An attorney owes the duties of competence, communication, confidentiality, loyalty and non-discrimination to a client. These duties require special attention and care by the attorney when representing client with diminished capacity. Recently the California State Bar issued formal Opinion No. 2021-207 (the “Opinion”) to examine four ethics issues when an attorney represents a client with diminished capacity.
First, “a lawyer has a duty to maintain, insofar as reasonably possible, a normal attorney-client relationship, as reflected in the rules relating to competence, communication, confidentiality, loyalty and nondiscrimination.” A lawyer must first apply the presumption that the client has capacity to engage in the legal activity. Capacity is evaluated on a “decision by decision basis” and the lawyer’s duty of competence may require the lawyer “taking measures to enhance the client’s ability to make and communicate an effective decision.” Some decisions require more capacity than other decisions.
For example, “the attorney may adjust the interview environment, communicate more slowly, spend more time, and meet the client when he or she is more lucid”. The attorney may have the client’s trusted family members help the client’s communication and understanding.
Nonetheless, the client must still have sufficient capacity. Even with support a lawyer must recognize that, “… the client may be unable to make a legally effective decision, …, or that diminished capacity will result in a decision that does not serve the client’s interest or exposes them to harm that the client cannot understand or prevent.”
For example, out of loyalty to the client, a lawyer should decline to modify a client’s estate planning when, “Lawyer’s reasonable belief is that Client lacks the capacity to make a decision reflecting Client’s interest and that Client’s preferred course would expose Client to the risk of exploitation.”
Litigation
involving the elderly and other vulnerable investors is set to increase
in the coming years due in part to an aging investor population
(indeed, all baby boomers are set to reach at least age 65 in 2029!).
As
investors age, brokerage firms and investment advisers will
increasingly face dilemmas involving diminished capacity and financial
exploitation of their senior and vulnerable customers. Spotting
potential issues in this space is not always easy and firms can face
costly litigation as a result.
Consider the following hypothetical: A
75-year old customer calls his financial adviser seeking to change the
beneficiary on his account to his new caregiver and instructs the
adviser to liquidate a large and long-held position with Company X.
Feeling that the customer’s requests are suspicious, especially given
the customer’s age and a recent hospitalization, the financial adviser
raises the issue with his manager, and the manager directs that a hold
be placed on the transaction.
The firm conducts a
thorough internal review and, determining there to be no evidence of
financial exploitation, the transaction hold is lifted. In the interim,
however, Company X’s share price drops. The customer loses out on a
significant amount of profit per share and seeks recovery against the
financial institution through litigation.
FINRA Rules and State Laws
A
firm’s temporary hold on a customer’s transaction must be authorized by
rule, statute, or account agreement. FINRA Rule 2165 permits firms to
place temporary holds only on disbursements of securities from accounts
of senior and vulnerable adults. Under current FINRA rules, therefore,
the firm in the scenario above would not have the ability to place a
temporary hold on the customer’s transaction. This situation, however,
is evolving. FINRA has proposed an amendment to Rule 2165, which would
allow firms to place transaction holds in suspected instances of
financial exploitation.
But, the firm is not out of luck.
Twenty-nine states have adopted, in whole or in part, a statute modeled
after the North American Securities Administrators Association (NASAA)
Model Act that is designed to protect vulnerable investors from
financial exploitation. Most states permit firms to place a temporary
transaction hold. This represents a growing trend—with New Jersey,
Florida, West Virginia, and Oklahoma all adopting financial exploitation
statutes with transaction holds in 2020.
Best Practices
Firms
are under tremendous pressure to make correct decisions, as displayed
in the case study above. If the broker or firm turns out to be wrong, it
may find itself the subject of an arbitration action. So, how do firms
make sure to get these calls right?
Firms should take proactive
steps to protect senior and vulnerable customers before any financial
exploitation is suspected. In addition to protecting the vulnerable
customer, these steps, some of which are outlined below, will benefit
the firm in future litigation.
Training and Policies and Procedures.
Florida and New Mexico have statutes that require firms to develop
training, policies, and procedures “reasonably designed” to train agents
on issues relating to financial exploitation of vulnerable adults.
Firms should design their training programs to educate their employees
about different signs of financial exploitation.
The training,
policies, and procedures should be robust: a customer’s counsel will
attempt to attack the firm’s training to undermine state statutory
immunity.
Centralized Reporting Groups. Firms
that employ a centralized reporting group (or individual) are more
likely to be equipped to identify and act on suspected financial
exploitation. Individuals within a centralized group operate at an
“expert” level on FINRA rules and state laws that is not always
achievable for a registered representative.
Protecting the Customer (and the Firm) After Suspected Exploitation
Even
the best training programs, policies, and procedures cannot prevent
financial exploitation. The question then becomes: What steps should the
firm take after suspecting financial exploitation to both protect its
customer from harm and shield itself in a potential litigation?
Thankfully, the steps taken to achieve these goals are typically
aligned.
Contact Third Parties. FINRA Rule 4512
requires brokerage firms to make reasonable efforts to obtain the name
and contact information for a trusted contact person. The trusted
contact person is a great place to start when the firm suspects
financial exploitation. However, clients often choose not to designate
such a person, or the trusted contact may be the one suspected of
engaging in the exploitation. In that case, firms should turn to state
law.
Many states allow firms to go beyond FINRA’s trusted contact
person to contact individuals “reasonably associated with the
vulnerable adult.” Understanding state law requirements is a great first step.
Contact Government Agencies.
Firms should look to the state where the customer is located and report
to all applicable government agencies—no matter whether the state
requires reporting. In states with NASAA-based financial exploitation
statutes, firms should also be aware of their reporting obligations
under long-standing adult protective services laws.
Documentation. Firms
should document each step they take after suspecting financial
exploitation, including the rationale for contacting third parties and
government agencies, and the results of their internal review. For
example, defending against the senior investor’s claim in the scenario
above will require documentation as to why the registered rep developed a
reasonable belief of financial exploitation, what steps the firm took
to investigate, and which individuals/government agencies were
contacted.
Firms are accustomed to lawsuits brought by
disgruntled customers. By taking the steps above, firms can act
proactively to protect their customers while developing important tools
and evidence to be used in potential litigation.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
