NASAA Says Broker-Dealers Should Treat Senior Clients Better
Commentary by Steven Lofchie
An examination of broker-dealer firms conducted by the North American Securities Administrators Association ("NASAA") found that "while improvements have been made in how firms interact with elderly clients, some firms lack formal written procedures on key areas related to senior investors." In response, NASAA issued a guide to assist broker-dealer and investment adviser firms in developing procedures to address instances of "diminished capacity" in senior clients, as well as potential cases of senior financial exploitation.
The NASAA Guide highlights the following:
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62% of firm examinations found that the broker-dealer had established a formal committee or designated at least one person to focus on senior investors' issues;
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there has been limited development of "trusted contact forms" at firms, and very limited use of the forms even after they were developed;
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24% of the examinations involved a firm that required verification of senior clients' profile information more frequently than every 3 years;
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10% of the examinations identified potentially unsuitable recommendations to senior investors;
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although many firms do not permit the use of "senior designations" by representatives, those that do may need to enhance their related controls and procedures; and
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senior clients filed the majority of complaints in most offices at which complaints had been filed.
NASAA stated:
In sum, the preliminary findings from the Coordinated Exam indicate that past efforts to highlight senior investor matters have been successful at effecting change, but continued progress is necessary to best serve our aging population.
Commentary
Firms doing retail business should be sure to implement procedures that (i) place the additional restrictions on salespeople concerning recommendations made to seniors, (ii) conduct ex-post-trade reviews of purchases made by seniors, and (iii) conduct pre-transmission reviews of free credit transfers made from the accounts of seniors. That said, it seems fair to ask how far the government should be allowed to go in requiring financial institutions to play an in loco parentis role for their clients. This difficult surrogacy is best illustrated by NASAA's suggestion that broker-dealers should:
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develop procedures for internal review and decision-making before, during and after the delay of the disbursement of customer funds from an account;
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include a process for the conduct of any internal review related to disbursement delays; and
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not withhold funds longer than permissible under applicable laws or as reasonably required by a given situation in the absence of legal provisions.
In other words, NASAA is telling firms to disregard clients' legal and binding instructions to wire funds or securities even "in the absence of legal provisions." If regulators really expect firms to disregard a client's instructions, then they should provide those firms with limited immunity from liability when acting reasonably by not following a client's instructions.
Related Articles
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The North American Securities Administrators Association now offers a training program for state regulators to teach broker-dealers and investment advisers to identify signs of financial abuse of seniors.
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The North American Securities Administrators Association adopted a model act titled "An Act to Protect Vulnerable Adults from Financial Exploitation." The model act (i) applies to adults age 65 and older, and to individuals who qualify for protection under a state adult protective services statute, and (ii) defines "qualified individuals" as broker-dealer agents; investment adviser representatives; those who serve in a supervisory, compliance or legal capacity for broker-dealers and investment advisers; and any independent contractors who may be fulfilling any of those roles.
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