Senior Investor Protection: What Broker-Dealers and Investment Advisors Need to Know

Senior Investor Protection: What Broker-Dealers and Investment Advisors Need to Know

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By Scott Hoffmann, CPA, Business Assurance & Advisory Services Senior Manager | Financial Services Industry Team

Senior Client Protections Remain a Financial Services Industry Regulatory Focus

Increased regulator and client expectations of consumer financial protection will remain a compliance challenge to retail brokerages and investment advisors for the foreseeable future. One area of focus that is becoming increasingly important for regulators is senior investor protection.

Senior Investors

Senior investors are a fast-growing demographic that, on the whole, have a wealth of assets but may also struggle with technological advances, increasing their risk of misunderstanding, errors, complaints, and fraud. Seniors lose between $352 million to $1.5 billion annually to financial exploitation, according to a study from 2016. The SEC, FINRA, and state regulators have worked on several initiatives in the past few years, including regulatory changes, changes to the exam programs, and educational programs, to help prevent this type of abuse and fraud.

Senior Investor Protection | Financial Services Industry | Keiter CPAs

FINRA Rule 2165, “Financial Exploitation of Specified Adults

Robin Traxler, Financial Services Institute’s senior vice president of policy and deputy general counsel notes that “Financial advisors and financial services firms are often the first to detect possible financial abuse, so it’s critical that they have the ability to report it without fear of violating privacy laws.” FINRA Rule 2165, “Financial Exploitation of Specified Adults,” adopted in 2018, permits broker-dealers to place a temporary hold on disbursements of funds or securities from the accounts of certain clients if the broker reasonably believes that financial exploitation of the client is occurring or has been attempted. The rule covers clients who are age 65 and older as well as other vulnerable clients. The rule allows, but does not require, broker-dealers to place a hold on disbursements if they suspect financial exploitation. If a firm places a hold on a client’s account, the firm must notify the trusted contact unless the firm reasonably believes that the trusted contact is engaged in the financial exploitation. Whereas this FINRA Rule only applies to broker-dealers, a total of 21 states, including Virginia, have also adopted laws (based on the NASAA Model Act) permitting investment advisors to pause disbursements when they suspect financial exploitation of their senior clients.

On the examination side, the SEC’s 2019 examination team as set as one of its priorities that they will review how broker-dealers and investment advisors oversee their interactions with senior investors, including their ability to identify financial exploitation of seniors. The SEC also launched an exam “Senior-Focused Initiative” that examined more than 200 investment advisors that had a significant exposure to senior clients. The exam reviewed investment advisors policies, procedures and practices that addressed senior clients.

Senior Client Protection Suggestions

To help spread awareness of senior client protections, in May 2019, the SEC Office of Investor Advocate released a list of suggestions for financial firms to consider when evaluating their policies regarding senior client protections. Some of these suggestions include:

  • Firms should establish and follow policies, procedures, and practices that specifically address seniors. The policies should be tailored to the firm’s particular business, clients, and circumstances.
  • Firms should draw up a road map that shows employees what to do if they suspect financial exploitation. The more specific, the better. Policies should include clear escalation procedures that make clear what steps registered representatives and other employees should take and who in particular they should notify.
  • Financial firms and professionals should know what the new tools are and how to apply them to protect senior investors. Specifically, firms and professionals should understand the requirements, conditional safe harbors, and other provisions of FINRA Rule 2165, FINRA Rule 4512, NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation, state laws patterned on the Model Act, and the Senior Safe Act.
  • Firms should train their employees and affiliated or associated representatives on the signs of financial exploitation and the steps to take if they spot or suspect abuse. Training is a prerequisite for firms that wish to avail themselves of the safe harbor provided in FINRA Rule 2165 and the immunity provided in the Senior Safe Act.

Protections for senior investor clients should continue to be a regulatory and client-service focus for broker-dealers and investment advisors in the coming years. Keiter’s Financial Services Industry team will keep you updated on new and changing senior investor regulations.

Questions on this topic? Contact your Keiter advisor or Email | Call: 804.747.0000

Additional Resources for Financial Services companies

References

Financial Planning: How Advisors Can Prevent Elder Financial Exploitation


The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


About the Author

Scott is a Senior Manager in Keiter’s Business Assurance & Advisory Services group. He provides insights and opportunities to clients in the financial services industry. His clients include broker-dealers, alternative investment funds, hedge funds, real-estate investment funds, and other financial institutions.  Scott is a member of Keiter’s Financial Services Industry team.  Read more of Scott’s articles on our blog.

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