Alert
07.28.2020

This month, a working group within the Senior Issues/Diminished Capacity Committee of the North America Securities Administrators Association (“NASAA”) published findings in connection with its research on issues of diminished capacity and cognitive impairment among financial professionals.  Diminished capacity among employees in the financial sector raises complex and unique issues concerning effective client service and compliance with securities laws, the Report noted, such as standards of conduct, continuing education, client data, books, and records, fraud, supervision, trades and service to clients, disclosures, and client harm.

In conducting its research, the working group, which interviewed broker-dealers, investment advisors, and compliance consultants of various sizes, focused on the following issues:  (1) how financial professionals with suspected cognitive impairment are identified by firms; (2) challenges firms face that prevent them from addressing employees with suspected cognitive impairment or diminished capacity; (3) practices or tools used by firms when they do address such individuals; and (4) the role, if any, securities regulators may have in assisting firms with addressing such issues. 

According to NASAA’s findings, firms that were able to identify diminished capacity issues among their workforce did so primarily through electronic surveillance, client complaints, and observations by firm staff.  One method identified was the electronic monitoring of call logs and trade corrections of professionals suspected to have diminished capacity in comparison to a peer group.  Another was the analysis of internal data to identify trends of the professional with suspected capacity issues in comparison to the behavior of his or her peers.  While client complaints were identified as a source of diminished capacity reporting, many firms noted that clients were generally not a reliable source, as some were reluctant to upset long-term relationships with their professional, or simply just switched representatives when issues arose without notifying the firm of potential capacity issues.  Some firms consulted by NASAA advised that they received notice of a representative’s capacity issues from compliance staff, assistants, and other employees, particularly where such employees had day-to-day contact with the affected person.  In these situations, according to NASAA, the firms felt that workforce training on red flags for detecting elder abuse and diminished capacity in customers was equally applicable to identifying such issues with financial professionals.

As for challenges in addressing workforce cognitive decline, the three mostly commonly identified were legal issues (such as discrimination, medical privacy, and unlawful termination lawsuits), human resource issues, and U5 disclosures. The research participants additionally indicated that the identification of capacity issues could be hindered by attempted hiding or covering of the condition or problematic behavior by persons close to the individual.  Challenges in identifying and addressing potential cognitive decline appear to be enhanced for firms with smaller or remote offices, as firms reported the most common source of discovery as being reports from coworkers with day-to-day interactions with the affected individual. 

Communication, education and training, and succession planning were the three tools most commonly identified by firms of various sizes and business models as being effective in addressing situations involving affected representatives.  According to the Report, firms with a formal plan to address circumstances involving an employee exhibiting signs of diminished capacity or cognitive decline had the best outcomes. 

According to the Report, industry professionals believe regulators should play a role in identifying issues in this space and in setting guidelines and goals on how such issues should be addressed.  In response, NASAA states that raising awareness among firms about resources available, encouraging the implementation of succession plans, and offering retirement tools throughout employees’ careers are major components in more successfully dealing with the issue of cognitive decline in the financial workforce.  In particular, NASAA’s Report recommends that firms consider the following in developing strategies to deal with this growing issue: (1) risk assessment (whether there are factors specific to the firm’s size or business model that may present particular challenges), (2) supervision (developing policies on reporting and following up on red flags, using error reports or other electronic surveillance, and engaging in additional or heightened supervision where appropriate), (3) training staff on spotting and reporting red flags among the workforce, and (4) succession planning (considering encouraging or requiring succession planning for all employees regardless of age).

While much attention has been paid to the aging customers of financial institutions, less attention has been directed toward the aging of those that advise them.  Given that 26% of financial industry representatives are age 55 and older, and one in ten people age 65 and older suffer from Alzheimer’s disease, the issues surrounding diminished capacity among financial advisors are certain to grow.  NASAA’s report is an important first step in increasing industry attention on the development of successful strategies to navigate this sensitive space.

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