On January 22, 2016, the North American Securities Administrators Association (“NASAA”) adopted a model act, entitled “An Act to Protect Vulnerable Adults from Financial Exploitation.” This act seeks to facilitate coordination among securities regulators, broker-dealers, and adult protective services agencies in dealing with the financial exploitation of seniors and other vulnerable adults. The model act reflects the collective views of the NASAA membership, which consists of 67 state, provincial, and territorial securities administrators from the 50 states, D.C., Puerto Rico, the U.S. Virgin Islands, Canada and Mexico; however, it has no legal authority and is only meant to serve as a guidepost to individual jurisdictions. The model act may be adopted by state legislatures or regulators (with or without modifications) and has both permissive and mandatory components.
The Basics of the Model Act
If adopted by a state legislature, the model act would require a state-registered broker-dealer or a “qualified individual”¹ with a reasonable belief that “financial exploitation”² of an “eligible adult”³ is occurring or may occur to notify adult protective services and the commissioner of securities in that jurisdiction (collectively, the “Agencies”).4 Optionally, the broker-dealer or other qualified individual could also notify any contact person previously designated by the eligible adult (unless the person is suspected of foul play). Additionally, if a disbursement is requested from the account, the broker-dealer, after an initial review of the facts, may place a temporary hold on disbursements from the account.
Under the model act, when pursuing a temporary hold, the broker-dealer must:
- notify, within two business days of the requested disbursement, all authorized parties on the account of the reason for the hold;
- notify, within two business days of the requested disbursement, the Agencies of the reason for the hold; and
- continue its internal review and report its findings to the Agencies within seven business days of the requested disbursement.
As contemplated in the model act, the hold will expire upon the earlier of (1) a determination by the broker-dealer that the disbursement will not result in financial exploitation, or (2) 15 business days after the date on which the hold was placed on the account, unless either of the Agencies requests an extension. In the event of an extension, the hold will expire (1) 25 business days after the date on which the hold was placed on the account, or (2) may be terminated on an earlier date by either of the Agencies or a court of competent jurisdiction. Further, a court of competent jurisdiction would be able to enter an order to extend the hold or order protective relief based on the petition of either of the Agencies, the broker-dealer initiating the delay or other interested party.
Under the model act, broker-dealers or other qualified individuals acting in good-faith and exercising reasonable care would be immunized from administrative and civil liability that may arise from disclosure of information to the government or to third parties, or that may arise from a delaying a disbursement.
FINRA Proposed Rules Closely Align with NASAA Model Act
NASAA isn’t the only one with an eye to preventing fraud and abuse of senior investors. Prior to the release of this model act, the Financial Industry Regulatory Authority (“FINRA”) launched its Securities Helpline for Seniors™, which serves as a resource for seniors making investment decisions and as a means for detecting fraud (see http://www.bdiaregulator.com/2016/01/finras-securities-helpline-for-seniors-provides-guidance-to-broker-dealers/ for more information). FINRA also proposed two rules, Rule 2165 and Rule 4512, to help combat financial exploitation of vulnerable adults (see http://www.bdiaregulator.com/2015/10/finra-proposes-rules-to-help-avoid-financial-exploitation-of-seniors/ for more information). The model act and the proposed FINRA rules have significant overlap, but also some notable differences and areas of emphasis.
First, the model act and the proposed FINRA rules apply to the same eligible persons and qualified individuals and use the same definition for financial exploitation. Second, the proposed FINRA rules propose a similar procedure for placing a hold on disbursements from a customer’s account. Lastly, the proposed FINRA rules also contemplate the benefit of a safe harbor for broker-dealers exercising reasonable judgment in choosing to disclose information or place a hold on a customer’s account.
Perhaps the more important question is how the two rules differ from one another. The model act places an emphasis on reporting to, and oversight by, Agencies. In contrast, the proposed FINRA rules do not require notifying any outside or government entity of the suspected abuse. Rather, the responsibility to investigate and resolve the situation is left to the broker-dealer, which must establish policies and procedures for identifying, handling and escalating potential problems. For example, the proposed FINRA rules would require broker-dealers to use reasonable efforts to obtain the name of a trusted contact person upon opening an account, or when updating a preexisting account.5 FINRA would also require that the trusted contact person be notified when a hold has been placed on the account (unless the person is suspected of foul play), in addition to notifying the authorized persons on the account. Like the model act, FINRA also proposed that any hold would expire within 15 business days from the date of the hold, but may be extended for another 15 days by a court of competent jurisdiction.
Though both the proposed FINRA rules and the model act may prove to be effective on their own, it is foreseeable that they could work together to provide a more robust approach to combatting abuse of senior investors and other vulnerable adults. By the same token, it is also possible that inconsistencies or conflicts between the two could create a more complex regulatory regime fraught with opportunities for inadvertent noncompliance.
- “Qualified individual” means any agent, investment adviser representative or person who serves in a supervisory, compliance, or legal capacity for a broker-dealer or investment adviser.
- “Financial exploitation” means: (a) the wrongful or unauthorized taking, withholding, appropriation, or use of money, assets or property of an eligible adult; or (b) any act or omission taken by a person, including through the use of a power of attorney, guardianship, or conservatorship of an eligible adult, to: (i) obtain control, through deception, intimidation or undue influence, over the eligible adult’s money, assets or property to deprive the eligible adult of the ownership, use, benefit or possession of his or her money, assets or property; or (ii) convert money, assets or property of the eligible adult to deprive such eligible adult of the ownership, use, benefit or possession of his or her money, assets or property.
- “Eligible adult” means (a) a person sixty-five years of age or older; or (b) a person with a severe mental impairment (or as otherwise defined in the relevant Adult Protective Services Statute).
- The titles “adult protective services” and “commissioner of securities” may vary by jurisdiction.
- Though the model act provides that a broker-dealer may reach out to a person previously designated by the account holder, it is silent on the matter of how a broker-dealer should go about obtaining this information.