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Regulators can do more to protect vulnerable, senior investors

Ongoing support must be committed to continuously enhance protection and fraud detection

Nov 14, 2019 @ 3:18 pm

By Michelle Oroschakoff

In recent years, our industry has taken enormous strides to prevent the financial exploitation of seniors. Regulators, firms and financial advisers have united in their efforts to create, enhance and utilize tools designed to protect senior investors. Recent actions by regulatory bodies, coupled with the ongoing efforts by firms and advisers, have effected change by providing tools and resources to help identify and resolve threats of fraud and exploitation.

The Model Act to Protect Vulnerable Adults from Financial Exploitation, created by the North American Securities Administrators Association and approved in January 2016, provides for mandatory reporting to regulatory agencies and allows firms and advisers to enlist the assistance of state securities regulators to review any red flags. The Model Act has been enacted in 23 jurisdictions, with more considering legislation in 2020.

In 2017, the Financial Industry Regulatory Authority Inc. enacted the following regulatory changes:

• Rule 2165 allows for temporary holds on disbursements of funds where exploitation is suspected, empowering the industry to intervene to protect senior investors.

• Amendments to existing Rule 4512 require that firms make reasonable efforts to collect the name and contact information for a trusted contact.

• In addition, Finra's Securities Helpline offers seniors direct access to assistance and provides Finra the ability to notify firms, when appropriate, that their investor may be at risk for financial exploitation or simply in need of assistance.

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Yet despite these initiatives, adult protection services confirmed 25,990 cases of elder abuse in 2017 across the 26 states that submitted data. Neglect comprised the highest percentage across types of elder abuse, followed by financial exploitation.

According to Suspicious Activity Reports, the number of filings on elder financial exploitation quadrupled from 2013 to 2017, with a total of $1.7 billion in suspicious activities reported.

Taking steps to prevent fraud

There's no end to the work that must be done to prevent fraud, and the onus is on firms and regulators to commit ongoing support to be able to continuously enhance the processes that protect investors. Finra, for one, recognizes that, having recently announced the agency will undergo a retrospective review of its rules.

LPL advocates that NASAA also undertake a retrospective review of the Model Act. State regulators and local authorities are on the front line of dealing with fraud and exploitation and are often the first place that investors or their families turn to for help.

The timing is opportune, given the ability to coordinate efforts with Finra as well as the National Association of Insurance Commissioners. By working collectively, the groups can benefit from shared learnings to be able to further increase and enhance the tools available and find alignment around the most important issues that need to be addressed today and over time.

Specifically, NASAA should consider the following:

• Allow firms to delay a broader range of account transactions, beyond just disbursements, to be able to reduce risk that may be less immediate but can have just as significant an impact on investors. That includes buy/sell orders, which can have tax implications that harm investors; change of address requests, a vital component to account protection and fraud detection; and change of beneficiary and account titling requests, which could alter financial distributions upon death.

• Provide for more efficient reporting, and act with urgency in doing so to make it possible for the many agencies and firms focused on protecting the investor to implement action more quickly and easily.

• Work with the NAIC to assist with adoption of a similar Model Act. NASAA and the NAIC partnered on their Misleading Senior Designations Model Rule some years ago, proving we can scale efforts by creating complementary model rules aimed at protecting seniors from financial exploitation.

NASAA is a proven leader in protecting senior investors and we urge it to continue its leadership by working with Finra, NAIC and the industry to explore potential enhancements to existing rules. Doing so now will allow those states that have not yet adopted the Model Act to benefit from the experiences of the past several years before they enact their own laws.

Michelle Oroschakoff is a managing director and chief legal officer at LPL Financial.

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