U.S. state securities regulators are preparing to advise Wall Street on a vexing problem: what to do about clients who place trades when their mental acuity is declining.
It is a problem that often pits a client's privacy interests against a brokerage's concerns about preventing fraud or even financial ruin.
Firms can violate privacy laws and industry regulations by telling a client's relatives or friends about a questionable trade, wire transfer or that an account even exists. That can trigger penalties by regulators.
Still, following the orders of a client whose mental acuity is slipping may cause other problems, such as the transfer of money to a scam artist, or lawsuits by clients' heirs for account losses.
One brokerage industry executive recalled challenges he faced earlier in his career because of a client whose mental acuity was faltering. He constantly had to review the client's instructions with a manager to make sure they wouldn't lead to trouble, the executive said during the Financial Industry Regulatory Authority's annual conference last week. His dealings with that client ultimately consumed most of his time, he said
Retail brokerages are bracing for more of those situations.
The number of people age 65 years or older with Alzheimer's disease may triple to as many as 16 million by 2050 from about 5 million currently, barring new medical breakthroughs, according to the Alzheimer's Association.
The North American Securities Administrators Association (NASAA), an organization of mostly U.S. state securities regulators, has been discussing those concerns with the securities industry. NASAA is developing written guidance that will provide more clarity about how brokerages can protect vulnerable clients, while keeping themselves out of trouble with regulators, said Tanya Solov, co-chair of the NASAA committee that works on issues affecting the brokerage industry.
NASAA plans to issue the guidance as early as September. The group also may develop model regulations for states, said Solov, who is also director of the Illinois Securities Department.
The Securities Industry and Financial Markets Association, the retail brokerage industry's largest trade group, has been pushing states for help with clients who may have dementia. Sifma wants to help establish a formal process that allows firms to alert regulators about situations that require more intervention than what their own staff can provide, said Marin Gibson, a Sifma lawyer. Regulators, for example, can typically issue an order that freezes an account.