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FAs Will Have Greater Role in Stopping Senior Abuse

By Rita Raagas De Ramos February 24, 2017

As financial abuse of seniors remains prevalent, two fresh developments – rules recently approved by the SEC and a bill that’s pending approval in the Senate – try to enhance the role of advisors in protecting elderly investors.

The SEC approved earlier this month rules proposed by Finra in October to protect seniors from financial abuse. Finra proposed amendments to Finra Rule 4512 (Customer Account Information) and to adopt new Finra Rule 2165 (Financial Exploitation of Specified Adults). The new rules take effect Feb. 5, 2018.

First, the rules require broker-dealers to maintain a record of the name and contact information for a “trusted contact person” who may be contacted about a customer’s account. Second, the rules permit broker-dealers to place a temporary hold on the disbursement of funds or securities from the accounts of certain customers if there is a reasonable belief that the customers may be subject to financial exploitation.

A bill reintroduced in January in the Senate – the Senior Safe Act of 2017 – aims to make it easier for financial companies to report suspected financial exploitation of senior citizens. The legislation is aimed at protecting financial institutions from legal liability tied to privacy laws when reporting suspected financial abuse of seniors, as long as the firms adequately train their employees. The bill was unanimously approved in July by the House of Representatives. That bill was first introduced in October 2015.

“There is a lot of elder abuse in this industry,” says Pete Mahurin, a Bowling Green, Ky.-based advisor at broker-dealer Hilliard Lyons with around $38 billion under management. “What so often occurs is that the elderly get sold very complicated products or investments that they don’t understand.”

One in 20 seniors has experienced “some form of perceived financial mistreatment,” according to data from the National Adult Protective Services Association (Napsa). The organization’s data shows that only one in 44 cases of financial abuse is reported.

Just this month, Finra permanently barred one advisor from the industry and suspended another for one year due to their actions on accounts of senior investors.

Ingrid Evans

Finra permanently barred Matthew Maczko from the industry for engaging in excessive trading in four accounts of a senior customer, who is now 93 years old, that had an average aggregate value of $3 million. Finra says Maczko was at Wells Fargo Advisors at the time until he was terminated in September 2016. The regulator says he generated around $582 million in commissions, $84,270 in fees and $397,000 in trading losses from more than 2,800 transactions from January 2009 to April 2016. The regulator adds the trading activity was unsuitable given the customer’s age, risk tolerance and income needs.

Finra suspended Adam Fritzsche from the industry for one year for making unsuitable recommendations to three customers – aged 61, 81 and 89 – that were inconsistent with the customers’ investment objectives and resulted in an over-concentration of their liquid net worth in alternative investments. Fritzsche was working at LPL Financial at the time until his voluntary termination in December 2012. He then moved to Citizens Securities before joining IFS Advisory, where he was registered until February 15. The Finra disciplinary action notice did not disclose the losses incurred by the LPL customers.

“The number of elderly abuse cases being reported is just the tip of the iceberg,” says Deborah Stavis, Houston-based CEO at broker-dealer Stavis & Financial with around $450 million under advisement. “The population will just keep getting older, more people will lose mental capacity, and it’s going to be a bigger problem if left unchecked.”

Finra says around 10,000 Americans will turn 65 every day over the next decade, with investors in this age group making up more than 75% of the financial assets in the U.S. More than 41 million people in the U.S., or more than 13% of the population, were 65 years or older in 2011, and that number is expected to rise to 79 million by 2040, the regulator adds.

Finra says its helpline for seniors has received nearly 8,000 calls since it was launched in April 2015, and it has made possible the return of nearly $3 million to senior investors. The toll-free phone number was created so that senior investors – and people calling on their behalf – can get assistance from Finra or raise concerns about issues with brokerage accounts and investments. Callers to the helpline have ranged in age from 17 to 102 years old, and the average age is 70. Florida, California and New York have the highest number of callers relative to the rest of the country.

When Finra has no jurisdiction over the issue, it refers the caller to the appropriate regulator or agency. Finra has referred nearly 531 matters to state, federal and foreign regulators, and more than 119 matters to Napsa’s Adult Protective Services in 16 states under mandatory reporting laws.

In its 2017 regulatory and examination priorities letter, Finra says there are many cases where registered representatives have recommended senior investors purchase speculative or complex products in search of yield. Finra says it will assess whether such recommendations were suitable given an investor’s profile and risk tolerance, and whether firms have appropriate supervisory mechanisms in place to detect and prevent problematic sales practices.

Finra plans to focus on fraud schemes involving microcap or penny stocks, which are particularly vulnerable to market manipulation since there is scarce public information on the companies’ underlying business, management and financials.

Ingrid Evans, a San Francisco-based co-founder and elder financial abuse law specialist at Evans Law Firm, says she worries that the Senior Safe Act of 2017 could be used by advisors and other money-managers “to protect themselves from their own abuse.”

She says a “strong and comprehensive” law protecting seniors from financial exploitation is needed to help deter the abuse in the first place and to more effectively help the elderly claim damages from “unscrupulous” advisors.

She cites the provisions on elder abuse in California’s Welfare and Institutions Code 15630 as a “good example” of a law that’s effective in redressing grievances of seniors. Under the code, any taking or the assisting of taking of real or personal property of a senior can be considered financial abuse if it is done in bad faith or undue influence, she says.