Dealing with senior citizens and those approaching retirement requires special care and planning. Many seniors are not up to date on the latest market trends, products, and strategies. Additionally, senior citizens generally have special needs when it comes to liquidity, income, and safety. With the goal of preying on the needs and vulnerabilities of seniors, guilty brokers generally tend to market more speculative income-producing products. These products typically have income features with greater hidden risks (and bigger commissions.) If you are a senior citizen and you noticed your investments declined significantly, your broker may have engaged in elder fraud. A New York elder financial fraud law firm like Malecki Law can review whether you have been subject to investment fraud. FINRA has implemented rules to protect seniors from financial exploitation and expects brokers to treat seniors with extra care when financial planning.
There are methods for investors to try to avoid elder financial exploitation, such as designating a trusted contact person on your brokerage accounts. Although, it may not be enough to stop your broker from engaging in misconduct. FINRA also requires brokerage firms to place holds on any transactions with red flags that indicate a potential financial exploitation. After placing such hold, the brokerage firm is required to investigate and determine whether there was in fact financial exploitation in your account. It is important to note, your brokerage firm cannot take advantage of these rules to simply place a hold on a transaction without a suspicion of financial exploitation.Elder Financial Fraud
There are an estimated 73 million baby boomers in the United States and by 2030, all baby-boomers will be 65 or older. Roughly one out of every five Americans, 65 years and older, has been the victim of financial abuse and exploitation, like broker fraud. Consequently, the elderly lose billions of dollars per year from financial scams, and the numbers are rising.
These figures are likely lower than the true figures since they only account for frauds that are reported, and seniors are less likely to report being scammed. Because most victims are retirees, they have irreplaceable assets and are not able to personally recoup their losses by working.
Elder financial fraud comes in many forms. Alzheimer’s disease and other types of dementia that deter mental capacity make seniors increasingly vulnerable to threats of unintentional self-impoverishment, victimization, and exploitation by others. A study by Stanford University psychologists with participation of FINRA and AARP concluded that inducing strong emotions in older adults, whether positive or negative, increased their susceptibility to falsely advertised messages and fraud, making them more likely to spend or give away their money based on the emotional state they were experiencing rather than perceived credibility of the messages they are receiving.
Regulators and self-regulatory organizations (“SROs”) like FINRA, as well as financial advisors and firms, have taken steps to protect the elderly from scams and broker fraud but there is still a long way to go. The responsibility of spotting and preventing elder financial fraud falls on professionals working in different capacities, be it investment professionals, estate planners or lawyers. Our elder financial fraud law firm in New York works to protect the rights of elderly investors, spread awareness about legal developments, and work towards changes in elder law. If there are signs your broker may have financially exploited you, you should contact Malecki Law’s experienced elder financial fraud lawyers in New York.
Here are some things you should know about elder financial fraud:
- Elder investment exploitation and fraud are more common than most people realize.
- Brokers are not your friend, they are business professionals. Seniors often get tricked by personable fraudsters.
- Investment/broker fraud is not just outright stealing money from your account. It is recommending products that are not right for you, too complicated to understand and the failure to explain the investments accurately.
- Investment Fraud can affect anyone, not just the extremely wealthy. It can happen to anyone with a 401k, IRA, and other investment accounts.
If the answer is yes, this is a red flag that should be addressed. Unfortunately, elder clients tend to fall victim to this type of misconduct. FNIRA Rule 3240 prohibits it and only provides certain exceptions for situations in which borrowing from or lending to customers is allowed.
Rule 3240 – Borrowing From or Lending to CustomersFinancial Industry Professionals and Elder Financial Fraud
This rule prohibits your advisor from borrowing from or lending to you unless an exception applies and the requirements of subsection (b) are satisfied. The exceptions are outlined in subsection (2)(a)-(e):
- If you are the advisor’s immediate family member
- If you are a person or entity that “extends credit in the ordinary course of business” and you are acting “in the course of such business”
- Both you and your advisor are registered representatives of the same member firm
- You and your advisor have created a lending arrangement based on a “personal relationship”, meaning that the loan at issue could not have been solicited for example
- You and your advisor have entered a lending arrangement in a business relationship capacity, “outside of the broker-customer relationship”
Subsection (b) provides specific requirements as to notification and approval. Your advisor should be aware of these requirements and ensure that they can satisfy such requirements, before finalizing a loan arrangement with you. If you engaged in borrowing/lending with your advisor and do not fit into one of the aforementioned exceptions, your broker may be liable. You need to reach out to Malecki Law’s elder financial fraud attorneys in New York for a free consultation.
Although financial industry advisors have been aware of elder issues, regulations have not always been favorable for advisors to assist the client, so FINRA took steps towards ‘empowering advisors’ to act and prevent elder fraud. FINRA approved the Pause Law that enables investment firms to put temporary holds on fund disbursement and securities transactions, and notify a designated trusted contact if they have a reasonable belief of financial exploitation, of an elderly investor. FINRA also established a toll-free senior hotline in April 2015. The rule aims to encourage and protect advisors and brokers to act on their suspicion if they believe they are dealing with a victim of abuse or someone making incompetent decisions due to diminished capacity.
There are also many instances, unfortunately, when financial advisors, brokers and estate planners are not motivated to act in the best interest of their elderly client. For instance, when it comes to retirement accounts and nest eggs, although brokers have been required to only recommend “suitable” investments under the existing “suitability standard,” they have been able to push a more expensive product that pays a higher commission than a cheaper fund that would be equally appropriate for that investor. That said, in 2020 the SEC initiated Regulation Best Interest. This holds the brokers and broker-dealers to a higher standard in which the aptly named regulation says they are required to act in the best interest of their clients. Among other things brokers and broker-dealers are required to make recommendations, “without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer.” These new regulations took effect June 30th, 2020, but it may be a while before we start to see the full impact.Challenges With Diminished Capacity and Elder Fraud Protection
There continues to be a struggle between financial autonomy and protection for the elderly. The potential negative outcomes of financial decisions made with diminished capacity can be very destructive.
Those of us who work with the elderly regularly, need to be attuned to deciding whether our clients have the capacity to make decisions regarding their financial affairs. As securities attorneys, when we see the elderly make questionable investment decisions, it immediately raises a red flag concerning their financial capacity and possible abuse. American Psychological Association (APA) together with the American Bar Association (ABA) developed a Handbook for Lawyers that focuses on the assessment of “civil” capacities including financial capacity that reflects the ability of an individual to manage his/her financial affairs in consistence with their self-interest. As an experienced New York elder financial fraud law firm, Malecki Law can review your case to determine whether elder fraud or exploitation occurred.
Firms and advisors are believed to be in the best position to identify suspicious activity, even before family and friends. Common signs include changing a long-term strategy, frequently repeating orders or questions, taking investment actions out of the ordinary such as making major withdrawals from an IRA, or having trouble processing basic information.
When elderly customers find themselves victimized, there are many legal recourses available to them. Institutions like FINRA, and criminal and civil statutes allow for aggressive legal action to provide protection for the elderly. However, there are many instances when elder financial fraud goes unreported because the victim might blame themselves for financial losses or feel emotionally attached or dependent on the person.