Development & Rationale
Overview of Recent Developments
Section 1. Short Title
Section 2. Definitions
Section 3. Governmental Disclosures
Section 4. Immunity for Governmental Disclosures
Section 5. Third-Party Disclosures
Section 6. Immunity for Third-Party Disclosures
Section 7. Delaying Disbursements
Section 8. Immunity for Delaying Disbursements
Section 9. Records
NASAA Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation | Adopted January 22, 2016
Legislative Text & Updated Commentary
for the 2021-22 Legislative Session
Overview of Recent Developments
Review of State Adoption of NASAA Model Act Since 2016
As of July 14, 2021, the NASAA Model Act has been adopted, in whole or in part, by thirty-two states. This is in addition to statutes previously enacted in Washington[i] and Missouri[ii] that included some, but not all, elements of the Model Act. While legislation may vary from state to state, two of the hallmarks of the Model Act are the “report” and “hold” provisions leading to these laws often being colloquially referred to as “report and hold” laws.
In 2016, Alabama[iii] enacted legislation that contained many of the provisions found in the Model Act, including mandatory reporting to state securities and Adult Protective Services (“APS”) offices, as did Indiana[iv] with respect to broker-dealers. Additionally, in 2016, Vermont[v] adopted the Model Act by regulation, and Louisiana[vi] enacted legislation that protects voluntary disclosures.
In 2017, Indiana[vii] adopted revisions to its version of the Model Act to include investment advisers, and an additional six states – Colorado,[viii] Maryland,[ix] New Mexico,[x] North Dakota,[xi] Oregon,[xii] and Texas[xiii] – enacted legislation containing provisions similar or identical to those in the Model Act, including mandatory reporting to state securities regulators and APS offices. Additionally, in 2017, several other states, including Arkansas,[xiv] Mississippi,[xv] Montana,[xvi] New Mexico,[xvii] and Tennessee,[xviii] enacted legislation that protects voluntary reports of financial exploitation. In 2018, five more states introduced bills based on the Model Act – Alaska,[xix] Delaware,[xx] Kentucky,[xxi] Minnesota,[xxii] and Utah[xxiii] – that were ultimately signed into law.
In 2019, Maine[xxiv] saw the adoption of a statute largely identical to the Model Act, while New Hampshire[xxv] enacted legislation substantially similar to the Model Act. Also in 2019, Arizona,[xxvi] California,[xxvii] Rhode Island,[xxviii] and Virginia[xxix] enacted legislation that protects disclosures of financial exploitation and allows for delayed disbursements. In 2020, despite the legislative impact of the coronavirus pandemic, four more states adopted rules that included elements of the Model Act – Florida,[xxx] New Jersey,[xxxi] and West Virginia[xxxii] adopted legislation based on the Model Act, while Oklahoma adopted the Model Act by regulation.[xxxiii] In 2020, Missouri also announced amendments to its financial exploitation statute, the Senior Saving Protection Act, which included modifying the definition of “qualified individual” to include broker-dealers, investment advisers, or persons associated with a broker-dealer or investment adviser, permitting transactional holds, and establishing that a subsequent extension of a hold must be reviewed every 30 days.[xxxiv]
State legislative activity in 2021 involving the Model Act included the adoption of statutes based on the Model Act in Iowa,[xxxv] Nebraska,[xxxvi] and South Carolina.[xxxvii] In addition, two states – Massachusetts[xxxviii] and Wisconsin[xxxix] – have legislation that includes provisions similar to the Model Act pending in their legislatures.[xl]
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 its broker-dealer members, but its role is also strictly circumscribed by federal statutes and regulations. Thus, state laws are legally and functionally distinct from rules adopted by FINRA and any other SRO.
In 2017, after the Model Act was adopted, FINRA adopted Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information).[xli] Certain provisions of these rules are complementary to the Model Act. For example, the former is similar to sections 7 and 8 of the Model Act in that it 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.[xlii] 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, which has similarities with sections 5 and 6 of the Model Act.[xliii] In the fall of 2019, FINRA announced that it was conducting a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation.[xliv] FINRA solicited public comment on a variety of ideas to expand its rules. The comment period closed on October 8, 2019.[xlv]
On June 28, 2021, FINRA filed with the Securities and Exchange Commission (“SEC”) a proposed rule change to amend rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm has reported the matter to a state regulator or agency or a court of competent jurisdiction; and (2) place a temporary hold on securities transactions where there is a reasonable belief of financial exploitation.[xlvi]
Adoption by FINRA of Rules 2165 and 4512 was an important step; however, the promulgation of these rules is not a substitute for the enactment of state legislation. The scope of FINRA’s jurisdiction is narrower than that of state securities regulators and does not include investment advisers.[xlvii] Moreover, the protections afforded by the FINRA rules are substantively different from those afforded by the Model Act and related report and hold legislation. For example, the requirement to report suspected financial exploitation to state regulators or state APS agencies (or both) is unique to the Model Act, as is the requirement that securities firms share records with state APS and law enforcement agencies, which is an essential tool for agencies tasked with preventing and investigating financial exploitation. Furthermore, the FINRA rules do not provide firms with civil and administrative immunity that may otherwise arise from disclosing certain financial information.
Federal Enactment and Implementation of the Senior Safe Act
On May 24, 2018, Congress enacted S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” which included a provision that is commonly referred to as “The Senior Safe Act.” This provision extends civil and administrative immunity for the disclosure of suspected financial exploitation to certain “qualified” financial institutions and individuals.[xlviii]
The Senior Safe Act does not mandate governmental or third-party disclosure of suspected financial exploitation. However, the law 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 is the only nationwide law covering such diverse entities.
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. The immunity provided by the Senior Safe Act is only applicable when employees receive training on how to identify and report exploitative activity against seniors. In addition, reports of suspected exploitation must be made “in good faith” and “with reasonable care.”
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, as explained above, 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 only applies to individuals 65 years of age or older and does not apply to vulnerable adults protected under state APS laws. In addition, the Senior Safe Act does not contemplate any manner of immunity for delays of disbursements.[xlix] To learn more about the Senior Safe Act, please see the 2019 Senior Safe Act Fact Sheet and 2021 “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors” training released jointly by NASAA, the SEC, and FINRA.[l]
Retrospective Review of the Model Act, 2020-2021
In 2020 and 2021, the Committee undertook a retrospective review (“retrospective review” or “review”) of the implementation and efficacy of the Model Act in the states that have adopted report and hold laws identical or substantially similar to the Model Act. The purpose of the retrospective review was to gather information about how effective the laws have been in protecting eligible adults from financial exploitation and determining whether a revision to the Model Act was warranted. The review included an analysis of feedback provided by state and federal regulators, law enforcement and APS agencies, investors, broker-dealers, investment advisers, and other interested stakeholders.[li]
The information derived from the review indicated that the Model Act and similar report and hold laws have been overwhelmingly successful at protecting investors. Securities regulators in several states reported that report and hold laws are being used to delay disbursements, and in some states, transactions in cases of suspected and attempted financial exploitation. No state securities regulator reported concerns of systematic inappropriate use of these holds. Therefore, the Committee determined that no amendments to the Model Act are warranted at this time.[lii]
At the same time, the review also revealed some considerations for jurisdictions and agency and industry participants on how regulator and industry participants can most effectively utilize the Model Act. An overview of these considerations is below.
- Effective Communication
The Committee overwhelmingly heard that open lines of communication are crucial to effective reports of financial exploitation. Without regular communication among all parties, including firms, state securities regulators, and APS, the firms that report this type of wrongdoing may become dissuaded to engage further. Although client privacy is paramount, firms stated that follow-up by state securities regulators or APS asking if they have any further information or developments to discuss could go a long way to building relationships between parties. This reassures reporting parties that something is being done with their reported concerns, even if particulars about the investigation cannot be disclosed.
- Comprehensive Education and Training
Education is key to effective reporting of financial exploitation. The Committee is encouraged to see that many jurisdictions are adopting laws modeled after the Model Act. We note that these laws are best utilized by those who know how to navigate and apply them effectively. In the past number of years, several training resources on financial exploitation have become available, including the newly released NASAA, SEC, and FINRA training entitled “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors.”[liii] Ensuring that state securities regulators, APS, firms, and anyone who encounters financial exploitation have proper knowledge of these rules is crucial to their continued success.
- Trusted Contacts
Separately, the Committee was made aware that the Model Act’s provision that allows firms to contact a third-party previously designated by the client, such as a trusted contact person, is an effective, yet often underutilized tool in assisting investors who face financial exploitation.[liv] Although the Model Act provides clear authority and administrative and civil immunity for contacting a previously designated contact person in good faith to report suspected financial exploitation, it does not require registrants to take reasonable steps to obtain a contact person. Our discussion revealed that this tool is not always available to firms as clients do not always appoint such a contact person. Some firms expressed the desire to contact anyone “reasonably associated” with the account, a broader authority than the Model Act contemplates. Some states have enacted laws allowing that broader authority to firms responding to suspected exploitation. Regardless, jurisdictions should continue to encourage firms and associated persons to discuss the merit of appointing a contact person their with clients. One opportunity to do this is during an examination of a firm. Asking licensed individuals during an examination to share how they request a contact person from clients may lead to a dialogue on recommended procedures. The Committee’s retrospective review found that a conversation with real-life examples of why and how appointing a contact person could be beneficial goes a long way in ensuring the client understands the concept and ultimately agrees to appoint one.[lv]
- Multi-disciplinary Approach
Lastly, creating a network of agencies and resources available to address suspected financial exploitation will ensure a multifaceted approach in assisting investors who may be experiencing financial exploitation and other harmful acts. NASAA previously released a taskforce toolkit intended to assist NASAA members with starting a partnership with other state and provincial agencies dedicated to preventing senior financial exploitation, generating resources, educating the community, and advocating for the needs of older and vulnerable victims.[lvi] This toolkit aims to create a stronger multi-disciplinary approach that we hear is so often lacking. Although the toolkit is designed for NASAA jurisdictions, firms and other interested persons may also create or be a part of such a taskforce. Additionally, state securities regulators and firms are encouraged to educate themselves on the APS reporting system in their jurisdictions and work cooperatively with APS when cases of financial exploitation arise. We believe that knowing your network, firms, state securities regulators, APS, and others who advocate for older adults will be more successful in addressing financial exploitation.
Additionally, the retrospective review highlighted the industry’s interest in a centralized reporting mechanism to notify multi-disciplinary teams, state securities regulators, and APS simultaneously. We are aware that a centralized reporting program is currently being piloted and are monitoring the outcome of said program to consider the feasibility of a national reporting system for the future.
In conclusion, we commend states for adopting report and hold laws modeled after the Model Act and are encouraged to see these laws working to further investor protection. In the text that follows, we provide some updated commentary, including an overview of variations in the approach jurisdictions have taken in regard to the length and type of hold (i.e., disbursement vs. transaction). However, the most important point remains that legislation based on the Model Act is paramount to investor protection. Therefore, it is crucial that jurisdictions continue to adopt these laws and work with other individuals and agencies to address cases, educate others on financial exploitation and how these laws and tools work, and develop relationships with their local network of individuals and agencies who can aid in these cases.
[i] See Revised Code of Washington, § 74.34.215, available at http://app.leg.wa.gov/rcw/default.aspx?cite=74.34.215.
[ii] See SB 244, Missouri Regular Session (2015), available at http://www.senate.mo.gov/15info/BTS_Web/Bill.aspx?SessionType=R&BillID=1174064.
[iii] See SB 220, Alabama Legislature, Regular Session (2016), available at http://alisondb.legislature.state.al.us/ALISON/SearchableInstruments/2016rs/PrintFiles/SB220-enr.pdf.
[iv] See SB 221, Indiana General Assembly, Second Regular Session (2016), available at http://iga.in.gov/legislative/2016/bills/senate/221#document-72ee118f.
[v] See Rule No. S-2016-01, Vermont Sec. Reg. § 8-5, available at https://dfr.vermont.gov/reg-bul-ord/vermont-securities-regulations.
[vi] See SB 338, Louisiana State Legislature, Regular Session (2016), available at https://www.legis.la.gov/legis/ViewDocument.aspx?d=1012781.
[vii] See HB 1526, Indiana General Assembly, First Regular Session (2017), available at http://iga.in.gov/legislative/2017/bills/house/1526/#document-d94fa5d4.
[ix] 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.
[x] See HB 326, New Mexico 53rd Legislature, First Session (2017), available at https://www.nmlegis.gov/Sessions/17%20Regular/final/HB0326.pdf.
[xi] See SB 2322, North Dakota 65th Legislative Assembly (2017), available at https://www.legis.nd.gov/assembly/65-2017/documents/17-0979-04000.pdf.
[xii] See SB 95, Oregon State Legislature, Regular Session (2017), available at https://olis.oregonlegislature.gov/liz/2017R1/Measures/Overview/SB95.
[xiii] See SB 95, Texas 85th Legislature (2017), available at http://www.legis.state.tx.us/BillLookup/History.aspx?LegSess=85R&Bill=HB3921.
[xiv] 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.
[xv] See SB 2911, Mississippi Legislature, Regular Session (2017), available at http://billstatus.ls.state.ms.us/2017/pdf/history/SB/SB2911.xml.
[xvii] 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.
[xviii] 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.
[xix] See HB 170, Alaska 30th Legislature (2017-2018), available at http://www.akleg.gov/basis/Bill/Detail/30?Root=HB%20170.
[xxi] See HB 93, Kentucky Regular Session (2018), available at https://apps.legislature.ky.gov/record/18rs/hb93.html.
[xxii] 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.
[xxiii] See SB 88, Utah State Legislature, General Session (2018), available at https://le.utah.gov/~2018/bills/static/SB0088.html.
[xxiv] See HP 410, Maine Legislature, Regular Session (2019), available at http://www.mainelegislature.org/legis/bills/getPDF.asp?paper=HP0410&item=3&snum=129.
[xxv] 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.
[xxvi] See SB 1483, Arizona State Legislature, Regular Session (2019), available at https://www.azleg.gov/legtext/54leg/1R/laws/0221.pdf.
[xxvii] See SB 496, California State Legislature, Regular Session (2019-2020), available at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB496.
[xxviii] 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.
[xxix] 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 https://lis.virginia.gov/cgi-bin/legp604.exe?191+sum+SB1490&191+sum+SB1490.
[xxx] 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.
[xxxi] See A 5091, New Jersey Legislature, Regular Session (2018-2019), available at https://www.njleg.state.nj.us/bills/BillsByNumber.asp.
[xxxii] See HB 4377, West Virginia Legislature, Regulator Session (2020), available at https://www.wvlegislature.gov/Bill_Text_HTML/2020_SESSIONS/RS/bills/HB4377%20SUB%20ENR.pdf.
[xxxiii] See Okla. Admin. Code § 660:11-15-2, available at https://www.securities.ok.gov/Act-Rules/Rules.asp#660:11-15-1.2.
[xxxiv] See Senior Savings Protection Act, Sections 409.605 to 409.630, RSMo., available at https://revisor.mo.gov/main/OneSection.aspx?section=409.605&bid=48648&hl=.
[xxxv] See HF 839, Iowa General Assembly, Regular Session (2021), available at https://www.legis.iowa.gov/legislation/BillBook?ga=89&ba=HF839.
[xxxvi] See LB 297, Nebraska Legislature, Regular Session (2021), available at https://nebraskalegislature.gov/FloorDocs/107/PDF/Intro/LB297.pdf?web=1&wdLOR=c00905468-7757-458F-A62F-B02952B2F844.
[xxxvii] See S425, South Carolina General Assembly, Regular Session (2021-2022), available at https://www.scstatehouse.gov/sess124_2021-2022/bills/425.htm.
[xxxix] See SB 20, Wisconsin State Legislature, Regular Session (2021), available at https://docs.legis.wisconsin.gov/2021/proposals/reg/sen/bill/sb20.
[xl] The Massachusetts State Legislature and Wisconsin State Legislature are scheduled to adjourn on December 31, 2021.
[xli] 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.
[xlii] See FINRA Rule 2165, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/2165.
[xliii] See FINRA Rule 4512, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/4512.
[xliv] See FINRA Regulatory Notice 19-27, available at https://www.finra.org/rules-guidance/notices/19-27.
[xlvi] See https://www.finra.org/rules-guidance/rule-filings/sr-finra-2021-016. See also NASAA’s December 2020 comment letter on the proposed amendment to FINRA Rule 2165, available at https://www.nasaa.org/wp-content/uploads/2020/12/NASAA-Comment-Letter-Re-Reg.-Notice-20-34.pdf.
[xlvii] FINRA has jurisdiction over broker-dealers but not investment advisers.
[xlviii] 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#tocid45B692A3CB264F64BDE568E071AA2CFD.
[xlix] For additional information about the Senior Safe Act, See the 2019 NASAA-SEC-FINRA Senior Safe Act Fact Sheet, available at https://www.nasaa.org/wp-content/uploads/2019/05/Senior-Safe-Act-Fact-Sheet.pdf.
[l] On May 23, 2019, NASAA, the SEC, and FINRA issued a Senior Safe Act Fact Sheet to help promote greater reporting of suspected senior financial exploitation, available at https://www.investor.gov/senior-safe-act-fact-sheet. On June 15, 2021, NASAA the SEC, and FINRA collaborated again to release the “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors” training presentation to train associated persons about how to detect, prevent, and report financial exploitation of senior and vulnerable adult investors, available at https://www.finra.org/rules-guidance/key-topics/senior-investors/elder-abuse-prevention-training.
[li] The retrospective review consisted of surveys and direct outreach to NASAA members, other regulators, industry participants, and other interested stakeholders. During the Summer and Fall of 2020, the Committee surveyed and conducted follow-up discussions with member states that have adopt rules based on the Model Act. The Committee also heard from its Advisory Council, which is comprised of experts from government, business, senior advocacy organizations, academia, and medical and legal practitioners, during our annual meeting in March 2021. In addition, the committee conducted outreach to mid and large sized firms with various organizational structures.
[lii] For instance, in 2019, NASAA members received 709 reports relating to the NASAA Model Act, which led to 233 investigations and 15 enforcement actions. See NASAA 2020 Enforcement Report, available at https://www.nasaa.org/wp-content/uploads/2020/09/2020-Enforcement-Report-Based-on-2019-Data-FINAL.pdf.
[liii] On June 15, 2021, NASAA, the SEC, and FINRA published a joint training presentation, entitled “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors,” as a service to the securities industry. Firms can use this presentation to train associated persons about how to detect, prevent, and report financial exploitation of senior and vulnerable adult investors. The training serves as a resource for firms implementing the requirements of the federal “Senior Safe Act” (Section 303 of the ‘‘Economic Growth, Regulatory Relief, and Consumer Protection Act’’) and the state training requirements for certain firms and financial institutions relating to senior investor protection. See https://www.finra.org/rules-guidance/key-topics/senior-investors/elder-abuse-prevention-training.
[liv] FINRA Rule 2165 mandates that all FINRA registrants ask their clients if they would like to designate a trusted contact person. The NASAA Model Act does not require registrants seek a third-party contact.
[lv] The Ontario Securities Commission released OSC Staff Notice 11-790 Protecting Aging Investors through Behavioral Insights in November 2020, which identified behaviorally informed techniques broker dealers and investment advisers can use to encourage their older clients to provide trusted contact person information. These techniques may also help firms increase the uptake of the trusted contact person information. See https://www.osc.ca/sites/default/files/2020-11/rule_20201109_11-790_protecting-aging-investors-through-behavioural-insights.pdf.