Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506
RE: Regulatory Notice 19-27
Request for Comment on Rules and Issues Relating to Senior Investors
Dear Ms. Piorko Mitchell:
I write on behalf of the Public Investors Advocate Bar Association (“PIABA”),1 an international bar association comprised of attorneys who represent investors in securities arbitrations and other dispute resolution forums. Since its formation in 1990, PIABA has promoted the interests of the public investor in all securities and commodities dispute resolution forums, while also advocating for public education regarding investment fraud and industry misconduct. Our members and their clients have a strong interest in rules promulgated by the Financial Industry Regulatory Authority (“FINRA”) relating to investor protection, and in particular, senior issues.
PIABA members frequently represent senior investors, and we are particularly concerned with enhancing protections for our most vulnerable population of investors. Regulatory Notice 19-27 seeks comment on the impact of relatively new FINRA Rules 2165, 4512, and 3240, as well as whether other tools, guidance, or changes that may be appropriate for FINRA’s consideration. In addition to the comments set forth herein, we also attach a comment letter which PIABA submitted to the SEC in connection with its Roundtable on Combating Elder Investor Fraud, held this past week.
Financial Exploitation of Senior Investors is a National Problem
The National Adult Protective Services Association (“NAPSA”) reports that 90% of financial abusers are family members or trusted others and abuse is vastly underreported – only an estimated one out of 44 cases is reported.2 Common forms of financial abuse by family members include misuse of a power of attorney or joint bank account, and threats to abandon the vulnerable person.3 In addition, bad actors in the securities industry may target elder investors, and their retirement accounts, for outright investment scams, or for inappropriately risky or otherwise unsuitable, high-commission investments. According to the 2018 Enforcement Report by the North American Securities Administrators Association (“NASAA”), the most often reported of these were promissory notes, real estate investment programs, affinity fraud (sales scams targeting a particular community or group), and Regulation D offerings (private placements exempt from SEC registration, certain disclosure and reporting requirements).4 Fraud by a financial advisor may cause greater harm to an individual because of the professional’s access to a customer’s funds, and may cause greater harm to society because there will likely be a greater number of victims than those subject to exploitation by a family member.
NASAA’s Model Act and States Adopting the Model Act
Recognizing the increasing problem of financial exploitation of investors over the age of 65, and the potential for prevention by financial advisors, NASAA formed its Committee on Senior Issues and Diminished Capacity in 2014. In September 2015, NASAA released its draft Model Act to Protect Vulnerable Adults from Financial Exploitation (“Model Act”). So far, twenty-three states have enacted legislation or regulations based on NASAA’s Model Act.5 The majority of these states follow the Model Act’s definition of “vulnerable adult” as including anyone age 65 or older. Those states also follow other NASAA Model Act provisions, such as: the time frames for permissive delays of disbursements, mandatory record keeping and state access to such records, mandatory reporting of suspected abuse to specified state agencies, and permissive notification to certain previously identified individuals (provided that they are not the suspected abuser).6 Correspondingly, FINRA proposed similar changes to its SRO rules in Regulatory Notice 15-37, issued in October 2015, which resulted in the adoption of Rule 2165 (Financial Exploitation of Specified Adults) and amendments to Rule 4512 (Customer Account Information). Unlike the Model Act, FINRA’s rules do not mandate suspected abuse be reported to specified agencies or law enforcement.
Requests for Comment Question Nos. 1-3 (Rule 2165)
Alignment with State Protections
At the outset, we note that one of the goals of the Model Act was to create some uniformity in legislation across the states regarding permissive delayed distributions and other operative features. PIABA is concerned that FINRA’s contemplated substantive changes to Rule 2165 may create confusion to the extent they could contradict state legislation on the topic. For example, if the permissive delay period is increased from the existing period (up to 25 business days) to a contemplated longer period of time, conflicts could arise. Or, if the scope of Rule 2165 expands to include not just distributions of cash or securities from or between accounts, but also delays to transactions within an account (e.g. orders to sell), a possibility of conflicts could arise. We note that FINRA’s proposed changes seek to offer even greater protections which is a laudable goal, but nonetheless, we encourage FINRA to harmonize any substantive changes with NASAA’s guidance and existing state law. In furtherance of that goal, PIABA also suggests that FINRA make its rule mandatory, in conformity with the NASAA Model Act, rather than permissive.
Potential Application Where There is Reasonable Suspicion of Impairment
Diminished capacity, and more specifically, whether an individual has legal capacity when making a significant financial decision, is a notoriously difficult subject. Capacity may fluctuate day to day. A person may have difficulty with cognition at certain times of day, as a result of a change of medication or temporary physical condition and may later regain legal capacity. PIABA understands that FINRA is not suggesting that its members attempt to make any conclusive determination regarding capacity. Rather, FINRA contemplates whether similar safe harbor protections as those in Rule 2165 might be extended for a permissive delay where there is a reasonable suspicion of diminished capacity. This temporary delay of disbursement may allow for investigation, communication with a pre-authorized trusted contact person, and might prevent significant financial harm to an account. For example, an order to liquidate all holdings might incur substantial transaction fees or surrender fees. However, respect for autonomy of the client is also paramount. A person may choose to make informed decisions that the advisor disagrees with. PIABA suggests that FINRA conduct further research on such issues before modifying or instituting any rules on the subject.
Request for Comment Question Nos. 9-12 (Rule 3240)
PIABA agrees that Rule 3240 has been effective in protecting investors and public interest, specifically by addressing potential misconduct relating to associated persons of broker-dealer firms borrowing from or lending money to customers. Specifically, the Rule has served to deter fraud and manipulative practices involving senior investors’ retirement savings by prohibiting such conduct. PIABA believes that, in situations where one of the enumerated exceptions apply, the current rule is broad enough to cover those instances in which lending or borrowing money from customers may be acceptable. Importantly, such situations first require appropriate disclosures and pre-approval by the broker-dealer firm, which is crucial to ensuring compliance with the Rule.
Request for Comment Question No. 13 (Enhancing Sanction Guidelines)
FINRA publishes the FINRA Sanction Guidelines so that members, associated persons and their counsel may become more familiar with the types of disciplinary sanctions that may be applicable to various violations.7 The Sanction Guidelines suggest factors that Adjudicators may consider in determining where disciplinary conduct within a range sanctions may fall.
PIABA supports an amendment to the Sanctions Guidelines to add as a principal consideration whether a victimized customer is a “specific adult,” i.e., a person 65 or older or a person 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interest. Such language conforms with FINRA’s mission to protect investors and the public interest, including persons over 65 and any other person who a member believes may be unable to protect their own interest. Failure to do so ought to be factored in determining appropriate disciplinary sanctions. FINRA’s Sanction Guidelines ought to expressly clarify the types of individuals members must take reasonable steps to protect.
Request for Comment Question No. 17 (Additional Disclosure and Heightened Supervision when Marketing to Senior Investors)
Members of PIABA frequently represent senior investors who were placed in unsuitable investment products and investment strategies at the recommendation of their financial advisor. Oftentimes, these recommendations involve complex products which are difficult for unsophisticated investors to understand, such as promissory notes, real estate investment programs, and Regulation D offerings.
PIABA believes that heightened supervision is necessary for particular products or investment strategies that are marketed to seniors. While providing additional disclosures is an important step, investors are already faced with a deluge of disclosure language in paperwork which they may have trouble accessing or may not comprehend. Heightened supervision is necessary to ensure that a particular product or investment strategy is suitable for elderly investors. Firms should be required to set appropriate supervisory parameters and conduct reviews of public communications with these issues in mind.
Request for Comment Question No. 18 (Efficiency / Effectiveness of Rules and Guidance relating to Senior Investors)
Aggrieved investors are generally required to submit to FINRA’s Dispute Resolution forum all claims against broker-dealer firms or their representatives. FINRA provides guidance for its staff and arbitrators in cases involving individuals at least 65 years old or have a serious health condition.8 FINRA notes that, “upon request, staff will expedite the administration of arbitration proceedings in matters involving senior or seriously ill parties.” When a case is expedited, parties and arbitrators are instructed to schedule a hearing within six months of from the date of the Initial Prehearing Conference.
PIABA urges FINRA to emphasize the importance of resolving such disputes expeditiously, at a minimum through Regulatory Notices and additional guidance to arbitrators. FINRA ought to make clear that an expedited case scheduled for an evidentiary hearing beyond six months from the Initial Prehearing Conference should be the exception and only granted for good cause shown. Oftentimes, such cases are scheduled for hearing far after when FINRA intends, due to scheduling conflicts and claimed unavailability of counsel for broker-dealer firms or their representatives. In such circumstances, FINRA arbitrators ought to be instructed to scrutinize alleged scheduling conflicts or unavailability, especially for larger law firms which employ multiple attorneys. Such enhanced enforcement by FINRA conforms to its pledge of delivering fair, expeditious and cost-effective dispute resolution services for investors.
Request for Comment Question Nos. 19 and 20 (Additional Comments)
PIABA appreciates the broad request for additional comments relevant to the senior protection issues. We start with the observation that our members have found that the vast majority of seniors and other vulnerable investors do not know what FINRA is, do not know (or appreciate) that they have rights as investors and customer of broker-dealers, and/or do not know that they are susceptible targets to affinity fraud. This is a problem that FINRA should address by devoting more and more resources to education outreach to programs like or similar to AARP, American Society on Aging, SPRY and many other groups that help and advocate for the rights of vulnerable individuals. FINRA needs to make presentations, provide literature and generally be more visible to the people who these rules are designed to protect.
We are also concerned that recent changes to the FINRA website may make it more difficult for investors to find relevant information regarding elder investor protections. For example, the Securities Helpline for Seniors, Investor Complaint Center, and generally, information about Arbitration and Mediation, are now located at the far bottom of the FINRA.org home page. The contact phone numbers are particularly difficult to read in size, weight, and color of font. This critical information should appear at a prominent, top location, on the home page. PIABA encourages FINRA to consider reviewing the home page and other informational pages for legibility to elder investors.
Finally, PIABA strongly encourages FINRA to issue a separate Regulatory Notice regarding proposed rulemaking on the issue of the ability of a Registered Person to become a named beneficiary, executor, power of attorney, trustee, or similar for a non-family member customer. The abuse of a power of attorney is one of the major areas of financial exploitation identified by the National Adult Protective Services Association. And, the confidential position of trust held by a financial adviser may give rise to a presumption of undue influence under state law, where a client changes his or her estate plans in a way that benefits the adviser. Additional guidance from FINRA on the topic should help to curb abusive intrusion into investors’ affairs and estate planning.
Conclusion
Once again, PIABA acknowledges and appreciates FINRA’s recognition that our elder population is particularly vulnerable to financial abuse, by a trusted friend or family member, as well as by a trusted broker or other financial professional. The “safe harbor” protections of Rule 2165 give brokers tools to help their clients and prevent potential abuse. Likewise, the prohibitions of Rule 3240 make it clear that potentially abusive lending arrangements are impermissible.
PIABA encourages FINRA to work in tandem with NASAA and state regulators, who are positioned to understand the needs of their particular aging populations. PIABA also applauds FINRA for its continued review of its rules and guidance to improve investor protections. We thank you for the opportunity to comment on the Notice, and urge FINRA to consider the issues set forth above.
Sincerely,
Christine Lazaro
President
Samuel B. Edwards
Executive Vice-President
1 Formerly known as the Public Investors Arbitration Bar Association.
2 http://www.napsa-now.org/policy-advocacy/exploitation/.
3Id.
4 2018 NASAA Enforcement Report available at: http://www.nasaa.org/46133/nasaa-releases-annual-enforcement-report-4/.
5 http://serveourseniors.org/about/policy-makers/nasaa-model-act/update/.
6 For a detailed comparison, see Darlene Pasieczny, States Adopting NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation (Mandatory and Permissive Conduct by Financial Advisors), PIABA Bar Journal, vol. 26, no. 2 (October
2019) (forthcoming).
7 FINRA, Sanction Guidelines (March 2019), available at: https://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
8 FINRA, Office of Dispute Resolution Arbitrator’s Guide (November 2018 Edition).