With the passing of The Financial Exploitation Prevention Act in the US House of Representatives, Broker-Dealers and Investment Advisors are now better equipped to address suspected financial exploitation and abuse of seniors and those with mental and physical disabilities. If passed by the US Senate, this bill coupled with the Senior Safe Act and several existing FINRA, SEC, and OFAC regulations, will be vital in the effort to prevent the financial exploitation of senior and vulnerable investors. However, for compliance officers, this will create more regulatory mandates to follow and enforce.
According to a 2022 Congressional Budget Office (CBO) report, 20% of seniors are financially exploited each year, which adds up to an estimated $2.9 billion annually. The Treasury Department's Financial Crimes Enforcement Network (FinCEN) noted that most incidents go unidentified and unreported as victims may choose not to come forward out of fear or embarrassment.
Why monitoring for exploitation is critically important.
To identify investors that qualify for protection, the Acts and regulations define a senior or vulnerable investor as any individual age 65 or older. Also, it includes any adult subject to the adopting state's existing adult protective services laws and any adult, regardless of age, exhibiting specific mental or physical disabilities.
However, when looking at these regulations, the language does not specify tactical steps a compliance officer may take to prevent exploitation. Instead, the offered recommendations note steps to take after the issue has occurred. But, once the money is gone, it is usually un-retrievable. Additionally, there is little or no mention of prevention or early detection tactics. Let’s review a few of the most common red flags an advisor may encounter:
Face-to-Face Red Flags
- An advisor meets with an elderly or vulnerable client who appears with new or unknown associates, friends, or relatives. This could mean that the independence of the client has been comprised. Therefore, if the advisor has difficulty speaking directly with the client without interference from others, this could be a sign something is wrong.
- An advisor notices a client has uncharacteristic nervousness or anxiety when visiting the office or on the phone.
- The vulnerable client lacks basic knowledge about their financial status, including account values and the location of those accounts.
- An unexplained or unusual windfall and a reluctance to discuss details may also be seen as a red flag.
Transaction-Based Red Flags
- Uncharacteristic and repeated cash withdrawals or wire transfers.
- Out-of-the-ordinary and unusual cash outflows, such as spikes in frequency or amounts.
- Sudden changes to financial documents such as powers of attorney, account beneficiaries, wills, or trusts.
- Large, atypical withdrawals or the closing of accounts without regard to penalties.
- Investing in security types unusual for the account profile, such as age, time horizon, and risk and investment objectives.
- Sudden liquidation of long-held “cornerstone” assets such as a dividend-producing position or asset.
- Liquidation of CDs or yield-based investments before the maturity date.
- Check numbers that are out of order.
Procedures and Protocols for the Advisor
Advisors are in a unique position to notice red flags and help identify early signs of diminished capacity. Therefore, compliance departments should develop internal procedures and checklists to assist their advisors in dealing with vulnerable clients who may be experiencing cognitive decline, abuse, or account takeover, including:
- Implementing training to ensure advisors and their assistants can recognize early warning signs.
- Developing easy-to-follow escalation procedures such as how to document suspected diminished capacity and how to escalate the information.
- Enhancing supervisory oversight for an account where there is suspicion a client may be experiencing.
The Compliance Officer Toolbox
Compliance officers should have procedures, protocols, and technology solutions in their “toolbox” to help ensure a successful and consistent oversight process. For example, to significantly improve the identification of any compromised accounts, it’s critical to have:
- A good view of all trades and non-trade transactions in a daily surveillance regimen
- The ability to leverage security types, market center information, account holdings, and cash positions
- The capability to use daily rules-based surveillance of data to detect rapid changes in account equity, as well as the ability to see changes in registration, hold mail, and returned mail
This is where SS&C can help. SS&C’s Black Diamond® Wealth Platform seamlessly integrates with the Risk & Compliance Platform (RCI), a web-based account, portfolio, and transaction-monitoring platform designed for Compliance Officers and Branch Managers. RCI automatically aggregates and analyzes custodial or clearing firm data to support mandated regulatory or internal oversight initiatives. Alerts, case management, and trade blotter features assist with day-to-day supervisory activities, easily allowing a compliance organization to evidence supervision. In addition, RCI provides advisors and broker-dealers modularized, fully configurable, and customizable surveillance and oversight features to support oversight, investment suitability, employee trade and activity monitoring, AML and transaction monitoring, senior and vulnerable investor surveillance, and best execution and market abuse oversight.