Bates Research  |  09-30-21

NASAA Reviews Senior Financial Protections - Uncovers Deficiencies in Policies to Protect Seniors; Promotes Diversity, Equity, Inclusion Goals

NASAA Reviews Senior Financial Protections - Uncovers Deficiencies in Policies to Protect Seniors; Promotes Diversity, Equity, Inclusion Goals
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NASAA jumped back into action after Labor Day, publishing two reports that have implications for the protection of senior investors. The first report is based on a year-long analysis of the status of NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation (the "Model Act") by states which have adopted it or parts of it. The second report is in the form of a presentation breaking down the results from coordinated examinations of investment adviser firms by state securities regulators. It includes a section on compliance deficiencies concerning  senior requirements. Both reports offer suggestions to improve supervision and compliance in order to strengthen protections for vulnerable adults. 

NASAA also issued a recent member approved statement on diversity, equity and inclusion (“DEI”). The statement defines DEI and establishes DEI goals both for the association and its members. Here’s a closer look.

Model Act Review Shows Progress in Regulatory Approach to Senior Financial Abuse

According to NASAA, the Model Act has been adopted, in whole or in part, by thirty-four jurisdictions since 2016. (Here’s the list.) In the report, NASAA emphasized the prevalence of senior financial exploitation, citing an earlier study in which the Consumer Financial Protection Bureau (“CFPB”) reported “over 180,000 suspicious activities targeting older adults, involving more than $6 billion.”

The NASAA report considered each of the five key provisions of the Model Act: (i) mandatory reporting to regulators and protective services agencies by “qualified individuals” (e.g., broker-dealer agents; investment adviser representatives; supervisors, compliance professionals, those who serve in a legal capacity for broker-dealers and investment advisers, and independent contractors serving these roles) when there is reasonable belief that a vulnerable eligible adult (those age 65 and older or who are subject to a state’s protective services statutes) has been a victim of financial exploitation; (ii) notification and disclosure to designated third parties (unless the qualified individual suspects the third party of the exploitation); (iii) the authority to temporarily delay disbursements where the firm reasonably believes financial exploitation would result; (iv) immunity from civil and administrative liability for a broker-dealer or investment adviser that delays a disbursement (see Bates article on temporary holds under FINRA Rule 2165 ("Financial Exploitation of Specified Adults"); and (v) mandatory sharing of requests for information from protective services and law enforcement in cases of financial exploitation.

NASAA Says Federal and State Approaches Are Complementary

In its commentary, NASAA provides an important review of the relationship between the Model Act and developments in federal and regulatory law since the Model Act was introduced. NASAA cautioned that while “state regulation of broker-dealers parallels self-regulation conducted by FINRA, … [FINRA’s] role is also strictly circumscribed by federal statutes and regulations. Thus, state laws are legally and functionally distinct from rules adopted by FINRA and any other SRO.”  NASAA went on to assert that “adoption by FINRA of Rule 2165 ("Financial Exploitation of Specified Adults") and Rule 4512 (“Customer Account Information”) was an important step; however, the promulgation of these rules is not a substitute for the enactment of state legislation… and … the protections afforded by the FINRA rules are substantively different from those afforded by the Model Act.”  NASAA also distinguished the Model Act from the federal Senior Safe Act, which, it said, also does not preempt or otherwise limit applicable state law and whose protections are also “substantively different from those afforded by the Model Act.”

Findings: Model Act Requires No New Amendments

The NASAA analysis—based on input from state and federal regulators, law enforcement and protective services agencies, investors, broker-dealers, investment advisers, and others—concluded that the Model Act has “been overwhelmingly successful at protecting investors,” and that “no state securities regulator reported concerns of systematic inappropriate use of … holds.” NASAA also concluded that “no amendments to the Model Act are warranted at this time.”

Based on the feedback, NASAA recommends (i) strengthening effective communication among firms, state regulators and protective services; the regulators found that effective communication was critical to the reporting regime and “reassures reporting parties that something is being done with their reported concerns, even if particulars about the investigation cannot be disclosed”; (ii) improving comprehensive education and training; NASAA relayed that  such training was critical to effective reporting and crucial to successful efforts to combat senior financial exploitation; (iii) greater utilization of designated individuals as trusted contacts; NASAA stated that the use of trusted contacts remains “an effective, yet often underutilized tool in assisting investors who face financial exploitation”; and (iv) building “a network of agencies and resources” to ensure a multifaceted approach for assisting investors who may be vulnerable to financial exploitation. The report noted that such an approach may include a “centralized reporting mechanism to notify multi-disciplinary teams, state securities regulators, and APS simultaneously.”

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State IA Examinations Reveal Serious Deficiencies in Policies and Procedures to Protect Seniors

The headline[i] from multi-state coordinated examinations of over 1200 investment advisers by state securities regulators is that “nearly 59 percent of investment advisers did not have policies or procedures in place for addressing the financial exploitation of seniors or vulnerable persons.” NASAA President and West Virginia Senior Deputy Commissioner of Securities Lisa A. Hopkins responded directly: “investment advisers must make improvements in recognizing and reporting cases of suspected abuse.”

In addition to the fact that a majority of firms lacked policies and procedures, according to the report, firms were seriously deficient in training and education on the subject (notably, one of the key elements highlighted by NASAA as critical to successfully addressing suspected financial exploitation of vulnerable adults). The examinations showed a host of related deficiencies, including that firms provided no training on suspected financial exploitation of vulnerable adults (23.5%); that training content was not maintained by the adviser (8.29%), that the adviser failed to provide training to all appropriate personnel (7.83%) and that the content of the training did not discuss the need to protect the privacy and integrity of the individual customer of the adviser (0.46%). In addition, under supervisory and compliance deficiencies, the report found that 17.72% of firms had inadequate or no supervision concerning the protection of vulnerable clients.  

The NASAA report offered up one recommendation to address these deficiencies: “add policies/procedures for seniors/vulnerable persons to include training of personnel.” President Hopkins added: “our hope is that this data will foster greater and earlier detection and reporting of suspected financial exploitation of older Americans.”

NASAA Issues Statement on Diversity, Equity and Inclusion

In a formal statement approved during its Fall Annual Meeting, NASAA proclaimed that it “values its diverse membership and is committed to a welcoming and accepting environment for all people regardless of race, ethnicity, nationality, gender, gender identity, religion, culture, sexual orientation, disability, or background.” Further, NASAA “committed to forging a powerful community that fosters integration, inclusion, respect, and treats everyone fairly.”

The statement explains that “diversity refers to the characteristics that make individuals or groups different from one another”; “equity refers to treating everyone fairly,” noting “structural factors that benefit some social groups and communities while harming others”; and “inclusion refers to an intentional effort to transform the status quo by creating opportunities for those who have been historically marginalized.” The definition of inclusion also emphasized a focus on “outcomes of diversity and equity, rather than assuming that increasing compositional diversity automatically creates equity in access and opportunity, or an enhanced organizational climate.”

President Lisa Hopkins asserted that “DEI issues will remain at the forefront … and our statement will inform and guide the way we carry out the NASAA mission.” The NASAA statement identified goals for the organization including (i) to “promote diverse representation” … in leadership, activities, and the development of policies; (ii) to “integrate and support the development of skills, knowledge, and attitudes needed to promote diverse, equitable and inclusive environments;” (iii) to promote the recruitment and retention of the brightest and best minds to better understand and serve the diverse needs of investors, regulated firms and individuals, companies seeking capital, and the capital markets; (iv) to provide members with tools and resources to attract and retain diverse talent; (v) to support members’ DEI efforts, including through NASAA’s education and mentorship efforts; and (vi) to be accountable, and provide measurable results, to our members and stakeholders with respect to the implementation of DEI measures.

Conclusion

Based on the findings from the state securities examinations, there remains a great distance between the adoption of the Model Act and the practices of investment advisers in those states. NASAA’s recommendations on improving communications, comprehensive training, better utilization of trusted contacts and moving toward a multifaceted approach to tackle the issue of senior financial abuse require state regulated investment advisers to embrace the spirit as well as the letter of the law. As NASAA’s statement on DEI shows, state securities regulators are committed to change. Will the market respond? Bates will keep you apprised.

 

[i] The biennial 2021 Investment Adviser Coordinated Exams report covered a broad range of compliance deficiencies, including registration, books and records, supervision, contracts, advertising, fees, custody and cybersecurity. In this article, we focused only on the findings related to the protection of seniors and vulnerable investors.

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