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By Amy Bard, Daniel Strashun, and Andrew Mount
Amy Bard is a principal in the Securities Litigation and Regulatory practice group of Bressler, Amery & Ross, Daniel Strashun is an associate in that practice and Andrew Mount is an associate in the firm’s Securities Litigation and Real Estate practice groups. They are reachable, respectively, at email@example.com, firstname.lastname@example.org and email@example.com
Two new FINRA rules went into effect on February 5, 2018, targeted to address senior “financial exploitation.” FINRA Rule 2165 permits member firms to place temporary holds on disbursements of funds or securities under certain circumstances where the firm has reason to believe a senior client is the victim of fraud. Amended Rule 4512, the “Trusted Contact Rule,” requires member firms to make reasonable efforts to obtain the name of and contact information for a ‘trusted contact person’ of a senior so they can reach out to him/her and discuss activity in the account.
It is estimated that elderly adults, who have been subject to scams perpetrated by third parties, lose $36.8 billion per year. These new rules have been implemented to provide firms with ways to respond to situations in which they have reason to believe financial exploitation of a senior is occurring or about to occur.
The question inevitably raised by these new rules is, what impact will they have on civil cases? Now that firms may apply a temporary hold or may reach out to a trusted contact, is this going to be construed as an obligation? Will claimants in civil suits point to these procedures as the new standard of care, so that failure to take action under the rules constitutes negligence or breach of a duty?
The commentary to Rule 2165 states “the rule creates no obligation to withhold a disbursement of funds or securities in such circumstances.” Rather the rule gives the institution a safe harbor, in effect, immunizing it, should it choose not to release funds. “Members can better protect their customers from financial exploitation,” the FINRA commentary notes, “if they have the ability to contact a customer’s designated trusted contact person and, when appropriate, place a temporary hold on a disbursement of funds or securities from a customer’s account.”
Language in the proposal for these rules suggests that FINRA never intended to create a new basis for civil liability. The 2015 Request for Comment, Notice to Members 15-17, notes “this proposed rule might serve as a rationale for a private action against firms that do not withhold disbursements when there is a reasonable belief of financial exploitation. To reduce [this] risk, proposed Rule 2165 would explicitly state that it provides firms with a safe harbor when they exercise discretion in placing temporary holds on disbursements…but would not require firms to place such holds.”
The concern that the additional procedures assisting firms to protect seniors will be interpreted as an affirmative obligation to withhold funds is not unfounded, as the recent FINRA award in Trottier v. Morgan Stanley, Dean Witter LLC, et al. (FINRA Arbitration No. 15-02910, June 9, 2017) suggests. In that case, a California FINRA panel awarded damages and attorney’s fees against a FINRA member under California’s elder abuse statute. Trottier involved Mary, a 68-year-old woman, suffering from dementia and delusions of danger who was convinced by a fraudster to purchase a $300,000 security system with withdrawals from her brokerage account. After the first cash withdrawal was made, Mary approached her financial advisor to liquidate securities in her account. The financial advisor advised Mary not to sell, but she insisted she was having a “financial emergency.” The next month, when the financial advisor learned that the funds were being used for a security system, he again cautioned Mary, this time to get a relative involved or go to the police – both of which she refused to do. Within two months, Mary had withdrawn $300,000 from of her account to purchase the security system. Her estate successfully brought this FINRA action seeking compensation for the disbursed funds.
In a thoughtful dissent, one of the arbitrators explained that claimant premised his claim on the fact that the firm had provided training to advisors working with senior clients to detect financial exploitation. This training described ‘red flags’ of exploitation, such as unexplained sudden withdrawals and required elevating these concerns to senior management. Claimant argued that the financial advisor’s failure to report these withdrawals to management constituted a breach of his duty. The dissent described this as a “classic example of no good deed goes unpunished” and stated that though he was sympathetic to the plight of the estate of Mary, he disagreed with the outcome of this case which was “inconsistent with the law, policy or facts proven at the hearing.”
While there is no specific guidance to the question of how these new FINRA rules can or should be interpreted, there is a corollary to this analysis. Many courts around the country have analyzed a similar issue in the banking context. They have concluded that elder abuse statutes do not create a private right of action for banking clients or a different standard of care of the bank towards its depositors. In Lucca v Wells Fargo Bank, N.A., 441 N.J. Super. 301 (Super. Ct. 2015), an 82-year-old woman and bank client, wired $330,000 from her bank account to third-parties out of the state and in Costa Rica in 27 different transfers over a period of six-months. She had never made such transfers before. When questioned about this by a bank employee, she told the employee to mind her own business. This led the bank employee to file reports with the firm’s internal elder abuse department, but no follow-up action was taken.
After the money was withdrawn, the plaintiff sued the bank. The plaintiff argued that New Jersey bank regulations, which permit financial institutions to release financial records to adult protective services if the institution has reason to suspect that a senior was being defrauded, created a standard of behavior, and the bank’s failure to report the scam to authorities amounted to “bad faith.”
The New Jersey Superior Court, analyzing the language of the statute, emphasized that the reporting requirement was permissive, not mandatory. Moreover, the statute provided that financial institutions which decided in good faith not to report, “shall not be liable” for that decision. Thus, the rule did not create a “duty to notify” and plaintiff could not allege an independent cause of action to assert a bad faith claim. The Court also rejected plaintiff’s argument that a private right of action should be inferred from the bank reporting statute. One of the criteria for inferring a private right of action under a statute, the Court stated, was whether the plaintiff was a member of a class for whose special benefit the statute was enacted. Here the Court concluded, “while creating this immunity may serve as an incentive for the financial institution to disclose suspected abuse to the authorities and in that sense, also benefits elderly and vulnerable customers,” the principal benefit of the statute was afforded to financial institutions.”
The Court of Appeals in California, in Das v. Bank of America N.A., 186 Cal. App. 4th 727 (2010), similarly rejected the plaintiff’s argument that California’s mandatory Financial Elder Abuse Reporting Act created a duty of care. There, a senior client who fell victim to a lottery scam liquidated his assets and instructed the bank to transfer all his money to bank accounts in different countries. Though the bank employees acknowledged that they “wondered” about the state of the client’s mind, they did not report to adult protective services. The Court concluded that the bank could not be construed to have assisted in the financial exploitation because it did not have actual knowledge of the fraud. Further, the mandatory reporting requirement did not create a duty to the client. The Court pointed out that even though the reporting requirement was mandatory and failure to comply with the statute might subject a bank to civil penalties, the statute was intended to be enforced by the state Attorney General, district attorney or county counsel, not by private litigants. The statute provided that nothing therein “shall be construed to limit, expand, or otherwise modify any civil liability or remedy that may exist under this or any other law”.
Similarly in Santucci v Citizens Bank of Rhode Island, 799 A.2d 254 (R.I. 2002), the Rhode Island Supreme Court rejected plaintiffs’ argument that Rhode Island’s Elder Abuse Reporting Statute created a legal duty to report financial exploitation of the elderly and that violation of that reporting statute constituted prima facie evidence of negligence. The Court here did not look to the permissive versus mandatory language of the statute or the legislative intent, but rather to common law principles. The factors that might be considered “in determining whether a duty exists”, the Court stated, were “foreseeability and likelihood of the injury to the plaintiff, the connection between the defendant’s conduct and the injury suffered, the policy of preventing future harm, and the consequences to the defendant and to the community of imposing a duty of care on the defendant with resulting liability for breach”. The Court concluded that the reporting statute did not intend to alter the relationship between the bank and its depositor (to deposit funds, direct withdrawals, follow duly authorized instructions). The parties still had the same rights and obligations and therefore the Court declined to impute a duty based on the reporting statute.
The courts’ analyses in these cases lend support to the argument that no right of action can or should be implied based on the new rules against a FINRA firm where it declines to stop the disbursement of funds. This is so even if it later turns out that the client authorizing the disbursement was the victim of fraud. The FINRA rules are permissive, not mandatory. Their purpose is to create a safe harbor for firms, to protect financial institutions so they can protect their clients. It is not to create liability when despite due diligence efforts and development of proper protocols, an institution is unable to detect and stop fraud. The rules provide firms with additional tools to address financial exploitation of seniors and should be viewed in that vein.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
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