This legal alert is the first in a series addressing the ever-changing regulatory landscape relating to senior investors, state law, and a broker-dealer’s legal obligation, if any, to protect its vulnerable customers. We explore some of the deceptively basic questions every broker-dealer faces in attempting to combat financial exploitation of vulnerable persons, and present two state-specific examples – New York and Florida – to illustrate the type of analysis required when planning for a response to these issues.
We focus on Florida and New York because they are among the thirteen (13) states identified by the Financial Industry Regulatory Authority (FINRA) as being the source of the highest volume of calls into the FINRA Securities Helpline for Seniors (HELPS™) (the Helpline), launched in April 2015.1 In February 2017, the Securities and Exchange Commission (SEC) approved FINRA’s adoption of its own senior exploitation rule – Rule 2165 – partly in response to state initiatives.
As the title of this alert suggests, the issues for broker-dealers are complicated because a good deal of research (or sleuthing) needs to be undertaken to grasp the breadth of potential liability a broker-dealer may face for not reacting to an indication of senior exploitation among the broker-dealer’s client base. This is an area where red flags mean everything and consistency in the law is a goal still to be achieved. In short, each state endeavors to protect its elderly and vulnerable populations from financial exploitation in its own unique way. A broker-dealer cannot wait until a particular case of potential financial exploitation presents itself; the complexity of determining the broker-dealer’s obligations under state law, if not researched in advance, could cause a broker-dealer to unwittingly expose itself to civil and/or criminal liability.
With this in mind, this alert lays out a possible framework for broker-dealers to utilize, in advance, in states in which they do business and have retail customers to whom the protections of state law are extended. Our framework takes a “who, what, when, how and where” approach but other approaches are possible. In suggesting a framework for analysis of state law, we do not mean to suggest that any line of inquiry is foolproof. Protecting elderly and vulnerable investors presents unique challenges to broker-dealers, not the least of which is that state law can be elastic and interpreted after-the-fact in a hard to predict manner.2
Finally, the discussion below is not intended to be exhaustive of all the issues that can arise under state law. For example, state privacy laws may come into play when anyone seeks to protect someone whom they suspect is being exploited. In addition, broker-dealers may have difficulty assessing whether a particular individual is experiencing diminished capacity. The starting point, however, does require a close examination of state law specific to the linkage created by the joinder of age and mental and physical capacity.
II. Fundamental Analysis: Who, What, When, How, and Where
We start our analysis by focusing on the purpose of each line of inquiry in the proposed framework: who, what, when, how, and where.
1. WHO. The purpose of the first prong of analysis is to help firms determine whether a particular state has identified certain types of persons as needing more protection than others need; in other words, assuming a state wishes to protect all its citizens from harm, has the state identified by statute, rule or regulation, one or more subsets of persons who are deserving of special care? If so, are persons identified in any such subset then linked in some manner to the issue of financial exploitation (as opposed to any other type of exploitation)? To answer these questions one must look at each state’s definition, if it exists, of an “elder” “senior” or “vulnerable” individual. Most definitions will be found in a state’s general welfare or adult protective services statutes, but others may be found in criminal codes.
Identifying “who” comes within a protected class is essential to applying the rest of the framework. FINRA’s new Rule 2165 uses the term “Specified Adult” to delineate the class of persons covered by FINRA’s rule. A “Specified Adult” is defined as: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. Although broker-dealers must use this definition to build compliance programs for Rule 2165, they cannot ignore the necessity of complying with state definitions that may be broader than the FINRA protected class.
2. WHAT. The second line of inquiry should seek to establish whether a state has identified one or more types of prohibitive activity from which the state seeks to protect the class identified in the “who” analysis. To answer this question, firms must explore: (A) how each state defines “exploitation,” if at all; (B) whether the definition of “exploitation” includes financial exploitation; and (C) whether there is any specific linkage between the protected class and prohibited financial exploitation.
As noted above with respect to the “who” analysis, FINRA member firms need to consider how FINRA defines financial exploitation: under FINRA Rule 2165, it means:
(A) the wrongful or unauthorized taking, withholding, appropriation, or use of a Specified Adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority regarding a Specified Adult, to: (i) obtain control, through deception, intimidation or undue influence, over the Specified Adult’s money, assets or property; or (ii) convert the Specified Adult’s money, assets or property.
3. WHEN. The increasingly complex third layer requires firms to determine “when” action may or must be taken to report activity identified in layer two. Unfortunately, this layer is not as simple as reading and analyzing a definition in a state code. Instead, this layer contains two separate but related procedural and substantive sublayers. Substantively, firms must determine, based on state law, the threshold by which they may or must take appropriate action (e.g., is there a “reasonable basis” for believing that financial exploitation is occurring vs. a “suspicion” of the same). Procedurally, firms must also determine: (A) how much time they have to take appropriate action; (B) whether to report the underlying activity; or (C) whether to delay a particular transaction. In performing this analysis, broker-dealers need to keep in mind that a particular state may have a very defined reporting scheme, e.g., a state may require reporting by the earlier of the date on which the broker-dealer completes its own internal investigation or a specified number of days after a broker-dealer identifies a suspicious transaction.
4. HOW. The fourth layer requires firms to determine how, even if financial exploitation has been identified, the firm may or must act on its finding, including by taking action outside the four corners of the broker-dealer’s own legal enterprise. As with the other layers, states vary on the parties that may or must report or act upon such findings, sometimes limiting action to healthcare workers or family members. They also differ on the methodology of reporting, e.g., is the reporting entity obligated to report to one or another state agency? (see the “where” prong, below). Yet other states specifically identify certain financial institutions, including broker-dealers, as among those who must take action where substantive thresholds explained in layer three are met.
5. WHERE. Assuming a firm has successfully navigated the first four layers above, it must then decide where its findings may or must be sent, or to whom such information must be reported. Again, states vary on the correct answer. Some states have laws specific to financial exploitation, in which case such matters are often referred or reported to the relevant state financial regulatory body. Still other states address all reports of exploitation through their adult protective services or health and welfare departments.
Florida has at least four potentially relevant definitions related to financial exploitation between its criminal and civil statutes. Florida’s social welfare statutes define the state’s protected classes in two ways. “Vulnerable adult” is defined as “a person 18 years of age or older whose ability to perform the normal activities of daily living or to provide for his or her own care or protection is impaired due to a mental, emotional, sensory, long-term physical, or developmental disability or dysfunction, or brain damage, or the infirmities of aging.”4 “Elderly person” is defined in Florida’s civil statutes as “any person 60 years of age or over who is currently a resident of this state and has an intent to remain in this state.”5
Florida’s criminal statutes define its protected classes slightly differently from the civil terms – creating a higher threshold for protection by adding elements of mental capacity. The same term, “elderly person” in Florida’s criminal statutes is “a person 60 years of age or older who is suffering from the infirmities of aging as manifested by advanced age or organic brain damage, or other physical, mental, or emotional dysfunctioning, to the extent that the ability of the person to provide adequately for the person’s own care or protection is impaired.”6 “Disabled adult” means “a person 18 years of age or older who suffers from a condition of physical or mental incapacitation due to a developmental disability, organic brain damage, or mental illness, or who has one or more physical or mental limitations that restrict the person’s ability to perform the normal activities of daily living.” 7
New York defines “elderly adult” more simply as a person 60 years of age and older.8 Unlike Florida, there is no definition of a “vulnerable adult.” However, while the term is not included in a definition, the New York Department of Financial Services stated in 2015 that much of its guidance related to preventing elder financial exploitation “applies to adults who may be vulnerable to financial exploitation but are not elderly, including those who are dependent on caregivers or those with certain impairments.”9 Unlike Florida, there is no relevant equivalent of “elderly adult” in the New York criminal statutes.10
Both Florida and New York protect a younger and therefore broader group of persons, than are covered by FINRA Rule 2165. FINRA Rule 2165 defines the protected class as including a natural person age 65 and older; or a natural person with certain physical or mental impairments. The age requirement in Florida and New York begins at 60.11
Florida’s civil statutes do not contain a specific definition of “financial exploitation.”12 Rather, the general term “exploitation” includes actions with financial impact, including but not limited to breaches of fiduciary relationships, unauthorized taking of assets, and misappropriation of assets from personal or joint accounts.13
As with the “who” definitions above, Florida’s criminal statute provides a more specific definition of “exploitation of an elderly person or disabled adult.”14 One subsection of the definition, while similar to the civil statute, requires that the exploitation be perpetrated by a person “stand[ing] in a position of trust and confidence” or who “has a business relationship” with the elderly or vulnerable adult.15 Broker-dealers may view this definition as posing a particular challenge under their business models, e.g., when a business model by necessity includes a “business relationship,” what mechanisms can a broker-dealer employ to defend against an allegation of financial exploitation? If a firm’s supervisory systems cannot guarantee appropriate behavior by its agents in all cases at all times (and no firm can or does provide this guarantee), what is a firm’s potential exposure to criminal liability for criminal conduct? In this regard, the "good faith" efforts of a broker-dealer to protect a vulnerable adult from financial exploitation can be critical.16
New York defines “financial exploitation” as the “improper use of an adult’s funds, property or resources by another individual, including but not limited to, fraud, false pretenses, embezzlement, conspiracy, forgery, falsifying records, coerced property transfers or denial of access to assets.”17
FINRA’s Rule 2165 definition of “financial exploitation” is also quite complex and includes wrongful or unauthorized taking of the elderly person’s funds or securities.18
V. When: Substance and Procedure
Florida law requires reporting of exploitation of vulnerable adults and elderly persons.19 The reporter should “know” or “have reasonable cause to suspect” that the “vulnerable adult has been or is being abused, neglected, or exploited.”20 The statute does not allow for much, if any, time once the reporter establishes the substantive exploitation. Reporters must take action “immediately.”21 There is no similar reporting language in the criminal statute; as a risk mitigation matter, however, firms may want to consider erring on the side of reporting, regardless of whether the activity may rise to a criminal level.
Unlike Florida, New York does not require the reporting of financial exploitation of elderly or vulnerable adults. However, the New York Department of Financial Services (NYFS) strongly encourages financial institutions to do so.22 In other words, New York is a permissive, rather than mandatory, reporting state. In 2015, the NYFS released guidance noting that:
[f]inancial institutions can play a key role in preventing elder financial exploitation, yet it appears that they are underreporting cases of abuse to the relevant authorities even though they are permitted to report under state and federal law. The Department recommends that financial institutions in New York make greater efforts to protect the elderly from financial exploitation by adopting red flag protocols, enhancing staff training, and reporting suspected financial abuse to Adult Protective Services...or other authorities.
FINRA Rule 2165 does not include any reporting obligation for firms. However, it does provide the option for firms to “place a temporary hold on a disbursement of funds or securities” from the elderly or vulnerable person’s account.24 A firm must have a “reasonable belief” of the exploitation to place the temporary hold. The firm’s decision to place the temporary hold triggers a series of other obligations, both procedural and substantive, including notice to authorized parties or trusted contacts, initiating an internal review of the circumstances leading to its “reasonable belief,” and retention of all documents related to the same.25 Firms relying on Rule 2165 must also “develop and document training policies or programs reasonably designed to ensure that associated persons comply with the . . . [r]ule.”26
Neither New York nor Florida has any law similar to FINRA Rule 2165 related to the temporary hold of funds or securities where there is a reasonable suspicion of financial exploitation.27
In Florida, everyone must report exploitation, including broker-dealers. The broadly written statute states that “any person” must report such exploitation.28 Florida also provides details for the content the reports must contain, including the actions taken by the reporting firm.29
As noted above, firms in New York are encouraged, but not required, to report financial exploitation.
FINRA Rule 2165 contains no reporting obligation. However, under FINRA Rule 2165, certain associated persons of the firm (those serving in a legal, compliance, or supervisory capacity) may take action to place a temporary hold on the account in question. 30
All reports in Florida must be made to the Florida Abuse Hotline at 1-800-692-2873, or online through the Florida Department of Children and Families.31 If a firm is certain that the activity is criminal in nature, it may also contact local law enforcement.
New York’s adult protective services system is structured by county through the Office of Children and Family Services. Firms should call 1-844-697-3505 for the specific county in which to report exploitation.32
Unlike Florida, FINRA Rule 2165 lacks a reporting requirement. Firms should, however, keep ample record of any reports made to state regulators as a means of reasonable supervision over brokerage activity within the firm.
Financial exploitation of seniors and other vulnerable adults raises numerous challenges for broker-dealers, both in terms of protecting their own customer populations, and also in protecting themselves from potential civil and criminal liability. This alert covers issues representing only a fraction of those raised by this subject area; the web of laws and regulations will undoubtedly grow. Firms will be well-served in taking a proactive approach to understanding this topic in greater detail, including updating policies and procedures to reflect FINRA and state rules and laws, and providing training to employees in detecting, preventing, and reporting instances of financial exploitation. In this area, sleuthing is required.
1 FINRA issued its first report on the Helpline (the Helpline Report) in December 2016. The other states identified in the Helpline Report are: Arizona, California, Georgia, Illinois, Massachusetts, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, and Texas. See Report on the FINRA Securities Helpline for Seniors (Dec. 2015), https://www.finra.org/sites/default/files/Securities_Helpline _for_Seniors_Report.pdf.
2 See FINRA Regulatory Notice 17-11 (Mar. 2017) (announcing the SEC’s approval of new FINRA Rule 2165). See also 82 Fed. Reg. 10059 (Feb. 9, 2017) (SEC’s release approving the adoption of FINRA Rule 2165). FINRA Rule 2165 (and amendments to FINRA Rule 4512) become effective February 5, 2018.
3 For example, Delaware requires “financial institution” employees to report financial exploitation of account holders to the Delaware Department of Health and Social Services. Delaware includes broker-dealers and investment advisers in its definition of “financial institution.” See 31 Del Code tit. 31, §§ 39-3902, 3910 (2016). 4 Fla. Stat. § 415.102(28) (2016). This is the definition provided in the chapter of the Florida statutes containing instruction on mandatory reporting of exploitation. The definition of “elderly person,” while under the same Title XXX of Social Welfare, is provided in a separate chapter, Chapter 430. Fla. Stat. § 430.602(2) (2016). Criminal statutes in Florida contain different variations on the definitions. See Fla. Stat. § 825.101(4) (2016).
5 Fla. Stat. § 430.602(2) (2016).
6 Fla. Stat. § 825.101(4) (2016).
7 Fla. Stat. § 825.101(3) (2016).
8 See N.Y. State Dep’t Fin. Servs., Guidance for Financial Institutions on Preventing Elder Financial Exploitation 1, n.4 (Feb. 26, 2015), http://www.dfs.ny.gov/consumer/seniors/ltr150226_elder_exploit_prevent.pdf (citing New York Social Services Law section 473(6)(g) as the appropriate definition “because this is the age that New York State social services, including Adult Protective Services, uses”) [hereinafter NYFS Letter].
9 Id. at n. 2. This statement is specific to New York’s financial regulator, not necessarily to social services-related statutes. Firms should consider whether to include these individuals as part of their own internal policies and procedures.
10 There is a definition of “vulnerable adult” in New York’s Executive Laws on criminal justice, but it is not applicable in this context. See N.Y. Exec. Law § 837-f-1 (2016) (defining a “vulnerable adult” as “eighteen years of age or older who has a cognitive impairment, mental disability, or brain disorder and whose disappearance has been determined by law enforcement to pose a creditable threat of harm to such missing individual”).
11 See FINRA Rule 2165(a)(1).
12 Florida’s criminal code has numerous financially related definitions of “exploitation of an elderly person or disabled adult.” See Fla. Stat. § 825.103 (2016).
13 Fla. Stat. § 415.102(8)(a), (b) (2016).
14 Fla. Stat. § 825.103(1) (2016).
15 Fla. Stat. § 825.103(1)(a) (2016). This is not the only definition. Chapter 825 of Title 46 of the Florida Statutes contains five subsections (a) – (e) that describe activity that could meet the definition of “exploitation of an elderly person or disabled adult.” See Fla. Stat. § 825.103(1) (2016). Firms should familiarize themselves with all definitions.
16 Chapter 825 provides a subsection on “[g]ood faith assistance,” explaining that the statute is not intended to impose criminal liability on a person who makes a good faith effort to assist an elderly person or disabled adult in the management of the funds, assets, or property of the elderly person or disabled adult, which effort fails through no fault of the person.” Fla. Stat. § 825.105 (2016). See also Fla. State § 415.1036(1) (2016).
17 N.Y. Soc. Serv. Law § 473(6)(g) (McKinney 2017).
18 See FINRA Rule 2165(a)(4).
19 See Fla. Stat. § 415.1034(1)(a) (2016). The language in the statute is specific to reporting of abuse of a “vulnerable adult,” and not necessarily an “elderly person.” However, the Florida Department of Children and Families confirms that Florida law is intended to include “elderly” persons in this reporting mandate. See Fla. Dep’t Children and Families, Who Should Report Abuse? http://www.myflfamilies.com/service-programs/adult-protective-services/who-should-report-abuse (“Florida law requires the reporting of known or suspected abuse, neglect, exploitation or self-neglect of vulnerable adults (elderly or disabled)”) (last visited May 22, 2017).
20 Fla. Stat. § 415.1034(1)(a).
22 NYFS Letter, supra note 8 at 1.
27 A handful of states have adopted laws similar to FINRA Rule 2165 or to the North American Securities Administrators Association (NASAA) Model Act to Protect Vulnerable Adults from Financial Exploitation. See NASAA, Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation (Jan. 22, 2016), http://serveourseniors.org/wp-content/uploads/2016/09/Model-Act-and-Commentary-for-2017-Legislative-Session.pdf. The NASAA model act differs in several ways from the FINRA rule. The most recent state to move to adopt a related law specific to temporary holds on disbursements of funds or securities is Texas. Texas House Bill 3921, the Elder Abuse Financial Bill, was passed by the Texas legislature on May 25, 2017, and is awaiting expected signature from the governor. 28 Fla. Stat. § 415.1034(1)(a) (2016).
29 Id. at § 415.1034(1)(b).
30 The initial drafts of FINRA Rule 2165 would have restricted the ability to place the hold to certain “qualified persons” within the broker-dealer who were "reasonably related to the account of the Specified Adult." No such connection was included in the final rule. See FINRA Regulatory Notice 15-37 (Oct. 2015), https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-37.pdf.
31 See Fla. Dep’t of Children and Families, Report Abuse, Neglect or Exploitation, Vulnerable Adult Victim Report, https://reportabuse.dcf.state.fl.us/Adult/AdultForm.aspx.
32See N.Y. State Adult Protective Servs., Financial Exploitation of Elderly and Impaired Adults, http://ocfs.ny.gov/main/publications/Pub4664.pdf.
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