Securities Law News

INSIGHT: 10 Takeaways From Senior and Vulnerable Investor Laws

Feb. 6, 2019, 9:00 AM

When Alaska’s “report and hold” law became effective on January 1, it became the 21st state with these laws. “Report and hold” laws provide a protocol for broker-dealers and state-registered investment advisers to report suspected financial exploitation of senior and vulnerable investors to governmental agencies. The laws also permit firms to delay suspicious disbursements.

Some state laws extend the scope of Financial Industry Regulatory Authority (FINRA) “report and hold” Rule 2165 and allow broker-dealers to place a hold on transactions if they suspect financial exploitation. In six of the 21 states, these laws also apply to investment advisers registered with the Securities and Exchange Commission.

Significant variances among the state laws create analytical and practical challenges for industry professionals trying to keep abreast of the changing mosaic of laws. While there is always a burden from new regulation, the benefits here outweigh the burden.

Driving the increase in these state laws is the fact that about 10,000 baby boomers will turn 65 each day for the next twelve years. With such numbers, it should be no surprise that financial exploitation costs seniors and the financial services industry billions of dollars annually.

In addition to the report and hold laws, all states have (and for some time have had) so-called “Adult Protective Services” (APS) statutes. Some APS statutes are more aggressive than others—some provide for misdemeanor criminal penalties for failure to report when financial exploitation is suspected. Here too, unique provisions in each state’s APS statute create challenges.

To aid financial services professionals, Bressler created a detailed summary of the report and hold and APS laws in a web-based 50 State Survey of laws governing senior and vulnerable investors.

State Analysis

Here are ten examples of how states treat the same issue in different ways:

  1. Ten APS statutes provide that a knowing and/or willful failure by broker-dealer/investment adviser personnel to report suspected abuse is a misdemeanor criminal offense. Four APS statutes create criminal liability with no specification of the requisite intent.
  2. Twenty-two states’ report and hold or APS laws require immediate or prompt reporting by broker-dealers and state-registered investment advisers. Seventeen require immediate or prompt reporting by SEC-registered investment advisers.
  3. One state requires disclosure of suspected financial exploitation to third parties “previously designated” by the vulnerable adult, and 11 states permit disclosure of suspected financial exploitation to third parties “previously designated” by the vulnerable adult; eight states permit disclosure to third parties “reasonably associated” with the vulnerable adult. One state permits disclosure to third parties “closely connected” to the vulnerable adult.
  4. Five jurisdictions require firms to train their client-facing personnel about financial exploitation.
  5. In one state, immunity under its “report and hold” law is predicated on completion of the required seniors training.
  6. Two states require all registered representatives and investment adviser representatives who suspect financial exploitation to escalate the suspicion to the firm.
  7. One state requires a firm to adopt policies and procedures regarding the firm’s reporting obligations.
  8. Two states have a “report and hold” statute, similar to FINRA’s Rule 2165, where reporting is not required.
  9. The permissive hold statutes of two states include a mandate to place a hold on disbursements in certain circumstances (for example, a governmental direction to do so). No state has a mandatory hold requirement absent special circumstances.
  10. Four states require their agencies to disclose the status of their investigation to the reporting firm. One state permits its agencies to disclose the status of their investigation to the reporting firm.

Most Viewed, Least Viewed States

Statistical data gleaned from traffic to the 50 State Survey shows which state laws draw the most, and least, interest. Over the last 60 days, the top five most frequently viewed states were: California, Florida, and New York (all have a large senior population); Texas (it passed one of the most complicated report and hold laws); and New Mexico (which has a unique training provision). The least viewed states were Rhode Island, North Dakota, Montana, Wyoming and Utah.

Besides a growth in these state laws, we also anticipate that FINRA will revisit its “report and hold” rule governing holds on disbursements and allow firms to hold transactions as well as disbursements. That would align FINRA’s rule with the seven states that have laws permitting transactional holds (three of which became law in 2018).

Looking forward to the rest of this year, Florida, Connecticut, Washington, D.C., New Hampshire, and Wisconsin will have legislation likely to be debated in 2019, and we expect those jurisdictions to pass bills in their 2019 legislative sessions.

As additional states move to adopt the “report and hold” laws, the laws will create certain compliance burdens, but will add substantive means for the industry to protect its clients.

Author Information

Richard C. Szuch is a principal at the law firm Bressler, Amery & Ross P.C. who manages the firm’s Senior and Vulnerable Investor Issues Group. He can be reached at rszuch@bressler.com.

Daniel S. Strashun is an associate in the practice. He can be reached at at dstrashun@bressler.com.

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