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Legal protections for seniors at risk of financial abuse

Fortunately, federal and state financial regulators have taken steps in recent years to shore up legal protections for elderly victims of financial fraud. Today elderly persons — or their trustees or guardians — can expect to be provided notice of suspicious transactions from banks and brokerage houses.

And if elder abuse is not detected until it is too late, they have strong legal rights to take action against financial institutions and brokerages who should have, but failed to, prevent elder financial abuse from occurring.

According to U.S. Census Bureau estimates:

Spotting Elder Financial Abuse

According to a report published by the AARP Public Policy Institute, seniors frequently lose “financial capacity” during early stages of cognitive decline.


Statistics show that over two-thirds of those committing elder financial abuse are related to the victim in some fashion.

Perpetrators of elder financial abuse rely on the trust that elders place in family members, their need for assistance to survive and the fact that advancing age has impaired their capacity to make sound decisions on financial matters.

According to a report published by the AARP Public Policy Institute, elderly persons frequently lose “financial capacity” during early stages of cognitive decline. Diminished “financial capacity” can significantly weaken a person’s financial judgment and render them unable to understand the consequences of spending and investment decisions. As a result, an elderly person’s money is often stolen or squandered before family members are aware of the vulnerability.

Do not assume you are not at risk

The following occurrences could be an indication of elder financial abuse:

  • Unexpected withdrawals or checks debited from a bank or brokerage account
  • Unnecessary expenses that cause the liquidation of securities or withdrawal of funds from an account
  • Changing power of attorney or beneficiaries of an account
  • Unexpected changes to testamentary documents (e.g., wills, trusts)
  • Transactions have occurred in the account but the elderly person has not spoken to their broker
  • Purchasing investments which are out of character for the elderly person
  • Loans made by the elderly person to their broker
Legal Liability of Brokers for Elder Financial Abuse

The Financial Industry Regulatory Authority (FINRA), a self-regulator of broker-dealers, has instituted special protections for elderly investors. Specifically, FINRA rules give brokers two tools to respond to situations in which they have a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted.

Although broker liability is not explicitly created by FINRA rules, the fact that a broker may place a temporary hold on a suspicious transaction could lead a court or arbitrator to conclude that the broker should have held up a transaction if the facts suggested to a reasonable person that financial exploitation was occurring.

Trusted Contact Person

FINRA Rule 4512 requires brokers to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer’s account or when updating account information for a non-institutional account.

 

Temporary Holds

FINRA Rule 2165 permits a broker who reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on the disbursement of funds or securities from the elderly person’s account.

The Safe Seniors Act

In the spring of 2018, President Trump signed the Senior Safe Act, a measure that was included in a package of financial regulatory reforms. The law incentivizes financial institutions to report suspected elder financial abuse in exchange for immunity from lawsuits claiming violations of bank privacy laws. Immunity is conditioned on bank employees enrolling training programs regarding elder financial exploitation.

Nothing in the Senior Safe Act requires financial institutions to report suspected elder financial exploitation, nor does it require enrollment in elder abuse training programs.

However, it is possible that widespread adoption of elder financial abuse training programs will create a standard of care that all financial institutions must meet.

Florida Laws Prohibiting Elder Financial Abuse

Nearly every state has a law protecting seniors from financial exploitation. In Florida, for example, a combination of criminal and civil statutes protect elders from financial abuse. Florida’s civil financial exploitation statute, Fla. Stat. § 415.102 (2016), provides in part:

(8)(a) “Exploitation” means a person who:

Stands in a position of trust and confidence with a vulnerable adult and knowingly, by deception or intimidation, obtains or uses, or endeavors to obtain or use, a vulnerable adult’s funds, assets, or property with the intent to temporarily or permanently deprive a vulnerable adult of the use, benefit, or possession of the funds, assets, or property for the benefit of someone other than the vulnerable adult; or

Knows or should know that the vulnerable adult lacks the capacity to consent, and obtains or uses, or endeavors to obtain or use, the vulnerable adult’s funds, assets, or property with the intent to temporarily or permanently deprive the vulnerable adult of the use, benefit, or possession of the funds, assets, or property for the benefit of someone other than the vulnerable adult.

(b) “Exploitation” may include, but is not limited to:

Florida defines an “Elderly person” as a person 60 years of age or older who is suffering from infirmities of aging as manifested by advanced age or organic brain damage, or other physical, mental, or emotional dysfunctioning, to the extent that the ability of the person to provide adequately for the person’s own care or protection is impaired. Fla. Stat. § 825.101(4). It also defines a “Vulnerable adult” as a person 18 years or older whose ability to perform normal activities of daily living or to provide for his/her own care or protection is impaired due to a mental, emotional, sensory, long-term physical or developmental disability or dysfunction or brain damage, or the infirmities of aging. Fla. Stat. § 415.102(28).

California Laws Prohibiting Elder Financial Abuse

California has equally powerful protections against elder financial abuse. California’s civil remedy for elder financial abuse, California’s Welfare & Institutions Code §§ 15600-15766 (2017), provides in part:

(a) “Financial abuse” of an elder or dependent adult occurs when a person or entity does any of the following:

(1) Takes, secretes, appropriates, obtains, or retains real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(2) Assists in taking, secreting, appropriating, obtaining, or retaining real or personal property of an elder or dependent adult for a wrongful use or with intent to defraud, or both.

(3) Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real or personal property of an elder or dependent adult by undue influence, as defined in Section 15610.70.

California’s statute protects all people age 65 and older, without regard to whether they are suffering from a cognitive impairment due to age. Similar to Florida, successful complainants are entitled to compensatory damages, punitive damages and attorneys’ fees.

Federal Securities Fraud

Elderly investors are particularly vulnerable to fraud and misrepresentation. Securities fraud includes a wide range of illegal activities centered around the misrepresentation or omission of information an investor would reasonably want to know and consider before making an investment decision regarding whether to buy, sell or hold a security.

A financial advisor can commit securities fraud in many ways, including but not limited to the following:

  • Failure to disclose the risks of an investment or strategy
  • Failure to disclose the cost or commission of a transaction at the time of the recommendation
  • Failure to disclose financial interests the financial advisor or their employing brokerage firm may have in the investment being recommended
  • Failure to consider and disclose the relative pros and cons of buying or selling an investment, or pursuing an investment strategy
  • Failure to put the investor’s interests first when recommending to buy, sell or hold an investment
  • Failure to disclose all material facts prior to recommending a transaction
SEC and FINRA Conduct Rules

The SEC and FINRA have set forth conduct rules and regulations to protect investors. Violation of these rules may serve as compelling evidence that a brokerage firm or financial advisor has engaged in actionable misconduct. The following types of broker fraud are frequently encountered in elder financial abuse cases.

1. Unsuitable Investments

Making suitable investment recommendations is the cornerstone of proper investment advice. When the investor is an elderly person, the investment advice given by the broker must advance reasonable investment objectives for an older person. Among the criteria that a financial advisor must evaluate include the investor’s age, financial situation and needs, time horizon, risk tolerance, and any other information disclosed by the investor.

2. Breach of Fiduciary Duty

A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom they owe the duty, is typically referred to as the principal or the beneficiary.

In the securities industry, a fiduciary relationship exists between the client investor and the brokerage firm, financial advisor or investment advisor. A fiduciary duty can arise through written agreement, statute or a verbal agreement in which the investor places trust and confidence in another person. To the extent a financial advisor or investment advisor directs the trading activity in an account through discretionary trading, enhanced fiduciary duties are owed to the client. These duties include, but are not limited to, warning investors regarding a change in market conditions that may impact the value of their investments.

3. Excessive Trading or Churning

Excessive trading or churning refers to the practice of a financial advisor recommending or placing trades for the purpose of generating fees or commissions. It is the classic example of a financial advisor putting their interests in front of the client’s interests. FINRA requires that financial advisors uphold the highest degree of commercial honor and just principles of trade. Engaging in churning or excessive trading violates that requirement.

4. Failure to Supervise

Brokerage firms are responsible for the activities of their employees and financial advisors when acting within the course and scope of their employment. FINRA requires that all brokerage firms implement a reasonable system of supervision that is designed to detect unsuitable investment activity, unusual withdrawals, account losses or portfolio concentration.

It is the responsibility of brokerage firm management to ensure that the account activity is consistent with the needs and objectives of the investor. If red flags are, or should have been, detected, the brokerage firm has a regulatory responsibility to take corrective action in order to protect the investor.

5. Broker Theft

Unfortunately, there are many financial advisors that engage in criminal activity under the auspices of providing legitimate financial advice. Broker theft has become more pronounced in accounts owned by elderly clients. The most common example of broker theft occurs when a financial advisor withdraws money from a client’s account for their own personal use. Often these withdrawals are accompanied by false promises to repay the money owed at a point in the future.

Consulting an experienced attorney that understands the complexity of elder financial abuse can help you know your legal rights and take action against financial institutions and brokerages. Contact the Wolper Law Firm and talk to an experienced elder financial abuse lawyer today.

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