Protecting vulnerable adults

As the American population ages and the world becomes more technologically complicated, financial exploitation becomes more prevalent. Senior citizens and people with certain disabilities tend to be the most affected. The Financial Industry Regulatory Authority (FINRA) provided this quote recently:

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 to protect vulnerable adults from financial exploitation. According to the rule, a vulnerable adult is defined as:

• A person age 65 or older, or
• A person age 18 or older that cannot protect their own interests

To better understand how financial professionals protect this type of client, we’ll cover the following:

• Financial exploitation
• Governmental disclosures
• Third-party disclosures
• Disbursement delays
• Client records

Financial exploitation

Before a professional can protect their clients, they must know what to protect them from. 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 simple terms, financial exploitation occurs when money or assets are stolen. This can occur in many different circumstances and scenarios. Here are some real world examples:

• Lawyer steals over $1 million from 21 disabled clients
• Caretaker steals $750,000 from 91-year-old dementia patient
• Scammer steals $260,000 from 68-year-old autistic man
• Facility manager steals $50,000 from residents with severe disabilities

Governmental disclosures

Financial professionals must notify the proper authorities when financial exploitation of a vulnerable adult is reasonably believed to occur. This responsibility is placed on qualified individuals, defined as any agent or investment adviser representative (IAR) in a supervisory, compliance, or legal capacity for a broker-dealer or investment adviser. These are the registered individuals at securities firms that handle sensitive situations and are typically managers, directors, partners, or officers. In most circumstances, qualified individuals investigate potential exploitation after being notified by colleagues or subordinates. For example, an IAR tells their manager they believe their client is being taken advantage of by a family member.

Adult Protective Services (APS) and the state administrator are the two authorities that must be notified promptly. Each state maintains its own APS, but each program operates similarly. Typical responsibilities are:

• Investigating potential abuse, neglect, or exploitation
• Offering protective services to those affected
• Facilitating the support of trusted family and friends
• Involving law enforcement if necessary

The notified authorities will take the appropriate actions once notified. Financial professionals gain immunity from punitive actions and civil liability when proper disclosures are made in good faith. In other words, qualified individuals need not worry about administrative or legal consequences when reporting potential financial exploitation. Bottom line - the authorities must be notified if exploitation is suspected!

Third-party disclosures

The NASAA model rule allows qualified individuals to contact third parties specifically designated by the vulnerable adult. When opening a brokerage account, firms typically ask investors to provide a trusted contact person, which is 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.

It is recommended that clients identify a close family member or friend at least 18 years old for this role. Although adding a trusted contact person is not required to be specified to open an account, it’s highly recommended (unless it’s an institutional account). Similar to making disclosures to authorities, immunity from punitive actions and legal liability is provided when third-party disclosures are made in good faith.

Disbursement delays

In addition to making proper disclosures, qualified individuals are empowered to delay disbursements (withdrawals) if financial exploitation is reasonably believed to occur. There have been many real world circumstances involving a person coercing a vulnerable adult to withdraw money so it can be stolen. For example, two individuals stole nearly $100,000 from an elderly person with dementia by gaining withdrawal access to their financial accounts. If instances like this are caught “in the act,” securities firms can prevent the disbursements from occurring.

Assuming exploitation is believed to be occurring, the NASAA model rule establishes specific protocols for disbursement delays. First, written notification and the reason for the restriction must be provided within two business days of the requested disbursement. All parties authorized on the account are provided the notification unless they are suspected of being involved in the exploitation.

The proper authorities must be notified within the same time frame (no more than two business days after the requested disbursement). The firm must continue its investigation in an effort to confirm the exploitation and turn over the additional findings to authorities within seven business days of the original disbursement request.

The NASAA model rule also establishes timeframes in which the disbursement delay will expire. In particular, the delay expires upon the sooner of:

• The firm confirming financial exploitation will not occur
• 15 business days after the delay was imposed unless extended by authorities*
• If extended by authorities, 25 business days after the delay was imposed

*The authorities are the same organizations required to be notified (as discussed above) - APS and the state administrator.

Only the legal court system can extend a disbursement delay further. A broker-dealer or investment adviser must be presented with a court order signed by a judge to expand the restriction beyond the timeframes discussed above.

Client records

Securities firms must provide client records to APS or law enforcement to assist with investigations into the suspected exploitation. This same rule applies to inquiries for events unrelated to vulnerable adults. Legal authorities with warrants or other legal mandates must be provided access to non-public client records upon request. These authorities include:

• Local law enforcement
• The Internal Revenue Service (IRS)
• The Federal Bureau of Investigation (FBI)

Free lunches

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.

The offer of free food in return for attendance in an investment seminar can be enticing. However, there’s a long track record of pushy sales representatives pressuring attendees to invest prior to leaving the event. Senior citizens and other vulnerable adults tend to be preyed upon the most. To prevent deceptive free lunch seminars from occurring, NASAA has teamed up with the AARP to train and send free lunch seminar monitors to these events. If fraud is occurring, these monitors make reports to the appropriate state administrator.

Misleading senior designations

Some financial professionals have been known to create misleading and false designations to appear uniquely qualified to handle a type of client. In particular, there have been a number of instances related to senior designations over the past decade. Let’s again quote NASAA on this topic:

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 that create fake designations related to senior citizens are subject to criminal penalties. Examples of false designations include:

• Senior specialist
• Certified senior adviser
• Qualified elder consultant
• Registered senior citizen planner

There are a number of legitimate designations that may be referenced if a person has passed the necessary qualifications. These include:

• Certified financial planner (CFP)
• Chartered financial analyst (CFA)
• Chartered financial consultant (ChFC)
• Certified Investment Management Analyst (CIMA)