Thirty states have now enacted legislation to protect senior and vulnerable investors from financial exploitation. The state statutes apply to broker-dealers and investment advisers and typically require or permit (i) reports to government agencies, (ii) disclosure to third parties, and (iii) holds on suspicious disbursements and/or transactions.
Along with these relatively new laws, firms must comply with reporting obligations under long-standing adult protective services, or APS, statutes that aim to protect the state’s senior and vulnerable population generally.
Often in the states that have adopted financial exploitation statutes, firms that suspect financial exploitation neglect to consider making a report under the APS statute. This can be a mistake.
Financial exploitation statutes and APS statutes grant firms immunity for reporting suspected financial exploitation. However, with one exception, the immunities granted are different in a critical way.
In 29 of the 30 states that have adopted financial exploitation statutes, firms are granted civil and administrative immunity for making a good faith report to government agencies or a third party. (The only exception, Minnesota, also grants criminal immunity for making a report under the state’s financial exploitation statute.) Under the APS statutes in most states, firms that report suspected financial exploitation to a government agency in good faith are granted civil, administrative and criminal immunity.
In certain states, the financial exploitation statute and APS statute require or permit reporting to the same agencies. In these states, a firm can fulfill its reporting responsibility under the APS statute (and gain the respective criminal immunity) simply by complying with the state’s financial exploitation statute.
For example, in New Mexico, under the APS statute, a firm that suspects financial exploitation must immediately make a report to APS. Under the financial exploitation statute, a firm must promptly make a report to both APS and the New Mexico Securities Division. Therefore, a firm that is compliant with the financial exploitation statute in New Mexico is also compliant with the APS statute -- and gains the resulting criminal immunity.
In many states, the analysis is more complicated. Under Montana’s financial exploitation statute, a firm is allowed to report suspected financial exploitation to the Montana Office of the Securities Commissioner. If a firm makes such a report in good faith, it receives immunity from administrative and civil liability. Under the APS statute, however, a firm is permitted to make a report to APS. A firm gains criminal immunity for doing so. To gain civil, administrative and criminal immunity for a report in Montana, a firm must act under both statutes and make a report to both the Montana Office of the Securities Commissioner and to APS.
In states such as Montana -- where the two statutes list different reporting agencies -- firms may be best served by reporting suspected exploitation to all applicable agencies in order to secure criminal immunity.
The interplay between the different reporting laws in each state are not always intuitive and securing civil, administrative and criminal immunity can be difficult. However, there are steps that firms can take to ease the burden.
Training. Firms should ensure that their employees are trained to identify red flags indicating possible exploitation including: (1) dramatic, unexplained shifts in investment style; (2) sudden withdrawals or changes in the amount or frequency of withdrawals; and (3) suspicious signatures on documents.
Documentation. Firms should document how they developed a reasonable belief of financial exploitation, including any and all aspects of their investigation.
Centralize reporting functions. Firms that employ a centralized reporting group (or individual) are more likely to appreciate the requirements imposed under different state laws.
Clear escalation and reporting procedures. Firms should develop clear escalation procedures for registered representatives and/or advisers to follow when they develop a reasonable suspicion of financial exploitation. Firms should create or utilize a resource for each state that clearly identifies the reporting mechanism that will guarantee achieving civil, administrative and criminal immunity. Bressler has developed a Senior and Vulnerable Investor Issues Map, which is a constantly updated resource detailing the financial exploitation and APS laws in each state.
Firms should recognize that to achieve civil, administrative and criminal immunity under state law, they must comply with both state financial exploitation statutes and APS statutes.
Andrew Mount is an associate in both the senior and vulnerable investor group and the financial institutions group at the law firm Bressler Amery & Ross. Email him at [email protected].
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