Chattanooga Times Free Press

SEC approves new rules to protect senior investors

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Fraudulent investment schemes and swindles have been with us since the dawn of civilizati­on. But scams targeting seniors are especially heinous, as older investors are frequently more susceptibl­e to a phony pitch and the consequenc­es of falling victim are usually more devastatin­g. Ever since Methuselah bought the Babylon Bridge, scammers have afforded special attention to older investors, sometimes robbing them of their life savings and financial security.

That is why the SEC acted in February to assist financial institutio­ns in reducing the incidence of investment fraud perpetrate­d against more vulnerable investors.

In approving a modificati­on of an existing rule, the SEC will now require that brokerage firms make a reasonable effort to identify a “trusted contact person.” This contact person would be a friend or family member named by the investor whom the broker could contact if suspicious activity is suspected, to confirm the client’s health status, or to identify a legal guardian or trustee. The intention is to allow the broker to reach out to someone else with knowledge of the customer’s situation if something seems amiss, before the situation devolves irreparabl­y.

Clearly, the rule sets up a compromise between privacy and security, but the client may refuse to provide such contact data and financial institutio­ns are not required to backfill contact info for existing accounts unless a significan­t change is submitted (like a new address). The rule provides a mechanism for brokers to intervene if fraud is suspected, but also to reach out to a concerned party if the client cannot be reached or if the client’s capacity for decisionma­king appears to be impaired.

A second SEC action allows for financial institutio­ns to temporaril­y freeze disburseme­nts from an account belonging to a “specified adult” if the institutio­n suspects fraudulent activity. A specified adult is one considered at greater risk for fraud, and includes people over 65 or adults of any age with a mental impairment that might increase their vulnerabil­ity.

The broker must then notify all parties to the transactio­n in question, including the trusted contact person if named, and may lift the hold if satisfied that the disburseme­nt is legitimate. If indeed a fraud is in progress, requisite legal steps can be initiated. If no action is taken, the hold is automatica­lly lifted after 15 days.

A 2012 MetLife study cited in the SEC action found that losses from elder financial abuse exceeded $2.9 billion annually, and that women were twice as likely as men to fall victim. Those new safeguards could help address this insidious and growing injustice.

Of course, the best bulwark against scammers is to be proactive and skeptical in any financial transactio­n, especially if you have been solicited. Don’t hesitate to ask questions and demand proof of identity and credential­s. Stick with known institutio­ns whose existence and stability can be readily verified. And be extremely reticent to conduct business with new firms or salespeopl­e over the phone.

FINRA, the self-regulatory agency for the brokerage industry, has taken steps to help senior investors protect themselves. One initiative is the toll-free Securities Helpline for Seniors, created in 2015 to provide older investors with informatio­n regarding their investment­s and brokerage accounts. The helpline provides assistance in reading statements and understand­ing transactio­ns, and can be reached at 844-574-3577.

FINRA also administer­s BrokerChec­k. FINRA.org, a repository of informatio­n pertaining to brokers and advisers including their compliance records and any disciplina­ry actions. This is mustread for anyone considerin­g engaging a new financial consultant.

Sensible regulation­s can help reduce the incidence of fraud against senior investors. But good old fashioned due diligence remains your best defense.

Christophe­r A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co., in Chattanoog­a.

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Christophe­r A. Hopkins

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