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

 

Legislative Text & Updated Commentary
for the 2020 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 2016 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 provide critical training to inspire action by financial services professionals who are positioned to identify red flags.  In this regard, the enclosed NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation (the “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 (the “Seniors Committee” or “Committee”).[ii]  The Seniors Committee, formed in 2014 by NASAA and its members, is the latest in a series of initiatives by NASAA focused on senior investors, which also include the 2008 adoption of the NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations[iii] and the 2003 launch of the Senior Investor Resource Center.[iv]  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 in the financial services industry and academia, as well as among regulatory agencies and advocates of the elderly.

On September 29, 2015, NASAA released a draft of the proposed Model Act for a 30-day public comment period.[v]  The Seniors Committee received and considered comments from various interested parties and considered a similar proposal set forth by the Financial Industry Regulatory Authority (“FINRA”) in FINRA Regulatory Notice 15-37.[vi]  Moreover, following the introduction of federal legislation in October 2015,[vii] the Committee further reviewed the Model Act in late 2015 and made several revisions to the proposal.  On December 22, 2015, the NASAA 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 (e.g. 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 statutorily adopted by a jurisdiction as part of its existing securities laws, or potentially, through regulation.  The Model Act has five core features that when taken together clarify and more closely align the interests and responsibilities of financial professionals, regulators, and law enforcement agencies regarding 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 record-sharing in cases of exploitation with law enforcement and state adult protective services agencies. 

The commentary in each section of the Model Act explains the rationale for these provisions and the interplay between them.  The endnotes to this report provide additional information about many of the policy recommendations embodied in the Model Act. 

(a)  Review of State Actions on NASAA Model Act Since 2016 

As of January 15, 2020, the NASAA Model Act has been adopted, in whole or in part, by twenty-five states.  This is in addition to statutes previously enacted in Washington,[viii] Missouri,[ix] and Delaware[x] that included some, but not all, elements of the Model Act. 

In 2016, Alabama[xi] 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[xii] with respect to broker-dealers.  Additionally, in 2016, Vermont[xiii] adopted the Model Act by regulation, and Louisiana[xiv] enacted legislation that protects voluntary disclosures.    

In 2017, Indiana[xv] adopted the Model Act with respect to investment advisers, and an additional six states – Colorado,[xvi] Maryland,[xvii] New Mexico,[xviii] North Dakota,[xix] Oregon,[xx] and Texas[xxi] – enacted legislation containing provisions similar or identical to those in the Model Act, including mandatory reporting to state securities and APS offices.  Additionally, in 2017, several other states, including Arkansas,[xxii] Mississippi,[xxiii] Montana,[xxiv] New Mexico,[xxv] and Tennessee,[xxvi] enacted legislation that protects voluntary reports of financial exploitation.  In 2018, five more states had bills based on the Model Act – Alaska,[xxvii] Delaware,[xxviii] Kentucky,[xxix] Minnesota,[xxx] and Utah[xxxi] – that were ultimately signed into law. 

State legislative activity in 2019 and early 2020 involving the Model Act included adoption in Maine[xxxii] of a statute largely identical to the Model Act as drafted by NASAA, and passage in New Jersey[xxxiii] and New Hampshire[xxxiv] of laws substantially similar to it.  Arizona,[xxxv] California,[xxxvi] Rhode Island,[xxxvii] and Virginia[xxxviii] have also enacted legislation that protects disclosures of financial exploitation and allows for delayed disbursements and/or transactions.  Other jurisdictions have introduced bills based on the Model Act.  For example, two states, Florida[xxxix] and Missouri,[xl] did not enact this type of legislation in 2019 but have reintroduced their bills this year.  Other jurisdictions – the District of Columbia,[xli] Michigan,[xlii] Minnesota,[xliii] and Wisconsin[xliv] – allow carryover of their bills from odd to even years and have legislation similar to the Model Act currently pending in their legislatures.   

(b)  Adoption of FINRA Rule 2165 and Relationship to NASAA Model Act 

State regulation of broker-dealers parallels self-regulation conducted by FINRA, a federally-sanctioned self-regulatory organization (“SRO”).  As an SRO, FINRA exercises significant authority over the conduct and practices 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 and any other SRO. 

Certain provisions of the Model Act are similar to those in FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information).[xlv]  The former allows broker-dealers to place temporary holds on the disbursements of funds or securities from the accounts of specified customers in situations where there is a reasonable belief that a customer may be the subject of financial exploitation.[xlvi]  The latter  requires broker-dealers to make reasonable efforts to obtain, from the customer, the name and contact information for a trusted contact person for the customer’s account.[xlvii] 

Adoption of FINRA Rules 2165 and 4512 are important steps, however, the promulgation of  these rules is not a substitute for the enactment of state legislation.  FINRA’s jurisdiction is narrower than that of state securities regulators: FINRA has jurisdiction over broker-dealers but not investment advisers. Moreover, the protections afforded by the FINRA rules are substantively different from those afforded by the Model Act and related legislation.  For example, the requirement to report suspected financial exploitation to state regulators or state APS agencies is a unique aspect of the Model Act, as is the requirement to share records with state APS and law enforcement agencies, which is an essential tool for agencies tasked with preventing exploitation. 

In the fall of 2019, FINRA announced that it will be conducting a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation.[xlviii] FINRA solicited public comment on a variety of ideas to expand its rules.  The comment period closed on October 8, 2019.[xlix] 

(c)  Federal Enactment and Implementation of the Senior Safe Act 

On May 24, 2018, President Trump signed into law S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” which included a provision that extends – to certain financial institutions and individuals – civil and administrative immunity for the disclosure of suspected financial exploitation.[l]  The provision is virtually identical to legislation set forth in H.R. 3758, the “Senior Safe Act of 2017,” for which NASAA expressed considerable support.[li] 

The Senior Safe Act does not mandate governmental or third-party disclosure of suspected financial exploitation, but it does complement the Model Act by providing immunity to broker-dealers, investment advisers, banks, credit unions, insurance companies, and certain individuals for disclosing suspected financial exploitation to state regulators, APS agencies, and certain other state and federal agencies.   

It should be emphasized that the Senior Safe Act  does not preempt or otherwise limit applicable state law.  On the contrary, it is intended to promote the reporting of suspected senior financial exploitation to state regulators and other state and federal authorities by providing certain financial institutions and individuals with a minimum level of protection against civil and administrative liability for making the disclosure.   

As with SRO rules, the adoption of the Senior Safe Act by the federal government is not a substitute for enacting state legislation.  The protections in the federal provision are substantively different from those afforded by the Model Act.  For instance, the Senior Safe Act expressly requires individuals to receive specialized training on financial exploitation as a prerequisite to the individual and/or the reporting firm receiving immunity.  Moreover, the Senior Safe Act does not apply to vulnerable adults, such as those subject to state APS laws, and the Senior Safe Act does not contemplate any manner of immunity for delays of disbursements. 

In May 2019, NASAA, FINRA, and the SEC jointly issued a fact sheet to help raise awareness among broker-dealers, investment advisers, and transfer agents of the Senior Safe Act and how its immunity provisions work.[lii] 

(D)    Recent Developments

In 2020, the NASAA Senior Issues and Diminished Capacity Committee will undertake a review of the implementation and efficacy of the Model Act in the 25 states where the law has been adopted.  The purpose of this review is to gather information about how effective the laws have  been in protecting vulnerable adults from financial exploitation.  This review will include an analysis of feedback and data provided by individual states and state regulators, other law enforcement and APS agencies, investors, broker-dealers, investment advisers, and concerned members of the public.  The Committee’s review is expected to be completed prior to the end of 2020 and key findings from this review may be included in future commentary. 

ENDNOTES

1      Almost one in five Americans over the age of 65, which is nearly seven million seniors, have “been taken  advantage of financially in terms of an inappropriate investment, unreasonably high fees for financial services, or outright fraud,” according to a major survey conducted by Public Policy Polling (PPP) and the Investor Protection Trust (ITP).  See: http://www.investorprotection.org. 

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

[iii]     See: NASAA Model Rule on the Use of Senior Specific Certifications and Professional Designations (Apr. 1, 2008), available at: http://www.nasaa.org/wp-content/uploads/2011/07/3-Senior_Model_Rule_Adopted.pdf. 

[iv]     See: NASAA Senior Investor Resource Center, available at: http://www.nasaa.org/1723/senior-investor-resource-center/. 

[v]      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: http://www.nasaa.org/
37301/notice-of-request-for-comments-regarding-nasaas-proposed-model-legislation-of-regulation-to-protect-vulnerable-adults-from-financial-exploitation/
. 

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

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

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

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

[x]      See: HB 417, Delaware 147th General Assembly (2013-2014), available at: http://legis.delaware.gov/
BillDetail?LegislationId=22741
. 

[xi]        See: SB 220, Alabama Legislature, Regular Session (2016), available at: http://alisondb.legislature.
state.al.us/ALISON/SearchableInstruments/2016rs/PrintFiles/SB220-enr.pdf
. 

[xii]    See: SB 221, Indiana General Assembly, Second Regular Session (2016), available at: http://iga.in.gov/
legislative/2016/bills/senate/221#document-72ee118f
. 

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

[xiv]    See: SB 338, Louisiana State Legislature, Regular Session (2016), available at: https://www.legis.la.gov/
legis/ViewDocument.aspx?d=1012781
. 

[xv]     See: HB 1526, Indiana General Assembly, First Regular Session (2017), available at: http://iga.in.gov/
legislative/2017/bills/house/1526/#document-d94fa5d4
. 

[xvi]    See: HB 17-1253, Colorado General Assembly, Regular Session (2017), available at: http://leg.colorado.gov/
bills/hb17-1253
. 

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

[xviii] See: HB 326, New Mexico 53rd Legislature, First Session (2017), available at: https://www.nmlegis.
gov/Sessions/17%20Regular/final/HB0326.pdf
. 

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

[xx]     See: SB 95, Oregon State Legislature, Regular Session (2017), available at: https://olis.leg.state.or.us/
liz/2017R1/Downloads/MeasureDocument/SB95/Enrolled
. 

[xxi]    See: SB 95, Texas 85th Legislature (2017), available at: http://www.legis.state.tx.us/
BillLookup/History.aspx?LegSess=85R&Bill=HB3921
. 

[xxii]   See: HB 1800, Arkansas State Legislature, 91st General Assembly, Regular Session (2017), available at: http://www.arkleg.state.ar.us/assembly/2017/2017R/Pages/BillInformation.aspx?measureno=HB1800. 

[xxiii] See: SB 2911, Mississippi Legislature, Regular Session (2017), available at: http://billstatus.ls.state.ms.us/
2017/pdf/history/SB/SB2911.xml
. 

[xxiv] See: SB 0024, Montana 65th Legislature (2017), available at: http://leg.mt.gov/bills/2017/
sesslaws/ch0084.pdf
. 

[xxv]   See: HB 326, New Mexico 53rd Legislature, First Session (2017), available at: https://www.nmlegis.gov/
Legislation/Legislation?chamber=H&legtype=B&legno=326&year=17
. 

[xxvi] See: SB 1192 and HB 0304, Tennessee General Assembly, 110th Regular Session (2017), available at: http://wapp.capitol.tn.gov/apps/BillInfo/Default.aspx?BillNumber=SB1192 and http://wapp.capitol.tn.gov/apps/BillInfo/Default.aspx?BillNumber=HB0304&GA=110, respectively. 

[xxvii] See: HB 170, Alaska 30th Legislature (2017-2018), available at: http://www.akleg.gov/
basis/Bill/Detail/30?Root=HB%20170
. 

[xxviii] See: HB 332, Delaware 149th General Assembly (2016-2018), available at: https://legis.delaware.gov/BillDetail/26343. 

[xxix] See: HB 93, Kentucky Regular Session (2018), available at: http://www.lrc.ky.gov/record/18RS/HB93.htm. 

[xxx]   See: HF 3833, Minnesota 90th Legislature (2017), available at: https://www.revisor.mn.gov/bills/bill.php?f=HF3833&y=2017&ssn=0&b=house. 

[xxxi] See: SB 88, Utah State Legislature, General Session (2018), available at: https://le.utah.gov/~2018/bills/static/SB0088.html. 

[xxxii] See: HP 410, Maine Legislature, Regular Session (2019), available at: http://www.mainelegislature.org/legis/bills/getPDF.asp?paper=HP0410&item=3&snum=129. 

[xxxiii] See: A 5091, New Jersey Legislature, Regular Session (2018-2019), available at: https://www.njleg.state.nj.us/bills/BillsByNumber.asp. 

[xxxiv] See: SB 252, The General Court of New Hampshire, Regular Session (2019), available at: http://gencourt.state.nh.us/bill_status/billText.aspx?sy=2019&id=1088&txtFormat=pdf&v=current. 

[xxxv]         See: SB 1483, Arizona State Legislature, Regular Session (2019), available at: https://www.azleg.gov/legtext/54leg/1R/laws/0221.pdf. 

[xxxvi] See: SB 496, California State Legislature, Regular Session (2019-2020), available at: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB496. 

[xxxvii] See: H 6091 and S 433, Rhode Island General Assembly, Regular Session (2019), available at: http://webserver.rilin.state.ri.us/BillText/BillText19/HouseText19/H6091A.pdf and http://webserver.rilin.state.ri.us/BillText/BillText19/SenateText19/S0433.pdf. 

[xxxviii]      See: HB 1987 and SB 1490, Virginia General Assembly, Regular Session (2019), available at: http://lis.virginia.gov/ cgi-bin/legp604.exe?191+sum+HB1987 and http://lis.virginia.gov/cgi-bin/legp604.exe?191+sum+SB1490. 

[xxxix] See: HB 813 and SB 1672, Florida Legislature, Regular Session (2020), available at: http://www.flsenate.gov/Session/Bill/2020/813/?Tab=BillText and http://www.flsenate.gov/Session/Bill/2020/1672.    

[xl]     See: HB 1736, Missouri General Assembly, Regular Session (2020), available at: https://house.mo.gov/Bill.aspx?bill=HB1736&year=2020&code=R 

[xli]    See: B 186, Council of the District of Columbia, Regular Session (2019-2020), available at: http://lims.dccouncil.us/Legislation/B23-0186?FromSearchResults=true. 

[xlii]   See: HB 5131 and SB 629, Michigan Legislature, Regular Session (2020), available at:       

https://www.legislature.mi.gov/(S(5l5kpa230jouo5pnvhprwlxq))/mileg.aspx?page=getObject&objectName=2019-HB-5131 and https://www.legislature.mi.gov/documents/2019-2020/billintroduced/Senate/pdf/2019-SIB-0629.pdf. 

[xliii]  See: HF 2475 and SF 2466, Minnesota Legislature, Regular Session (2019-2020), available at: https://www.house.leg.state.mn.us/bills/billnum.asp?billnumber=HF2475 and https://www.revisor.mn.gov/bills/bill.php?b=Senate&f=SF2466&ssn=0&y=2019. 

[xliv]   See: SB 428, Wisconsin State Legislature, available at:  https://docs.legis.wisconsin.gov/2019/related/proposals/sb428 

[xlv]    See: Regulatory Notice 17-11, Financial Exploitation of Seniors – SEC Approves Rules Relating to Financial Exploitation of Seniors, FINRA (Mar. 30, 2017), available at: http://www.finra.org/sites/default/files/Regulatory-Notice-17-11.pdf. 

[xlvi]   See: FINRA Rule 2165, available at: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=12784. 

[xlvii] See: FINRA Rule 4512, available at: http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9958. 

[xlviii] See: FINRA Regulatory Notice 19-27, available at: https://www.finra.org/rules-guidance/notices/19-27.

[xlix]     Id. 

[l]       See: Economic Growth, Regulatory Relief, and Consumer Protection Act, S. 2155, 115th Cong. § 303 (2018), available at: https://www.congress.gov/bill/115th-congress/senate-bill/2155/text?q=%7B%22search%22%3A%5B%222155%22%5D%7D&r=7#toc-id45B692A3CB264F64BDE568E071AA2CFD. 

[li]      See: Senior Safe Act of 2017, H.R. 3758, 115th Congress (2017), available at: https://www.congress.gov/bill/115th-congress/house-bill/3758/all-info. 

[lii]     See: Senior Safe Act Fact Sheet, available at: https://s30730.pcdn.co/wp-content/uploads/2019/05/Senior-Safe-Act-Fact-Sheet.pdf. 

 

 

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