The North American population is aging at an unprecedented rate, with wealth increasingly concentrated in the hands of seniors. This demographic and financial trend, combined with the prevalence of medical conditions affecting cognitive ability among seniors, has led to an unfortunate acceleration of senior financial fraud and abuse, in some cases by unscrupulous financial professionals and, in many instances, family members or caregivers.
Faced with this serious and growing societal issue, the North American Securities Administrators Association (NASAA) and its members have responded aggressively with innovative regulatory solutions, targeted enforcement and investor education. From programs designed to address unscrupulous sales tactics used during “free lunch” seminars, regulatory initiatives designed to prohibit the use of misleading professional designations, and aggressive enforcement actions, state and Canadian regulators have made the protection of older investors a priority.
The most recent example of this multi-faceted approach is NASAA’s newly approved model act to address issues faced by broker-dealer and investment advisor firms and their compliance and registered personnel when confronted with suspected financial exploitation of seniors and other vulnerable adults.
The model, entitled “An Act to Protect Vulnerable Adults from Financial Exploitation,” was approved by a vote of the NASAA membership on Jan. 22, 2016. The model act offers industry participants and state regulators new tools to help detect and prevent financial exploitation of vulnerable adults age 65 and over by:
- Requiring reporting to the state securities regulator and state adult protective services agency when a qualified individual has a reasonable belief that financial exploitation of an eligible adult has been attempted or has occurred.
- Enabling broker-dealers or investment advisers to delay disbursements from an account of a vulnerable adult for up to 15 business days if financial exploitation is suspected. The delay can be extended for an additional 10 days at the request of either the state securities regulator or adult protective services.
- Providing immunity from administrative or civil liability for broker-dealers and investment advisers for taking certain actions permitted under the act including the reporting of violative conduct.
- Requiring qualified individuals to provide records that are relevant to the suspected or attempted financial exploitation to relevant authorities.
- Authorizing notification to third parties but only in instances where an eligible adult has previously designated the third party to whom the disclosure may be made. Importantly, the model act directs that disclosure may not be made to the third party if the qualified individual suspects the third party of the financial exploitation.
Regulators and industry share a common goal to provide a greater layer of protection for seniors and vulnerable adults through a clear approach to strengthen efforts to deter their financial exploitation.
We believe the NASAA model act provides such an approach and does so in a manner that provides for the timely notification of suspected financial exploitation to appropriate authorities.
Some industry commenters have noted that mandatory reporting could increase reports to state agencies. In states that adopt the model, we believe the number of unsubstantiated reports will be kept to a minimum given the “reasonable belief” standard upon which a report is required to be made. We also believe that this approach will best serve vulnerable adults as financial exploitation is usually accompanied by other challenges such as self-neglect or medical infirmity which are best addressed by government agencies and other professionals.
Mandatory reporting, with corresponding immunity, creates the proper incentives to encourage broker-dealers and investment advisers to report potential financial exploitation. It also ensures that the proper regulatory agencies are alerted to cases of potential financial exploitation as early as possible, when their intervention may be able to prevent harm or limit the damage to victims of financial exploitation. Absent such reporting, regulators lose valuable time that could provide a much needed safety net for a vulnerable investor in jeopardy.
The adopted model act has been distributed to NASAA members throughout the United States for consideration within their jurisdictions either through the legislative or regulatory process.
These are difficult but important issues for us all. By working together through a holistic, community approach we can and will close the holes in our safety net of support and protection for vulnerable adult investors.