Are You Prepared for the Regulatory Audit of Your Senior Program?

Financial Institutions Law Alert

 

The honeymoon is over for firms that have yet to establish and implement protocols to protect senior and vulnerable investors (“Seniors”). February 2019 marked the one year anniversary since FINRA’s amended and new Seniors rules went live.1  Recent FINRA guidance has changed in tone, demonstrating a clear intention by the regulator to examine member firms’ compliance with the new rules, and many firms have already received exam notices and targeted requests focused on their Seniors programs.

Although FINRA has been the most active regulator in the Seniors space, firms should expect state regulators and the SEC’s Office of Compliance Inspections and Examinations (OCIE) to focus on similar topics in exams and targeted requests. Adding to the complexity, different regulators have issued “vulnerable client” requests with varying parameters and focus – some have focused on age, while others have focused on capacity – and firms need to be prepared to demonstrate why their programs are robust enough to account for these different characteristics.

What To Expect

Based on recent guidance and presentations, and through our consultation with firms recently contacted by regulators, we crafted a comprehensive list of issues that you should expect regulators to address when they come knocking:

  • How does your firm define a “senior” customer?
  • What percentage of your client base is 62 or older?
  • What is the total of assets under management at your firm for clients 62 or older?
  • Does your firm have a dedicated person or task force responsible for Seniors issues?
  • How does your firm monitor Seniors client accounts differently from other client accounts?
  • What are your policies and procedures that specifically address:
    • Special requirements for opening and updating senior customer accounts;
    • The collection of information on trusted points of contact;
    • Updates to investment guidelines for aging clients;
    • Holds on disbursements or transactions;
    • Identifying clients with possible diminished capacity; and
    • Identifying potential financial exploitation?
  • For your client-facing personnel, what kind of training have you implemented specifically addressing Seniors?
  • Does your firm code accounts for vulnerable/diminished capacity clients, and can it generate reports identifying vulnerable/diminished capacity clients and their accounts?
  • What escalation system does your firm have in place for suspected financial exploitation?
  • How does your firm identify trusted points of contact for Seniors?
    • Does your firm have a process in place for identifying trusted points of contact for existing clients (as opposed to new clients)?
  • Has your firm updated client agreements to address:
    • The right to seek judicial or administrative intervention where suspected financial abuse is suspected;
    • The right to refuse to execute a disbursement or transaction; and
    • The right to contact family or other third parties reasonably associated with the account who are not authorized parties or listed trusted contact persons?
  • How does your firm notify Seniors about additional authorizations on their account?
  • How many times has your firm reported suspected financial abuse to regulators, law enforcement or administrative agencies?
  • Explain the circumstances under which your firm may restrict a customer’s account due to suspected financial abuse.
  • Describe an example of how your firm has helped prevent or resolve an issue involving suspected exploitation related to a senior customer.
How to Prepare

Regulators have already stated that firms need to do more than just revise their policies and procedures. Firms need to be prepared to show how their systems actually work to train employees, detect suspected abuse, escalate suspicions and implement protective measures and document their processes. Firms can better position themselves to respond to regulators by taking the following steps:

  • Review the parameters used in your supervisory systems to ensure that those parameters account for Seniors, are able to isolate that client base and capture relevant data (e.g., assets under management, securities holdings, risk profiles and investment objectives).
  • Develop mandatory training systems that provide practical guidance for identifying potential abuse.
  • Maintain clear lines of reporting for escalation of suspected financial abuse.
  • Update client agreements and account opening documentation to account for specific senior and vulnerable client issues, such as potential forms of firm recourse and the rights and obligations when firms suspect client abuse.
  • Document instances where your firm addressed senior or vulnerable client exploitation, including any lessons learned and how your firm adapted following those experiences.
In addition, please keep in mind the following general tips for handling an onsite regulatory exam:

  • Designate a workspace for the examiner, including access to a copier.
  • Designate one or more employees to interface with the regulator. The point of contact should get to know the examiner and develop a good, communicative working relationship. The point person can be responsible for documenting the exam process.
  • During the initial meeting, ask the examiner to describe the nature and scope of the exam, as well as the process and to provide an estimate of how long the onsite exam is expected to last.
  • Consider providing copies of requested documents to the examiner in advance, keeping in mind that the examiner will likely request additional documents and records during the exam.
  • In the event the examiner identifies potential exceptions or violations, consider whether your firm can address the issue before the exam concludes; and
  • Keep in mind that cooperation and truthful communication are the keys to a successful onsite exam.
Seniors issues are certain to remain a regulatory priority in the coming years. Spending the time and resources to align procedures and processes with industry standard now will enhance your firm’s chances of successfully navigating an exam in the future.


1 Amended Rule 4512 (requiring firms to make reasonable efforts to obtain trusted contacts for retail accounts) and new Rule 2165 (supervision and controls to prevent financial exploitation of seniors).