Protecting Vulnerable Investors During the COVID-19 Pandemic & Beyond

In the investing world, the term ‘vulnerable customers’ refers to people who have physical and mental challenges that could impede their understanding of financial products and actions, and their ability to protect their financial well-being.

Regulators have placed much emphasis on the fundamental obligation of treating customers fairly. This is especially important during times of crisis such as the COVID-19 pandemic, which encompasses health and safety implications beyond financial ones and when the term ‘vulnerable customer’ might have been expanded by the pandemic.

Regulatory activism

U.S. financial regulators, like the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) have listed the protection of vulnerable customers in multiple annual examination priority letters, this year included.

And FINRA’s new rule new FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information) became effective in February 2018. Rule 2165 allows a securities firm to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the firm has a reasonable belief regarding the financial exploitation of a customer.

The amendments to Rule 4512 require firms to make reasonable efforts to implement a ‘trusted contact’ system into their customer accounts. The trade group Securities Industry and Financial Markets Association has developed a customisable trusted contact authorisation form for firms to use.

The SEC cited its commitment to enforcing investor protection, particularly with regard to the protection of the most vulnerable investors, in an alert early last month, in light of the COVID-19 pandemic. In addition, the Senior Safe Act provides immunity from liability in any civil or administrative proceeding for the act of reporting potential exploitation of a senior citizen. The law is meant to encourage reporting, particularly when a business might be afraid to abridge a privacy requirement or other competing obligation.

States have passed their own laws to protect seniors from financial exploitation. For example, New Jersey’s Safeguarding Against Financial Exploitation Act obligates third parties, such as brokers and investment advisers and their compliance and legal personnel, to notify the state when they believe financial exploitation is occurring.

Connecticut, New Mexico, Nevada and Washington require businesses to train their client-facing personnel on the detection and reporting of financial exploitation.

Considerations for compliance

A combination of check-ins, technology, and erring on the cautious side can help financial professionals meet the challenge of addressing their needs and satisfying regulatory expectations.

Businesses should strive to keep in close contact with their clients in the new environment so they can better understand their health condition, financial outlook and potential need for assistance. Indeed, some institutions are offering financial assistance outside of what regulatory bodies have mandated, such as Wells Fargo, Bank of America, and MassMutual. And some institutions are considering additional services like training for clients, business advice, and investor financial education.

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Those with client-facing positions within the firm need the training to appreciate signs of client vulnerability and to know what information is required to proceed with any investment changes requested by the client. Staff need incentives for taking the time to carry out such measures, instead of being rushed to lock in fees and commissions or to cross-sell to existing customers.

This may be a time to pull back on all or many sales incentives, however.

Some products most suitable for the vulnerable (especially elderly) investor are insurance and savings vehicles that do not generate a lot of money for the business — but it’s the business’s obligations to recognise it.

Businesses that are advocating digital-only transactional and communication media, thanks to social distancing, should be mindful of how well their clients may or may not be willing and able to conduct online business and make digital-based inquiries. The business should consider helping the customer navigate a digital platform with their close help, conferring by phone with the client and documenting the steps it took to ensure the client was aware of decisions made, both during and after the point of sale.

If the business uses financial technology that relies on alerts when trade data fails to correspond to the investor’s risk profile, the business should also consider surveiling email and text communications with clients so the compliance team can ensure the business is getting multiple alerts relating to the provision of advice in their best interest. Businesses should also consider implementing a specific advisory committee that targets educational resources and special messaging to vulnerable investors, and that provides them a portal for the reporting of suspected abuse.

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As a joint report from the SEC and FINRA advises, the use of designations within firms such as ‘senior specialist’ to highlight persons well-trained in handling the accounts of vulnerable clients can help ensure the right firm representative is assigned to these customers. Enhanced supervision over these accounts by independent third parties, such as compliance officers, can provide another layer of protection.

Regulated firms would further be wise to make sure clients are aware of what their state and local consumer bureaus are circulating on the scams-of-the-day being perpetrated by fraudsters, and let clients know that they can research the credentials and records of the financial professionals they deal with.

The author of this article is Julie DiMauro, Regulatory Intelligence and E-learning Expert, based in the US. Julie’s article first appeared over at Answers On, the Thomson Reuters publication.

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