RIA Compliance Blog
Earlier this year, the North American Securities Administrators Association (“NASAA”) adopted a proposed model legislation or regulation (“Model Act”) aimed at protecting vulnerable adults from financial exploitation. A 2010 survey by the Investor Protection Trust Elder Fund Society found that one out of every five United States citizens age sixty-five and over has been a victim of financial fraud. As a result, the protection of vulnerable adults, such as senior investors, from financial exploitation has been one of NASAA’s priorities.
The Model Act is entitled “NASAA Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation.” It is designed to protect “eligible adults.” An “eligible adult” is defined as a person age sixty-five years or older, or a person subject to a state’s Adult Protective Services statute, such as disabled or impaired persons.
To protect eligible adults, the Model Act provides guidelines regarding disclosure of attempts and instances of financial exploitation of eligible adults to “qualified individuals.” A “qualified individual” is defined as “any agent, investment adviser representative or person who serves in a supervisory, compliance, or legal capacity for a broker-dealer or investment adviser.” The Model Act also provides that the term “investment adviser” shall have the same meaning as in the relevant state code section of any state that adopts legislation or a regulation modeled after the Model Act. This definition shows that investment advisers will be subject to certain disclosure rules regarding financial exploitation of eligible adults if their state adopts legislation or a regulation based on the NASAA model.
The first guideline in the Model Act pertains to governmental disclosures. The guideline provides that if a qualified individual “reasonably believes that financial exploitation of an eligible adult may have occurred, may have been attempted, or is being attempted, the qualified individual shall promptly notify Adult Protective Services and the commissioner of securities.” Thus, governmental disclosures are mandatory if the qualified individual has a reasonable belief that an attempt or instance of financial exploitation of an eligible adult is occurring or has occurred. The Model Act further provides that a qualified individual who makes a disclosure in good faith and while exercising reasonable care shall be immune from any administrative or civil liability that could otherwise arise from the disclosure or any failure to notify the customer of the disclosure.
The second guideline in the Model Act pertains to disclosures to a third party whom an eligible adult has designated to receive financial disclosures relating to the eligible adult. Like the guideline pertaining to governmental disclosures, the qualified individual must have a reasonable belief that financial exploitation of an eligible adult “may have occurred, may have been attempted, or is being attempted” before any disclosures can be made. However, the Model Act states that the qualified individual “may notify any third party previously designated by the eligible adult.” Thus, disclosure to a third party is not mandatory. The Model Act further states that disclosure may not be made to a designated third party that is suspected of financially exploiting or carrying out other abuse of the eligible adult.
The third guideline relates to possible delay of disbursements from an eligible adult’s account or an account on which an eligible adult is a beneficiary in the case of possible financial exploitation. The Model Act provides that a broker-dealer or investment adviser may delay a disbursement if the person 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.” If the broker-dealer or investment adviser decides to delay the disbursement, the person must provide written notification of the delay and the reason for it to all parties authorized to transact business on the account, unless any party is reasonably believed to have engaged in suspected or attempted financial exploitation of the eligible adult. The broker-dealer or investment adviser must also notify Adult Protective Services and the state commissioner of securities. All of these disclosures must take place no more than two business days after the requested disbursement.
Any delay of a disbursement will expire upon the sooner of either a determination by the broker-dealer or investment adviser that the disbursement will not cause financial exploitation of the eligible adult, or fifteen business days after the date on which the person delayed the disbursement. Adult Protective Services or the state commissioner of securities, however, may request that the broker-dealer or investment adviser extend the delay, in which case the delay must expire no more than twenty-five business days after the date the disbursement was delayed. Court action is necessary to extend the delay further. Any broker-dealer or investment adviser who delays a disbursement pursuant to the model shall be immune from administrative or civil liability that might otherwise arise from the delay if the person acted in good faith and exercised reasonable care.
The final guideline relates to access to records. Under the Model Act, broker-dealers and investment advisers are required to provide access to or copies of records that concern the suspected or attempted financial exploitation to Adult Protective Services agencies and to law enforcement. The Model Act further provides, though, that all records made available to the above agencies shall not be considered public records under a state’s public records law.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.