New and Amended FINRA Rules Protecting Seniors from Financial Exploitation

What would you do as a firm if you suspected that a customer’s child was misappropriating funds from his elderly parents’ financial accounts? Or if the compliance department noticed a pattern of suspicious transactions from a customer’s account, and that customer was an adult with some mental impairment? Amended FINRA Rule 4512 and new FINRA Rule 2165 empowers firms to help protect seniors and other vulnerable adults from unauthorized disbursements from their accounts in two ways: (1) allowing the firm to contact a “trusted contact person” and (2) allowing the firm to place a temporary hold on disbursements from the customer’s account. These new FINRA Rules are effective February 5, 2018.

Amended Rule 4512 and the “Trusted Contact Person”
Rule 4512, regarding Customer Account Information, was amended to add subparagraph (a)(1)(F), which subject to Supplementary Material .06, requires the firm to take reasonable steps to obtain the name and contact information for a “trusted contact person” – think of it as an “emergency contact” – whom the firm may contact about the customer’s account. Generally, asking the customer to provide this information will be considered reasonable efforts under Rule 4512, even if the customer does not ultimately provide the name and contact information for a trusted contact person. The firm should document the efforts it undertakes to obtain this information.

Supplementary Material .06 to the Rule describes the types of information that the firm may call upon the trusted contact person to address, including “possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or …” if the firm places a temporary hold on disbursements from the account under Rule 2165.

New Rule 2165 and Temporary Holds on Disbursements
New Rule 2165, Financial Exploitation of Specified Adults, authorizes members to take immediate action to stop or prevent suspected financial exploitation of certain customers, defined as “specified adults,” by authorizing the firm to place a temporary hold on disbursements from the customer’s account if it reasonably suspects financial exploitation. Rule 2165 has four key parts: (1) it defines the customers who may be considered “specified adults” and what is “financial exploitation,” (2) authorizes and defines the scope of temporary holds, (3) imposes supervisory obligations, and (4) imposes recordkeeping obligations on the firm.

Rule 2165 was designed to protect two classes of customers as “specified adults”: any person older than age 65 and any person over age 18, whom the member firm reasonably believes has a mental or physical impairment that makes it impossible for the individual to protect himself. As to customers with a “mental or physical impairment,” member firms are not expected to obtain information or know to a medical degree of certainty that a customer has such an impairment. Instead, Supplementary Material .03 to Rule 2165 states that the member need only have a “reasonable belief” of an impairment based upon “facts and circumstances observed in the member’s business relationship with the [customer.]” While there is no recordkeeping requirement associated with a determination of an impairment, should the need arise, the firm or financial advisor should be able to articulate whatever facts and circumstances led him or her to believe a customer is a “specified adult” protected by Rule 2165.

“Financial exploitation” is defined to include a broad class of activities, many of which firms and financial advisors are likely already equipped to identify, including the following:

  • Wrongful or unauthorized taking of a specified adult’s funds or securities;
  • Abusing a power of attorney or guardianship to obtain control over or convert the specified adult’s money or property; or
  • Using deception, intimidation, or undue influence to obtain control over a specified person’s assets.

The Temporary Hold Process
If a member reasonably suspects or discovers financial exploitation, the member may immediately place a temporary hold on the customer’s accounts to prevent the disbursement of funds or securities from the account. Note, however, that the temporary hold would not undo a sale of securities, but it would temporarily prevent the disbursement of the proceeds of that sale.

If a member imposes a temporary hold, it must notify any party authorized to transact business on the account and the trusted contact person within two business days of imposing the hold. Except that, if the party or trusted contact person is engaged in the suspected financial exploitation, he or she need not be notified under the Rule. The firm must keep records of the suspect transaction and any notice it provides of the imposition of the hold. The firm may terminate the temporary hold at any time, but if it does not, Rule 2165(b)(2) imposes a 15 business day time limit on the hold – if it is not terminated within 15 days, or extended by a regulator or the courts, it automatically expires.

Once the hold is in place, the member is required to commence an immediate internal review of the facts and circumstances that led to the temporary hold. The firm’s internal review should be documented and the records retained to comply with paragraph (d) of Rule 2165. If the internal review process supports the firm’s finding of financial exploitation, then the firm may extend the temporary hold for another 10 business days. After that, the temporary hold will expire, unless extended by a regulator or the courts.

Supervision and Recordkeeping Requirements
As expected, Rule 2165 requires the firm’s written supervisory procedures to contain policies and procedures to comply with Rule 2165.  Rule 2165(c) also requires WSPs to contain procedures and processes “related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults” and to identify the “title of each person authorized to place, terminate or extend a temporary hold.” The persons who may place, terminate, or extend a hold must serve in a supervisory, compliance or legal capacity.

Finally, Rule 2165 imposes specific recordkeeping requirements on the firm, which protect both the customer and the firm.  The firm must keep records of the suspect disbursement request, finding that financial exploitation is afoot, the name of whomever authorized the hold, copies of notifications provided to the customer or trusted contact person, and the firm’s internal review.

Firms and financial advisors have been trained for years to keep their eyes open for the possible exploitation of senior customers and vulnerable adults. Amended Rule 4512 and new Rule 2165 empowers firms to take quick action to prevent their customers from suffering financial losses from their accounts at the hands of wrongdoers. So, when a financial advisor suspects a family member of attempting to take advantage of an older customer, or the compliance department identifies unusual transactions in a vulnerable client’s account, the firm can protect the customer from suffering financial losses and help reduce the risk to the firm of arbitration or litigation concerning the exploitation of its customers.

About Dan Supalla

Dan Supalla is a member of Briggs and Morgan's Financial Markets and Appellate practice groups. He practices principally in the areas of financial services and securities litigation, state and federal appeals, and business and employment litigation.
This entry was posted in FINRA, Uncategorized and tagged , . Bookmark the permalink.