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


Section 7. Delaying Disbursements

(1) A broker-dealer or investment adviser may delay a disbursement from an account of an eligible adult or an account on which an eligible adult is a beneficiary if:

(a) the broker-dealer, investment adviser, or qualified individual reasonably believes, after initiating an internal review of the requested disbursement and the suspected financial exploitation, that the requested disbursement may result in financial exploitation of an eligible adult; and

(b) the broker-dealer or investment adviser:

(i) Immediately, but in no event more than two business days after the requested disbursement, provides written notification of the delay and the reason for the delay to all parties authorized to transact business on the account, unless any such party is reasonably believed to have engaged in suspected or attempted financial exploitation of the eligible adult;

(ii) Immediately, but in no event more than two business days after the requested disbursement, notifies the Agencies; and

(iii) Continues its internal review of the suspected or attempted financial exploitation of the eligible adult, as necessary, and reports the investigation’s results to the Agencies within seven business days after the requested disbursement.

(2) Any delay of a disbursement as authorized by this section will expire upon the sooner of:

(a) a determination by the broker-dealer or investment adviser that the disbursement will not result in financial exploitation of the eligible adult; or

(b) fifteen business days after the date on which the broker-dealer or investment adviser first delayed disbursement of the funds, unless either of the Agencies requests that the broker-dealer or investment adviser extend the delay, in which case the delay shall expire no more than twenty-five business days after the date on which the broker-dealer or investment adviser first delayed disbursement of the funds unless sooner terminated by either of the agencies or an order of a court of competent jurisdiction.

(3) A court of competent jurisdiction may enter an order extending the delay of the disbursement of funds or may order other protective relief based on the petition of the commissioner of securities, Adult Protective Services, the broker-dealer or investment adviser that initiated the delay under this Section 7, or other interested party.


Commentary:

Section 7provides broker-dealers and investment advisers with the authority to delay disbursing funds from an eligible adult’s account if the broker-dealer or investment adviser (or any qualifying individuals therein) reasonably believes that such disbursement will result in the financial exploitation of the eligible adult. The broker-dealer or investment adviser shall direct that the funds be held in temporary escrow pending resolution of the disbursement decision. If a disbursement is delayed, notice must be provided within two days to all persons authorized to transact business on the account (unless any such person is suspected of financial exploitation) and to the state securities commissioner and APS agency. The broker-dealer or investment adviser must also undertake an internal review and report the results within seven days of the requested disbursement.[i] In developing the Model Act, the Committee considered some commenters’ suggestions that the Model Act allow broker-dealers or investment advisers to delay the actual execution of transactions but concluded that holding funds in temporary escrow would be preferable policy and, furthermore, that delaying executions could be inconsistent with applicable federal laws and regulations governing the execution of securities transactions.

Retrospective Review: Disbursement and Transactional Holds

In conducting its retrospective review, NASAA noted that some state’s report and hold laws are limited to disbursement delays, while some states permit holds on transactions within the account, not connected to a disbursement.[ii] The states that adopted only disbursement holds, cite client autonomy as one of their primary concerns in limiting temporary holds to disbursements. They note that transactions within an investment account do not change ownership of the investment and that delaying a transaction may have a severe adverse impact on an eligible adult if the price of a security changes during the delay. Eligible adults, particularly those in retirement, are unlikely to earn back their losses. Member jurisdictions that permit a transactional delay note that transactional delays have the potential to protect an eligible adult from tax implications should a person with authority over the account request a sale of a high-priced security that has a low tax basis. The tax implications may have a severe impact, just as the price change impact. Notably, states that allow transactional delays report it is rarely used, but in all reported instances a finding of financial exploitation was substantiated.

Some firms report incorporating clauses in their customer contracts that permit holds on transactions.[iii] This may mean that firms are implementing transactional holds in the states whose statutes do not allow for it outside the scope of the statute.

Retrospective Review: Length of Holds

The retrospective review also found that state securities regulators were divided on whether the Model Act’s 15-day hold, with a potential extension of 10 days, should be extended to adequately address situations of suspected financial exploitation. Those surveyed were split on whether or not the delay should be extended with no clear consensus. When adopted in 2016, the purpose of the Model Act’s hold period was to implement a temporary pause in order to interrupt the disbursement, notify APS, and contact the Eligible Adult. Of those who supported extending the delay the reasons given included:

  • To provide additional time to get information from third parties;
  • To address delays by firms unaware of the statutory requirements; and
  • To obtain further protections for individuals who are unaware they are being exploited.

No responses indicated that additional time was necessary to contact the Eligible Adult.

Firms canvassed supported lengthening the hold period to allow government authorities to complete their investigations, stating APS was the agency most likely investigating instances of financial exploitation. According to NAPSA, an average APS investigation of any type is 52.6 days, and financial exploitation investigations are more complicated and time-consuming.[iv]  Firms surveyed expressed frustration with the system that mandates they report but does not allow for reciprocal dialogue with government agencies after the report has been made. While the goal of a firm’s transaction or disbursement hold and an APS investigation both aim to protect the investor, without that reciprocal dialogue a firm can be left wondering whether their client is being supported and protected adequately such that the holds should be lifted.

Although the Committee noted discrepancies in the delays permitted from jurisdiction to jurisdiction, we were encouraged to hear that report and hold laws based on the Model Act are working to prevent exploitation, increase investor protection, and are being administered appropriately. Jurisdictions, firms, and those involved with the review agree that understanding the laws, educating others on resources that can be used in tandem with the laws, and developing relationships between entities that utilize the laws are important to the utilization of the Model Act.

NOTES

[i] As initially proposed, the Model Act would have permitted an initial disbursement delay of 10 business days. The Committee increased this initial disbursement delay from 10 to 15 business days in the final version of the Act following public comment because a longer period would provide more time for broker-dealers or investment advisers to review the suspected financial exploitation. Section 7(1)(a) clarifies that a firm must conduct an internal review of the facts and circumstances in order to have a reasonable belief that financial exploitation may occur. Section 7(1)(b)(iii) clarifies that a firm must continue its review or investigation following a delayed disbursement and must report the results of that review or investigation to the Agencies. The Committee considered but declined some commenters’ recommendations to add a provision relating to governmental investigations. The Committee declined to expand the delay beyond a total of 25 business days (an initial 15-day delay at the firm’s discretion, followed by a potential 10-day extension at the request of a state securities regulator or adult protective services office) in view of comments from consumer advocates noting the potential harms investors could face if disbursements are delayed too long, such as bounced check fees, missed bill payments, and other financial hardships.

[ii] As of July 2021, the following 21 states permit holds on both disbursements and transactions: Arizona, Arkansas, California, Florida, Hawaii, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia, and West Virginia.

[iii] See SIFMA Response to FINRA Regulatory Notice 20-34 (Dec. 4, 2020), available at https://www.finra.org/sites/default/files/NoticeComment/12.4.2020%20-%20SIFMA%20Comments%20on%20FINRA%20RN%2020-34%20FINAL%20%5BLisa%20J.%20Bleier%5D_Redacted.pdf.

[iv] See NAPSA Response to FINRA Regulatory Notice 20-34 (Dec. 4, 2020), available at https://www.finra.org/sites/default/files/NoticeComment/12.3.2020%20-%2020201204%20-%20NAPSA%20Comments%20-%20FINRA%20Regulatory%20Notice%2020-34.pdf.

 

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