As America’s population ages and elderly and vulnerable adult statutes and administrative rules proliferate, FINRA claims for abuse or exploitation have and will continue to increase. This article explores many of the issues this poses for FINRA, practitioners and member firms, and suggests how to manage them.1
America’s Aging Population and the Spread of Elder Abuse
More than 50 million Americans are currently age 65 or older, and that number is projected to reach more than 73 million by 2030.2 The growth rate of the senior population for the current decade will be nearly three times the rates seen in earlier decades, as baby boomers continue to reach 65. Baby boomers control over 70% of the nation’s disposable income,3 and it is estimated that their assets will peak at $26 trillion in 2029.4
This population growth has led to an increase in the number of financially exploited seniors. $2.9 billion is lost each year to financial exploitation of seniors and vulnerable persons.5 In a June 2018 report, the U.S. Securities and Exchange Commission highlighted research finding that more than 6% of the senior population is exploited each year (and many more cases go unreported). By 2025, the study projects that more than 4 million instances of financial exploitation will occur. This should lead to an increase in elder abuse claim filings with FINRA, presenting challenges for the forum and the attorneys who practice before it.
The Beginning of the Upward Trend of FINRA Elder Abuse Claims
FINRA publishes monthly statistics breaking down the “type of controversy” involved in each of the arbitrations it oversees.6 Cases can be coded to more than one type of controversy. Initially, FINRA included ten controversy types. Starting in 2015, FINRA has reported the monthly “top 15” controversy types.
Elder abuse claims first appeared in the top 15 in December 2017, where they have remained through the present. In 2018, 5% of all claims filed were identified as elder abuse claims. Through April of this year, the percentage has increased by 20%, as claims identified as belonging in this category are now 6% of all filed claims. These numbers do not include claims by elderly customers in which theories of liability in the Statement of Claim do not specifically include elder abuse, but which involve a variety of issues related to seniors.
Statutes and Regulations
Statutes and rules designed to combat elder abuse have also multiplied in recent years. At the federal level, the Senior Safe Act of 2018 was enacted to encourage financial institutions to report potential elder exploitation. The Act is not mandatory, but, for an institution willing to train its employees to identify and report abuse, the Senior Safe Act provides civil and administrative immunity for making such reports “in good faith” and “with reasonable care” to designated state and federal authorities and regulators.7
All states have passed adult protective services statutes related to how and when to report elder abuse, and almost half of the states have passed “report and hold” laws.8 State laws generally protect persons 60 years old or older (as well as persons over 18 with diminished physical or mental capacity). Some state adult protective services statutes require reporting of elder abuse, while others permit it, and states have different protocols and time frames for reporting. Good faith reporting triggers immunity from civil/criminal liability. “Report and hold” statutes additionally permit temporary holds of suspicious disbursements and/or transactions, and disclosures to certain third parties. Holds are allowed only where the firm suspects exploitation of the senior or vulnerable investor, not just diminished capacity.
FINRA has been the most active financial services regulator in this space. New FINRA Rule 2165 became effective in February 2018, as did FINRA’s amendment to existing Rule 4512.
Rule 4512(1)(f) requires that, when opening or updating a non-institutional account,9 a firm make reasonable efforts to obtain the name and contact information for a trusted contact person, with whom the firm can discuss the customer’s account to address possible financial exploitation and confirm certain customer information such as current contact information, health status, or identity of any legal guardian or holder of a power of attorney.
Rule 2165, aimed at protecting persons who are 65 or older and/or vulnerable, permits the firm to place an initial 15-business-day temporary hold on suspicious disbursements of funds or securities if the firm has a reasonable belief that financial exploitation is occurring. Only designated supervisory, compliance or legal firm personnel can place, end or extend a hold. Within two days of placing the hold, the firm must send notification to all persons authorized to transact business in the account and to the trusted contact person, unless the firm reasonably believes that any such persons are engaged in the financial exploitation.
Pursuant to Rule 2165, the firm must immediately conduct an investigation of the facts giving rise to the suspicion of financial exploitation, and, should that investigation support the reasonable belief that exploitation is occurring, may extend the hold for an additional 10 business days. The rule defines “financial exploitation” as (1) the wrongful or unauthorized withholding or misappropriation of funds or securities; and, (2) any act or omission to obtain control, by improper means, over property or to convert property. Only the suspicious disbursement can be stopped, as the rule does not authorize the firm to stop suspicious investment transactions.
Firms relying on Rule 2165 must also establish and maintain written supervisory procedures and training policies reasonably designed to achieve compliance with the rule, such as procedures related to the identification, escalation and reporting of matters related to the financial exploitation of the elder or vulnerable adult. The firm must also keep records of, among other things, the data supporting the reasonable belief that exploitation justifying a hold is occurring, and the giving of notification of the hold.
Protecting the Elderly or Vulnerable Adult
Financial firm employees are not doctors or psychologists, and there is a natural tension between the desire to protect vulnerable seniors and the obligation to respect an elderly investor’s privacy, choices and desires. Known signs of possible diminished capacity to consider include:10
- Making decisions inconsistent with history or stated goals, such as dramatic, unexplained shifts in investment style or unusual transactions
- Interest in “get rich quick” schemes
- Sudden withdrawals or changes in amount/frequency of withdrawals
- Inability to understand important or basic aspects of the account
- Family/friends/new acquaintances who show extraordinary interest in assets/belongings
- Abrupt changes in a trusted contact, beneficiary or estate planning documents
- Memory loss
- Change in appearance
- Suspicious signatures or documents
- Inability to pay bills or multiple bills at the same time, bouncing checks
- Repeated calls to reset online account access
To protect clients and avoid claims, FINRA member firms should implement preventative measures. Such measures may include:
- Centralizing resources and reporting/hold functions
- Encouraging financial advisors and supervisors to increase contact with older clients, including in-person meetings
- Being vigilant with POA/guardian accounts
- Creating automatic supervisory reviews for distributions on accounts with POAs/guardians or for retirement accounts
- Training employees to detect and properly report elderly exploitation
- Educating clients about the risk of exploitation and the resources to prevent it
- Involving third parties such as family, friends or law enforcement
- Delaying disbursements where financial exploitation is suspected
Rules or statutes designed to prevent exploitation of the elderly or of vulnerable adults will be deployed as a basis for additional claims in FINRA arbitration. The FINRA rule changes, for example, raise the following litigation potential:
- Rule 2165 does not require a hold even if the firm suspects financial exploitation. Counsel for claimants, nevertheless, may well use the rule as a basis for negligence or other breach of duty claims where the firm suspects or is actually aware of exploitation and does not take any steps to protect an elderly client.
- The other side of the coin is also a concern. Rule 2165 requires a “reasonable” belief that financial exploitation is taking place. An elderly client whose assets have been placed on hold may bring a claim attacking the “reasonableness” of the firm’s belief and alleging that the wrongful freezing of her account has caused her lost profits or other damages.
- The supplementary materials to Rule 2165 mandate that firms implementing the rule develop and document training policies “reasonably designed to ensure that associated persons comply with the requirements of this Rule.” This could give rise to claims that the training policies were defective or negligently implemented.
- A client may not provide the “trusted contact” information requested under Rule 4512, leading to subsequent claims that the firm did not make “reasonable efforts” to obtain such information.
- When a “trusted contact” is provided, that person is often close to the client and may be in a position to exploit her. Claims that such exploitation occurred and the firm negligently assisted in it may arise.
- Similarly, a “trusted contact” may also be a beneficiary of the client’s account or will. Claims based on adverse consequences from the firm’s communicating to the “trusted contact” the client’s desire to make changes that adversely affect the “trusted contact” could also arise.
- An exploiter may persuade the client to request a change of the “trusted contact.” This leaves the firm vulnerable to claims regarding its honoring or dishonoring the client’s request.
Composition of Arbitration Panels
In managing the expected increase in elder exploitation claims, the composition of FINRA arbitration panels is also a consideration. For example,
- Is a potential arbitrator a professional likely to have dealt with diminished capacity issues in the course of doing her work?
- Is the potential arbitrator himself elderly and has he experienced some diminution of his faculties?
- Has the potential arbitrator herself dealt with a loved one suffering from diminished capacity?
- Will an aging panelist resent a firm’s efforts to limit an elderly investor who is asserting her competency to decide her own financial affairs?
FINRA has recognized that its arbitrator pool has a significant number of elderly persons. Therefore, practitioners must make thoughtful and delicate decisions regarding arbitrator selection.
FINRA has committed to expedite proceedings for claims involving elderly customers. While it cannot shorten the time requirements in the Code of Arbitration Procedure, FINRA will endeavor to expedite arbitrator selection, scheduling of the pre-hearing conference, service of the final award and inquiries regarding the parties’ interest in mediation. FINRA will also honor the parties’ agreement to shorten the time requirements under the Code. And, FINRA instructs arbitrators to press for early hearing dates and discovery deadlines that will expedite the process, while still providing for a fair amount of time for case preparation.
The challenges for FINRA, its member firms and investment professionals in managing the expected increase in claims from elderly investors are numerous. But sound planning, training and supervision will greatly assist in reducing and processing such claims, while protecting the elderly or vulnerable customer.
1 Special thanks to my fellow members of the Bressler Senior and Vulnerable Investor Group, whose thoughtful analysis and research vastly contributed to this article.
2 Unless otherwise noted, population data in this article was taken from the U.S. Census Bureau at https://www.census.gov/.
3 Baby Boomer Report 2015, U.S. News & World Report.
4 Val Srinivas and Urval Goradia, “The Future of Wealth in the United States,” Deloitte Center for Financial Services (Nov. 9, 2015).
5 Metlife Mature Market Inst. et al., The Metlife Study of Elder Financial Abuse: Crimes of Occasion, Desperation, and Predation Against America’s Elders (June 2011).
6 See https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics#top15controversycustomers.
7 See Senior Safe Act Fact sheet at www.finra.org/sites/default/files/senior-safe-act-factsheet.pdf.
8 See map of senior and vulnerable investor laws by state at www.bressler.com/senior-map.
9 “Institutional accounts” are defined as the accounts of financial institutions such as banks and insurance companies, registered investment advisers, or persons with total assets of at least $50 million.
10 For a comprehensive treatment of red flags, see NASAA, A Guide for Developing Practices and Procedures for Protecting Senior Investors and Vulnerable Adults from Financial Exploitation (September 2016); FINRA Regulatory Notice 07-43, Senior Investors (September 2007).