New York Securities Fraud Lawyers Blog
Every day for the next 15 years, an average of 10,000 Americans will turn 65 (FINRA 2015). This initiative was an addition to several other FINRA initiatives to protect seniors, which includes the establishment of a toll-free hotline in April 2015. FINRA’s proposal is a step toward empowering advisors to act and prevent elder fraud. But how do advisors distinguish between valid and fraudulent transactions? After all, their intervention can risk delaying critical transactions and disbursement of funds, resulting in financial losses or, worse, delaying payments related to health care or housing.
IDENTIFYING SUSPICIOUS ACTIVITY
Firms and advisors are believed to be in the best position to identify suspicious activity, even before family and friends. According to Susan Axelrod, executive VP of regulatory operations at FINRA, one of the warning signs of Alzheimer’s disease is “changing a long-term strategy suddenly.”(CBS News 2010) Other common signs include frequently repeating orders or questions and having trouble processing basic information.
FINRA’s existing account information rule was altered, requiring firms to make reasonable efforts to obtain and maintain the information of a trusted contact person when opening a customer’s account. Investment advisors have a duty to look for next of kin when dealing with aging clients, and keep records about estate attorneys and power of attorneys (POA) in case their clients face incapacity. Nevertheless, the SEC’s Office of Compliance Inspections and Examinations and FINRA reported that a mere 30% of firms currently obtain information regarding the existence of durable POA.
The latest FINRA rule emphasized the “reasonable efforts” all advisors must exercise to obtain such information. It is also important to note that, according to National Adult Protective Services, senior citizens are usually abused by someone they know and trust, so advisors should monitor accounts more closely once a trusted agent has exercised a POA.
Seniors are often at risk of affinity fraud, where groups of senior citizens in a community are led to believe that a crooked investment or scheme is right for them. If advisors spot any such red flags, they should inform the elderly investor and their agent immediately. Similarly, advisors should be wary of sudden heightened activity across multiple accounts belonging to a client. Elder fraud comes in many forms.
Brokers and advisors should also be properly trained and educated by firms to identify and deal with diminished capacity and elder fraud. Although efforts are on the way, they are not uniform across the industry, with only 33% of advisors currently receiving the required training (AARP Public Policy Institute 2011).
Making these procedures an industry standard and providing additional training is necessary. Advisors should also have open channels of communication with their firms, comply with firm protocols and seek guidance when dealing with vulnerable elderly investors. Some firms build authorization forms allowing brokers to ask designated contacts about a client’s health issues without discussing their investments. While this is not an easy discussion, brokers can easily ask clients to designate an individual if there is an issue.
Exercising these powers is tricky for brokers, but the FINRA rulemaking does attempt to alleviate advisors from legal liability when their intervention results in financial losses for clients. At the same time, the rule does not hold brokers legally liable in cases where they do not attempt to intervene where abuse is taking place. The rule would likely have wider-reaching impact if brokers accept fiduciary duties to protect elder investors from fraud, rather than seek exemption from liabilities if they decide to act on it.