I. Highlights from FINRA/SIFMA Senior Investor Conference

On October 22-23, members of the securities industry, academia, regulators, and public policy experts gathered in Washington, D.C., at the joint Financial Industry Regulatory Authority (FINRA) and Securities Industry and Financial Markets Association (SIFMA) Senior Investor Protection Conference. The theme throughout the two-day conference was simple: proactivity. Firms should move swiftly to: (1) establish policies and procedures to recognize diminished capacity in senior investors and in their own aging financial adviser population; and (2) proactively combat financial exploitation of senior investors. The conference was held one day after FINRA filed a related proposed rulemaking with the Securities and Exchange Commission (SEC or Commission). 

II. Ongoing Push for Senior-Focused Legislation and Rulemaking 

Federal and state securities regulators continue to concentrate on the challenges in protecting senior investors from financial exploitation. In October 2015, FINRA issued a rulemaking proposal aimed at creating tools for FINRA member firms to combat financial exploitation of senior investors. Proposed FINRA Rule 2165 (Financial Exploitation of Specified Adults) (Rule 2165) would allow qualified persons of FINRA member firms to “place a temporary hold on the disbursement of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.”1 The FINRA proposal also seeks to amend existing FINRA Rule 4512 (Customer Account Information) to require firms to make reasonable efforts to obtain the information of a “trusted contact person” with whom the firm could communicate in the event of an emergency or in response to potential financial exploitation of the accountholder.2 On October 19, 2016, FINRA filed its proposed rulemaking with the SEC for further public comment and Commission review.3  

Although FINRA maintained most of its original proposal language, the recent SEC submission differs in the following notable ways:

  • Elimination of the proposed amendment to FINRA Rule 4512, which would require firms to contact an immediate family member of an accountholder if the trusted contact person is unavailable or is otherwise engaged in the underlying financial exploitation;4  
  • Harmonization of timelines for temporary hold extensions with those presented in the NASAA Model Act (discussed further below), i.e., up to an additional 10 business days;5 and 
  • Elimination of the requirement that the supervisory, compliance, or legal personnel at the firm be “reasonably related to the account” in order to place a temporary hold on the disbursement of funds in question.6 

In addition to the FINRA proposal, earlier this year the North American Securities Administrators Association (NASAA) published a model act (the Model Act) for state legislatures that similarly provides a “temporary hold” option potentially applicable to both broker-dealer and investment advisory firms should they wish to delay disbursements where there is a suspicion of financial exploitation of senior investors.7 The Model Act differs in some significant respects from the proposed FINRA rulemaking, however. For example, the Model Act mandates reporting to a state securities regulator or state adult protective services department where there is a reasonable belief of financial exploitation.8 The Model Act also provides immunity from civil or administrative liability for delaying a disbursement of funds.9While the Model Act may be a helpful option for state legislatures, however, it has only been enacted in four states, leaving firms to navigate a labyrinth of state regulations as they relate to the financial exploitation of senior investors. 

III. Securities Regulatory Examination Focus on Seniors

FINRA/SIFMA conference panelists from both the SEC and FINRA confirmed securities regulators’ increasing emphasis on firms’ management of senior investor issues. In particular, securities regulators will continue to concentrate on the following in their examinations:

  • Suitability concerns given senior investors’ potential time horizon and relatively low risk tolerances;
  • Aggressive use of complex products; 
  • Misleading marketing materials, particularly those targeting senior investors;
  • Branch offices and individual financial advisers with high concentrations of senior investor accountholders; and
  • Escalation and reporting procedures for identifying and addressing diminished capacity and financial exploitation of senior investors.

IV. Takeaway for Firms: Proactivity Is Key 

Given the securities regulators’ increased focus in this area, it is essential that firms learn to recognize not only the unique risks posed by serving senior investors but also the challenges in addressing them. Firms should establish robust policies and procedures to prevent, detect, and mitigate financial exploitation of senior investors, as well as recognize instances of diminished capacity. Firms should specifically concentrate on establishing senior-centric policies and procedures to reflect the concerns addressed in last week’s FINRA/SIFMA conference, including:

  • Creating training modules related to the recognition of potential diminished capacity of seniors as well as financial advisers; 
  • Establishing escalation procedures for instances where there is reasonable suspicion of diminished capacity or financial exploitation of seniors; and
  • Cultivating and maintaining contacts with local law enforcement, state securities regulators, and adult protective services agencies to more effectively coordinate the reporting of potential fraud or exploitation of a senior investor.

The key to establishing and following these procedures is proactivity. After all, it is not if, but rather when, the securities regulators will be examining your firm for these issues.