State regulators: Advisers fall short in guarding against senior financial abuse

A NASAA exam sweep shows that more than half of advisers lack policies and procedures to address exploitation of elderly clients.

Most investment advisers lack internal systems to respond to the financial exploitation of elderly clients, according to a survey by state regulators.

An exam sweep conducted earlier this year by the North American Securities Administrators Association shows that 58.5% of advisers had no policies or procedures to address senior financial abuse; 23.5% did not provide training for advisory personnel to spot problems; and 17.7% lacked appropriate supervision in this area.

The sweep consisted of 1,206 examinations of 289 state-registered investment advisers across 42 NASAA jurisdictions from Jan. 1 to July 7. Most of the exams were conducted remotely due to the coronavirus pandemic.

The state regulators’ group adopted a model act to protect vulnerable adults from financial exploitation in 2016. Enacted in 32 states, the measure — which applies to broker-dealers and investment advisers — includes mandatory reporting of suspected abuse and provides a safe harbor for brokers and advisers to withhold disbursements from accounts of clients who may be victims. The Financial Industry Regulatory Authority Inc. adopted a similar rule for brokerages it oversees.

State regulators want advisers to elevate their efforts to protect elderly clients.

“The results of this multi-state coordinated initiative show that investment advisers must make improvements in recognizing and reporting cases of suspected abuse,” NASAA President Lisa A. Hopkins, West Virginia senior deputy commissioner of securities, said in a statement. “Our hope is that this data will foster greater and earlier detection and reporting of suspected financial exploitation of older Americans.”

Last week, NASAA released a report about the model act designed to encourage more states to adopt the measure.

In the exam sweep, the top five areas where state regulators found deficiencies were registration (44%), books and records (41.7%), contracts (30.5%), supervision and compliance (29.5%) and advertising (19.7%), according to a NASAA statement.

State regulators saw improvement among advisers in cybersecurity compliance, with deficiencies falling from 26% in 2019 to 5.3% this year. The exam sweep is conducted every two years.

“Cybersecurity has been a priority for NASAA, and we are pleased to see the decrease in deficiencies in this category,” Michael Huggs, Mississippi securities division director, said in a statement. “I believe the investment adviser industry is getting the message of how important cybersecurity is and is starting to implement policies and practices as well as taking advantage of the free cybersecurity checklist offered by NASAA to help assess their cybersecurity practices.”

The advisers who participated this year were small: 68% were one-person operations; 62.8% had more than $30 million in assets under management, while 37.2% had AUM under $30 million.

State regulators oversee advisers with less than $100 million in assets under management. Larger advisers must register with the Securities and Exchange Commission.