Efforts to Protect Seniors and Other Vulnerable Adults from Financial Exploitation, 070118 ALBJ, 79 The Alabama Lawyer 246 (2018)
| Author | Joshua D. Jones, J. and W. Preston Martin, J. |
| Position | Vol. 79 4 Pg. 246 |
Joshua D. Jones, J. and W. Preston Martin, J.
In
April 2016, Alabama became one of the first states to enact
legislation requiring certain financial institutions to
report suspected financial exploitation of persons deemed to
be “vulnerable clients” to governmental
authorities.
The Protection of Vulnerable Adults From Financial Exploitation Act
The Act was drafted by the Alabama Securities Commission ("ASC") in connection with its role of furthering investor protection. As discussed in more detail below, the Act contains several key provisions: (i) broker-dealers, investment advisers and other qualified individuals are required to report to the ASC and the Alabama Department of Human Resources ("DHR") whenever they reasonably believe that financial exploitation of a "vulnerable adult" may have occurred, has been attempted or is being attempted; (ii) brokerage firms2 that suspect financial exploitation are permitted to delay the disbursement of funds from a vulnerable adult's account; (iii) in certain instances, brokerage firms are authorized to make disclosures about potential financial exploitation to "reasonably associated individual [s]" or to other third parties with whom the vulnerable adult has a legal relationship (e.g., legal guardian, conservator, trustee); and (iv) to incentivize brokerage firms, the Act provides qualified immunity from administrative and civil liability for actions taken consistent with the Act. The following is a brief overview of the Act.
Who Is Protected by the Act?
The Act seeks to protect "vulnerable adults" from financial exploitation. As defined in the Act, a "vulnerable adult" includes (i) a person 65 years of age or older, and (ii) a "protected person" as defined in § 38-9-2 of the Code of Alabama, which includes persons over 18 years of age who are senile, have intellectual or developmental disabilities, or are mentally or physically incapable of adequately caring for themselves.3 The ASC has encouraged brokerage firms to implement policies and procedures to help employees identify adults who may be subject to financial exploitation as a result of their advanced age, diminished capacity or other intellectual or developmental disabilities. In addition to this encouragement, the ASC has issued written guidance to firms regarding the implementation of the Act and containing "useful information related to the detection, reporting, and mitigation of senior financial exploitation."4 In doing so, the ASC has noted that "[financial professionals are often uniquely positioned to see the red flags of cognitive decline or other potential impairments affecting their clients and customers, and their prompt actions may prevent a client or customer from becoming the victim of financial exploitation."[5]
The ASC has also developed training programs to help brokerage firms teach their frontline employees to spot the signs of cognitive decline or a reduced capacity to handle financial decisions. One of the best ways to detect signs of diminished capacity is by developing strong relationships with clients, which puts the financial professional in a better position to notice red flags that may signal cognitive issues.6 An AARP study found that the red flags most commonly observed by compliance officers and financial advisors were repeating of orders or questions, difficulty with basic math, memory loss and erratic behavior.7 Finally, firms should train their employees on "how to ask appropriate questions regarding potential cognitive decline while still maintaining a client's sense of autonomy and dignity."8
Detecting senior financial Exploitation
In addition to helping their employees identify clients who could be a potential victim of financial exploitation, firms should also train their employees to detect potential financial exploitation. The Act broadly defines “financial exploitation” as the wrongful taking of property, and any act or omission taken by a person (or through a legal relationship such as a power of attorney, conservatorship or guardianship) with the intent to deprive a vulnerable adult of his or her property.9 Per the ASC, there are several signs that indicate an investor could be the victim of financial exploitation:10
• Uncharacteristic and repeated cash withdrawals or wire transfers;
• Appearing with new and unknown associates, friends or relatives;
• Uncharacteristic nervousness or anxiety when visiting the office or conducting telephonic transactions;
• A lack of knowledge about his or her financial status;
• Having difficulty speaking directly with the client or customer;
• Unexplained or unusual excitement about a sudden windfall; reluctance to discuss details;
• Sudden changes to financial documents such as powers of attorney, account beneficiaries, wills or trusts; and
• Closing of accounts without regard to penalties.
Reporting senior financial Exploitation
Under the Act, brokerage firms11 are required to notify the ASC and DHR if there is a reasonable belief that a client has been the victim of financial exploitation.[12] To simplify the reporting process, the ASC and DHR developed an initial reporting form–the “Alabama Securities Commission and Department of Human Resources Report of Adult Suspected to be Financially Exploited”– which must be completed and transmitted to both agencies via email.13
Notifying Third Parties of Potential financial Exploitation
Beyond reporting suspected financial exploitation to the ASC and DHR, the Act also provides an avenue for brokerage firms to notify trusted third parties about unusual activity in a vulnerable adult’s account.14 Notably, pursuant to the Act, brokerage firms are permitted, but not required, to inform trusted third parties of the potentially exploitive activity. It is left to the brokerage firm to select the appropriate third party contact based on the relationship with the client, but the Act notes that “[d]isclosure may not be made to a designated third party that is suspected of financial exploitation or other abuse of the vulnerable adult.”15
Delaying the disbursement of funds
Another option provided under the Act is delaying disbursements in situations of potential financial exploitation. Under the Act, a brokerage firm is permitted to delay a disbursement from an account of a vulnerable adult if the brokerage firm “reasonably believes . . . that the requested disbursement may result in financial exploitation of a vulnerable adult.”16 In connection with delaying a disbursement, a brokerage firm must notify all parties authorized on the account at issue, notify the ASC and DHR within two business days and conduct an internal review of the suspected or attempted financial exploitation.17 The ASC recommends that “given the potential and unintended consequences of delaying disbursements, firms should develop clear and robust policies and procedures designed to effectively utilize these delays and to ensure that such delays comply with Alabama law and [are] used only in appropriate circumstances.”18 Moreover, the delay of any disbursement must terminate after 15 days or upon a “determination by the broker-dealer or investment adviser that the disbursement will not result in financial exploitation of the vulnerable adult[,]” whichever is sooner.19 And the delay may only be extended once for another 10 days upon request by the ASC or DHR or as otherwise ordered by a court of competent jurisdiction.20
Qualified immunity from Potential liability
Finally, to incentivize brokerage firms to help protect customers from financial exploitation, the Act provides civil and administrative immunity to brokerage firms that comply with the provisions of the Act in “good faith” and with “reasonable care.”21 In drafting the immunity provisions, the ASC hoped that “firms will be more willing to utilize the...
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