Elder Financial Exploitation (EFE) Prevention: Comparing Regulations in the Broker Dealer, Banking, and Credit Union Industries

by Ben Rininger, Associate Member, University of Cincinnati Law Review Vol. 92

I. Introduction

According to the FBI’s 2022 Elder Fraud Report, persons over sixty in the United States reported to the Internet Crime Complaint Center over $3.1 billion in losses from fraudulent financial schemes in 2022.¹ This represents an 84% increase from 2021, and over a 400% increase from 2018.² The problem of elder financial exploitation (“EFE”) is growing and policies to address EFE have evolved as a consequence.

The Financial Institution Regulatory Authority (“FINRA”) enforces multiple regulations that encourage EFE-prevention.³ On February 5, 2018, FINRA adopted Rule 2165, which allows broker dealers and investment advisers to place a temporary hold on the disbursement of funds or securities owned by a customer over age sixty-five if an institution reasonably suspects that the customer is being financially exploited.⁴ The temporary hold may last up to fifteen days unless certain regulatory agencies or courts of competent jurisdiction grant an extension.⁵ On December 15, 2022, FINRA adopted Rule 4512, which mandates that institutions provide customers over age sixty-five the opportunity to designate a trusted contact person (“TCP”) for institutions to contact in the event of suspected financial abuse.⁶

By granting broker dealers and investment advisers a statutory right to delay disbursements from elder investors’ accounts and creating a statutory obligation for such institutions to allow elder investors to designate a TCP, FINRA Rules 2165 and 4512 make these two practices ubiquitous throughout the broker dealer and investment adviser industries. In the credit union and banking industries, however, these practices are rare.⁷

This blog addresses the issue of whether the credit union and banking industries should be legally authorized to adopt these two practices. Part II discusses the legal duties banks and credit unions owe to elderly depositors and how the two FINRA Rules would affect these duties. Part II also discusses current state-led initiatives to reduce EFE. Part III (1) discusses the benefits and risks of adopting the two FINRA rules in the banking and credit union industries, and (2) argues that FINRA and various states should gather data regarding the efficacy of disbursement delay and TCP policies to allow lawmakers and regulators to assess whether such policies would be worthwhile in the banking and credit union context. Part IV concludes by underscoring the need for TCP and disbursement delays policies to be considered, given that EFE is an ever-growing problem in our ever-aging country.

II. Background

A. The Effects of New Rules on the Existing Legal Duties of Banks and Credit Unions

Banks and credit unions rarely owe a fiduciary duty to depositors.⁸ This means that a bank does not need to look out for the overall financial well-being of a depositor; rather, a bank’s obligation is usually circumscribed to the narrow duty of following a depositor’s instructions.⁹ Thus, the law imposes no affirmative duty on banks and credit unions to warn their depositors when they suspect that their depositors are being fooled. This legal reality can have dire consequences. In one case, an elderly depositor had $3.6 million transferred overseas in seventy-five installments, forty-two of which occurred after the depositor was notified of the bank’s suspicion that he was being scammed.¹⁰

These types of exploitative situations gave rise to FINRA Rules 2165 and 4512; the two regulations, in conjunction, allow institutions time to delay transfers from elderly investors’ accounts, notify TCPs, and discern whether investors are being exploited.¹¹ The key word is allow; nothing in the FINRA rules obligates broker-dealers to delay disbursements or contact TCPs.¹² Thus, if legislators or regulators applied the FINRA Rules to the banking and credit union context, banks and credit unions would still have no legal duty to stop scamming. Mere authorization, however, can still be a powerful policy tool. Financial institutions may institute a policy only because of express legal authorization. The convenience of express authorization may nudge institutions out of inertia.

B. Current State-Led Initiatives to Reduce EFE in the Banking and Credit Union Industries

Since 2016, numerous states have utilized the NASAA Model Act to craft statutes giving financial institutions permission to delay disbursements on account of suspected financial abuse.¹³ Such statutes generally set timelines and grant immunity to institutions and employees who proactively withhold transactions and report suspected financial abuse to specified authorities.¹⁴ Most states have applied their version of the NASAA Model Act only to institutions dealing in securities.¹⁵

The states of Delaware, Kentucky, Tennessee, Texas, Virginia, and Washington, however, have authorized suspected financial abuse transaction holds by banks and credit unions.¹⁶ Tennessee and Texas made such authorization after the publication of the NASAA Model Act; the other states made such authorization prior to the publication of the NASAA Model Act.¹⁷

In 2023, Nevada joined the ranks of states authorizing suspected financial abuse transaction holds by banks and credit unions.¹⁸ Nevada Senate Bill 355 (“SB 355”), effective June 15, 2023, allows banks to delay the disbursement of a depositor over the age of sixty for up to fifteen business days, even against the depositor’s will, upon reasonable suspicion of financial elder abuse.¹⁹ SB 355 lists numerous scenarios where banks and credit unions may enact such delays, such as when “a check [is] written by an older person or vulnerable person under suspicious circumstances” or when a bank observes “an uncharacteristic attempt by an older person or vulnerable person to initiate a wire transfer of a significant sum of money.”²⁰ Virginia also allows banks and credit unions to delay disbursements of adults over sixty upon reasonable suspicion of EFE.²¹ Virginia law allows such institutions to delay disbursement for up to thirty business days.²²

III. Discussion

A. The Benefits of 2165 and 4512 Equivalents for Banks and Credit Unions

Currently, in most states, banks and credit unions need to include provisions in their deposit agreement to have the authority to delay depositors’ disbursements.²³ This is implicit in the fact that most banks and credit unions are not given legal or regulatory authority to hold transactions on the basis of suspected financial abuse.²⁴ Statutes or regulations authorizing disbursement delays in the absence of a contractual right are not the norm.²⁵ Many banks and credit unions may not be inclined to delay elderly depositors’ disbursements given such an absence of express legal permission. Financial institutions are composed of people. People are more inclined to do things when they are convenient.²⁶

Granted, some financial institutions may choose not to delay disbursements, even when given express legal authorization to do so. Some brokers dealers subject to FINRA 2165 have never frozen elderly depositors’ accounts.²⁷ Broker dealers authorized by Rule 2165 have declined to delay disbursements under the rule’s safe harbor provision, citing litigation risks associated with placing temporary holds.²⁸ If some financial institutions cannot be nudged into delaying disbursements by an authorizing regulation, such a regulation may still be worthwhile, as other financial institutions may still take action. Delaying disbursements can have real impacts on real people—in some instances, preventing peoples’ life savings from being swept away.²⁹

Mandating that banks and credit unions have TCP policies can also prevent harm. If an elderly person transfers a considerable sum of money to a fraudster, contacting an elderly person’s TCP can bring attention to other health problems that make elders’ finances vulnerable, such as dementia. When a financial institution contacts a TCP, the TCP can provide law enforcement with information about the scam at hand.³⁰ Notifying a TCP about a scam may expedite the process of redressing the scam.³¹The Risks of Disbursement Delay and TCP Policies

Disbursement delay and TCP policies have their benefits; however, such policies are not without risks or detractors.

When members of the New York Senate Assembly considered a bill authorizing banks to freeze depositors’ accounts, numerous Assembly members expressed concerns about such a law stereotyping all seniors as suffering from diminished brain function.³² Assembly members also expressed concerns about banks putting needless transaction holds on the accounts of seniors, with no consequences for mistakes.³³

While disbursement delay and account freezing policies provoke concerns about negative stereotyping and unwarranted intervention from banks, TCP policies present issues of their own. A TCP could themselves be an elder financial abuser. Just as financial powers of attorney can act against an elderly person’s interest,³⁴ so too could a TCP act against an elderly person’s interest. Thus, providing a TCP with information about suspicious financial activity might not always be beneficial.

B. The Need for More Data

The potential risks of applying FINRA Rules 2165 and 4512 to the banking and credit union industries can be accurately assessed only if they are measured. Take, for example, false positives (disbursements paused for supposed suspicious transactions that are valid). FINRA did not publish data regarding false positives resulting from disbursement delay authorization in its 2021 proposed change to rule 2165.³⁵ Such data is vital to determining whether authorizing disbursement delays would be worthwhile. A fuller set of data could pave the way for a more comprehensive cost-benefit analysis.

C. Data Gathering Recommendations

Data points that could be collected (by both states authorizing disbursement delays and by FINRA) to assess the efficacy of disbursement delay authorization include: (1) the number of disbursements delayed by financial institutions in a calendar year; (2) the percent of these disbursement delays that were warranted (the result of actual EFE); (3) the number of these disbursement delays that were unwarranted; (4) the total dollar amount of improper transfers that were prevented; (5) the average and median dollar amounts of improper transfers that were prevented; (6) the total amount of valid transfers that were improperly delayed; and (7) the average and median amounts of valid transfers that were improperly delayed.

Data points that could be collected to assess the efficacy of TCP policies include (1) the number of times financial institutions contacted a TCP in a calendar year; (2) the number of times the TCP helped the investigation of EFE; (3) the number of times the TCP helped to identify an elder as incapacitated; (4) the number of times the TCP was a financial abuser; and (5) the number of times contacting a TCP did not affect the prevention of EFE.

IV. Conclusion

The financial exploitation of older adults is a growing problem in the United States and is projected to grow as the United States population ages.³⁶ 10,000 Baby Boomers in the United States turn 65 every day.³⁷ Amid this environment, bankers, lawmakers, regulatory agencies, and law enforcement need to make informed decisions to protect elderly depositors.

FINRA and states that have utilized disbursement delays and TCPs may help lawmakers by engaging in data gathering regarding the effects of TCP and disbursement delay policies. Comprehensive data gathering would help lawmakers decide whether to apply similar rules to banks and credit unions. Such data gathering may also help banks and credit unions decide if they want to apply these policies through deposit agreements.

FINRA Rules 4512 and 2165 have an intuitive appeal. The former allows someone close to an elderly person to be notified of suspicious financial activity; this may pave the way for scams to be investigated more immediately and more efficiently.³⁸ The latter allows financial institutions to put a pause on a payment that looks suspicious.³⁹ Such a pause can prevent improper payments from going through, thereby preventing financial abuse.

Given the intuitive appeal of these policies and the ever-growing problem of EFE, authorities at all levels of government ought to give these policies a hard look. As our population ages to record levels, now is the time for action. None of us are getting any younger.

Cover Photo by FLY:D on Unsplash

Ben Rininger

Ben Rininger is a 2L Associate Member of the University of Cincinnati Law Review. Ben is from Akron, Ohio. Ben's legal areas of interest include litigation, antitrust, banking, constitutional, and environmental law. When is Ben is not doing legal work, Ben likes to hike, kayak, play board games, travel, and spend time with friends and family.

References

1
Fed. Bureau of Investigation, Elder Fraud Report (2022), https://www.ic3.gov/Media/PDF/AnnualReport/2022_IC3ElderFraudReport.pdf.
2
Id.
3
FINRA, Finra Senior Exploitation Rules (2023), https://www.finra.org/rules-guidance/key-topics/senior-investors/protecting-senior-investors-2015-2020/finra-senior-exploitation-rules.
4
Financial Exploitation of Specified Adults, FINRA Rule 2165(b) (2018).
5
Id.
6
Customer Account Information, FINRA Rule 4512(a) (2022).
7
The National Credit Union Administration (“NCUA”), the Federal Reserve Board (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) do not mandate either of these practices, and numerous major banking institutions do not voluntarily adopt these practices either. See U.S. Bank, Your Deposit Account Agreement (Eff. Aug. 14, 2023); Huntington Bank, Consumer Deposit Account Agreement (Eff. May 7, 2023) (stating that Huntington Bank “may apply additional delays on the availability of funds based on any other factors as determined by us in our sole discretion”; the agreement does not provide protocols for instances of scamming); and America First Credit Union, Membership & Account Agreement (2020).
8
United Jersey Bank v. Kensey,704 A.2d 38, 42 (N.J. Super. Ct. App. Div. 1997) (observing “[t]he virtually unanimous rule is that creditor-debtor relationships rarely give rise to a fiduciary duty”).
9
Id.; see also First Sec. Bank N.A. v. Banberry Dev. Corp., 786 P.2d 1326, 1333, n.24 (Utah 1990); Tevdorachvili v. Chase Manhattan Bank, 103 F. Supp. 2d 632, 640 (E.D.N.Y. 2000).
10
Amritpal Kaur Sandhu-Longoria, An Elderly Man Was Scammed Out of Millions. Could the Bank Have Done More to Prevent Fraud?, USA Today (May 14, 2023), https://www.usatoday.com/story/money/2023/05/14/scams-bank-fraud-prevention-case/70179958007/).
11
Kaitlyn Kiernan, The Essential Senior Investor Protection Tools: FINRA 2165 and 4512, FINRA Unscripted (May 3, 2022), https://www.finra.org/media-center/finra-unscripted/rules-2165-4512.
12
FINRA, supra note 6; FINRA, supra note 4.
13
Reporting of Suspected Elder Financial Exploitation by Financial Institutions, Consumer Fin. Prot. Bureau (July 2019), cfpb_suspected-elder-financial-exploitation-financial-institutions_report.pdf (consumerfinance.gov).
14
Id.
15
Id.
16
Id.
17
Id.
18
S.B. 355, 82nd Leg. Sess. (Nev. 2023)
19
Id.
20
Id.
21
Va. Code Ann. § 63.2-1606 (2023).
22
Id. (The Virginia statute not only authorizes a 30-day delay period; the statute sets a maximum of 30 days, unless a court of competent jurisdiction grants an exemption. The language of the statute does not appear to allow for a longer period if one is agreed to within a deposit agreement by refusing to ”disburse funds for a period no longer than 30 business days” (emphasis added)).
23
Bank One, Tex., N.A. v. Taylor, 970 F.2d 16, 27 (5th Cir. 1992) (“The fundamentalbasis of the relationship between a bank and its customer is the bank’s agreement to pay out the customer’s money in accordance with his order… the evidence is quite clear that MBank had no right to freeze Taylor’s accounts… Under the terms and conditions of the deposit agreements, MBank owed a contractual duty only to its depositor”) (emphasis added).
24
Id.
25
Id.
26
Stephanie Burns, Why Convenience is Essential, Forbes (Sept. 24, 2020), https://www.forbes.com/sites/stephanieburns/2020/09/24/why-convenience-is-essential/?sh=311dcb591a31.
27
FINRA, SR-FINRA-2021-016, PROPOSED RULE CHANGE TO AMEND RULE 2165 (FINANCIAL EXPLOITATION OF SPECIFIED ADULTS) (2021), https://www.finra.org/rules-guidance/rule-filings/sr-finra-2021-016.
28
Id.
29
Al Janavel, 76-Year-Old Now Homeless After Being Scammed Out of $800k Life-Savings, Fox13 (June 23, 2023), https://www.fox13seattle.com/news/76-year-old-scammed-out-of-800k-life-savings-now-faces-homelessness.
30
Sandra Guy, How to Report Elder Financial Exploitation, AARP (Jan. 26, 2022), https://www.aarp.org/money/scams-fraud/info-2022/report-elder-financial-abuse.html (discussing how loved ones can provide information to law enforcement authorities regarding instances of elder financial abuse).
31
Brenda Uekert et al., Prosecuting Elder Abuse Cases: Basic Tools and Strategies, Nat’l Ctr. for State Cts. (2012), https://bja.ojp.gov/sites/g/files/xyckuh186/files/Publications/NCSC-Prosecuting-Elder-Abuse-Cases-Basic-Tools-and-Strategies.pdf (discussing “[d]elayed reporting [of elder abuse] resulting in lack of physical evidence”).
32
Should Banks Freeze Accounts of the Elderly to Protect Them Financially?, Epperly & Follis , https://epperlyfollis.com/should-banks-freeze-accounts-of-the-elderly-to-protect-them-financially/ (last visited Sept. 23, 2023).
33
Id.
34
Michele M. Hughes,Remedying Financial Abuse by Agents Under a Power of Attorney for Finances, 2 Marq. Elder’s Advisor 39 (2001).
35
FINRA, supra note 27.
36
Stephen Deane, Elder Financial Exploitation: Why It Is A Concern, What Regulators Are Doing About It, And Looking Ahead, SEC Office of the Investor Advoc. (June 2018), https://www.sec.gov/files/elder-financial-exploitation.pdf.
37
Kaitlyn Kiernan, The Essential Senior Investor Protection Tools: FINRA 2165 and 4512, FINRA Unscripted (May 3, 2022), https://www.finra.org/media-center/finra-unscripted/rules-2165-4512.
38
FINRA, supra note 6.
39
FINRA, supra note 4.