New FINRA Rules Provide Launching Pad to Combat Senior Investor Fraud And Reinforce Anti-Money Laundering Reporting Requirements
In November 2017, a Financial Industry Regulatory Authority (FINRA) hearing panel barred broker Hank Werner for making unsuitable investment recommendations for his customer—a blind, ill, and elderly widow—and for fraudulently churning and excessively trading the accounts of that customer. Werner had been the vulnerable widow’s and her late husband’s broker since 1995, but following the husband’s death in 2012, he took advantage of the widow. Motivated solely by his desire to generate commissions, over a three-year period Werner made 700 trades on 200 securities. He generated approximately $210,000 in commissions for himself, while at the same time losing his elderly customer more than $175,000. The FINRA hearing panel ordered Werner to pay more than $155,000 in restitution to his customer, fined him $80,000, and ordered him to disgorge $10,000 in commissions. Additionally, the hearing panel fined Legend Securities, Inc., the brokerage firm that employed Werner, $200,000 for failing to appropriately supervise him.
Seniors, like the elderly widow defrauded by Werner, are among the investors most vulnerable to fraud. According to the National Council on Aging, financial abuse and fraud cost senior Americans an estimated $36.5 billion each year. And this figure is likely underreported. In fact, although the National Adult Protective Services Association (NAPSA) reports that one in twenty older adults indicate some form of financial mistreatment occurring in the recent past, NAPSA also estimates that only one in 44 financial abuse cases is ever reported.
With the aging of the United States population, financial exploitation of seniors is a serious and growing issue that demands immediate attention. The U.S. Census currently projects that the 65 and over population will reach 83.7 million by 2050—nearly double its projection from 2012. Already, NAPSA has seen the number and complexity of reports involving the financial abuse of seniors significantly increase over the past decade. Failing to take action to protect this vulnerable and growing population is simply not an option.
Fortunately, these facts and concerns have not been ignored. In fact, both the Securities Exchange Commission’s (SEC) 2018 National Exam Program Examination Priorities and FINRA’s 2018 Regulatory and Examination Priorities Letter identify protecting the senior population from financial exploitation as a high priority. Both regulators encouraged financial institutions to take concrete, preventative action against this misconduct.
But perhaps the most noteworthy development in the fight to protect the senior population was FINRA’s issuance of two news rules that took effect on February 5, 2018. As a result, broker-dealers are now required to make reasonable efforts to obtain the name and contact information of a trusted contact person for each customer’s account. Additionally, firms are now permitted to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation. Where there is reasonable belief of financial exploitation, this provision also allows firms to conduct an investigation and contact the customer, the trusted contact and—if necessary—law enforcement or adult protective services, before disbursing funds. No doubt a substantial step, FINRA’s changes represent the first uniform, national standards aimed to protect senior investors from financial exploitation.
With these changes, it is critical that brokerage firms understand essential anti-money laundering (AML) requirements related to FINRA’s new rules. The direct link between AML and senior financial exploitation is not novel. In fact, in 2011, FinCEN issued extensive guidance on red flag indicators of senior financial exploitation and instructions on how to report this activity by filing a suspicious activity report (SAR). More recently, in 2017, a joint memorandum between the Consumer Financial Protection Bureau, the United States Department of the Treasury and FinCEN reiterated this guidance, stressing the importance of filing SARs disclosing senior financial exploitation.
To this end, firms should ensure that employees, complying with FINRA’s new rules, immediately escalate instances of fraud or abuse involving senior financial exploitation to AML departments. These departments can then assess whether it is necessary to file SARs disclosing elder financial exploitation. When a SAR is filed, resulting law enforcement or regulatory investigations could lead to criminal punishment or regulatory sanctions of those parties responsible for the fraud or abuse.
But to comply effectively with FINRA’s new rules, brokerage firms—who play a pivotal role in detecting and preventing instances of exploitation—may need to make compliance program adjustments. First, firms must ensure that they have up-to-date policies and procedures and that their employees are trained effectively on the new FINRA regulations, changes to the firm’s policies and procedures, the proper use of new controls, and related AML requirements. Second, firms should seek sophisticated and cost-effective technology that will provide successful, comprehensive transaction monitoring that will target the kinds of financial abuse and fraud often perpetrated against the senior population.
Cutting-edge surveillance tools could monitor and trigger alerts detecting elder financial exploitation red flags. Firms should ensure that their automated surveillance tools are calibrated to flag the types of suspicious activity related to senior financial exploitation, including unauthorized trading, churning, pump and dump schemes involving low-priced securities, and unauthorized transfers of funds and securities. For example, an automated transaction monitoring system, factoring in the customer’s profile, including age, could trigger an alert for review by business supervisors or compliance when a recent change in a senior’s profile is closely followed by a series of withdrawals. Once an alert is triggered, the firm can hold place a temporary hold on the transaction and investigate any deviation from the customer’s known habits. Additionally, the alert would initiate review by appropriate AML personnel to determine if a SAR should be filed.
By implementing cost-effective surveillance technology and ensuring that employees are properly trained on the new regulations, policies and procedures, and controls, financial firms can successfully realize the goal of FINRA’s new rules—to protect the most vulnerable populations from financial exploitation—in addition to ensuring compliance with AML regulations, that could eventually result in the punishment of those responsible for this reprehensible behavior.
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