Views on improving the integrity of global capital markets
22 December 2015

Investment Industry Regulators Tackle Financial Exploitation of Older Adults

Recent regulatory proposals by the North American Securities Administrators Association (NASAA) and Financial Industry Regulatory Authority (FINRA) aimed at protecting older adults from financial exploitation represent but the most recent attempts by regulators and industry groups to rein in the unscrupulous practices that take advantage of the elderly and disadvantaged. Although different in certain respects, both proposals would protect investment firms and agents from liability when they act or do not take certain actions (e.g., execute a trade directed by their elderly client) upon reasonable belief that their client is at risk of exploitation.

How have we come to singling out this subset of investors for additional protection? With approximately 10,000 baby boomers turning 65 daily for the next 15 years, this burgeoning population apparently is ripe for financial mistreatment, especially factoring in the presumptive diminished mental capacity that seems to accompany aging populations. Both proposals cast the net even wider to include “vulnerable” adults, including those who have otherwise diminished mental capacity, not just the elderly.

View related blog post on how the CFA Institute Code of Ethics and Standards of Professional Conduct incorporate several principles that address the special elements of client engagement relating to working with senior investors.

According to NASAA, the Securities and Exchange Commission, and various other organizations, one of the greatest sources of financial fraud, sadly enough, is the victim’s own family. This may be exacerbated by the fact that retirement plans have moved from defined benefit plans (that came with professional advisers) to defined contribution plans, and rollover accounts (IRAs) can keep the investment decision making with individuals. Regardless, it’s one thing to prohibit regulated entities like advisers or brokers from defrauding their customers, but how does one go about protecting an individual from a family member?

Following the lead of several state securities regulators, who have enacted rules allowing advisers to “pause” certain transactions, NASAA has crafted a Model Act that states can use to enact new legislation or regulations. It would shield advisers and others in the financial sector from liability when refusing to take certain client-directed actions from their elderly clients upon reasonable cause to believe those actions would perpetuate an exploitation of that individual. While much attention has been focused on protecting those of a certain age, NASAA’s proposal also includes those who are subject to a state’s adult protective services statute — not just the elderly.

Similarly, FINRA’s proposal would allow firms to temporarily suspend trading in a customer’s account upon reasonable belief of attempted financial exploitation. It also adds a second prong to its approach — firms would be required to try to obtain from clients the names of their “trusted contact persons” who could be contacted in certain situations (a helpful option when a family member is at the source of the misdeed).

As an organization with a strong interest in investor protections, CFA Institute supported the aims of these proposals in comment letters to both NASAA and FINRA. The rise in this unscrupulous practice needs to be addressed in a concerted effort by the investment management profession. And to that end, we urge regulators to not only allow financial service providers to take certain actions without fear of liability, but to encourage those actions. Those in positions of trust must proactively take up the banner to ferret out and address activities that take advantage of seniors and other vulnerable adults. Many of us will be there one day.

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About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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