The Securities and Exchange Commission’s Investor Advocate, Rick Fleming, told lawmakers that he will spend part of his time this year watching the progress of proposed rules issued by the North American Securities Administrators Association and the Financial Industry Regulatory Authority to allow a broker-dealer or investment advisor to delay disbursement of funds if elder financial fraud is suspected.
Fleming told lawmakers in his FY 2015 report to Congress that while he believes financial firms “should have the ability to pause disbursements of funds, contrary to the explicit instructions of a customer, if there is a reasonable belief that financial exploitation is occurring,” if the suspicion is “strong enough to warrant a pause on a disbursement, it also should trigger an obligation to report the suspicious activity” to adult protective services (APS).
His office, Fleming said, will comment “as appropriate” on the NASAA and FINRA plans, and will also examine other measures that need to be considered at the federal level to protect seniors and other vulnerable adults from financial exploitation.
Fleming told attendees at the MarketCounsel Summit in early December that his office is “actively” assessing what type of rule the agency should promulgate for RIAs to protect elderly or handicapped customers’ accounts if there is a reasonable belief of elder fraud.
In his report to Congress, Fleming said that any elder fraud rule or law “must balance two potentially conflicting goals: to respect every individual’s right to self-determination, and also to prevent his or her unwitting financial self-destruction. We should remove undue restraints that keep financial professionals from acting to protect their clients. Yet if we confer new authority on broker-dealers and investment advisors to intervene in clients’ accounts when they suspect elder exploitation, we must place appropriate limits on that authority.”
The challenge, he said, “is to strike the right balance.”
For this type of reporting mechanism to be effective, Fleming said in his report, “it is necessary for APS to have adequate resources to do the job. Sadly, those resources appear to be lacking.”
Congress authorized $125 million to fight elder financial abuse when it passed the Elder Justice Act in 2010, but “the first actual appropriation came in 2015 and amounted to $4 million,” Fleming said. “Additional funding would go a long way toward helping APS address the financial exploitation of seniors, a problem that likely will grow in the coming years.”
As to increasing the number of investment advisor exams, he noted the Commission’s FY 2015 budget request made it a “top priority” to increase these exams, adding that the request called for an increase of 316 new positions to the SEC’s Office of Compliance Inspections and Examinations.
Congress appropriated $1.5 billion for the SEC in FY 2015, which was less than the SEC’s request of $1.7 billion but 11% more than the previous year’s overall budget.
With the increased funding, the Commission has used a portion to increase its examination staff by 91 full-time staff, Fleming said. The SEC budget request for FY 2016 calls for funding to hire an additional 225 OCIE examiners, primarily to conduct advisor exams.
As to SEC Chairwoman Mary Jo White’s call to SEC staff to develop a rule to require third-party compliance reviews for advisors, Fleming told MarketCounsel attendees that such third-party exams are “quite a ways down” on his list of how to boost advisor exams.
If the agency does adopt such a third-party exam proposal, he said such a rule should very specifically list the auditor’s duties as “objectively as possible so that we can assess their job,” and also require “asset verification” whether the advisor has custody or not. “After Madoff, SEC has ramped up asset verification, which is good,” Fleming said.
Third-party examiners should also have “some sort of regulatory or review structure over top of them,” Fleming added, “because there is a conflict between the firm being audited and the auditor.”
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