The Securities Litigation Expert Blog

Protecting Senior Investors - Deconstructing a Supervisory Failure

Posted by Jack Duval

Aug 30, 2018 8:10:55 AM

 

This blog post continues a series I began in 2012 highlighting regulatory efforts to protect senior investors.  (My previous blog posts on protecting senior investors can be found here.)

On August 24th, The New York Times published an article relating the predatory abuse of senior investors by a broker engaging in unauthorized trading and churning of their account.[1]

Client Profile

The profile of the senior investors is typical in many abuse cases.  The father was 89 years old, had suffered two strokes and was residing in an assisted living facility.  The mother was 84 years old, had been diagnosed with Alzheimer’s, and was in the process of being moved to the same facility as her husband.

There was an younger adult daughter living in a community for adults with developmental disabilities and an older adult daughter who had been overseeing the parents accounts.

Fact Pattern

In 2017, Trevor Rahn, a broker at JP Morgan, began unauthorized trading in the account (which was worth about $1.3 million at the time) and in the first six months of the year  generated $128,000 in commissions.

It appears Mr. Rahn was selling positions that had been held for years and using the proceeds to purchase new-issue closed-end funds (“CEFs”).  The closed-end fund purchases were not mentioned in the article, but Mr. Rahn’s CRD lists CEFs as a product involved in the dispute.[2]

Furthermore, the commissions generated could not have been generated from stock trades alone, and were almost certainly from high-commission new issue CEFs.  The New York Times article mentions $47,600 in commissions in August 2017.  A look at the statement page in the article reveals there were $822,000 in sales proceeds and $796,300 in purchases.  At a 1.25 percent commission rate on the purchases and sales, there would have been $20,500 in commissions generated.  Less than half of the $47,600 reported.

However, if the sales of stock were made at a 1.25 percent commission rate and the proceeds invested in new-issue CEFs paying 4.5 percent commissions, the math works out very close:

  • $822,000 sold at 1.25% = 10,275;
  • $796,300 in purchases at 4.5% = 35,833;
  • This results in total commissions of $46,108 versus the $47,600 reported.

Supervisory Red Flags Missed

There were a host of missed supervisory red flags.  So many that it defies simple explanation.  What’s worse is that many of the red flags existed before the unauthorized churning trades took place.  The following is a list of supervisory red flags that should have been triggered under standard industry practice and systems:

Pre-Trade Red Flags

The following account traits should have resulting in the account being on heightened supervision and/or generated exception reports:

  • Two senior investors, aged 84 and 89;
  • Special needs adult child;
  • An unsophisticated daughter overseeing the account;
  • High cash flow needs for two parents and one child in assisted living communities;
  • Asset allocation of 93 percent equities (and possibly higher given the six percent in mutual funds could also have been in equities), and;
  • Lien on Trevor Rahn:[3]
    • Rahn had a $763,000 lean outstanding against him from Deutsche Bank Securities.
    • Under a forgivable loan, Mr. Rahn owed Deutsche Bank $748,011 when he resigned to go to JP Morgan. Upon signing with JP Morgan, Mr. Rahn received an upfront loan of $1,404,084 and $468,000 in restricted stock.
    • He chose not to use any of his upfront cash to pay back the loan from Deutsche Bank.

Client Statement:

Accelerant Protecting Senior Investors Jack Duval - Client Statement

Trading Red Flags

Even if the pre-trade red flags were missed, the trading in the account should have triggered multiple supervisory red flags immediately:

  • Sudden and uncharacteristicaly high turnover;
  • 344 unsolicited trades being entered in one account;
  • Multiple small odd-lot orders instead of block trades;
  • Large purchases of new-issue closed-end funds, and;
  • 10 percent cost/equity ratio (the costs were 10 percent of the account value).

Account-Related Red Flags 

Finally, if the pre-trade and trading red flags were missed, the following account-related red flags should have generated supervisory inquiry:

  • Sudden decline in account value (unrelated to market movements), and;
  • Realizing over $342,000 in long- and short-term gains on sales.

Supervision

Even casual supervision should have prevented the abuse described above.  The SEC and FINRA have made the protection of senior investors a regulatory priority since 2006.  (See my blog post with a timeline of regulatory actions to protect senior investors.)  Their focus has only intensified over the years and broker-dealers have been well informed of their obligations in this area.  (Access my Protecting Senior Investors white paper.)

Because of the high potential for abuse by brokers, family members, and fraudsters, all accounts of senior investors should be on heightened supervision.  Today’s supervisory systems can easily add age-based triggers for exception reports.  Indeed, because age is a hard number and not subject to debate (such as the suitability of certain investments) this should be a trivial red flag to implement.

There can be no excuse for failing to supervise the accounts of senior investors.

__________

Notes:

[1]      “Caring for Aging Parents, With an Eye on the Broker Handling Their Savings”; Tara Siegel Bernard; The New York Times; August 24, 2018; Available at: https://www.nytimes.com/2018/08/24/business/brokers-excessive-trading-retirement.html?login=email&auth=login-email; Accessed August 27, 2018.

[2]      CRD of Trevor Rahn; Available at: https://files.brokercheck.finra.org/individual/individual_2196155.pdf; Accessed August 27, 2018.

[3]      Deutsche Bank Securities Inc., v. Trevor Rahn; Case No. CV13-5534 RGK (VBKx).  Mr. Rahn attempted to have the arbitration decision to award Deutsche Bank the $748,011 vacated.  His claim was denied.

 

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's, financial exploitation

Protecting Senior Investors - 2nd Circuit Decision

Posted by Jack Duval

Mar 20, 2018 8:04:09 AM

 

Accelerant - Protecting Senior Investors.png

This blog post continues a series I began in 2012 highlighting regulatory efforts to protect senior investors.  (My previous blog posts on protecting senior investors can be found here.)

A recent 2nd Circuit decision is of interest to Broker-Dealers (“BDs”) implementing policies and procedures necessary to protect senior investors.

In brief, Claimant Alba T. Pfeffer filed a FINRA arbitration claim against Wells Fargo Advisors, LLC (“WFC”) and its Registered Representative Andre Mirkine.  The claim was based upon WFC and Mirkine’s refusal to transfer money from a trust account of Claimant Pfeffer’s husband that benefited their children to a trust account that benefited only Claimant Pfeffer.

“Mirkine explained that he did not transfer the assets because he became concerned following conversations with Mr. Pfeffer and Mr. Pferrer's son that Mr. Pfeffer was not competent and was being unduly influenced by Mrs. Pfeffer.  After receiving two letters from physicians opining that Mr. Pfeffer was not capable of making financial decisions, Wells Fargo froze both trusts."[1]

The FINRA arbitration panel denied all of Pfeffer’s claims.  Pfeffer then attempted to have the district court vacate the award and was there also denied.  Finally, Pfeffer appealed the district court’s decision to the 2nd Circuit Court of Appeals, which affirmed the district court’s ruling.[2]

There are a number of interesting items in the 2nd Circuit’s decision.

Refusing to Transfer Client Funds

Primarily, the decision to affirm the district court's denial of the vacature claim should bolster BDs in their efforts to protect senior investors.  It appears that WFC broker Mirkine and WFC supervisors did their job well by making a decision that would leave them open to potential litigation - refusing a request from an account holder to transfer money.[3]

This goes directly to FINRA Rule 2165 - Financial Exploitation of Specified Adults, which "provides a safe harbor for a member to place a temporary hold on a disbursement of funds or securities from the account... if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted."[4]

Manifest Disregard of the Law and Evidence?

Secondarily, the 2nd Circuit wrote:[5]

"On appeal, Mrs. Pfeffer argues that the award was procured by undue means, evident partiality, and misconduct because the Panel was intimidated by defense counsel and refused to consider relevant evidence.  She alleges that the Panel exhibited manifest disregard for the law and facts…

This Circuit does not recognize manifest disregard of the evidence as proper ground for vacating an arbitration panel's award and will only find a manifest disregard of the law where there is no colorable justification for a panel's conclusion."  (Emphasis added)

The 2nd Circuit found that the FINRA panel did not disregard evidence.  However, the fact that manifest disregard of evidence is not proper ground for vacating an award is bracing.

Finally, the 2nd Circuit sets the “manifest disregard of the law” standard so low at “no colorable justification” that it would seem highly remote to meet it.

Supervision

While it is no trivial matter to stop client distributions, supervisors should take quick action to stop suspect activity and to seek input from medical professionals and, if necessary, make referrals to law enforcement.

----------

Notes:

[1]       United States Court of Appeals for the Second Circuit; Summary Order; Alba T. Pfeffer Plaintiff-Appellant v. Wells Fargo Advisors, LLC, et al. Defendants-Appellees; 17-1819-cv; February 15, 2018; 3.  Available at: http://caselaw.findlaw.com/us-2nd-circuit/1889422.html; Accessed March 20, 2018.

[2]       Plaintiff Pfeffer was pro se for all three proceedings.

[3]       The FINRA panel denied Respondent Mirkine’s request for expungement of his CRD records and applied all forum fees to Respondent WFC.  This could indicate the Panel’s displeasure with some aspect of Respondent’s actions, however, without a reasoned award this is speculation.  See FINRA Award at: https://www.finra.org/sites/default/files/aao_documents/15-00294.pdf; Accessed March 20, 2018.

[4]       See FINRA Rule 2165 FAQs; Available at: http://www.finra.org/industry/frequently-asked-questions-regarding-finra-rules-relating-financial-exploitation-seniors; Accessed March 20, 2018.

[5]        See Supra Note 1 at 4-5.

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's, financial exploitation, 2nd Circuit

Protecting Senior Investors - Nationwide Elder Fraud Sweep

Posted by Jack Duval

Feb 27, 2018 7:49:13 AM

Accelerant - Senior Investors DOJ Image-1.jpeg 

This blog post continues a series I began in 2012 highlighting regulatory efforts to protect senior investors.  (My previous blog posts on protecting senior investors can be found here.)

On February 22, 2018, the Justice Department announced a nationwide sweep that resulted in over 200 criminal charges for financial crimes targeting the elderly.

Attorney General Jeff Sessions was quoted, saying:

The Justice Department and its partners are taking unprecedented, coordinated action to protect elderly Americans from financial threats, both foreign and domestic... Today's actions send a clear message:  we will hold perpetrators of elder fraud schemes accountable wherever they are.  When criminals steal the hard-earned life savings of older Americans, we will respond with all the tools at the Department's disposal - criminal prosecutions to punish offenders, civil injunctions to shut the schemes down, and asset forfeiture to take back ill-gotten gains.

Today is only the beginning.  I have directed Department prosecutors to coordinate with both domestic law enforcement partners and foreign counterparts to stop these criminals from exploiting our seniors.

The Perpetrators

As I have written about before, many of the perpetrators were known to the victims.  The DOJ press release gave this description:

The actions charged a variety of fraud schemes, ranging from mass mailing, telemarketing and investment frauds to individual incidences of identity theft and theft by guardians.  A number of cases involved transnational criminal organizations that defrauded hundreds of thousands of elderly victims, while others involved a single relative or fiduciary who took advantage of an individual victim.  (Emphasis added)

While few crimes could be more heinous than those targeting senior investors, those perpetrated by guardians, relatives, or fiduciaries would qualify.

Supervisory Implications

The financial abuse of senior investors is not an isolated problem.  The DOJ press release stated that the schemes undertaken by the alleged criminals caused more than $500 million in losses to over a million victims.  

These sweep results should be a call to action to broker-dealers, RIA firms, and banks across the country to raise their supervisory oversight of senior investors accounts.

In the past, there has rightfully been significant focus on cases that involve senior investors with Alzheimer's or dementia.  However, unsophisticated and wholly trusting senior investors, who do not have the wherewithal to question recommendations, can also be subject to abuse by unscrupulous advisors.

Compliance and supervisory personnel at all financial firms need to be aware of the potential for abuse and should have special policies and procedures in place to monitor the activity in the accounts of senior investors.  At a minimum, these policies and procedures should detect financial fraud such as: unnecessary trading, unsuitable investments, and suspicious withdrawals.

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's, financial exploitation, Justice Department

Protecting Senior Investors - FINRA FAQs

Posted by Jack Duval

Jan 17, 2018 7:48:00 AM

 

accelerant - senior investor fraud.jpg

 

This blog post continues a series that I began in 2012 highlighting regulatory efforts to protect senior investors.  (My previous blog posts on protecting senior investors can be found here.)

On January 3, 2018, FINRA posted guidance in the form of Frequently Asked Questions (“FAQs”) relating to protecting senior investors.

They did this in advance of FINRA Rule 2165 – Financial Exploitation of Specified Adults and Rule 4512 – Customer Account Information becoming (respectively) effective and amended on February 5, 2018.  Both rules were approved by the SEC in March 2017 and discussed in FINRA RM 17- 11.

I summarize and discuss a few of the more important points made in the FAQs and how they relate to account supervision.

Rule 2165 – Financial Exploitation of Specified Adults[1]

Q.1.1. May a member place a temporary hold on a securities transaction pursuant to Rule 2165?

A. Rule 2165 provides a safe harbor for a member to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted. (Emphasis added)

This FAQ illustrates one of the key deficiencies with Rule 2165, that trading may continue in accounts where financial exploitation is occurring.  This is especially relevant to instances where the perpetrator of the exploitation is the Registered Representative.  In these instances, the Registered Representative could generate excessive compensation for herself without triggering a red flag under Rule 2165.  Indeed, it is conceivable that abusive trading could occur even if the account was under a temporary hold.

In these instances, the Registered Representative would be making withdrawals from the account through the broker-dealers own compensation mechanism.

An example of this could be the selling of a long-held low cost basis stock and using the proceeds to buy a high commission products.  The Registered Representative would get paid twice, once on the stock sale and once on the product purchases.  The payment of the commissions would not be reflected as a “disbursement of funds” and thus not flagged by a compliance system.

This scenario is not far-fetched.  I have seen cases where Registered Representatives have churned accounts after the client has died.

Supervisors must know the clients and their accounts well enough to detect abuse by Registered Representatives.

Q.1.2 Under Rule 2165, may a member that has a reasonable belief of financial exploitation of a Specified Adult regarding a disbursement or disbursements place a temporary hold or restrictions on an entire account if the member permits legitimate disbursements from the account?

A. FINRA has stated that, where a questionable disbursement involves less than all assets in an account, a member should not place a blanket hold on the entire account. Each disbursement should be analyzed separately.  (Emphasis added)

Here FINRA wants to avoid the failure of paying of legitimate bills and other disbursements even if a temporary hold has been placed on the account.  This would require significant diligence from the supervisor and Registered Representative to insure the disbursements were legitimate.

Rule 4512 – Customer Account Information[2]

Q.3.2. does the requirement in Rule 4512(a)(1)(F) to make reasonable efforts to obtain the name and contact information for a trusted contact upon the opening of a non-institutional customer’s account or when updating account information for an existing non-institutional account apply to all non-institutional accounts?

A. Rule 4512(a)(1)(F) provides that the trusted-contact provision “shall not apply to an institutional account”.  Accordingly, the trusted-contact provision applies to any account that does not meet the definition of an “institutional account” in Rule 4512(c), including accounts of non-natural persons that do not meet the definition.

FINRA defines an “institutional account” as:[3]

(1)  A bank, savings and loan association, insurance company or registered investment company;

(2) An investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions); or

(3) Any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.

The key provision of this guidance is that member firms should try to obtain trusted contact information for all accounts, including entities such as trusts, corporations, and partnerships.

Also, in my experience, even if a client meets the “institutional” account criteria by having assets of $50 million or greater, they are just as subject to potential abuse as anyone else.  Furthermore, having more assets does not imply greater sophistication or protection from bad actors.

Supervisors should monitor these accounts with the same diligence as they do other accounts.

Q.3.4. When is a member required to seek to obtain the trusted-contact information for accounts in existence prior to the effective date of the amendments to Rule 4512 (“existing accounts”)?  When is a member required to update the trusted-contact information?

A. Consistent with the current requirements of Rule 4512(b), a member would not need to seek to obtain the trusted-contact information for existing accounts until such a time as the member updates the information for the account either in the course of the member’s routine and customary business or as otherwise required by applicable laws or rules.

Since knowing the client is an ongoing duty[4], asking clients for trusted contact information should be done at least as soon as the next contact with the client.  Client contact could be when making a trade recommendation, when presenting an account review, or for other reasons.

Q.4.1.  What is a member allowed to disclose to the trusted contact about a customer’s account?

A. Supplementary Material .06(a) to Rule 4512 requires that, at the time of account opening, a member disclose in writing (which may be electronic) to the customer that the member or an associated person is authorized to contact the trusted contact and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165.[5]

… A member also could reach out to a trusted contact if it suspects that the customer may be suffering from Alzheimer’s disease, dementia or other forms of diminished capacity.

The disclosures should be limited to what the trusted contact would need to know to help make a determination as to any suspected exploitation or diminished capacity.  In most instances, it would not be necessary to disclose the total account value and details about a client’s investments with the trusted contact.

In the case of suspected possible financial exploitation, the focus would likely be on distribution requests.  If diminished capacity is suspected, no financial information would need to be disclosed, unless it was part of the indicia of the diminished capacity.

_________________

Notes:

[1]       Frequently Asked Questions Regarding FINRA Rules Relating to Financial Exploitation of Seniors;  January 3, 2018; Available at: http://www.finra.org/industry/frequently-asked-questions-regarding-finra-rules-relating-financial-exploitation-seniors; Accessed January 15, 2018.

[2]       Id.

[3]       FINRA Rule 4512 – Customer Account Information; Available at: http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9958; Accessed January 16, 2018.

[4]       See FINRA Rule 2111 – Suitability, regarding client profiling, and FINRA Rule 2090 – Know Your Client regarding diligence in the maintenance of client accounts.

[5]       FINRA also confirms that disclosures of financial information to a trusted contact would not be in violation of Regulation S-P (the SEC’s Privacy of Consumer Financial Information rule), since any disclosures would have been made with the customer’s consent.  See Regulation S-P Final Rule, available at: https://www.sec.gov/rules/final/34-42974.htm.  Accessed January 17, 2018.

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's, financial exploitation

Protecting Senior Investors - FINRA Rule Changes

Posted by Jack Duval

Feb 27, 2017 7:21:48 AM

 

accelerant - senior investor fraud.jpg

 

This blog post continues a series that we began in 2012 highlighting regulatory efforts to protect senior investors.  (Some of our previous coverage of senior investors can be found here,  here, and here.)

On February 3, 2017, the SEC approved the changes to FINRA Rule 4512 and the adoption of FINRA Rule 2165 that were proposed in FINRA Regulatory Notice 15-37 – Financial Exploitation of Seniors and Other Vulnerable Adults.[1]  These rule changes are designed to protect senior investors from financial fraud and elder abuse, and are built on what is known as a “report and hold” framework.

The changes to, and amendment of, the rules will become effective on February 5, 2018.  I examine each of the rules below.

FINRA Rule 4512 – Customer Account Information

The additions to Rule 4512 add a pre-identified trusted contact person for broker-dealers to reach out to in the event of suspicious activity.  While contacting the authorities has been and remains and option, this adds another contact to “report” to, the first part of the report and hold framework.

The rule currently requires Registered Representatives to gather information about any person or entity opening an account.  Gathering information is part of the profiling process and one of the ways in which the broker-dealer can demonstrate that it knows the client.  While new account forms used to be one or two page documents in the 1980’s and 90’s, under the heightened requirements of The Patriot Act, OFAC, and FinCEN, many new account forms extend to four or five pages.

The new part of FINRA Rule 4512 – Customer Account Information, states:[2]

(a)(1)(F) subject to Supplementary Material .06, name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer's account; provided, however, that this requirement shall not apply to an institutional account.

.06 Trusted Contact Person

(a) With respect to paragraph (a)(1)(F) of this Rule, at the time of account opening a member shall disclose in writing, which may be electronic, to the customer that the member or an associated person of the member is authorized to contact the trusted contact person and disclose information about the customer's account to address possible financial exploitation, to confirm the specifics of the customer's current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165.  With respect to any account that was opened pursuant to a prior FINRA rule, a member shall provide this disclosure in writing, which may be electronic, when updating the information for the account pursuant to paragraph (b) of this Rule either in the course of the member's routine and customary business or as otherwise required by applicable laws or rules.

(b) The absence of the name of or contact information for a trusted contact person shall not prevent a member from opening or maintaining an account for a customer, provided that the member makes reasonable efforts to obtain the name of and contact information for a trusted contact person.

(c) With respect to any account subject to the requirements of SEA Rule 17a-3(a)(17) to periodically update customer records, a member shall make reasonable efforts to obtain or, if previously obtained, to update where appropriate the name of and contact information for a trusted contact person consistent with the requirements of SEA Rule 17a-3(a)(17). (Emphasis added)

FINRA Rule 2165 – Financial Exploitation of Specified Adults

This new rule addressed the “hold” part of the report and hold framework.  It works in tandem with the amendments to Rule 4512.  Rule 2165 states, in part:[3]

(a)(1) For purposes of this Rule, the term “Specified Adult” shall mean: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

(b)(1) A member may place a temporary hold on a disbursement of funds or securities from the Account of a Specified Adult if:

(A) The member reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted; and

(b)(2) The temporary hold authorized by this Rule will expire not later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction, or extended pursuant to paragraph (b)(3) of this Rule.  (Emphasis added)

Supervision

As with all FINRA rules, each firm must design and implement supervisory policies and procedures that are tailored to their business and reasonable designed to achieve compliance.  While the changes to Rule 4512 do not specifically address supervision, Rule 2165 states:[4]

(c)(1) In addition to the general supervisory and recordkeeping requirements of Rules 3110, 3120, 3130, 3150, and Rule 4510 Series, a member relying on this Rule shall establish and maintain written supervisory procedures reasonably designed to achieve compliance with this Rule, including, but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults.

(2) A member's written supervisory procedures also shall identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the member pursuant to this Rule. Any such person shall be an associated person of the member who serves in a supervisory, compliance or legal capacity for the member.  (Emphasis added)

_________________

Notes:

[1]       SEC Release No. 34-79964; File No. SR-FINRA-2016-039; Available at: https://www.gpo.gov/fdsys/pkg/FR-2017-02-09/pdf/2017-02645.pdf; Accessed February 25, 2017; 10059.

[2]       FINRA Rule 4512 – Customer Account Information; Available at: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=17537&element_id=9958&highlight=4512#r17537; Accessed February 25, 2017.

[3]       FINRA Rule 2165 – Financial Exploitation of Specified Adults; Available at: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=17538&element_id=12784&highlight=2165#r17538; Accessed February 25, 2017.

[4]       Id.

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's

Protecting Senior Investors - Defining "Senior"

Posted by Jack Duval

Feb 16, 2017 7:18:59 AM

 

This blog post continues a series that we began in 2012 highlighting regulatory efforts to protect senior investors.  (Some of our previous coverage of senior investors can be found herehere, and here.)

Most regulators and state statutes define a "senior" as someone aged 60 to 65 or older.  The table below summarizes these.

Table 1: Age of "Senior"

Entity Document Senior Age Notes
FINRA NTM 07-43 - Senior Investors 65 Age referred to but not defined.
FINRA RN 15-37 65  
SEC National Senior Investor Initiative 65  
NASAA Model Legislation 65  
Missouri Sweep Report Findings 60 Age of "elderly persons".
Washington State Title 74, Chapter 74.34 60 Age of "vulnerable adult".
Delaware Title 11, Section 222 62 Age of "elderly person".
Illinios 720 ILCS 5/17-56 60 Age of "elderly person".
Alabama Title 38, Capter 9E, Section 38-9E-2 60 Age of "elderly person".
Louisiana Elder Law Task Force 2014 Update 60  
Congress Senior$afe Act, S.2216 65 Age of "senior citizen".
Senate The Elder Protection and Abuse Prevention Act, S.3270 60 Age of "elder".

_________________

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's

Protecting Senior Investors - Knowing Dementia

Posted by Jack Duval

Jan 26, 2017 8:28:57 AM

 

Accelerant - Protecting Senior Investors Image.jpg

This blog post continues a series that we began in 2012 highlighting regulatory efforts to protect senior investors.  (Some of our previous coverage of senior investors can be found herehere, and here.)

Financial advisors are tasked to “know your customer”.  FINRA Rule 2090 states:[1]

Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.

Of particular import is the phrase “opening and maintenance”, this means the duty to know the customer is not a one-time obligation to be met at the beginning of a relationship.  Instead, it is an ongoing duty that must be maintained throughout the relationship.  It is a diligence-based rule, as opposed to 2111 – Suitability, which is a recommendation-based rule.

In industry parlance, FINRA Rule 2090 imposes a duty upon financial advisors to continually inquire (or “profile”) the client in order to be up to date on any changes in their “essential facts”.  Not only is this common sense, it is standard industry practice.

Furthermore, it is a long-standing rule with antecedence in NYSE Rule 405 – Diligence as to Accounts:[2]

Every member organization is required through a principal executive or a person or persons designated under the provisions of Rule 342(b) (1) to 

(1)  Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.

The phase “accepted or carried” is important.  As with the FINRA Rule 2090 “opening and maintenance”, it means that the obligation to know the client is ongoing.

Knowing Dementia

While no financial advisor should be held to a standard of diagnosing dementia, they must be extra vigilant to know their senior clients and to watch for signs of mental decline.  Any indications of decline should be escalated for supervisory review.

Dementia can take many forms and have many levels of severity.  Financial advisors and their supervisors should be familiar with them.  I have included a general overview of the definitions and stages of dementia below.

Definitions of Dementia

The Alzheimer’s Association gives this description of dementia:[3]

Dementia is a general term for a decline in mental ability severe enough to interfere with daily life.  Memory loss is an example.  Alzheimer’s is the most common type of dementia.

Dementia is not a specific disease.  It's an overall term that describes a wide range of symptoms associated with a decline in memory or other thinking skills severe enough to reduce a person's ability to perform everyday activities.  Alzheimer's disease accounts for 60 to 80 percent of cases.  Vascular dementia, which occurs after a stroke, is the second most common dementia type.  But there are many other conditions that can cause symptoms of dementia, including some that are reversible, such as thyroid problems and vitamin deficiencies.

Dementia is often incorrectly referred to as "senility" or "senile dementia," which reflects the formerly widespread but incorrect belief that serious mental decline is a normal part of aging.

Some common problems experienced by those with dementia include:[4] 

  • Day-to-day memory;
  • Concentrating, planning or organizing;
  • Language (e.g. struggling to find the right word);
  • Judging distances and seeing objects properly (not caused by poor eyesight);
  • Orientation (e.g. confusion about the day or month, or where they are).

Health professionals have created a number of scales to judge the level of dementia.  One of the most commonly used is the Global Deterioration Scale for Assessment of Primary Degenerative Dementia (“GDS”).[5]  The table below summarizes the seven stages of the GDS:

Table 1:  Global Deterioration Scale for Assessment of Primary Degenerative Dementia

Stage of Cognitive Decline

Dementia Diagnosis

Signs

Average Duration

1: None

No dementia

Normal functioning, no memory loss.

-

2: Very mild

No dementia

Normal forgetfulness associated with aging.

-

3: Mild

No dementia

Increased forgetfulness, slight difficulty concentrating, decreased work performance.

7

4: Moderate

Early-stage

Difficulty concentrating, decreased memory of recent events, difficulties managing finances or traveling alone to new locations.

2

5: Moderately severe

Mid-stage

Major memory deficiencies and need of assistance to complete daily activities (dressing, bathing, preparing meals).

1.5

6: Severe

Mid-stage

Requirement of extensive assistance to carry out daily activities.  Forgetting names of close family members.

2.5

7: Very severe

Late-stage

Essentially no ability to speak or communicate.

2.5

_________________

Notes:

[1]       FINRA Rule 2090 – Know Your Customer; Available at: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=13389&element_id=9858&highlight=2090#r13389; Accessed January 26, 2017.

[2]       FINRA Rule 405 – Diligence as to Accounts.  Rule 405 is no longer in force, having been replaced by FINRA Rule 2111 – Suitability and FINRA Rule 2090 – Know Your Customer.  NYSE rules were subsumed into FINRA rules on November 11, 2008.  See FINRA RN 08-64 – Transitional Rulebook.  Available at: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=12773&element_id=9319&highlight=405#r12773; Accessed January 26, 2017.

[3]       Alzheimer’s Organization; “What is Dementia?”; Available at: http://www.alz.org/what-is-dementia.asp; Accessed January 24, 2017.

[4]       Alzheimer’s Association; “About Dementia | Assessment and Diagnosis”; Available at: https://www.alzheimers.org.uk/site/scripts/documents_info.php?documentID=260; Accessed January 24, 2017.

[5]       Dementia Care Central, “Seven Stages of Dementia | Symptoms & Progression”; Available at: https://www.dementiacarecentral.com/aboutdementia/facts/stages/; Accessed January 25, 2017.

For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, supervision, Protecting Senior Investors, Elder Abuse, dementia, Alzheimer's

Protecting Senior Investors - Regulatory Timeline

Posted by Jack Duval

Jan 17, 2017 8:15:10 AM

 

This blog post continues a series that we began in 2012 highlighting regulatory efforts to protect senior investors.  (Some of our previous coverage of senior investors can be found here, here, and here.)

A recent article in Nature entitled “The Dementia Time Bomb” estimated that by 2050 over 130 million people worldwide could be affected by dementia.[1]  The article estimated the costs in the US alone to reach $1 trillion in today’s dollars.[2]

However, a more immediate threat exists from dementia, that of financial exploitation.  Investors 50 years of age and older hold 77 percent of all US financial assets.[3]  Of course, they are also the most at risk of dementia.  This makes them an easy target for financial abuse.

Apparently, the criminally inclined have figured this out.  Some statistics summarized by the Securities Industry and Financial Markets Association (“SIFMA”) are sobering:

Senior financial exploitation is a problem that costs senior investors an estimated $2.9 billion annually – funds that many were relying on to support them in retirement.  Moreover, with 10,000 Americans turning 65 every day and an estimated 1 in 5 Americans aged 65 or older being victimized by financial fraud, this problem will continue to grow.  Complicating these protection efforts is the fact that only an estimated 1 in 44 cases of financial elder abuse is reported and the fact that 55% of financial abuse in the United States is committed by family members, caregivers and friends.[4]

Regulatory, Law Enforcement, and Government, Response

These facts have not gone unnoticed by financial regulators, law enforcement, and the government agencies, including: 

  • The Securities Exchange Commission (“SEC”);
  • The Financial Industry Regulatory Association (“FINRA”);
  • The Office of Compliance Inspections and Examinations (“OCIE”);
  • The North American Securities Administrators Association;
  • The Federal Bureau of Investigation (“FBI”);
  • The Government Accountability Office (“GAO”), and;
  • The US Senate Special Committee on Aging.

These regulators and government agencies have been focused on financial fraud targeting seniors for at least the past 15 years.  For instance, in a September 10, 2001 speech by Dennis M. Lormel, (then the FBI Financial Crimes Section Chief), he stated:

… the FBI has identified elder fraud and fraud against those suffering from serious illness as two of the most insidious of all white-collar crimes being perpetrated by today’s modern and high tech con-man.[5]

The problem appears to have gotten worse.  FINRA established a special hotline dedicated to seniors in April 2015 and it has fielded approximately 6,700 calls – about 353 calls per month.  Callers to the hotline have recovered $2.4 million in voluntary reimbursements.[6]

Timeline

Since at least 2006 there has been a concerted effort from financial regulators to protect senior investors from financial fraud and abuse.  The timeline below highlights some of those efforts.

(Higher resolution PDF.)

Accelerant - Protecting Senior Investors Timeline.gif

 

_________________

Notes:

[1]                 Elie Dolgin, Nature, “The Dementia Time Bomb”; November 10, 2016; 156.

[2]                 Id.

[3]                 Yuka Hayaski, The Wall Street Journal, “FINRA Proposes Steps to Prevent Abuse of Senior Investors”; October 20, 2016; Available at: http://www.wsj.com/articles/finra-proposes-protections-for-seniors-against-exploitation-1476977937.  Accessed January 4, 2017.

[4]                 Lisa Bleier, SIFMA, Comments regarding FINRA Regulatory Notice 15-37, Financial Exploitation of Seniors and Other Vulnerable Adults; December 1, 2015.  Notes omitted.

[5]                 Dennis M. Lormel; Chief, Financial Crimes Section, FBI; September 10, 2001; Available at: https://archives.fbi.gov/archives/news/testimony/fraud-against-the-elderly.  Accessed January 6, 2017.

[6]                 Yuka Hayashi, The Wall Street Journal, “Finra Proposes Steps to Prevent Abuse of Senior Investors”; October 20, 2016.  Available at: http://www.wsj.com/articles/finra-proposes-protections-for-seniors-against-exploitation-1476977937; Accessed January 6, 2017.

 

 For information about securities expert Jack Duval, click here.

SIGN UP FOR OUR BLOG

Read More

Topics: fraud, Senior Investors, Protecting Senior Investors, Elder Abuse

Accelerant Insurance Expert John Duval, Sr. Quoted in MarketWatch Article

Posted by Jack Duval

Nov 16, 2013 5:22:07 AM

Variable annuity expert John Duval, Sr. was quoted in a recent MarketWatch article about the suitability of variable annuities for retirees.  (MarketWatch)  Duval, Sr. was quoted a number of times about the tax aspects of variable annuity investing, including:

Variable annuities only offer ordinary income, no capital gains opportunities, ever... High net worth investors and variable annuities trigger double taxation at death, he said. In fact, the beneficiaries get 1099s for the gains.

The article was written by Robert Powell, a MarketWatch Retirement columnist.
Read More

Topics: variable annuity taxation, variable annuity expert, insurance, Senior Investors, investments, variable annuity litigation, John Duval Sr.

Leveraged and Inverse ETFs: Trojan Horses for Long-Term Investors

Posted by Jack Duval

Aug 28, 2013 2:34:25 AM

Accelerant has a new white paper about leveraged and inverse Exchange Traded Funds ("ETFs"), here.  The paper includes the following:


  • Historical background on ETFs;

  • The introduction of leveraged and inverse ETFs;

  • How leveraged and inverse ETFs have been misused;

  • An explanation of the internal rebalancing mechanism of leveraged and inverse ETFs;

  • A review of prospectus language;

  • A literature review, including popular and financial press, academic, and industry sources;

  • FINRA Suitability Rules;

  • RIA Suitability Regulations, including the fiduciary duty;

  • Supervision and compliance implications for both Broker-Dealers and RIA firms.


 

 

Read More

Topics: FINRA, RIA, Leveraged and Inverse, Investment Advisors, litigation, Senior Investors, investments, rebalancing; investments; FINRA, '40 Act; Suitability; Supervision; Compliance, SEC, ETF, Compliance, regulation.

Subscribe to Email Updates

Recent Posts

Posts by Topic

see all