NASAA Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation | Adopted January 22, 2016

 

Legislative Text & Updated Commentary
for the 2018 Legislative Session


Background

The need for new tools to help detect and prevent financial exploitation of vulnerable adults

Financial exploitation is the fastest growing category of elder abuse in many states.  According to the 2010 Investor Protection Trust Elder Fraud Survey, one out of every five citizens over the age of 65 has been victimized by a financial fraud.[i]  These frauds can be perpetrated by strangers, con artists, or even by family members and caregivers in whom the elderly have placed their trust.

State securities regulators are committed to protecting retail investors and are often well positioned to intercede on behalf of vulnerable seniors.  However, to be successful in combating senior financial exploitation, securities regulators must be made aware of it.  State legislatures should assist in this effort by enacting policies that will break down barriers to the sharing of information about financial exploitation and inspire action by financial services professionals who are positioned to identify red flags.  In this regard, the enclosed NASAA Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation (“Model Act” or “Act”) represents an important and significant step forward.

The Model Act originated as an initiative of NASAA’s Committee on Senior Issues and Diminished Capacity (“Seniors Committee” or “Committee”).[ii]  The Seniors Committee, formed in 2014, is the latest in a series of initiatives from NASAA and its members focused on senior investors including the launch of the Senior Investor Resource Center in 2003 and the adoption of a Model Rule on the use of senior-specific certifications and professional designations in 2008.  The most effective way to address the protection of seniors and vulnerable adults is through a holistic approach, and the Seniors Committee is advised by an Advisory Council drawing from representatives from industry, academia, regulatory agencies and elder advocates.

On September 29, 2015, a draft of the proposed Model Act was released for a 30-day public comment period.[iii]  The Committee received and considered comments from various interested parties and considered a similar proposal contained in Regulatory Notice 15-37 issued by the Financial Industry Regulatory Authority (“FINRA”).[iv]  Furthermore, in light of federal legislation proposed in October 2015,[v] the Committee conducted further internal review in late 2015 and revised several elements of the Model Act.  On December 22, 2015, NASAA’s Board of Directors approved the Committee’s request to submit the proposed Model Act to the NASAA membership for consideration.  On January 22, 2016, NASAA members voted to approve the Model Act.

The NASAA Model Act applies to broker-dealers and investment advisers, including certain qualified individuals (broker-dealer agents, investment adviser representatives and persons serving in a supervisory, compliance, or legal capacity for a broker-dealer or investment adviser).  The provisions of the Model Act could be adopted by a jurisdiction statutorily as part of a jurisdiction’s existing securities laws or, potentially, through regulation.  The Model Act has five core features.  Taken together, these provisions clarify and more closely align the interests and responsibilities of financial professionals, regulators, and law enforcement in regard to the reporting and prevention of senior financial exploitation.  These features include:

  • A mandatory reporting requirement applicable to qualified individuals of broker-dealers and investment advisers;
  • Notification to third-parties of potential financial exploitation with advance consent of the investor;
  • The authority to temporarily delay disbursement of funds;
  • Immunity from civil and administrative liability for reporting, notifications, and delays; and
  • Mandatory sharing of records related to exploitation with law enforcement and state adult protective services agencies.

An explanation of the rationale for these provisions and the interplay between them is discussed in the commentary to each section of the Model Act.  Additional information about many of the policy recommendations embodied in the Model Act is included in the notes below.

Overview of State Actions on NASAA Model Act in 2016 and 2017

As of November 13, 2017, the NASAA Model Act has been adopted in whole or in part by thirteen U.S. states.  This is in addition to statues previously enacted in Washington,[vi] Missouri,[vii] and Delaware[viii] that incorporated some but not all elements of the Model Act.

In 2016, Alabama[ix] enacted legislation that contained many of the provisions found in the Model Act, including mandatory reporting to state securities with APS offices, as did Indiana[x] with respect to investment advisers.[1]  Additionally, in 2016, Vermont[xi] adopted the Model Act by regulation, and Louisiana[xii] enacted legislation that protects voluntary disclosures.   During  2017, an additional six states – Colorado,[xiii] Maryland,[xiv] New Mexico,[xv] North Dakota,[xvi] Oregon,[xvii] and Texas[xviii] – enacted legislation that contain provisions similar or identical to those in the Model Act including mandatory reporting to state securities and APS offices. Several other states, including Arkansas,[xix] Mississippi,[xx] and New Mexico[xxi] enacted legislation that protects voluntary disclosures.

Other jurisdictions introduced legislation directly inspired by the Model Act in 2017.  These include Alaska,[xxii] Delaware,[xxiii] the District of Columbia,[xxiv] Kentucky,[xxv] Michigan,[xxvi] Minnesota,[xxvii] and New York.[xxviii]  Although these states did not enact the legislation in 2017, in some cases progress was made in the form of favorable votes and/or recommendations from legislative committees.[xxix]

[1] Indiana enacted legislation in 2017 expanding their 2016 law to cover to broker-dealers.

Adoption of FINRA Rule and Relationship to NASAA’s Model Act

State regulation of broker-dealers exists in parallel with self-regulation conducted by the Financial Industry Regulatory Authority, or FINRA, a federally-sanctioned self-regulatory organization (SRO).  FINRA has significant authority over the conduct of broker-dealers, but its role is also strictly circumscribed by federal statute and regulation.  State laws are legally and functionally distinct from rules adopted by FINRA or any other SRO.

In March 2017, FINRA adopted Rule 2165 (Financial Exploitation of Specified Adults), allowing members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation these customers, as well as amendments to Rule 4512 (Customer Account Information), requiring members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. [i]  Rule 2165 and the amendments to Rule 4512 will become effective on February 5, 2018.[ii]

It should be emphasized that while FINRA’s rule changes are important steps, SRO rules are not a substitute for the enactment of legislation.  Moreover, the protections afforded by the FINRA rules are substantively different from those afforded by the Model Act and related legislation.  For example, FINRA does not require mandatory reporting of suspected financial exploitation to state regulators or state APS agencies, and does not incentivize reporting by offering immunity for disclosing information to government and third-parties.  Further, while FINRA requires retention of records, it does not require the sharing of records with state APS and law enforcement agencies, which can prove an essential tool for agencies tasked with preventing exploitation.[1]

Additional information about the FINRA rules is included below:

  • FINRA Regulatory Notice 17-11, Financial Exploitation of Seniors (March 2017), available at finra.org/sites/default/files/Regulatory-Notice-17-11.pdf.
  • FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on the disbursement of funds or securities from a “specified adult,” defined as a person age 65 or older or age 18 or older who has a mental or physical impairment that renders that individual unable to protect his or her own interests.  Upon placing a hold, Rule 2165 requires the member to immediately initiate an internal review of the facts and circumstances within no later than two business days, with the hold expiring no later than 15 business days after the date of the initial hold.  Amendments to Rule 4512 require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer’s account or when updating account information for a non-institutional account in existence prior to the effective date of the amendments, to which Rule 2165 requires members to contact a trusted contact person in the event of a temporary hold on disbursements.

NOTES

[i]  2010 Investor Protection Trust Elder Fraud Survey, available at investorprotection.org/downloads/EIFFE_Survey_Report.pdf.

[ii] For more information about the NASAA Seniors Committee, see serveourseniors.org/about/policy-makers/advisory-council/.

[iii] See Notice of Request for Comments Regarding NASAA’s Proposed Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation (Sept. 29, 2015), available at nasaa.org/37301/notice-of-request-for-comments-regarding-nasaas-proposed-model-legislation-of-regulation-to-protect-vulnerable-adults-from-financial-exploitation/.

[iv] FINRA Regulatory Notice 15-37, Financial Exploitation of Seniors and Other Vulnerable Adults (Nov. 30, 2015), available at finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-37.pdf.

[v] See Senior$afe Act of 2015, S.2216 / H.R. 4538, available at congress.gov/bill/114th-congress/senate-bill/2216/related-bills.

[vi] See Revised Code of Washington 74.34.215, available at app.leg.wa.gov/rcw/default.aspx?cite=74.34.215.

[vii] See SB 244, Missouri Regular Session 2015, available at senate.mo.gov/15info/BTS_Web/Bill.aspx?SessionType=R&BillID=1174064.

[viii] See HB 417, Delaware 147th General Assembly, available at legis.delaware.gov/BillDetail?LegislationId=22741.

[ix] See SB 220, Alabama Regular Session 2016, available at alisondb.legislature.state.al.us/ALISON/SearchableInstruments/2016rs/PrintFiles/SB220-enr.pdf.

[x] See SB 221, Indiana Second Regular Session 2016, available at iga.in.gov/legislative/2016/bills/senate/221#document-72ee118f.

[xi] See Rule No. S-2016-01, Vermont Sec. Reg. § 8-5, available at dfr.vermont.gov/reg-bul-ord/vermont-securities-regulations.

[xii] See SB 338, Louisiana Regular Session 2016, available at egis.la.gov/legis/ViewDocument.aspx?d=1012781.

[xiii] See HB 17-1253, Colorado Regular Sessions 2017, available at leg.colorado.gov/sites/default/files/documents/2017A/bills/2017a_1253_signed.pdf.

[xiv] See HB 1149, Maryland Regular Session 2017, available at mgaleg.maryland.gov/webmga/frmMain.aspx?id=hb1149&stab=01&pid=billpage&tab=subject3&ys=2017rs and SB 951, Maryland Regular Session 2017, available at mgaleg.maryland.gov/webmga/frmMain.aspx?id=sb0951&stab=01&pid=billpage&tab=subject3&ys=2017rs.

[xv] See HB 326, New Mexico Regular Session, available at nmlegis.gov/Sessions/17%20Regular/final/HB0326.pdf.

[xvi] See SB 2322, North Dakota 65th Legislative Assembly, available at legis.nd.gov/assembly/65-2017/documents/17-0979-04000.pdf.

[xvii] See SB 95, Oregon Regular Session 2017, available at olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/SB95/Enrolled.

[xviii] See SB 95, Texas 85th Legislature, available at legis.state.tx.us/BillLookup/History.aspx?LegSess=85R&Bill=HB3921.

[xix] See HB 1800, Arkansas 91st General Assembly, available at arkleg.state.ar.us/assembly/2017/2017R/Pages/BillInformation.aspx?measureno=HB1800.

[xx] See SB 2911, Mississippi Regular Session 2017, available at billstatus.ls.state.ms.us/2017/pdf/history/SB/SB2911.xml.

[xxi] See HB 326, New Mexico Regular Session, available at nmlegis.gov/Legislation/Legislation?chamber=H&legtype=B&legno=326&year=17.

[xxii] See HB 170, Alaska 30th Legislature, available at akleg.gov/basis/Bill/Detail/30?Root=HB170.

[xxiii] See HB 162, Delaware 149th General Assembly, available at legis.delaware.gov/BillDetail?LegislationId=25743.

[xxiv] See B22-0422, District of Columbia 22nd Council, available at lims.dccouncil.us/Legislation/B22-0422?FromSearchResults=true.

[xxv] See HB 83, Kentucky Regular Session, available at lrc.ky.gov/record/17RS/HB83.htm.

[xxvi] See SB 346, Michigan 99th Legislature, available at legislature.mi.gov/(S(n1l2teirtyl5rcgnr5cf3rvj))/mileg.aspx?page=GetObject&objectname=2017-SB-0346.

[xxvii] See SB 919, Minnesota 90th Legislature, available at revisor.mn.gov/bills/bill.php?b=Senate&f=SF0919&ssn=0&y=2017.

[xxviii] See SB 2804, New York General Assembly, available at assembly.state.ny.us/leg/?default_fld=&bn=S02804&term=2017&Summary=Y&Actions=Y&Text=Y&Committee%26nbspVotes=Y&Floor%26nbspVotes=Y.

[xxix] On April 17, the Alaska House of Representatives passed HB 170; on September 22, a Notice of Intent to Act on B22-0422 was published in the District of Columbia Register.

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