BILL ANALYSIS
AB 2107
Page 1
Date of Hearing: April 11, 2000
ASSEMBLY COMMITTEE ON JUDICIARY
Sheila James Kuehl, Chair
AB 2107 (Scott) - As Amended: April 3, 2000
As Proposed to Be Amended
SUBJECT : FINANCIAL ABUSE OF ELDERS
KEY ISSUES :
1)SHOULD LAST YEAR'S NEW "DISCLOSURE" APPROACH BE DISCARDED AND
REPLACED WITH AN OUTRIGHT BAN ON ATTORNEYS SELLING AN ANNUITY
TO A CURRENT OF FORMER ELDER CLIENT?
2)SHOULD THE DUTY OF HONESTY, GOOD FAITH, AND FAIR DEALING BE
EXTENDED TO COVER ALL INSURANCE TRANSACTIONS INVOLVING ELDERS?
SUMMARY : Prohibits attorneys from selling annuities to current
or former elder clients, imposes the duty of honesty, good faith
and fair dealing on insurers and their agents in all insurance
transactions involving elders, prohibits financial services
agents from entering into compensated referral arrangements with
lawyers, and makes various other changes to the laws governing
the financial abuse of elders and dependent adults.
Specifically, this bill :
1)Prohibits a lawyer from selling an annuity to an elder with
whom the lawyer has or has had an attorney-client
relationship.
2)Provides that all insurers, insurance brokers and agents owe a
prospective insured who is age 65 years or older, a duty of
honesty, good faith, and fair dealing in all insurance
transactions. It also eliminates exemptions from this duty
that currently apply to Medicare supplement, long-term care,
accidental death, credit disability and certain other forms of
insurance.
3)Prohibits a financial services agent, including, but not
limited to, an insurance agent or broker, mortgage broker,
real estate broker, or securities broker, from entering into a
compensated referral arrangement with any lawyer who offers
legal services to that agent's client or agent.
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4)Provides that only a licensed life agent who has a National
Association of Securities Dealers Series 7 license and who is
either a certified financial planner or certified financial
analyst may advise an elder or his or her agent to purchase
long-term care planning with the proceeds from the sale of
assets. It also requires the life agent to give certain
advice and make specified disclosures regarding the potential
consequences of such transactions. It further only permits
those life agents to sell or offer for sale to an elder or his
or her agent any financial product on the basis of the
product's treatment under Medi-Cal. And it allows an elder
applicant for an annuity the right to rescind the application
for 30 days, without any penalty.
5)Revises and recasts the definition of financial abuse for the
purpose of the Elder Abuse and Dependent Adult Civil
Protection Act.
EXISTING LAW :
1)Permits a lawyer to sell financial products to a client who is
an elder or dependent adult with whom the lawyer has or has
had, within the preceding three years, an attorney-client
relationship if the transaction is fair and reasonable to the
client and the lawyer provides the client with a specified
disclosure. (Business and Professions Code section 6175 et
seq .)
2)Imposes on all insurers, brokers, agents and others engaged in
the transaction of insurance with a prospective insured who is
age 65 or older, a duty of honesty, good faith, and fair
dealing, and exempts specified kinds of insurance policies
from these obligations. (Insurance Code section 785.)
3)Defines financial abuse for the purpose of reporting and
investigating elder and dependent adult abuse. (Welfare and
Institutions Code section 15610.30.)
FISCAL EFFECT : Unknown
COMMENTS : This bill is sponsored by California Advocates for
Nursing Home Reform (CANHR). According to the author, "AB 2107
is a comprehensive approach to address the problems of financial
fraud and misrepresentation directed against seniors.
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California seniors are losing millions of dollars by purchasing
unnecessary financial products from attorneys and others who
have a financial stake in the sale. Current statutes designed
to protect seniors are weak and ambiguous and need to be
strengthened. This bill's four-pronged approach will: (1)
prohibit attorneys from selling annuities to elders with whom
they have an attorney-client relationship; (2) impose a duty of
honesty and good faith on insurers and agents in all insurance
transactions with elders; (3) require disclosures regarding
certain financial products and prohibit the sale of annuities as
a replacement for long-term care insurance; and, (4) strengthen
elder financial abuse protection statutes. This multi-faceted
approach will combat elder abuse through strengthening
protections and assisting in the prosecution of perpetrators."
Author's amendment . The author's office has notified Committee
staff that the author will be offering an amendment in Committee
that deletes Section 5 of the bill in its entirety, pertaining
to Penal Code section 368, in response to concerns raised by the
L.A. District Attorney's office and others. That provision
would have reduced from $400 to $100 the threshold amount under
the proscription of theft or embezzlement relating to the
property of elders or dependent adults. This analysis reflects
this amendment.
Recent Legislative Efforts to Ban Lawyers from Selling Financial
Products to Elder or Dependent Adult Clients . Two years ago,
then Assemblyman Murray carried AB 1716, which was passed by
this Committee on April 14, 1998, in a form that would have
completely banned lawyers from selling financial products to
their elder or dependent adult clients. AB 1716 was
subsequently amended to permit a lawyer to sell various
financial products to an elder or dependent adult client with
whom the lawyer has or has had an attorney-client relationship
within the past three years, if the lawyer provided the client
with a detailed disclosure. That version of AB 1716 was passed
by the Legislature, but was vetoed by the governor. Then
Governor Wilson's veto message stated that he would have signed
the bill "were it not for the requirement that the attorney
advise his client as to how to spend down his assets in order to
qualify for Medi-Cal."
SB 72 Adopts Disclosure Approach . Last year, Senator Murray
reintroduced the measure as SB 72. In its original form, SB 72
also would have banned lawyers from selling financial products
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to their elder or dependent adult clients. However, SB 72 was
subsequently amended into a disclosure bill, and that bill was
passed by this Committee and the Legislature, and signed into
law. (Chapter 454, Stats. 1999.) Under SB 72, which became
effective January 1, 2000, a lawyer, while acting as a
fiduciary, is authorized to sell financial products to any
client who is an elder or dependent adult with whom he or she
has had an attorney-client relationship within the preceding
three years, if the transaction is fair and reasonable to the
client and the lawyer provides the client with a detailed
disclosure. (See Business and Professions Code section 6175.3
for a list of disclosure requirements.)
A client who suffers any damage as the result of a violation of
the provisions of SB 72 by any lawyer may bring an action
against that person to recover a host of remedies, including
actual damages, restitution of property, and punitive damages.
(Business and Professions Code section 6175.4.) In addition, a
violation of SB 72 shall be cause for discipline by the State
Bar. (Business and Professions Code section 6175.5.)
Part One of Bill: Would Eliminate The New Disclosure Law and
Would Ban Lawyers from Selling Annuities to Elder Clients . As
noted above, this bill would ban lawyers from selling any
annuity products to an elder with whom the lawyer has or has had
an attorney-client relationship. Proponents argue that,
notwithstanding last year's disclosure law, it is an inherent
conflict of interest for an attorney to engage in any financial
transaction with a client. Because there is unequal bargaining
power between the attorney and the client, the client
understandably puts great faith in whatever advice is provided,
whether legal or financial counsel. When the legal advice turns
to financial advice, a client may be unable to substitute their
independent judgment despite the fact that the attorney may have
a personal interest in the decision. Proponents believe this is
especially true in the case of elder clients, and that the
disclosure requirements in SB 72 (described above) aren't
sufficient to protect seniors, who are particularly vulnerable
to financial abuse generally, and annuity scams in particular.
They offer the following case examples in support of the need
for a complete ban on annuity sales by lawyers:
Mrs. M went to an attorney who advertises as an "Elder Law
Specialist." Her husband was in a nursing home, and she had a
very low income, but assets and mutual funds of approximately
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$200,000. The attorney, who also sells annuities, did not
inform her of the fact that she could retain all of her assets
by filing for a fair hearing or a probate petition. Instead,
the attorney sold her an annuity, telling her that the annuity
would be "exempt." Now Mrs. M's funds are tied up in an
annuity, and, if she wishes to liquidate anything more than
the monthly fixed payment, she will have to pay a stiff
penalty.
One "elder law" attorney sold a $250,000 annuity to an
85-year-old woman, and then talked the woman into making the
attorney's two children the beneficiaries on the client's
policy. The woman was very upset, but she didn't want to cause
any problems, since the attorney was a prominent member of her
local community.
Another attorney who markets annuities in the Sacramento area
talked an elderly woman and her sister into canceling their
long-term care insurance and placing all of their assets into
a "deferred" annuity, for which he received a 12% commission.
Opponents, on the other hand, argue that many clients trust
their attorneys, and want their own attorney to be able to sell
them financial products and services. They may not want to
receive such assistance from a financial planner with whom they
have not developed a trusting relationship. This bill would
take that choice away from elder consumers.
Attorney Rules of Professional Conduct . Rule 3-300 of the Rules
of Professional Conduct suggests that the attorney-client
relationship does not rob the client of the ability to exercise
independent judgment in financial transactions with his or her
attorney. That Rule permits an attorney to enter into a
business transaction with a client so long as all of the
following are true: (a) the terms of the transaction are fair,
reasonable and fully disclosed to the client; (b) the client is
advised in writing to seek independent advice from an attorney;
and (c) the client consents to the transaction. However, up
until 1975, the Rules of Professional Conduct expressly
prohibited involvement in a business transaction with a client,
no matter how fair and reasonable the transaction .
PART TWO OF BILL: Would Impose of Duty of Honesty, Good Faith,
and Fair Dealing For All Insurance Transactions Involving the
Elderly . Current law specifically exempts insurers, brokers and
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agents from a duty of honesty, good faith and fair dealing, when
the agent sells certain products such as long-term care
insurance and disability credit insurance. (See Insurance Code
section 785(c).) As a result, proponents contend that senior
purchasers of credit insurance are often "uninformed, pressured
and ill-advised." According to the sponsor, brokers have been
caught selling credit disability insurance policies to persons
on SSI, and once the premium is in hand, the insurer then denies
the claim because of a "pre-existing disability." In addition,
the sponsor claims that "larger lenders force-feed high-priced
policies issued by in-house insurers, pocketing both premiums
and the commissions." As one consumer attorney noted: "Section
785, as written, seems to be a license to steal."
This bill appropriately provides that all insurers, insurance
brokers and agents owe a prospective insured who is age 65 years
or older, a duty of honesty, good faith, and fair dealing in all
insurance transactions. Accordingly, it eliminates the
exemptions from this duty that currently apply to Medicare
supplement, long-term care, accidental death, credit disability
and certain other forms of insurance.
PART THREE OF BILL: Would Add New Consumer Protections for the
Sale and Issuance of Annuities for Long-term Care Planning .
According to the sponsor, "the sale and marketing of annuities
to seniors seeking information on long-term care planning is
perhaps the most wide-spread consumer scam in California, and
there are few legal protections that regulate the sale of these
products. Reaching out to seniors through 'free' seminars on
living trusts and long-term care, these sales agents target
seniors all over California, particularly in the rural areas,
where few informational resources are available. By marketing
low cost living trusts at such seminars, the sales agent then
goes to the consumer's home with the living trust and starts the
annuity sales pitch. These seniors are unaware that the living
trust (often sold for $299.95 or less than $400) is not the
source of the sales agent's pay, but rather the sales agent
relies on the commission from the sale of an annuity."
"In addition to advising people to forego long-term care
insurance in favor of their products, these agents invariably
misrepresent what assets are already considered exempt under
the state's Medi-Cal program. As a result, many consumers,
particularly those over 65 and those who live in rural areas,
end up needlessly borrowing on their homes, selling their
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homes or cashing in pension funds to purchase an annuity that
they do not need. They are usually placed in a worse
financial position over the long term."
This bill attempts to respond to these problems by providing
that only a qualified licensed life agent may advise an elder,
or the elder's agent, to purchase financial products for
long-term care planning with the proceeds from the sale of any
stock, bond, IRA, certificate of deposit, mutual fund, annuity,
or other asset.
PART FOUR OF BILL: Would Revise the Definition of "Financial
Abuse" for the Purpose of the Elder Abuse and Dependent Adult
Civil Protection Act . Attorneys who work with elder and
dependent adult civil financial abuse cases are reportedly
having trouble using the current statute to hold liable anyone
other than the person who actually misappropriated the property.
According to the sponsor, "third party abusers, such as the
insurance company or the parent company who runs a 'trust mill'
are difficult to hold accountable. The revisions in AB 2107
clarify the definition of civil financial abuse to include all
parties involved in the wrongful taking or secreting of the
assets belonging to the elder or dependent adult."
ARGUMENTS IN SUPPORT : The National Senior Citizens Law Center
(NSCLC) writes in support of the bill, stating that it is a
necessary protection for senior citizens against financial
abuse. "The bill ends the conflict of interest that exists when
a lawyer counsels a client to buy an annuity and then sells that
annuity to the client. The attorney's independent judgment as
to whether an annuity is in the best interests of the client
comes into conflict with the attorney's self-interest in selling
the annuity. This should not be permitted and the bill rightly
prohibits it." NSCLC further supports the bill's provision
which "ends the exemption from good faith requirements for
insurance brokers selling insurance so vital to senior[s], such
as Medi-Gap insurance and long-term care insurance."
The Congress of California Seniors also supports the bill,
stating that it offers important protections for seniors who are
being victimized by scams involving insurance and living trusts.
Bankers Support if Amended to Delete Ban on Annuity Sales by
Lawyers . The California Bankers Association writes that it
would support the bill "if it is amended to remove the absolute
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prohibition on an attorney with a prior relationship with a
client from selling the client an annuity, if the client meets
the definition of an elderly person. We realize the goal of
this legislation is to prevent elder abuse, a goal that we
support without question. However, we believe this provision in
your measure is overly broad and should be narrowed by amendment
so that it does not have untoward effects on our trust
departments and trust companies."
ARGUMENTS IN OPPOSITION : A number of individual attorneys who
also provide financial planning services to their clients have
written to the Committee in opposition to the bill. For
example, John E. Trommald, who is certified by the State Bar as
a specialist in the area of estate planning, trust and probate
law, writes that "certain provisions of AB2107 would actually
work against the noble goals of protecting seniors from
financial elder abuse." According to Mr. Trommald, "Medi-Cal
laws are complex and constantly changing. Attorneys are best
situated to advise clients on these topics and determine if
annuities are appropriate on a case-by-case scenario." He
continues that "[i]nsurance agents, who are not attorneys, only
get paid when they sell annuities, thus their analysis always
comes to the proposition that the client should buy. An
attorney's analysis is the most fair and inclusive because it
includes all of the client's legal options." Trommald concludes
that "[t]he official position by the California State Bar
association and the Department of Insurance is that an attorney
can be dually licensed as an insurance agent as long as there is
adequate disclosure to the client."
Along these same lines, various other individuals argue that
there is no evidence of widespread misconduct on behalf of the
attorneys who engage in the sale of financial products. They
contend that attorney/financial planners are currently the most
regulated of all financial planners and, therefore, consumers
are more protected under current laws and regulations if their
financial planner is also an attorney. In addition, they argue
that the bill will harm thousands of consumers who currently
rely upon their attorneys for financial services. They further
argue that the legislature has already resolved this issue with
last year's passage of SB 72 (Murray), in which the absolute ban
approach was rejected in favor of allowing attorneys to provide
financial services to their elder and dependent adult clients
provided that certain disclosures are made. Finally, they
contend that the bill is seriously out of step with the current
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thinking on the provision of ancillary services by attorneys.
RELATED PENDING LEGISLATION : AB 1138 (Strom-Martin), which
prohibits the unauthorized practice of law in connection with
living trusts and other estate planning services, is
currently pending in the Senate Judiciary Committee.
PRIOR RELATED LEGISLATION : SB 72 (Murray), Ch. 454, Stats.
1999, requires lawyers to provide a detailed disclosure
statement in order to sell financial products to elder and
dependent adult clients.
AB 1716 (Murray) of 1997-98, as described above, was vetoed.
REGISTERED SUPPORT / OPPOSITION :
Support
California Advocates for Nursing Home Reform (sponsor)
Congress of California Seniors
Consumer Attorneys of California
National Senior Citizens Law Center
California Bankers Association (if amended)
Various individuals
Opposition
Various individuals
Analysis Prepared by : Daniel Pone / JUD. / (916) 319-2334