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Protecting the Most Vulnerable: How FINRA Enforcement Prioritizes Senior Investors

June 23, 2020

You can't talk about investor protection without talking about senior investors, according to Chris Kelly, deputy head of FINRA Enforcement and head of Main Enforcement and Sales Practice Enforcement.

In recent years, there has been a substantial increase in the number of cases involving the exploitation of senior investors and the results are often devastating, especially for seniors who may be out of the workforce and living on a fixed income. That’s why protecting senior investors is a priority for FINRA Enforcement.  

On this episode, Kelly shares how FINRA is working to protect this segment of the population and what firms can do to work with FINRA in this important effort.

Resources mentioned in this episode:

Episode 57: Securities Helpline for Seniors: Celebrating 5 Years

Episode 59: Protecting Investors and Markets in Good Times and Bad

Regulatory Notice 19-36

Under the Radar: New York State Elder Abuse Prevalence Study

CFPB: Suspicious Activity Reports on Elder Financial Exploitation

Listen and subscribe to our podcast on Apple PodcastsGoogle PlaySpotify or where ever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:01- 00:23

Kaitlyn Kiernan: You can't talk about investor protection without talking about senior investors--one of the group's most vulnerable to fraud, in part due to the sheer amount of wealth they've had a chance to amass over the course of their lives. On this episode, FINRA Enforcement's Chris Kelly shares how FINRA is working to protect this segment of the population and what firms can do to work with FINRA in this important effort.

00:23 – 00:32

Intro Music

00:32 - 00:56

Kaitlyn Kiernan: Welcome to FINRA unscripted from Hoboken New Jersey I'm your host Kaitlyn Kiernan. Today we've got a new guest joining us from further south here in New Jersey, in Monmouth County. Today we're welcoming Chris Kelly the Deputy Head of Enforcement and Head of Main Enforcement and Sales Practice Enforcement to talk about the work that group does around protecting senior investors. Chris, thanks for joining us.

00:56 - 00:57

Chris Kelly: Thanks for having me.

00:57 - 01:08

Kaitlyn Kiernan: So, Chris before we dig into the topic of protecting senior investors can you tell me a bit about your background? How long have you been at FINRA and what did you do prior to joining us?

01:08 - 01:50

Chris Kelly: I joined FINRA in 2014, so I've been here for just shy of six years, and prior to that I was a federal prosecutor. I spent almost nine years at the U.S. Attorney's Office in New Jersey, most recently at the U.S. Attorney's Office. I was deputy chief of the Criminal Division. In that role, I oversaw the U.S. Attorney Office's white-collar groups, including economic crimes, cybercrime, national security and money laundering. And as you mentioned, currently I served as Deputy Head of FINRA's Enforcement department. And so now in that role I oversee the work of the Main Enforcement staff who work from our headquarters in Rockville, Maryland, and in New York, New York, as well as the Sales Practice Enforcement staff, who are dispersed in FINRA's 14 district offices around the country.

01:50 - 01:56

Kaitlyn Kiernan: So, it seems like you probably--in normal times--travel a fair bit to these different offices?

01:56 - 01:59

Chris Kelly: The key phrase being in normal times, yes.

01:59 - 02:09

Kaitlyn Kiernan: And it sounds like there is a decent amount of overlap between what you did at the U.S. Attorney's Office in New Jersey and what you're doing here at FINRA. It's just maybe jurisdictional differences here?

02:10 - 02:28

Chris Kelly: Yeah that's exactly right. Largely the mission is the same--protecting the vulnerable, rooting out the bad guys, conducting investigations and trying to do the right thing. It's just now we have a little bit different jurisdiction and I have fewer tools in the toolbox, but the mission is the same. The work is very similar.

02:28 - 02:50

Kaitlyn Kiernan: So, as an organization, FINRA talks a lot about the importance of protecting senior investors. Jessica Hopper, your boss, mentioned it when we talked with her on episode 59, then in April we also talked with the staff of the Senior Helpline which is devoted to that mission. Why is protecting senior investors so important for FINRA?

02:51 - 03:23

Chris Kelly: You know, FINRA's mission is investor protection, and you can't talk about investor protection without talking about protecting senior investors. Just in the five or six years that I've been with FINRA, I've seen a substantial increase in the number of cases involving the exploitation of senior investors and the results are often devastating, especially when you're talking about seniors who may be out of the workforce and living on a fixed income. If they lose their life savings to an investment scheme, they may never recover. So yes, I would echo what Jessica said in an interview with her. There is no higher priority for FINRA than protecting senior investors.

03:24 - 03:30

Kaitlyn Kiernan: So, Chris, you mentioned an increase in the number of cases. Why do you think that is?

03:30 - 05:04

Chris Kelly: I think there are a couple of reasons. First, senior investors present an attractive target for bad guys and part of that is simply a function of demographics. As you know, the senior population is growing rapidly. In fact, the fastest growing segment of the American population are those 85 and above. Also, on average, seniors tend to hold to higher levels of wealth than other generations, if for no other reason than they've had more time to accumulate that wealth.

So, there are more seniors than ever before, and seniors have more money than other generations. Both factors make them an attractive target for exploitation. Another factor is the health-related effects of aging can make some seniors more vulnerable, especially those seniors who may be experiencing cognitive decline. And so, you put those two factors together--an increased risk that seniors will be targets of attempted financial exploitation and then an increased risk that once targeted some seniors will be less able to protect themselves, and the results are what I think we've all seen and that is more and more cases of financial exploitation.

There was a really interesting study published by the Consumer Financial Protection Bureau last year that analyzed Suspicious Activity Reports, as you know financial institutions have an obligation to report certain suspicious activities to the federal government, and you do that on these Suspicious Activity Reports or SARs. And one of the categories on the SAR form is elder financial exploitation. The Consumer Financial Protection Bureau looked at all of these SAR filings with that older financial exploitation designation between 2013 and 2017, and what they found was that the number of reported instances of elder financial exploitation quadrupled in that four year period and shockingly the average monetary loss reported was over thirty four thousand dollars.

05:04 - 05:22

Kaitlyn Kiernan: Wow, that is incredible numbers there. Quadrupling in such a short amount of time. What have you seen in the world of senior investors? Have you seen any trends around what's going on in terms of are there certain types of schemes that are more likely to be perpetrated against senior investors?

05:23 - 07:46

Chris Kelly: Absolutely, yes. So, I think one of those is a trend that's not limited to the broker dealer industry and that is seniors are often exploited not by strangers, but by family members or other close relatives. And we saw an example of this in a case that we brought just this month, where we had a brokerage firm employee who stole from her parents’ variable annuities while her parents were traveling out of the country.

The second trend is probably more specific to the broker dealer industry, and that is more and more often we have seen brokers who use the relationship of trust with senior customers to convince those customers to name them as beneficiaries of their estates. I'll give you an example. We received a referral from our exam staff and there was a case involving a broker for a brokerage account held by a senior retired widow.

At the time this widow, the customer, was 81 years old. She was in declining physical and mental health. She required near full time care for a variety of physical ailments. She'd been diagnosed with Alzheimer's disease and dementia and, unfortunately, she didn't have any close living relatives. She was really on her own at that time. The broker drove the customer to a local estate planning attorney and asked that attorney to mend the customer's will to name the broker a beneficiary the customer's estate. Now, to her credit, the attorney said I cannot make that change unless and until a psychologist examines the customer and determines that she is competent to do so. And so, a psychologist examined the customer and found that, not surprisingly, she was not competent, and the attorney refused to amend the will.

What happened next--the broker drove the customer to his personal attorney, who amended the will and named the broker a beneficiary entitling him to receive about $1.4 million from the customer's estate. So, we got the case and after investigation we charged the broker with acting unethically in violation of FINRA Rule 2010 by procuring his appointment as beneficiary when he knew that the customer lacked the capacity to make that appointment.

That particular story had a happy ending. The request to the broker was stopped. He didn't get the $1.4 million and ultimately that broker was barred. But that is a trend that we have seen more and more often in the broker dealer industry. I should also mention that recently FINRA proposed a new rule on this subject and that rule would limit the circumstances under which a broker could be named a beneficiary executor or trustee for a customer. We announced that rule proposal in Regulatory Notice 19-36. And it's not finalized yet. It's still in process, but it's a rule that we are considering.

07:47 - 08:10

Kaitlyn Kiernan: We will link to that in our show notes. But that's interesting. So, it seems like the broker-dealer has a role to play in protecting their customers here. What are some of the takeaways for what a firm can do to help protect their customers not just from the customers' own family members, but also their employees, the brokers. Are there any best practices you've seen?

08:11 - 08:53

Chris Kelly: Sure. We like to think of ourselves in FINRA Enforcement as being on the frontlines of investor protection, but in reality, the very front lines of investor protection is the broker-dealers themselves. They're the ones who have the day-to-day contact with the customers and they're most likely to see potential red flags. You know, one of the things going off of what I was just saying is, even in lieu of this rule proposal that may come out and may end up being a new FINRA Rule about brokers acting as customers beneficiary as executors or trustees, firms can have robust policies that maybe not prevent that, but at least provide some guidance as to when that's appropriate and require that the broker disclose those relationships to the firm, so that the firm can be aware of them supervise them and make sure that there's no untoward conduct going on.

08:53 - 09:16

Kaitlyn Kiernan: And it seems that given our current situation as we talked about at the very top, how these are not normal times with COVID-19, many interactions with customers are remotely. Does that make seniors more vulnerable and is there anything firms should be thinking about in terms of going the extra step to make sure that their senior customers are not being preyed upon?

09:17 - 10:02

Chris Kelly: Yeah, I think that's a great point. Studies have shown that some of the risk factors that make a person--not just a senior, but any person--more likely to fall victim to an investment scheme include social isolation, active online engagement and financial vulnerability. Well the COVID-19 environment has led to not just the seniors, but all of us, being more socially isolated with lots of time on our hands to be online and engage with people on social media or searching online for investments. And it has also created unfortunately financial strain for large segment of the population due to the market volatility or job loss. And so, you put all of those factors together and you have sort of a perfect storm for fraudsters who may be looking for especially vulnerable victims. I think the most important thing is that firms be aware of that and that they be on the lookout for red flags of potential misconduct.

10:03 - 10:25

Kaitlyn Kiernan: So, some of the cases you talked about like that broker working with his attorney to get himself named to the estate. It sounds like it might not just be a violation of FINRA rules but also potentially a crime. Does FINRA Enforcement work to make referrals to local authorities or other organizations when working on cases like these?

10:26 - 10:36

Chris Kelly: Absolutely. FINRA makes hundreds of referrals a year not just to criminal authorities, but to other state and federal regulators and to Adult Protective Services departments in various states.

10:36 - 10:49

Kaitlyn Kiernan: So, with so many different entities involved in this whole process with a role to play in protecting seniors how would you describe FINRA's role compared to that of some of the other regulators or authorities?

10:49 - 11:44

Chris Kelly: Well, first, there's a practical difference in that FINRA's jurisdiction is limited to the broker-dealer industry. So, if we observe financial exploitation of seniors by persons or entities outside the broker dealer industry, which frequently we will, we'll immediately bring that to the attention of another regulator or authority with jurisdiction. The other thing that I think is unique about the role of FINRA and FINRA Enforcement is that as I mentioned we're really on the frontlines of investor protection.

At the very beginning you asked me what I used to do, and I said I used to be a prosecutor. As a prosecutor, I was really on the last line of defense. By the time the case got to me the crime was often months--if not years--old and the damage had been done. Here, in contrast, because FINRA has such a great exam staff who are out there every day in the industry examining firms and brokers, we often discover the wrongdoing while it is still ongoing, and that gives us a unique ability to stop a fraud before further harm is committed and to get that bad actor out of the industry quickly.

11:45 - 11:53

Kaitlyn Kiernan: So, in the case you mentioned preventing that disbursement from ever going to the broker, so that is where you're stopping it before the harm happens?

11:53 - 12:33

Chris Kelly: That's exactly right. I can give you an even more recent example. Just a few weeks ago, an examiner within FINRA's Vulnerable Adults and Seniors Team called us about a case and the allegation in that case was that the broker was using Venmo, a mobile payment app, to transfer money out of his customers account. And it was an ongoing thing. We called the customer, who was a senior, who told us that not only did he not authorize those transactions, he had never heard of Venmo. He didn't even own a smartphone. In a situation like that we try to move as quickly as possible. And I'm really proud that in that case, from the time that we first got the call from the Examiner to the time that we in Enforcement were able to bar the broker was less than seven days.

12:33 - 12:44

Kaitlyn Kiernan: That is impressive really quickly. And so, you mentioned the FINRA exam staff. Is that primarily where you get your cases? How do you work with them and others across FINRA?

12:45 - 13:08

Chris Kelly: Yeah, so the exam staff will provide the large majority of the referrals that we get in Enforcement, and we work incredibly closely with these other departments. First, we work with them every day on pending investigations. And second, as I mentioned, almost all of our referrals come from the Member Supervision exam program, in particular, the Office of the Whistleblower, and relevant to seniors, FINRA's new Vulnerable Adults and Seniors team.

13:08 - 13:35

Kaitlyn Kiernan: And that team actually now has the Senior Helpline as part of it, for our listeners who checked out that podcast earlier this year about the Helpline anniversary. And so, a lot of what you mentioned brings home why protecting seniors is so important to FINRA. What makes it important to you, as someone who's worked on the investor protection side of the legal profession for a number of years?

13:35 - 14:36

Chris Kelly: Yeah, whether in my old job or my current job there are certain cases that just stick with you over time and often those are the ones involved senior investors, because those have the most heartbreaking fact patterns. Just to give you example, one of the cases that really sticks with me that I worked on here at FINRA.

A couple of years ago we had a case where there was a customer, who is 93 years old, was a Holocaust survivor and he was suffering from diminished mental capacity. He opened an account with a broker in Long Island and that broker started churning the account and by churning, I mean executing a vast number of trades not to benefit the customer but just to generate commissions for the broker. And when I say a vast number of trades in this case it was truly a vast number of trades.

In just a couple of years the broker affected over 3,000 trades in the customer's account. The broker generated over $700,000 in commissions for himself while the customer lost his life savings--over $700,000. Those are the types of cases that stick with you and those are sort of the cases that bring home why it's so important for us to focus on senior investors.

14:38 - 15:07

Kaitlyn Kiernan: Yeah, it's heartbreaking to hear stories like that. FINRA has made a number of efforts in recent years to help protect senior investors and to help firms protect their senior clients as well. You mentioned Regulatory Notice 19-36, but there was also the recent adoption of a rule allowing firms to ask clients for a trusted contact that a broker could reach out to in cases of suspected financial exploitation or fraud. Are you seeing any signs of hope that these things are starting to make a difference?

15:08 - 15:45

Chris Kelly: So, it's a little hard for me to quantify. I can tell you that, anecdotally, I've definitely seen an increase awareness on the behalf of the broker-dealer industry of the issue and the problem. And it's easy to be pessimistic or down because it's such a big problem. But what makes me optimistic is that in my conversations with folks in the industry, compliance professionals and others, clearly, they take this as seriously as we do. This is a problem that affects all of us and we are all looking for a solution together. And so, I am optimistic in that sense that even though it's an enormous problem that we can work together to help protect senior investors.

15:45 - 15:49

Kaitlyn Kiernan: So just before we wrap up is there anything else you'd like to add on this topic?

15:49 - 16:36

Chris Kelly: The thing that keeps me up at night are all the cases that we're not seeing. There was a New York study that found that for every incident of senior financial exploitation that is reported, 44 are not reported. If that's true, then we're seeing less than 3 percent of the problem. And that means that we really need help from the industry.

I mentioned that in FINRA Enforcement we view ourselves as being on the frontlines of investor protection, but really the front lines of investor protection are the broker dealers themselves. They are the ones who are most likely to see red flags of past liquidation before anyone else. So my ask is that if firms see those red flags that they don't hesitate to loop us in so that we can work together to help protect investors, because this is a problem that will require us--the broker-dealer industry, FINRA and FINRA Enforcement--to work together.

16:36 - 16:52

Kaitlyn Kiernan: Chris, thanks for joining us. Listeners if you don't already, make sure you subscribe to FINRA Unscripted on Apple Podcasts, Google Play or wherever you listen to podcasts. If you have any ideas for future episodes you can send us an email at [email protected]. Until next time

16:52 – 16:58

Outro Music

16:58 - 17:25

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17:25 – 17:31

Music Fades Out

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