Senior Investor Protection Steps for Investment Advisers

The fiduciary standard of care required by investment advisers is well established and is a major component of every client relationship. Investment advisers are tasked with the financial health of their clients and safe keeping of nest eggs built over years and decades of hard work. While every client deserves an investment adviser’s highest duty of care, regulators are taking steps to add additional protections to those clients who most often are the targets of financial abuse, scams, and manipulation: senior citizens.

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According to the U.S. Census Bureau, adults aged 65 and above represented 16.3% of the US population as of 2019.[1] With almost a third of the population either considered senior citizens or will soon be considered senior citizens, the demand for protections of our aging population and their retirement assets is essential.

Growing Focus of Regulatory Examinations

During the last few years, we have seen a growing amount of laws and rules being implemented by many regulators that are aimed at protecting seniors and other venerable adults from financial exploitation. In January 2016, the North American Securities Administrators Association (“NASAA”) adopted a model rule for member-state and territories to do just that.[2] The model rule provides not only the guidance for reporting suspected financial exploitation of seniors, but also a method for reporting potential cases.

In May 2018, the Senior Safe Act[3] was signed into law and provides provisions similar to the NASAA model rule and includes immunity from liability for firms and certain associated persons so long as they satisfy the safe harbor requirements outlined within the Act. The Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) are charged, in part, with the enforcement of those requirements under the Senior Safe Act.

With the rules in place, regulators are spending time during routine examinations to review the senior investor protections securities firms have in place. The reason for the increased focus is clear. A February 2019 report from the Consumer Financial Protection Bureau’s Office of Financial Protection for Older Americans estimated that from 2013 to 2017 financial institutions reported over $6 billion in suspicious activity reports[4] targeting older adults, with $1.7 billion being reported in 2017 alone.[5] According to the report, these activities were perpetrated by scammers, family members, caregivers, and others. What is important to bear in mind is that, unfortunately, many cases of financial abuse go unreported by the elder community. In fact, the National Association of Adult Protective Services (NAPSA) says only one in 44 cases of financial abuse is ever reported.[6]

Expectations of Regulators

The SEC and state regulators have provided clear expectations of investment advisers compliance programs with respect to protections of senior investors. While each jurisdiction may vary in the scope of their expectations, the common controls these regulators expect a firm to have in place include:

  • Policies and procedures for identifying and reporting warning signs;
  • Increased supervisory oversight for servicing of at-risk senior clients;
  • Gathering trusted contact information;
  • Providing ongoing training to firm personnel; and
  • Having complete records for all communications and contact with, and regarding at-risk senior clients. 

Firm policies & procedures should, at a minimum include guidance for recognizing and reporting potential warning signs of behavioral characteristics of senior clients that could indicate financial exploitation. The policies and procedures also should outline what the reporting chain of command is and how to document the suspected activity in a timely manner.

Obtaining a trusted contact of a senior client can add an additional layer of protection. It’s important to communicate to clients why the trusted contact information is important and how it would be utilized, so they can better understand the reason for the request. Firms who provide training and policies & procedures to recognizing signs of potential diminished capacity, cognitive decline, or financial impairment are better prepared to proactively deter or catch financial exploitation of senior investors. Having a trusted contact on file is one tool in a firm’s toolbox to protect clients.

 

Resources for Firms

Investment advisers have a wealth of resources to assist them with establishing and expanding their senior investor protections. Utilizing and building upon the resources available will help to ensure that a firm’s protections are robust and in compliance, as well as offering clients’ peace of mind.

Over the last few years, the SEC has issued several Investor Alerts & Bulletins about senior investor protections. A couple examples, include “Please Consider Adding a Trusted Contact to Your Account”[7] and “Investor Alert for Seniors: Five Red Flags of Investment Fraud”[8] which both offer important information to share with clients.

The SEC also maintains a webpage[9] that includes, among other things, links to additional resources, such as the National Center on Elder Abuse and the Consumer Financial Protection Bureau.

NASAA has a website solely dedicated to the protection of senior investors[10] that provides valuable information and resources for investors, financial firms, caregivers, and policymakers.

In June 2021, the SEC, FINRA, and NASAA launched a coordinated training program to assist securities industry firms in training their personnel regarding the detection, prevention, and reporting of financial exploitation of senior and vulnerable adult investors.[11] Firms that implement the training will fulfill one of the safe harbor requirements of the Senior Safe Act and several state senior investor protection rules and statues.

Conclusion

The need to protect senior investors is ever present, as they are prime targets for scammers, criminals, and ill-intended caregivers, and even family members. With larger assets to maintain them through retirement, and the possibility of declining mental capacities due to age, it’s important for senior investors to have trusted fiduciaries that can help them protect their assets from possible financial exploitation.

Now is a good time to review your senior investor protection protocols, including your training program to determine whether they are robust and in line with the safe harbor of the Senior Safe Act.

The Core Compliance & Legal Services, Inc. consulting team are well versed in this area and can assist with the assessment of your senior investor protections. Call or email us at 619-278-0020 or info@corecls.com, or visit us at www.corecls.com for more information.

 

Author: Jeremy Bolf, Compliance Consultant; Editor: Tina Mitchell, Managing Director, Consultation Services, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and managers to private funds on regulatory compliance issues.

 

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This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.


[1] U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, 2019; https://www.census.gov/data/tables/2019/demo/age-and-sex/2019-older-population.html

[2] See https://www.nasaa.org/wp-content/uploads/2011/07/NASAA-Model-Seniors-Act-adopted-Jan-22-2016.pdf

[3] The Senior Safe Act was included as Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act

[4] A Suspicious Activity Report (SAR) is a document that financial institutions, and those associated with their business, must file with the Financial Crimes Enforcement Network (FinCEN) whenever there is a suspected case of money laundering or fraud. These reports are tools to help monitor any activity within finance-related industries that is deemed out of the ordinary, a precursor of illegal activity, or might threaten public safety. (https://legal.thomsonreuters.com/en/insights/articles/what-is-a-suspicious-activity-report)

[5] https://files.consumerfinance.gov/f/documents/cfpb_suspicious-activity-reports-elder-financial-exploitation_report.pdf

[6] https://www.napsa-now.org/get-informed/exploitation-resources/

[7] See https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-trusted-contact

[8] See https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/updated-4

[9] See https://www.investor.gov/additional-resources/information/seniors

[10] See serveourseniors.org

[11] See https://www.sec.gov/news/press-release/2021-104