The securities industry’s concern over the aging of the U.S. population, specifically, aging investors, has, apparently, reached a fever pitch. Yesterday in New York, SIFMA hosted its “Senior Investor Protection Conference – One Year Later: FINRA Rules 2165 and 4512,” and, for a securities conference, it received pretty extensive news coverage. I saw at least two articles published today that discussed what transpired, and both stressed the same underlying points: first, abuse of elders is serious and on-going, and, second, while the new FINRA rules are helpful, they are limited in their utility.
I blogged about the two FINRA rules regarding seniors two years ago. I said at the time that they were a good idea, since they primarily served to provide protections to BDs which develop concerns about the mental acumen of an aging customer, and I still feel that way. Look, I am now 60 years old. Despite (or, maybe, because of?) my continued affinity for clearly non-senior things like loud punk rock music, I am compelled to admit that, at a minimum, I may be on my way to becoming one of “those” customers. And there are lots of us. Back in 2007, in the first Regulatory Notice that FINRA published about seniors, some pretty daunting statistics were cited:
The number of Americans who are at or nearing retirement age is growing at an unprecedented pace. The United States population aged 65 years and older is expected to double in size within the next 25 years. By 2030, almost 1 out of every 5 Americans – approximately 72 million people – will be 65 years old or older. Those who are 85 years old and older are now in the fastest-growing segment of the U.S. population.
Age alone certainly doesn’t tell anything, of course, about a person’s intellect. There is a Supreme Court justice in her 80s who no one would reasonably suggest has lost a thing mentally. Nancy Pelosi is 78. Still sharp. Bernie Sanders is 77. Same. Joe Biden is 76. Same. The president is 72. Well, you get my point. The aging of America is undeniable.
Neither is the impact that exploitation of seniors has, and not just on the actual victims of the scams. According to SIFMA, while
no one has yet been able to estimate the precise impact of financial exploitation on the national economy, . . . a New York study estimated an annual cost around $1.5 billion in that state alone. Across the entire U.S. population, that could mean a $25 billion annual cost. Making things more difficult is the fact that the bad actor is often a family member, friend or caregiver of their victim – in fact, that same New York State found that 67% of verified cases of financial exploitation were committed by family members – and only an estimated 1 in 44 cases are ever reported to the authorities.
So, it makes sense that the regulators are paying pretty close attention when it comes to protecting seniors. The problem, however, is twofold. First, there is only so much that rules can accomplish. Second, as with, say, AML, BDs have been installed by their regulators as the first line of defense against senior exploitation, which raises the question whether this in an appropriate role for the industry. I mean, neighborhood watch programs may also a first line of defense against vandalism, but they are voluntary. If some dad is late for his “shift,” and, as a result, misses some teenager whacking a mailbox off its post with a baseball bat, the dad doesn’t find himself named as a respondent in a disciplinary action that could cost him his career. On the other hand, if a BD misses a red flag indicative of senior exploitation, well, the consequences could be dire.
According to FINRA Rule 2165, when a BD “reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted,” it may impose a temporary hold on requests by the customer to disburse money from his or her account (theoretically, to prevent a scammer who has exercised some unhealthy influence over a senior citizen from quickly getting his hands on funds from the securities account). It’s not perfect, of course; no rule is. As was highlighted at the SIFMA conference, the length of the temporary hold is relatively short – no more than 15 business days initially (subject to being further extended by a state agency or a court), plus up to ten more business days if the initial review turns up something that reinforces the BD’s “reasonable belief” that there is, has been, or may be financial exploitation of the senior customer. In other words, the rule simply may not provide sufficient time within which to investigate the circumstances adequately, or to succeed in getting a state agency sufficiently motivated to intercede (which then leaves the BD no choice but to accede to the disbursement request).
Also, the rule only addresses the disbursement of funds and securities, not actual securities transactions. So, if an elderly customer gives an order to sell securities in his account – even, say, with the stated intent of having the proceeds of the sale disbursed to someone the BD may suspect to be a scammer – while the BD can put a hold on the disbursement request, it cannot legally ignore the sell order. Obviously, that could result in trades taking place that, if the industry had the same ability to step in and impose a hold as it could with a disbursement request, would never happen in the first place. Even trades that make no financial sense, even trades that result in serious tax implications for the customer, must happen if the client directs it.
There is also a practical problem with FINRA Rule 4512, which – sensibly – encourages a BD to make reasonable efforts to identify a “trusted contact” for any customer over 18 years old, i.e., someone who the BD can contact when it develops concerns about “possible financial exploitation” of the customer. The problem is that while BDs can ask their customers to name a trusted contact, they can’t require that their customers actually provide one. It seems that when BDs ask seniors for a trusted contact, many of them react like they’re being asked to give up their driver’s license. They refuse. It was reported that Vanguard’s chief compliance officer informed the attendees at the SIFMA conference that of the 300,000 trusted-contact forms Vanguard received in the last year, 78 percent of them were for investors under age 65. In other words, the investors who have the most pressing need for a trusted contact are the very ones most likely to decline to provide one.
If there’s good news, it’s that FINRA supposedly isn’t immediately interested in dinging firms regarding their compliance with Rules 2165 and 4512. Investment News wrote that Jim Wrona, an associate GC at FINRA (who has been around a long time), announced at the SIFMA conference that while FINRA will look at how firms have implemented these rules, “the exams will primarily be to check on the systems and processes firms have in place, to check that issues are properly elevated and that there’s an identified team to handle relevant decisions.” According to Mr. Wrona, FINRA just “want[s] more information. This isn’t going to be a gotcha, check the box, did you do it or not. We’re interested in learning about your situations, how you’re dealing with [the rules] and how we can assist.”