.”  This move to a subjective standard – after all, who can objectively say what is in a client’s “best interest”? – is far more susceptible to hindsight criticism than the suitability standard, which focused on established criteria.  As a result, it is also more likely to lead to second-guessing, which invariably leads to lawsuits.  If that happens, firms will likely reduce the number of accounts presenting this risk.  This will undoubtedly lead to the “little guy” – those most in need of strategies to help stretch their nest egg – being left behind.  Those clients will likely be directed to a call center, for self-directed trading.

It is certainly true that investors who are more vulnerable, whether due to diminished capacity, lack of financial management experience or other knowledge or skill deficits, can become victims of abusive practices, such as excessive trading, unauthorized trading or misleading advice.  But, that type of conduct is already prohibited by a myriad of federal, state, industry and internal firm rules.

Less clear is how the new efforts, particularly NASAA’s Model Act and FINRA’s recent rule proposals will impact or prevent abuse by external agents, such as caretakers, family members and even adult children (who can be among the worst abusers).  How is a broker or adviser to know if a client is being abused by persons outside the firm?  What obligation does he or she have to probe into a client’s private life?  Is “see something, say something” to become a governing standard for the financial services industry?  What if an agent fails to “connect the dots”; will she or her firm be held responsible for the acts of others?  This proliferation of well-intentioned rules to protect the vulnerable has the propensity to make the industry both a guarantor of a client’s financial success (per the best interest standard) as well as a guardian for his or her outside behavior (per the Model Act).

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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