As the American population ages and the world becomes more technologically complex, financial exploitation has become more common. Senior citizens and people with certain disabilities are often the most affected. The Financial Industry Regulatory Authority (FINRA) recently shared the following:
Each day for the next 12 years, an average of 10,000 Americans will turn 65. Con artists tend to target older people, in part, because they are more likely to have built up nest eggs, according to the FBI. And the U.S. Department of Justice estimates that $3 billion is stolen or defrauded from millions of elderly Americans every year.
In January 2016, the North American Securities Administrators Association (NASAA) adopted a model rule designed to protect vulnerable adults from financial exploitation. Under the rule, a vulnerable adult is:
To understand how financial professionals protect these clients, we’ll cover:
To protect clients effectively, a professional first needs to understand what counts as exploitation. NASAA’s model rule defines financial exploitation as:
The wrongful or unauthorized taking, withholding, appropriation, or use of money, assets or property of an eligible adult; or
Any act or omission taken by a person, including through the use of a power of attorney, guardianship, or conservatorship of an eligible adult, to:
… Obtain control, through deception, intimidation or undue influence, over the eligible adult’s money, assets or property to deprive the eligible adult of the ownership, use, benefit or possession of his or her money, assets or property; or
… Convert money, assets or property of the eligible adult to deprive such eligible adult of the ownership, use, benefit or possession of his or her money, assets or property.
In plain terms, financial exploitation is the theft or misuse of a vulnerable adult’s money or assets. It can happen in many settings and through many relationships. Here are a few real-world examples:
When a financial professional reasonably believes a vulnerable adult is being financially exploited, the firm must notify the proper authorities. This responsibility falls on qualified individuals, meaning any agent or investment adviser representative (IAR) who serves in a supervisory, compliance, or legal role for a broker-dealer or investment adviser.
These are the registered individuals at securities firms who handle sensitive situations - typically managers, directors, partners, or officers. In many cases, a qualified individual begins investigating after a colleague reports a concern. For example, an IAR might tell their manager they believe a client is being taken advantage of by a family member.
Two authorities must be notified promptly:
Each state runs its own APS program, but the core responsibilities are similar:
Once notified, these authorities take appropriate action. When disclosures are made in good faith, financial professionals receive immunity from punitive actions and civil liability. In other words, qualified individuals generally don’t face administrative or legal consequences for reporting suspected exploitation in good faith.
NASAA’s model rule also allows qualified individuals to contact third parties that the vulnerable adult has specifically designated. When opening a brokerage account, firms typically ask investors to name a trusted contact person, defined as:
A “trusted contact person” is a person that you authorize your brokerage firm to contact if your broker has a reasonable belief that your account may be exposed to possible financial exploitation or fraud.
Clients are encouraged to choose a close family member or friend who is at least 18 years old. While naming a trusted contact person usually isn’t required to open an account, it’s strongly recommended (unless it’s an institutional account).
As with disclosures to authorities, qualified individuals receive immunity from punitive actions and legal liability when third-party disclosures are made in good faith.
Beyond disclosures, qualified individuals may delay disbursements (withdrawals) when financial exploitation is reasonably believed to be occurring. This matters because exploitation often involves pressuring or coercing a vulnerable adult to withdraw funds so someone else can take them. For example, two individuals stole nearly $100,000 from an elderly person with dementia by gaining withdrawal access to the person’s financial accounts. If a firm identifies a suspicious withdrawal request in time, it may be able to stop the money from leaving the account.
When exploitation is suspected, the NASAA model rule sets specific procedures for a disbursement delay:
First, the firm must provide written notification of the restriction and the reason for it within two business days of the requested disbursement. The notice goes to all parties authorized on the account, unless a party is suspected of being involved in the exploitation.
The firm must also notify the proper authorities within the same time frame (no more than two business days after the requested disbursement).
The firm must continue investigating to determine whether exploitation is occurring. Any additional findings must be provided to authorities within seven business days of the original disbursement request.
The NASAA model rule also sets limits on how long the delay can last. The delay expires upon the sooner of:
*The authorities are the same organizations required to be notified (as discussed above) - APS and the state administrator.
Only the court system can extend a disbursement delay beyond these timeframes. To continue the restriction past the limits above, a broker-dealer or investment adviser must receive a court order signed by a judge.
Securities firms must provide client records to APS or law enforcement to support investigations into suspected exploitation. This same requirement also applies to investigations unrelated to vulnerable adults.
When legal authorities present warrants or other legal mandates, firms must provide access to non-public client records upon request. These authorities include:
NASAA has the following to say about free lunches:
A common setting for fraudsters to engage with their victims is by offering a free lunch or dinner seminar for older investors interested in learning more about investing in retirement. Often, attendees of these free seminars are pitched unsuitable or fraudulent investment products and pressured into providing personal information. Remember: there’s no such thing as a free lunch.
A free meal in exchange for attending an investment seminar can be tempting. However, these events have a long history of high-pressure sales tactics, including pushing attendees to invest before leaving. Senior citizens and other vulnerable adults are often targeted.
To help prevent deceptive free lunch seminars, NASAA has teamed up with the AARP to train and send free lunch seminar monitors to these events. If fraud is occurring, the monitors report it to the appropriate state administrator.
Some financial professionals have created misleading or false designations to appear uniquely qualified to work with certain clients. In recent years, this has been a particular issue with “senior” designations. NASAA warns:
Seniors should carefully check the credentials of individuals holding themselves out as “senior specialists.” Some of these individuals hold nothing more than a “designation” as “senior specialists” implying that they have expertise in assisting seniors when in fact they have received no significant education or training in senior financial matters.
Those who create fake designations related to senior citizens are subject to criminal penalties. Examples of false designations include:
There are also legitimate designations that may be used when a person has met the required qualifications. These include:
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