John F. Renner, LL.M., J.D., CFP®, ChFC®, is an attorney and financial planner. He maintains a diverse law practice including estate administration and planning matters as well as litigation in both state and federal courts. He also holds the Series 7 and 66 licenses.
As the classic song, “Someone to Watch over Me,” introduced by George and Ira Gershwin in 1926 attests, we all seek comfort in the care and protection of others. As financial planners, we are also increasingly required to watch over our vulnerable clients to provide protection against suspected financial exploitation. New regulations addressing elder abuse, effective in February 2018, will impact planners and their clients.
The problem of elder abuse (including financial exploitation) is real and well-documented. It can take many forms, including physical and emotional abuse. Financial exploitation, however, is estimated as the third most common form of elder abuse, after self-neglect and caregiver neglect, according to the National Center on Elder Abuse.1 The 2011 “MetLife Study of Elder Financial Abuse” estimated that the total nationwide annual financial loss from elder abuse was $2.9 billion. The MetLife study also found that the second-largest percentage (34 percent) of perpetrators are the victim’s own family members, friends, and neighbors.
President Obama summarized the problem in a presidential proclamation as part of World Elder Abuse Awareness Day, on June 15, 2015:
Often under-identified and under-reported, elder abuse is a public health crisis that crosses all socioeconomic lines, and it is an affront to human rights around the world…. Every year, millions of older Americans experience abuse, neglect, or exploitation. They are our friends and neighbors, and our parents, grandparents, and loved ones, and we must do more to change this unacceptable reality.2
This public health crisis is only expected to continue as the population ages. A 2014 U.S. Census Bureau report estimated 40.3 million citizens age 65 or older as of 2010. The same study projected the number will double to 83.7 million by 2050.3 At the same time, this age group owns more than $15 trillion in household assets and holds the majority of mutual fund assets in the U.S., according to estimates from the AARP Public Policy Institute and the Investment Company Institute.4
This article offers information on recent federal- and state-level regulatory responses to the financial exploitation of the elderly (as a form of elder abuse) and explores the importance of incompetency planning.
New and Amended FINRA Rules
The U.S. Securities and Exchange Commission (SEC) is assigned the mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. This mission includes protecting elderly investors from financial exploitation. Financial planners are on the front line of defense protecting this group of vulnerable clients. As such, the SEC identified senior financial exploitation as an examination priority for 2017 and recently approved a new FINRA rule to protect the elderly (and other “specified adults”) against financial exploitation.5
Per Regulatory Notice 17–11, FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amended Rule 4512 (Customer Account Information) will take effect February 5, 2018. FINRA views members as having personal knowledge of the customer’s well-being due to the personal interactions common in the brokerage relationship.
First, per amended Rule 4512, FINRA broker-dealers shall maintain a record of the name and contact information of a “trusted contact person” who can be contacted to obtain information about the customer and the customer account. The trusted contact person serves as an intended resource of information. A request for the information is deemed sufficient to satisfy the rule as long as a written disclosure is also provided to the client, regardless of whether the client actually provides the trusted contact name and other pertinent information.6
Second, per Rule 2165, FINRA broker-dealers are permitted to place a temporary hold on the disbursement of funds or securities from the account of a specified adult if there is reason to believe that the customer is or will be the victim of financial exploitation.
The decision to execute a temporary hold requires, among other listed requirements, that the member: (1) establish and maintain written supervisory procedures reasonably designed to achieve compliance with this rule; (2) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule; and (3) retain records related to compliance with this rule, which shall be readily available to FINRA, upon request.7
Moreover, a member must notify the trusted contact person if there is a temporary hold placed on disbursements from the customer’s account, unless the trusted contact is reasonably suspected as the perpetrator of financial exploitation.8
NASAA Model Legislation
The North American Securities Administrators Association (NASAA) Model Act to Protect Vulnerable Adults from Financial Exploitation can be adopted by legislation or regulation by NASAA members in their respective states, should the state choose to do so with or without modification.9
The NASAA model act is similar to FINRA Rule 2165, allowing for disbursement delays of funds from “eligible adults” when the financial representative reasonably believes that the requested disbursement may result in financial exploitation of an eligible adult. The disbursement delay, like FINRA Rule 2165, permits but does not mandate action by the financial representative. To date, 13 states have enacted legislation or regulations based on the NASAA model act (see the sidebar on page 33 for details).
However, there is one important difference between the NASAA model act and FINRA Rule 2165: the NASAA model act imposes a mandatory obligation on financial representatives to report suspected financial exploitation. The reporting shall be made promptly and shall be made to the state commissioner of securities and to adult protective services. As such, a reasonable belief of financial exploitation either in the past or present involving an actual act or an attempted act of financial exploitation must be reported to the appropriate government agencies, under the NASAA model act.
Given the new FINRA regulatory scheme on the horizon and new regulations already enacted in many states based upon the NASAA model act, is there an approach to more strategically address the issue of vulnerable client protection and plan in advance for the likelihood a client may face a future period of incompetency?
Using the Durable Power of Attorney
The power of attorney is a creation of state law, and each state can set different requirements on the type, scope, and extent of the power. The durable power of attorney, however, is a vital part of incompetency planning for each client (“durability” refers to the power of attorney remaining legally valid after incompetency). The document creates an agency relationship between the grantor of the authority (known as the principal) and the receiver of the authority (known as the agent). With the document, the agent may exercise discretionary authority in managing the affairs of the principal, usually during a period of incompetency.
In the realm of estate planning, the discretion granted the agent is typically inclusive of “standing in the shoes” of the principal regarding financial decision-making power. As such, financial planners often work directly with the agent in lieu of the client once incompetency renders the client unable to manage his or her financial affairs.
A durable power of attorney remains in effect even after the grantor’s incompetency and remains in effect up until the death of the grantor. A durable power of attorney can either be effective immediately or effective upon incapacity (or it can “spring” into effect upon incapacity). The definition of incapacity can vary from state to state, but it generally reflects a time when the principal is no longer able to manage financial affairs.
The determination of what point the client is no longer able to make rational financial decisions is difficult. Given the complexity of determining when the power “springs” into effect, the Uniform Power of Attorney Act is model legislation promulgated in 2006 that takes the position that all durable powers of attorney take effect immediately upon signing.10 The theory is that if the agent is untrustworthy to give authority while the principal is competent, then the principal has chosen the wrong agent and should select another agent. Florida, for example, no longer recognizes a springing power of attorney as legally enforceable, although there is a grandfather provision regarding powers of attorney signed before the enactment of the 2011 law.
A durable power of attorney that is effective immediately can also avoid the necessity to make fine distinctions between a vulnerable client and an incompetent client. A vulnerable client may not necessarily be an incompetent client. The distinction for most elderly clients may exist in the degree of cognitive impairment.
FINRA Rule 2165 and the applicable state RIA rules regarding financial exploitation refer to vulnerable clients. With a springing power of attorney, an agent can only act on behalf of an incompetent client, which may not include a vulnerable client who is not yet so cognitively impaired to be considered incompetent. A durable power of attorney that is effective immediately, however, remains effective regardless of the degree of cognitive impairment of the principal.
Only as Good as the Agent Chosen
The durable power of attorney is only as good as the agent chosen to exercise the power. Because the agent acts as a fiduciary of the principal, the process of naming an agent is critical. The fiduciary has legally enforceable duties to the principal; those duties often include acting in good faith and in the principal’s best interest.
To foster a true understanding of the fiduciary duties, the power of attorney might include references to the duties and require the agent’s acknowledgement that he or she is bound to them by a signature in the presence of a notary. Pennsylvania, for example, mandates that an agent sign, in the presence of a notary, that he or she will exercise the powers of the agency for the benefit of the principal, not commingle assets, keep full and accurate records, and act in accordance with the best interests of the principal, among other duties set forth in the Pennsylvania statute.
The inclusion of agent fiduciary responsibilities in the power of attorney and agent acknowledgement before a notary is intended to impress upon the agent that the duty is substantial with accountability and transparency required under law. This formality is hopefully enough to avoid financial exploitation of the principal. However, exploitation could still occur.
In the realm of financial exploitation, immediate family members are often the abusers. The power of attorney could be used nefariously to benefit the agent against the best interests of the principal. Both FINRA Rule 2165 and the NASAA model act define financial exploitation to include acts or omissions using a power of attorney that reflect an anticipation that exploitation may come in the form of otherwise properly designated agents purporting to lawfully act under a properly drafted and legally enforceable document.11 This possibility creates a classic wolf-in-sheep’s-clothing scenario, leading to potentially catastrophic consequences for the client. In this situation, the financial planner can use a system of checks and balances.
The Role of the Trusted Contact Person
The person identified as the “trusted contact” pursuant to the new FINRA rules can serve as a second set of eyes and ears in the event the suspected perpetrator is the agent under the power of attorney. The trusted contact might also serve as an interested person needed to file a demand for an accounting or a similar legal action to address any financial exploitation by the agent.
The mere knowledge of a “trusted contact” in existence could be a sufficient motivator for the agent not to abuse authority under the power of attorney. In announcing the new FINRA Rule 2165, FINRA Notice 17–11 reflects that the trusted contact might be relied upon in a variety of circumstances, including verification of client contact information to the discussion of client’s health status when warranted and, most importantly for this discussion, addressing possible financial exploitation.
The naming of a trusted contact person is another protective mechanism for your client if vulnerability or incompetency becomes a reality. The trusted contact person, then, is another important step in the incompetency planning process, requiring a similar selection process to that of selecting an agent under the power of attorney.
Planning for Incompetency
A financial planner and client who proactively plan for incompetency can avoid the exploitation so frequently encountered today. A vulnerable client lacking financial decision-making skills is usually not in a position to undertake the required, in-depth process of choosing an agent and may even lack the capacity to sign the durable power of attorney document. At this point of vulnerability, a critical planning opportunity will be lost, possibly leading to guardianship proceedings before a judge. A judge would appoint someone to make life decisions, including all aspects of financial management. Depending on the circumstances, some level of court supervision may be required.
A financial planner can take the first steps in incompetency planning by proactively assisting the client in choosing the agent and then involving the agent in the financial planning process. If the client begins to suffer from dementia, the planner can rely on the client’s agent of choice to speak on the client’s behalf. By inviting the agent to client meetings or simply phoning the agent toward the conclusion of the client meeting, financial planners can weave a seamless transition at an otherwise vulnerable time in the lives of their clients who are experiencing physical and mental limitations associated with advanced age.
In summary, compliance with new FINRA Rule 2165 or the applicable state RIA rules regarding financial exploitation is a key step in incompetency planning for the elderly client. Incompetency planning is a critical part of serving clients and staying in full compliance with new regulations requiring greater responsibility by financial planners to detect and report financial exploitation. Advanced planning, including the trusted contact requirement, may avoid intra-family contests for control over a client’s financial assets and the possibility the planner could be drawn into a contested guardianship proceeding.
In the end, your client will know they have someone (or two) they have chosen in advance after careful consideration and with your assistance to watch over them.
This article is for educational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any specific legal questions.
See the 2006 report, “The 2004 Survey of State Adult Protective Services: Abuse of Adults 60 Years of Age and Older” by Pamela B. Teaster, Ph.D. and colleagues, prepared for the National Center on Elder Abuse, available at napsa-now.org/wp-content/uploads/2012/09/2-14-06-FINAL-60+REPORT.pdf.
See “Presidential Proclamation: World Elder Abuse Awareness Day, 2015,” at obamawhitehouse.archives.gov/the-press-office/2015/06/12/presidential-proclamation-world-elder-abuse-awareness-day-2015.
See “Protecting Older Investors: The Challenge of Diminished Capacity,” by the AARP Public Policy Institute, available at aarp.org/content/dam/aarp/research/public_policy_institute/cons_prot/2011/rr2011-04.pdf.
See the SEC’s examination priorities for 2017 at sec.gov/news/pressrelease/2017-7.html, and FINRA’s “2017 Annual Regulatory and Examination Priorities Letter” at finra.org/industry/2017-regulatory-and-examination-priorities-letter.
FINRA Rule 4512 (a) (1) (F); FINRA Rule 4512.06 (a); and FINRA Rule 4512.06 (a), (b).
FINRA Rule 2165 (c) (1); FINRA Rule 2165.02; and FINRA Rule 2165 (d).
FINRA Rule 2165 (b) (1) (B) (ii).
The model act has been enacted in 25 states with three additional states introducing legislation for enactment in 2017 to date. See details at uniformlaws.org/LegislativeFactSheet.aspx?title=Power%20of%20Attorney. The model act also contains a host of provisions designed to prevent the misuse of agent power by requiring accountability and transparency including civil liability provisions.
FINRA Rule 2165 (a) (4) (B); NASAA Model Legislation Section 2 (4) (b).
Sidebar: States That Have Enacted Legislation Based on the NASAA Model Act
The following states have enacted legislation or regulations based on the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation. The year of passage is shown in parenthesis.
Alabama Act 2016-141 (2016)
Arkansas Act 668 (2017)
Colorado HB 17-1253 (2017)
Indiana Act 221 for broker-dealers (2016) and Act 1526 for investment advisers (2017)
Louisiana Act 580 (2016)
Maryland HB 1149 and SB 951 (2017)
Mississippi SB 2911 (2017)
Montana SB 0024 (2017)
New Mexico HB 0326 (2017)
North Dakota SB 2322 (2017)
Oregon SB0095 (2017)
Texas HB 3291 (2017)
Vermont, see V.S.R. § 8-5, Protection of Vulnerable Adults from Financial Exploitation (2016)
Source: ServeOurSeniors.org, an initiative of the North American Securities Administrators Association. For the most up-to-date information on states that have enacted legislation based on the NASAA Model Act, visit serveourseniors.org/about/policy-makers/nasaa-model-act/update.