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CLOSING ENTRY: Be on the lookout

What you need to know about new legislation protecting senior and vulnerable people against financial exploitation

New Jersey recently joined the growing list of states that have prioritized the protection of senior and vulnerable people against financial exploitation. New Jersey’s “Safeguarding Against Financial Exploitation Act” went into effect on April 12.

Like many similar state laws around the country, the act requires broker-dealers and state-registered investment advisers to report suspected financial exploitation of senior and vulnerable investors to state agencies. It permits firms to temporarily delay transactions and disbursements of funds when they suspect exploitation of senior or vulnerable investors. Firms will enjoy limited legal immunity related to reports and holds, as long as they act with due care and in good faith.

DEPOSIT PHOTOS

The Act explicitly protects two classes of “eligible” adults: seniors 65 years of age or older; and vulnerable persons aged 18 years or older who, because of a physical or mental illness or disability, lack sufficient understanding or capacity to make decisions concerning their well-being and are the subject of abuse, neglect or exploitation.

Reporting to authorities

The act requires broker-dealer and state-registered investment adviser firms to promptly report to the New Jersey Bureau of Securities and the applicable county adult protective services provider when they have a reasonable belief that financial exploitation of an eligible customer may have occurred, may have been attempted or is being attempted. When made in good faith and with reasonable care, the reporting entity is immune from administrative and civil liability that might otherwise result from the report.

The bureau set up a dedicated webpage to provide firms with information about the Act, including a reporting form, contact information for New Jersey’s adult protective services providers and contact information for the bureau.

Third-party contacts/disclosures

Where there is a reasonable suspicion of exploitation, the act requires broker-dealers and state-registered investment advisers to contact any third party previously designated by the eligible adult for such contacts.

The act also permits a firm to notify any third party reasonably associated with the eligible customer. This provision gives firms additional tools to combat financial exploitation in a situation where a vulnerable customer does not designate a contact, the contact person is unwilling or unable to provide useful information or the contact person is also the suspected bad actor. Firms can contact other individuals – relatives, friends or neighbors – who may be able to provide facts useful to the firm’s investigation.

As an obvious, but important point, firms are not required to contact third parties who they suspect are involved in the exploitation. A firm that contacts a third party in good faith and with reasonable care enjoys immunity from any resulting administrative and civil liability.

Temporary delay

The act allows broker-dealers and state-registered investment advisers to temporarily delay both disbursements and transactions in an eligible adult’s account if they suspect financial exploitation. The ability to delay a transaction goes above and beyond what is allowed under Financial Industry Regulatory Authority Rule 2165, which only permits broker-dealers to place a temporary delay on disbursements. Importantly, a firm is not permitted under the act to place a hold on an entire account but is instead limited to delaying the specific transaction or disbursement at issue. If a firm acts in good faith and with reasonable care in delaying a transaction or disbursement, it is immune from any resulting administrative or civil liability.

Once the hold is placed, the firm must immediately contact all parties authorized to transact business on the account. The firm must also report the hold to the bureau and the applicable county adult protective services provider. The firm is required to update the agencies within seven business days after the completion of the review.

A temporary delay of a disbursement or transaction may last up to 15 business days provided: the firm’s ongoing, internal review supports its initial belief of financial exploitation; and the investigation is not terminated by the bureau, the applicable county adult protective services provider or by court order.

The bureau or county adult protective services provider can authorize the firm to extend the delay for an additional 10 business days for a total of 25 business days. In addition, the act includes an open-ended provision that allows either the agency or a court to extend the delay for an indefinite period. This extension provision is crucial for firms that have found the 25-day period under FINRA Rule 2165 and other state laws to be too short to complete an effective internal investigation.

Andrew Mount is an associate in the Senior & Vulnerable Investor Group at the law firm of Bressler, Amery & Ross PC. For more information on state laws like New Jersey’s go to this web-based 50 state survey that keep firms up to date.

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