Last week, a securities arbitration panel in Los Angeles, California, found Morgan Stanley Smith Barney (“MSSB”) liable for elder financial abuse by aiding and abetting an unaffiliated individual’s financial exploitation of their customer. The decision, which was arbitrated before the Financial Industry Regulatory Authority (FINRA), ordered MSSB to pay compensatory damages, interest and attorney fees totaling $396,623 pursuant to California’s Elder Abuse Statute. Although one of the three arbitrators dissented, the majority found that MSSB failed to protect their elderly customer from being victimized by a third party who exploited the customer’s paranoid delusions and bilked her out of $300,000 for home security equipment. The funds were withdrawn from the customer’s MSSB account over a 4-month period. Prior to the fraud, the customer had only withdrawn $375 per month from the account. The panel majority concluded that MSSB knew or should have known of the fraudulent conduct and failed to take adequate measures to counteract it.
FINRA’s Proposed Rule to Curtail Financial Exploitation of Seniors
In October 2015, FINRA released Regulatory Notice 15-37 adopting Rule 2165 which gives firms the authority to temporarily place a hold on accounts of elderly customers when there is a reasonable belief that financial exploitation has occurred. The rule takes effect February 5, 2018.
Does FINRA’s new rule go far enough to protect vulnerable adults? Instead of obligating firms to report financial exploitation, the proposed rule simply offers a “safe harbor” to firms who suspect exploitation and voluntarily place their customer’s accounts on hold. As the MSSB arbitration decision discussed above illustrates, when there are obvious signs of financial exploitation, firms that choose to steer clear of the “safe harbor” may find themselves on the losing side of a customer arbitration claim.