05.20.20

Diminished Capacity and Elder Abuse – a Financial Advisor’s Duty

by: Barbara Mallon, Mallon & Johnson, & Matthew Dougherty & Elizabeth Hill, The Huntington Investment Company

This article is designed to improve financial professionals’ recognition of diminished capacity and elder abuse and discuss procedures to manage those issues. In addition, the article will discuss the ramification of the SEC’s Senior Safe Act and FINRA’s addition of certain rules to protect senior investors and vulnerable adults.

Senior investors are typically defined as any client aged 65 or above, and vulnerable adults are any individuals 18 and up who have a physical or mental impairment that causes them to be placed in a vulnerable position for financial exploitation.

An investment advisor or broker-dealer may be in a unique position to observe certain behavior or incidents that cause concern for senior investors concerning withdrawals, transfers, and named beneficiaries. Therefore, it is imperative for the firm and its representatives to recognize the red flags associated with diminished capacity or elder financial exploitation in order to proactively protect their customers.

Certain behavior may signal to a financial advisor that the client may suffer from diminished capacity, such as:

• Confusion with simple concepts that he or she has understood before;
• Repeating instructions over the course of a meeting or over repeated occasions;
• Memory loss, such as forgetting to attend a meeting at the advisor’s office or being unable to correctly answer straightforward identifying questions;
• Increased irritability and anger, particularly when making any change to an agreed-upon portfolio;
• Difficulty performing familiar tasks—for example, signing his or her name to a check or being unable to review a quarterly report;
• Disorientation as to time and place—for example, a client arrives several hours late to a meeting or goes to a wrong place or office for the meeting; or
• An unkempt appearance if normally well-groomed.

The following incidents may be indicative of elder financial abuse:

• Unexpected changes or additions of beneficiaries;
• Unknown individuals appear in the client relationship or family members appear claiming rights;
• Discussion of unusual or unexpected investments, such as cryptocurrency or a pyramid scheme;
• Client appears afraid of someone;
• Inaccurate or suspicious explanations for transactions;
• Withdrawals that are out character and to an unknown person; and
• Improper actions on the part of a guardian, holder of a power of attorney, or another fiduciary.

The SEC has stepped in to provide some relief and direction for financial advisors confronted with these situations. The first is the Senior Safe Act (“SSA”). The Senior Safe Act protects advisors if they should divulge client’s non-public information (“NPI”) to an outside source if they fear elder abuse issues. The SSA covers investment advisers, broker-dealers and banks and their registered personnel from lawsuits that may be brought by a client for divulging client NPI. 

The SSA requires that firms have procedures in place for determining if financial exploitation exists, as well as the steps to be taken if it determines that the firm suspects abuse. In addition, the financial firm must have training on this topic, so it is clear to employees the process of reporting and the potential outcome of a determination of financial abuse. Moreover, the training is to keep the process contained within the correct personnel who can make the decision quickly whether to make a report to the outside agency. This is the most important provision of the SSA. This allows an advisor to notify a third party (“covered agency”) of suspected abuse. The covered agency is limited to the SEC, State Securities Regulators, FINRA, a federal law enforcement agency and State Adult Protective Services agencies. It does not include family members or any persons outside of the definition of covered agency. The report itself should contain all of the financial advisor’s records concerning potential financial exploitation of a senior or vulnerable adult. Once turned over, it is the responsibility of the covered agency, generally the Adult Protective Services agency of the client’s state of residence, to follow up with an investigation.

Likewise, FINRA has adopted rules and amendments to rules to assist financial advisors with situations involving suspected abuse or dementia. The first is an amendment to FINRA Rule 4512 that requires firms to make reasonable efforts to implement a “trusted contact” form into their customer accounts. These efforts are required upon the opening of a retail account or when updating information for a retail account already in existence.  

            FINRA also recently adopted Rule 2165, which permits a broker-dealer to delay disbursements the client has requested if it suspects that they are the result of coercion or financial exploitation. The delay relates to disbursements by seniors or vulnerable adults, and may remain in existence for up to, but no more than 15 days after the hold has been placed, with some limited exceptions. It is expected that the firm would investigate within that time frame to determine if the disbursement is a result of financial exploitation. In addition, the broker-dealer must notify the customer and trusted contact (if one exists) of the delay. If the broker-dealer determines financial exploitation happened, the hold may be extended for no more than additional 10 business days, with some limited exceptions.

In order to establish procedures to address proactively issues of diminished capacity or elder abuse, broker-dealers may want to consider the following:

            1.Use a Trusted Contact Form. This provides the financial advisor with a starting point if he or she suspects dementia or elder abuse. It may be wise to have two trusted contacts in light of the fact that a family member or caregiver may be the abuser. Most broker-dealers have folded this in as part of their account applications. Advisers can utilize a stand-alone form as well. It is important to note that the Trusted Contact acts as a receptacle only with communications, concerns and documents deriving from the adviser and being transmitted to the Trusted Contact. The Trusted Contact cannot initiate an inquiry into the senior or vulnerable adult’s financial information, nor can the Trusted Contact make any recommendations on the client’s account.

            2. Note and retain increased communications from clients in a Client Records Management (“CRM”) system such as Junxure or Redtail. These notes may reflect observance of dementia symptoms, or some of the noted items in elder financial exploitation. In addition, the CRM system can retain records of problematic transfers or changed beneficiaries and record the broker-dealer’s responses to possible red flags.

            3. Have personal contact with the elderly client or vulnerable adult, including visiting in his or her home along with another colleague. This can be folded into an annual or periodic review of the client’s financial situation and would serve to demonstrate a firm’s adherence to applicable best interest or “know your customer” requirements.

            4. Delay problematic disbursements.  For broker-dealers, this is a possibility. For advisers, only the State of New Jersey has authorized delayed disbursements by advisers. The firm must follow the protocol of the hold on any disbursement: have a reasonable belief of exploitation, begin an internal review immediately, and release the hold after 15 days if not supported by the review or agreed upon by the customer.

            5. Reach out to another professional who has the client’s non-public information, such as an attorney or accountant. In that way, the financial advisor is not violating Regulation S-P if in fact the third-party professional already has the client’s NPI.

            6. Consider notification to the appropriate authority(ies). If none of the above appears to cease the exploitation, then the financial advisor may have to avail him or herself of the protections of the SSA. In that way, the adviser will assemble a report that contains the communications, the transfers, and notes of any other observations or indicia of financial exploitation that may be occurring to the detriment of the adviser’s clients. The report is then sent to a covered agency, which is generally the Adult Protective Services agency of whatever state where the client is located. The report cannot be revealed to other third parties, but only to the covered agency.  The Act also requires that the adviser maintain certain records, including the documents underlying any report to a covered agency as well as proof of its own training of its financial advisors.

The following is a series of hypothetical scenarios of potential elder exploitation followed by some practical solutions for firms to consider.

Ensure that appropriate procedures are in place to notify the designated group (typically Compliance or the Corporate Security Department) so an initial investigation can be conducted.  Under FINRA Rule 2165, a broker-dealer must designate in writing the individuals/positions who have the authority to temporarily restrict the account, so engaging those individual(s) early in the process is critical. Typical steps taken by this group during the initial investigation might include:

• Pose follow-up questions to the person who initially identified the concern or others within the bank or broker-dealer, if needed;
• Compare the activity – or requested activity – to historical activity in the client’s account(s);
• Determine if the client has a trusted contact on file, if there have been any recent beneficiary changes, or if a power of attorney (POA) has recently been added/changed;
• If a brokerage account-based distribution is involved, determine whether to withhold the distribution under Rule 2165 as permitted by the rule;
• Notify and coordinate with the insurance carrier, if applicable, in annuity-based situations; and,
• Determine if the matter needs to be escalated to a centralized, enterprise-level Corporate Security team that handles all potential elder abuse/financial exploitation matters across the various business units.

After escalation, coordinate with any other groups, such as legal and the business line, until the situation is resolved.

Firms should be mindful that various challenges may arise during the course of an elder abuse investigation, including but not limited to:

• A combative or uncooperative client;
• Time sensitivity regarding withdrawal of funds;
• A trusted contact who is the suspect of the financial exploitations;
• A family member that believes the broker-dealer is at fault; and,
• A lack of engagement/guidance from APS.

Thus, it is important to have well-established procedures in place to swiftly move through an investigation. It is also important to document conclusions of the investigation and steps taken by the firm and its decision making to protect against future challenges by a family member, regulator or court. Ultimately, though, the goal is to protect the client and the firm, and ensure the firm is complying with the applicable rules and regulations throughout the process.