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Protecting elderly clients against fraud has become a higher priority for advisers after the Financial Industry Regulatory Authority (Finra) introduced rules last month designed to tackle embezzlement and improve reporting of these crimes.
On February 5, the self-regulatory organisation that governs US broker-dealers introduced a rule that requires members to make reasonable efforts to obtain a name and contact information for a trusted contact person on a vulnerable customer’s account. A further directive, known as the “senior rule”, authorises Finra member firms to place a temporary hold on funds or securities when there is a reasonable belief of financial exploitation.
“The rules provide firms with additional tools to combat senior financial abuse, particularly in situations where someone outside of the securities industry is committing the abuse,” says Finra.
The trusted contact rule aims to give more scope to advisers to report suspected fraud against the elderly by helping negate the obstacle of competing privacy regulations.
Crucially, the rules also aim to align reporting at a national level as an improvement on the current fragmented framework.
Data compiled by the Stetson Law School Elder Consumer Protection Program reveals only a handful of US states have laws dictating mandatory reporting to authorities by individuals who suspect malfeasance or financial abuse of clients while acting in a fiduciary capacity.
As advisers come into contact with more cases of seniors suffering conditions such as dementia or Alzheimer’s disease, they are faced with a growing challenge of how to respond when they spot or suspect foul play.
“As recently as 10 years ago, there were no definitive standards across states for what constituted senior fraud,” says Joseph Borg, president of the North American Securities Administrators Association (NASAA). “But as the number of seniors is rising, advisers are encountering higher instances of conditions like dementia or senility, so regulations and laws need to change to reflect the demographic shift.”
Finra has singled out microcap schemes — securities scams involving companies that do not have to meet any minimum financial standards — as a particular area of fraud concern.
Industry experts also point to other areas where the elderly have been vulnerable recently.
Mr Borg, whose organisation works with local state governments to improve investor protection, says single or widowed seniors are vulnerable to financial scams on online dating platforms and homecare provision.
Timothy Wyman, managing partner at the Center for Financial Planning, adds that the elderly can also be at risk from family members or carers as well as their advisers.
“Some people are working with seniors with diminished capacity and they simply steal from them. That is hard for firms to monitor or regulate,” he says. “Then, you get some advisers pushing unsuitable products such as non-publicly traded Reits [real estate investment trusts] that pay high commissions, which is done in the name of high compensation.” Finra can ban them, he says, but those who do not want to abide by its rules can sign up with the Securities and Exchange Commission as registered investment advisers, which Mr Wyman says is a problem.
Mr Wyman thinks advisers are responding to the new rules swiftly but says the better advisers were ahead of this curve.
“There are some broker-dealers now putting entire teams together for senior investors and because of the new rules they need to do that,” he explains. “But with the new rules, successful brokers were already capturing information and putting reporting measures in place when it was not a requirement. That should have been a good business practice.”
The risk of family members being perpetrators is a particular concern for advisers, who must tread a cautious line between reporting suspected fraud but also being careful not to risk losing client business.
Marve Ann Alaimo, a partner specialising in estate planning at Porter Wright Morris & Arthur, acknowledges Finra’s attempt to improve this but says the rules could do more to address the family risk problem.
“Finra is trying to give the brokers a more comfortable method,” she says.
“My criticism is that sometimes clients have trusted family members to contact but when the client starts to [lose independence] the family member takes advantage, so the senior rule does not cover what it needs to cover.”
Finra does not currently publish data specific to mistreatment of elderly clients but says its new rules were introduced amid a rise in referrals of fraud and insider trading cases, which went to “more than 850” in 2017, compared with 785 in 2016.
The regulator says firm responses to the rules have been “very positive”, but on the broker side concerns remain that senior fraud could be better addressed with greater alignment between regulatory bodies.
“There is, dare I say, some conflict or competition between Finra and the SEC’s fiduciary standards and there could be more harmonisation,” says Mr Wyman.
But Ms Alaimo says more action is needed at a higher level than regulators. “Financial exploitation of seniors is more top of mind at a state level but at federal level it is not touching lawmakers in the same way it affects their constituents,” she explains. “It would be great if the federal government took more responsibility in drafting more uniform laws.”