Bates Research - 09-06-17
Senior Investors Update: New Developments Signal Tough Line on Elder Financial Abuse
A FINRA arbitration panel recently assessed over $1.5 million in costs, disgorgement and punitive damages against a privately held financial services and investment firm in relation to allegations of senior financial abuse and violations of state and federal securities laws (among other claims). The outcome of this case, together with a new North American Securities Administrators Association (NASAA) "Pulse Survey" of state securities regulators on the topic of senior financial fraud, and a newly announced National Association of Attorneys General senior financial fraud initiative are the latest chapters in the story of an industry working to address elder and vulnerable clients. Bates Group has been following both the federal and state efforts to help seniors and other vulnerable investors. (See here and here.)
An Unequivocal Message
In the instant case, decided this summer, the all-public FINRA arbitration panel came down hard on a financial services firm and a broker accused of elder abuse, awarding penalties beyond what the claimant requested in the statement of claim. The allegations centered on trading in long-term municipal bonds and structured certificates with certain derivative features. Reportedly, according to AdvisorHub, the broker had been accused of age-unsuitable investments in 2015 and had previous customer complaints recorded in the BrokerCheck database. He separated from the firm named in this matter at the time of the age-related accusations in 2015.
As detailed in the award, the FINRA arbitrators ordered the firm to pay $1.08 million in punitive damages, $250,000 in compensatory damages, $110,000 in commissions paid, more than $300,000 in legal and arbitration costs, as well as indemnifying the broker. The punitive damages were assessed pursuant to state law: the California Elder Abuse and Adult Civil Protective Act. The heavy penalties have not gone unnoticed. The case has been interpreted as sending a message that FINRA arbitrators may now be placing a high priority on elder abuse issues appearing in cases, particularly in light of the new pending senior protection rules (see below) and the increased activity of state regulators on this issue.
NASAA Follows Up Industry Study with Regulator Survey
In June 2017, NASAA published its findings from a survey about firms’ practices and policies applicable to senior customers (See Bates Group’s review here.) Utilizing data from more than 60 firms “regarding account documentation, policies and procedures, training, supervision of seniors’ accounts, and escalation of senior issues,” NASAA found that broker-dealers have developed a variety of processes and procedures to identify and report suspected diminished capacity or abuse. The study concluded, however, that the industry as a whole had more work to do to fulfill the goal of protecting senior investors.
NASAA has now followed up that study with a “pulse" survey to gauge state securities regulators’ perspectives on senior financial fraud, and the findings are challenging. The vast majority of regulators think that most cases of senior financial fraud go undetected rather than being discovered before they cause serious problems. Further, despite near unanimous acknowledgement that there is greater awareness of the problem, the regulators have seen no decrease in cases or complaints involving such fraud, and almost a third of the them contend that there has been an increase in such cases. That said, three out of four respondents stated that fraud has been effectively addressed in jurisdictions that permit the use of disbursement holds to stop the distribution of funds. The same percentage also stated that broker-dealers and investment advisers should do more to help prevent senior fraud.
The pulse survey results demonstrate a timely snapshot of the market during this period. In this context, both the June 2017 study of financial firms and the August 2017 survey of state regulators serve to highlight the extensive efforts underway by a variety of participants to understand and address the issue of senior financial exploitation.
Upcoming SIFMA Conference on New Senior Investor Rules
Whether the efforts described above can effectively address the problem of senior financial fraud will be better determined after new federal regulations take effect, and after federal and state legislative efforts resolve. On September 13, 2017, SIFMA will be hosting a conference on the new FINRA senior investor protection rules which go into effect on February 5, 2018. The conference will review FINRA rule 2165 (Financial Exploitation of Specified Adults), which permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers; and FINRA rule 4512 (Customer Account Information), which requires members to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account. (see Finra Notice 17-11). See Bates Group’s overview of these new rules here.
Noteworthy: Keeping an Eye on State Attorneys General
On August 22, 2017, the National Association of Attorneys General (NAAG) announced that they too will take steps to address senior abuse in general and senior financial fraud in particular. NAAG announced it will begin a “Protecting America's Seniors: Attorneys General United Against Elder Abuse” initiative. Included in the initiative will be enhanced efforts to prosecute those who abuse, neglect or exploit seniors and to “educate older adults and their families about financial exploitation.” According to the release, the initiative includes “attorneys general in the 50 states, U.S. territories and the District of Columbia,” and will culminate in an NAAG Presidential Initiative Summit in April 2018 in Kansas.
Bates Group will continue to provide updates on this developing story.