Protecting Seniors and Vulnerable Adults Against Financial Exploitation

Regulators have listed the protection of senior investors at the top of their examination priorities for years. It should be no surprise as 10,000 people turn 65 every day in the United States (a number predicted to more than double over the next several decades)^[1], and Americans aged 70 and older hold 27% of all U.S. wealth.^[2] Also consider the fact that the risk of experiencing cognitive impairments, like Alzheimer’s and dementia, increases with age. In the U.S., 11% of people aged 65 and older have Alzheimer’s or dementia.^[3] Diminished cognition affects approximately 20% of people aged 85 years or older.^[4] Elderly populations are therefore vulnerable to scammers in various ways, and lawmakers are aggressively pursuing methods to protect senior investors from fraud.

As financial stewards, investment advisors are poised at the front lines between their vulnerable clients and the scammers who are constantly in search of new ways to defraud them. According to the U.S. Senate Special Committee on Aging (“Aging Committee”), the COVID-19 pandemic has created new avenues for scammers to exploit seniors.^[5] Nevertheless, some efforts to protect senior investors from financial exploitation may invite civil litigation. This article discusses the challenges facing those in the financial services industry when seeking to protect vulnerable populations from fraud while not interfering with the right of an individual to control their own assets. This article also discusses regulatory efforts made to protect good-faith reporters of financial exploitation in addition to practical ways financial professionals can identify fraud before assets can fall into the wrong hands.

Challenges

There is a serious balance financial professionals must strike to carefully navigate the landscape of financial exploitation while avoiding the threat of legal landmines. Depending upon your place in the financial industry, you may be subject to a variety of (potentially conflicting) rules and laws involving senior investors. Financial professionals must also navigate the risks of incurring civil liability arising from improper interference with another’s property. For example, in 2019, a 71-year-old widow filed an arbitration against Fidelity for conversion and pain and suffering due to “restricted access to funds in [her] accounts for a period of six months.” Fidelity restricted access to the client’s $1.02 million in funds in 2017 after it suspected the client was suffering from diminished capacity and was being financially exploited.^[6][7] Just two years earlier, FINRA sanctioned Fidelity $1 million for failing to follow up on red flags related to senior investor fraud.^[8] How can financial professionals intervene in cases of financial exploitation without fear of getting it wrong one way or another?

Each case is unique, and therefore this is largely a facts and circumstances issue. The solution is multifaceted and includes providing legal safe harbors for those who “report-and-hold” suspicious disbursement requests in good faith, building a relationship between clients and firms such that financial professionals “know their clients,” obtaining the name and contact information of a trusted contact to assist if and when financial exploitation is suspected, regularly documenting detailed observations from meetings and conversations with clients, and understanding the common schemes to which vulnerable clients may fall victim.

Safe Harbors

In the pursuit of investor protection, federal and state lawmakers and regulators have created safe harbors to protect financial firms from civil liability when there is a good-faith belief of financial exploitation.

State “Report and Hold” Laws

Since 2015, an increasing number of states have enacted “report and hold laws” which provide a path for financial professionals to report suspected financial exploitation to a designated agency (such as the securities administrator or adult protective services) and hold the suspicious disbursement request for a period of time to allow for the state to perform an investigation. Reporting suspected fraud or abuse may be mandatory or voluntary depending on state law.

Senior Safe Act

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (a/k/a “The Senior Safe Act”) became federal law. The Act provides financial institutions with a safe harbor from liability in any civil or administrative proceeding for reporting suspected financial exploitation of a senior when certain conditions are met (including training, acting in good faith and with reasonable care, and reporting to a covered agency).

Securities and Exchange Commission (“SEC”) Examination Priorities

Over the years, the protection of senior investors has consistently been one of the SEC’s top priorities. In 2019, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) examined over 200 investment advisors with accounts or assets held by senior investors to review advisors’ policies, procedures, and practices pertaining to senior investors. This sweep focused on several factors including whether clients provided trusted contacts, how advisors addressed suspected diminished capacity, and training provided to employees concerning vulnerable adults and the risks of financial exploitation. OCIE found that advisor policies often were not specific enough when discussing how to identify and address red flags suggesting potential financial exploitation.^[9]

FINRA Rules

In 2018, FINRA Rule 2165 began providing a safe harbor from FINRA Rules 2010, 2150, and 11870 to allow broker-dealers to place temporary holds on an account when a good-faith belief of exploitation has been reported to a trusted contact. FINRA also updated its Customer Account Information Rule 4512 to require reasonable efforts to obtain the name and contact information of a trusted contact who may be contacted in the event of suspected financial exploitation. While not subject to FINRA rules, investment advisers are subject to federal and/or state securities laws depending on their assets under management.

Gaps

There are currently no laws protecting investment companies from civil liability if they intervene and stop redemption requests when financial exploitation is suspected.^[10] The Financial Exploitation Act, a bill that was recently unanimously approved by the U.S. House of Representatives but has yet to be taken up by the Senate, would fill this gap if passed. The Act would allow open-end investment management companies or their transfer agents to delay transactions reasonably believed to be the result of financial exploitation for as long as 15 business days, allowing time for a reasonable verification process.^[11]

Common Perpetrators and Scams

Scams by Family Members / Friends

According to the National Adult Protective Services Association, 90% of abusers (including financial abusers) of vulnerable adults are family members or other trusted persons such as caretakers, neighbors, friends, and acquaintances.^[12] When financial abuse involves a trusted friend or family member, the exploitation often takes the form of the abuser:

• Using a Power of Attorney for their own benefit
• Adding themselves to bank accounts to convert assets for their own gain
• Using ATM cards/checks to withdraw funds from accounts
• Misusing bill pay to pay the perpetrator’s bills

Examples of scams that are most often perpetrated by strangers are^[13]:

Government Impersonation Scams	Scammers pose as an employee of a government agency (ex. IRS or Social Security) and may demand payment by wire, prepaid debit card, retail gift, or cash.
Sweepstakes Scams	Scammers trick seniors into believing they have won a lottery and need to pay a fee or taxes to collect their winnings or increase their chances of winning a prize. They may impersonate well-known organizations (ex. Publishers Clearinghouse
Computer Scams	Scammers pretend to be calling from well-known tech companies such as Microsoft or Apple and falsely claim the victim’s computer has been infected with malware. To remove the virus, victims must provide personal information, including social security information and credit card numbers.
Grandparent Scams	Scammers exploit the emotions of grandparents by posing as the victim’s grandchild, a law enforcement officer claiming the grandchild is in trouble, or a medical professional claiming the grandchild requires medical assistance
Romance Scams	Scammers prey on lonely seniors by creating a fake social media profile or dating page and posing as a love interest to gain a victim’s trust before requesting financial assistance or access to a victim’s bank accounts
COVID-19 Scams	Scammers use a variety of COVID-19 related topics to deceive vulnerable adults including fake contact tracing, virus/antibody test kits, vaccines, and miracle cure scams.

Best Practices for Investment Advisors

Have Policies and Procedures

It is recommended that advisors establish detailed policies and procedures designed to identify diminished capacity, provide for ongoing training of financial professionals, establish supervisory controls to detect suspicious activity and give specific guidance on how to handle suspected financial exploitation. When and if financial exploitation does occur, advisers should have a process for compliance with state, federal, and/or self-regulatory rules and laws that address whether written notice is required, the maximum allowable timeframe for a disbursement hold, when or if a disbursement hold may be extended, and how to report suspicious activities.

Additionally, the firm’s system of surveillance should consider the activities of its representatives and the trusted relationships between financial professionals and their clients and monitor for unauthorized borrowing from clients, improper trustee and/or beneficiary arrangements, and other conflicts or breaches of a financial professional’s fiduciary duties.

Know Your Client

Financial professionals working with senior investors should maintain detailed notes that include observations such as how did the client arrive at the meeting, and did they drive themselves? Did they bring a loved one?  Be sure to make a reasonable effort to obtain the name and contact information for a trusted contact and explain to your client when and how that information can be used if diminished capacity and/or financial exploitation are suspected. Financial professionals are often uniquely positioned within networks of other legal and tax professionals that can also provide important estate planning services to investors so that important documents are in place when they are needed. Maintaining a detailed record of client meetings and observations about clients can be helpful when determining if circumstances arise that are new or unusual and may raise a concern of diminished capacity or financial exploitation. These records may also prove helpful in the event of a legal or regulatory challenge.

As a side issue, because some clients can be sensitive to insinuations that they are old or may suffer (now or in the future) from loss of cognitive function, one way to address the topic with them is to couch it in a neutral fashion by discussing accidental injuries. Having a discussion about how they’d like their finances handled in case they have an accident that results in traumatic brain injury and letting them know that you have this discussion with all your clients removes the specter of old age and dementia from the equation.

Be Vigilant

Financial professionals are the first line of defense against financial exploitation. By keeping an eye on scam trends, financial professionals are more likely to be alerted to certain key words that may come up during interactions with their clients. Perhaps a client requests funds to help a friend they met online return home from a foreign country, or a client that commonly arrived at meetings alone now brings along a new friend and begins making irregular distribution requests. While further diligence is necessary, knowing the tell-tale signs of financial exploitation is the first step toward prevention.

 

^{[1] AARP, The Aging Readiness & Competitiveness Report United States}

^{[2] “Older Americans Stockpiled a Record $35 Trillion. The Time Has Come to Give It Away.” By Ben Eisen and Anne Tergesen, The Wall Street Journal, July 2, 2021.}

^{[3] Alzheimer’s Association, 2021 Alzheimer’s Disease Facts and Figures Special report Race, Ethnicity and Alzheimer’s in America.}

^{[4] FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers, FINRA Regulatory Notice 07-43, September 2007.}

^{[5] United States Senate Special Committee on Aging, Fighting Fraud: Senate Aging Committee Identifies Top 5 Scams Targeting Our Nation’s Seniors Since 2015, Senator Robert P. Casey, Jr., Chairman and Senator Tim Scott, Ranking Member.}

^{[6] In the Matter of the Arbitration Between Claudine Webb, Claimant, v. Fidelity Brokerage Services LLC, Respondent (FINRA Arbitration Award 19-01960).}

^{[7] “New tools to protect elderly from fraud, exploitation,” by Bruce Kelly, Investment News, July 7, 2018.}

^{[8] FINRA Sanctions Fidelity Brokerage Services LLC $1 Million for Supervisory Failures, FINRA News Release, December 18, 2015.}

^{[9] Speech: How We Protect Retail Investors, Peter Driscoll, Director, Office of Compliance Inspections and Examinations, NRS Spring 2019 Compliance Conference, Orlando, FL, April 29, 2019.}

^{[10] While there are no laws in place, in 2018, the Investment Company Institute received No-Action Relief if a “transfer agent, acting on behalf of a mutual fund, temporarily delay for more than seven days, the disbursement of redemption proceeds from the mutual fund account of a Specified Adult held directly with the transfer agent based on the transfer agent’s reasonable belief that financial exploitation of the Specific Adult has occurred, is occurring, has been attempted, or will be attempted” so long as it met the terms and conditions of the request for relief (the terms of which mirrored FINRA 2165). (https://www.sec.gov/divisions/investment/noaction/2018/investment-company-institute-060118-22e.htm)}

^{[11] H.R. 2265 – Financial Exploitation Prevention act of 2021, 117th Congress (2021-2022). (https://www.congress.gov/bill/117th-congress/house-bill/2265).}

^{[12] Elder Financial Exploitation, Get Informed, National Adult Protective Services Association (https://www.napsa-now.org/get-informed/exploitation-resources/).}

^{[13] United States Senate Special Committee on Aging, Fighting Fraud: Senate Aging Committee Identifies Top 5 Scams Targeting Our Nation’s Seniors Since 2015, Senator Robert P. Casey, Jr., Chairman and Senator Tim Scott, Ranking Member.}