New Elder Financial Abuse Rules for Brokerage and Investment Firms

On October 15, 2015, the Financial Industry Regulatory Authority (“FINRA”) proposed new rules and amendments to existing rules designed to combat elder abuse. The amendments will allow brokerage and investment firms to delay for up to 15 days the disbursement of funds or securities from the account of any vulnerable adult – defined as persons over 65, or persons under 65 with diminished mental or physical capacity – without incurring liability, if they have reason to believe the account holder is being exploited by a third party. In so doing, FINRA is taking the logical next step in response to the huge volume of calls it has been receiving since launching a toll-free hotline for seniors in April 2015. FINRA also appears to be following the lead of the North American Securities Administrators Association (“NASAA”), the umbrella group for the 50 state securities regulators, which on September 29, 2015, proposed similar rules (but with only a 10-day delay on disbursements). NASAA’s proposal would also mandate reporting any suspected abuse or exploitation to the appropriate state securities regulator and department or agency responsible for adult protective services. Both proposals would require financial services firms to obtain from the accountholder the name of a trusted contact, i.e., someone the accountholder would want contacted in situations where potential abuse is suspected.

These developments are long overdue. The question can fairly be asked: why has it taken the financial services industry so long to get here? Elder exploitation has been a national concern for many years. The World Health Organization began calling attention to the issue as early as 2002. And, for the past 10 years there’s even been a World Elder Abuse Awareness Day, promoted by the International Network for Prevention of Elder Abuse and observed annually on June 15.

In the U.S., over the next 15 years, 10,000 Baby Boomers (born between 1946 and 1964) per day will turn 65, all 50 states have enacted statutes addressing and prohibiting elder abuse, and there are several national organizations dedicated to elder abuse issues, including the Administration on Aging (part of the Department of Health and Human Services), the National Committee for the Prevention of Elder Abuse and the National Center on Elder Abuse. All of these organizations have identified financial exploitation as one of many ways in which the elderly are victimized. Indeed, a federal interagency memorandum defined financial abuse as “the most common form of elder abuse . . . .” resulting in billions of dollars in losses each year.

One reason for the slow approach may have been concern with liability under privacy and other laws governing the protection of accountholders’ personal details. Until now the 1999 Gramm-Leach-Bliley Act (“GLBA”) and SEC regulation SP (“Reg SP”), and other laws have limited what information financial services firms could share about accountholders.

While the proposed NASAA and FINRA rules cannot insulate a financial institution from potential liability when it discusses an accountholder’s account or activity with a third party, even if a family member, they do create a safe-harbor at the state and industry levels. Guidance provided by a number of federal agencies including, among others, the Federal Reserve Board of Governors, the Commodity Futures Trading Commission, the Federal Trade Commission and the Securities and Exchange Commission (“SEC”) clarifies the circumstances under which firms are not prohibited by GLBA and Reg SP from reporting suspected abuse to authorities. This guidance effectively encourages firms to report, but only to authorities.

To enable and encourage broader discussions the proposed rules would require brokerage firms to request from new and existing accountholders perceived to be vulnerable the name of a trusted contact person or immediate family member whom the firm could call should they detect suspicious behavior by the accountholder or a caretaker. This might include activity representing a sudden or notable departure from historical patterns or interests, or the appearance of a new voice in the accountholder’s decision making process. Obtaining the name of a trusted contact person or family member would represent the accountholder’s implied consent to discuss certain details concerning the accountholder’s account with the trusted contact person or family member. The proposed rules do not obligate a firm to act in any particular situation, but would provide a safe-harbor if they chose to do so. A hold on funds or securities could only be authorized by someone in the legal or compliance departments, and would require the firm to immediately investigate the underlying circumstances and, within two days, notify the trusted contact person. The NASAA proposal would also require a report be made with authorities in the state securities and adult protective services agencies.

One interesting note about the two proposals is that both focus externally on the potential conduct of third parties, but not internally toward the financial services firms themselves or their professionals. Why are such persons, who derive direct benefit from business done with and for elderly accountholders, not the focus of either proposal? The answer probably lies in the fact that such firms are already subject to several layers of rules and regulations at the federal, state and industry levels – by the SEC, NASAA, and FINRA – that impose liability on the firms for failing to supervise customer accounts and broker activity, and also on individual brokers and advisors for conduct that violates the securities laws.

For example, a brokerage or investment firm may be subject to liability where it lacks or fails to create and implement procedures designed to both prevent and detect securities law violations, which any type of financial abuse would almost certainly represent. Likewise, it is a violation for any individual professional to misrepresent or not completely disclose the risks or costs of a potential investment, or to recommend the sale of familiar or appropriate investments, solely to generate compensation for themselves. It is also a breach of an advisor’s fiduciary duty to direct an accountholder toward investments that have a more immediate and consequential benefit to the advisor than to the accountholder. These rules are well ingrained in the regulatory framework governing the securities industry and are generally effective at keeping good financial service professionals in their lane, and help the firms zero-in more quickly on bad actors, or at least those drifting too close to, or actually straddling a line.

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