Elder financial exploitation has been recognized by many state and national agencies as a concern as the population ages and elders shoulder more responsibility for managing their retirement assets under defined contribution plans.  For investment advisers and broker-dealers, balancing the protection of customer information and reporting financial exploitation is challenging.  Fortunately, state and national authorities have taken actions to ease the regulatory tension.

State Regulations

Most states have laws in place to address elder financial exploitation.  Under state laws, a financial institution, such as an investment adviser or a broker-dealer, that complies with the rules is immune from civil and administrative liability for reporting suspected elder financial exploitation.  State regulatory regimes that apply to financial institutions can be split into two groups:  the permissive and the mandatory.  Under the mandatory reporting regime, a financial institution has a duty to report suspected elder financial exploitation.  In the permissive reporting regime, a financial institution reporting elder financial exploitation is immune from liabilities but has no obligation to report such exploitation.  In addition, some state laws permit a financial institution to put a temporary hold on disbursals upon a reasonable suspicion of financial exploitation.

National Regulations

On the national level, three notable efforts were taken to address the elder financial exploitation.  Earlier this year, FINRA amended two rules to curb elder financial exploitation.  FINRA Rule 2165 allows a broker-dealer to place a temporary hold on disbursements from a client’s account when elder financial exploitation is suspected.  If the member firm places a hold on a customer’s account, FINRA Rule 4512 requires the firm to take reasonable efforts to notify the trusted contact of that account to address possible financial exploitation.

More recently, President Trump signed the Senior Safe Act of 2018 (the “Act”) into law.  The Act encourages reporting of elder financial exploitation by providing immunity for covered financial institutions that make reporting in good faith and with reasonable care.  Covered financial institutions under the Act include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The Act also encourages training at covered financial institutions by making the immunity from liability contingent on certain training specified in the Act.  Under the Act, covered individuals and financial institutions will not be liable for disclosure of information made to certain state and federal regulatory agencies.  The Act also has limited preemption provisions.  State laws that do not provide immunities for covered financial institutions and individuals for reporting elder financial exploitation will presumably be preempted by the Act.

In addition, a recent bipartisan bill introduced in Congress titled the “National Senior Investor Initiative Act of 2018” proposes to create a task force within the SEC to focus on the challenges senior investors face.  The task force would work with national and state authorities and issue biennial reports with recommendations for regulatory or statutory changes benefiting senior investors.  Furthermore, the bill would require a study on direct and indirect costs resulting from elder financial exploitation.

Potential Issues

While the Senior Safe Act is a positive step towards a uniform regulatory regime on elder financial exploitation, it does not resolve all the issues.  Because the Act has only limited preemption of state laws, there are potential inconsistent regulatory requirements across states.

Who are covered financial institutions and individuals?

Under the Act, covered financial institutions include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The individuals covered under the Act are limited to certain individuals with specified roles.  Under some state statutes, covered financial institutions include only depository institutions and credit unions, but all officers and employees of the covered financial institutions are covered.

Who are protected adults?

The Act only protects adults age 65 and older, while FINRA Rule 2165 and some state laws protect both elder adults and adults with a mental or physical impairment.

What is financial exploitation?

The definition of financial exploitation varies from state to state and from agency to agency.  For example, under the Act, exploitation is defined to include “fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual… that … results in depriving a senior citizen of rightful access to or use of benefits, resources, belongings, or assets.”  This definition does not require wrongful use. Some state statutes, on the other hand, require “wrongful use.”  Furthermore, only an individual is capable of committing financial exploitation under the Act and FINRA Rule 2165, while in some states, both an individual and entity are capable of committing financial exploitation.

Other considerations

Finally, even when reporting elder financial exploitation is optional, a financial institution should carefully consider the potential risks of inconsistent practices across different offices and the reputational risks in the event an incident of elder financial exploitation goes unreported.  Consequently, a financial institution should balance the risk and benefits when developing or revisiting reporting policies and procedures.  To be eligible for the immunity provided by the Act, a financial institution must implement training programs, or update existing programs, to meet the requirements of the Act.

Read our full REVERSEinquiries issue here.

The New York Stock Exchange LLC (“NYSE”) proposes to amend Rule 2 to remove the FINRA or other national securities exchange membership requirement for member organizations.  Rule 2 was previously amended in 2007 to require FINRA membership as part of the transition plan for the consolidation of NYSE Regulation, Inc. and the National Association of Securities Dealers (“NASD”).  During this transition period, FINRA provided regulatory surveillance and enforcement services to NYSE, including with respect to NYSE rules, while the harmonization of NYSE and NASD rules was completed.  The proposed rule change reflects the end of the transition period and related regulatory outsourcing as NYSE resumed direct performance of certain previously outsourced regulatory functions on January 1, 2016.  Going forward, common members will continue to be regulated pursuant to the current allocation plan between FINRA and NYSE, and FINRA will continue to perform certain regulatory services under the oversight of NYSE’s regulatory unit pursuant to the existing Regulatory Services Agreement.  The full notice may be found here and the full text of the proposed revisions may be found here.

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Last month’s announcement by FINRA marks the completion of the consolidation of FINRA’s enforcement functions under the leadership of Susan Schroeder.  One of the key outcomes of FINRA360,  the new structure is designed to ensure a more consistent enforcement program.  Schroeder noted, “The consolidation of our enforcement function enables us to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.”  Under the new structure, the Department of Enforcement contains two new centralized units, Investigations and the Office of the Counsel to the Head of Enforcement, and three specialized teams, Main Enforcement, Sales Practice Enforcement and Market Regulation Enforcement.  The groups will be headed by Terrence Bohan, Lara Thyagarajan, Jessica Hopper, Christopher Kelly and Elizabeth Hogan, respectively.  See the full announcement here.

Read our full REVERSEinquiries issue here.