Avoiding financial exploitation of older investors has been on our regulators’ radar screens for several years. With new rules proposed in October 2015, FINRA seeks to make investing safer for seniors and other vulnerable adults.
The proposed new rules would permit (but not require) a broker to place a temporary hold on a disbursement of funds or securities from customer accounts. They would also require brokers to obtain for each non-institutional account holder the name of a “trusted contact person,” so that the trusted contract person could be reached if a hold is imposed.
The proposed rules may be found at the following link: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-37.pdf
Who Do the Proposed Rules Protect?
New proposed Rule 2165 would create a new category of persons: “specified adults.” A specified adult would be defined as someone who is:
- any natural person age 65 or older (regardless of their perceived mental or physical health); or
- a person 18 or older that is reasonably believed by the FINRA member to have a mental or physical impairment that renders the person unable to protect his or her own interest.
What are the proposed rules designed to address? As defined by FINRA, “financial exploitation” would include:
- the wrongful or unauthorized taking, withholding, appropriation, or use of a “specified adult’s” funds or securities; or
- any act or omission taken by a person regarding a specified adult:
– to obtain control through deception, intimidation or undue influence over the specified adult’s money, assets or property; or
– to convert the specified adult’s money, assets or property.
Placing a Hold on an Account
Proposed new Rule 2165 would permit, but would not require, a “qualified person” at the firm with a “reasonable belief” that financial exploitation is occurring to place a hold on the account of a specified adult customer. The hold could also be imposed if the financial exploitation is believed to have previously occurred, has been attempted, or will be attempted in the future.
The “qualified person” would be an associated person of a firm serving in a supervisory, compliance, or legal capacity that is reasonably related to the account of the specified adult.
When exercising discretion under Rule 2165, the firm would be required to notify all authorized parties on the account, and in most instances, the trusted contact person, within two business days after placing the hold. If the trusted contact person is believed to be engaged in the financial exploitation (not a pleasant set of facts to contemplate, unfortunately), then the firm must contact an immediate family member of the specified adult (unless that person is also believed to be engaged in the financial exploitation).
A firm placing a hold on a customer’s account must also immediately initiate an internal review of the facts and circumstances that caused the qualified person to reasonably believe that there is, was or will be financial exploitation.
The hold would expire not later than 15 business days from the date of the hold and, if supported by the facts and circumstances upon an internal review, may be extended for another 15 business days. The hold may expire after the designated number of business days, or it may be terminated or extended by a court of competent jurisdiction.
Finding a Trusted Contact Person
Rule 4512, relating to customer account information, would be revised to require firms to make a reasonable effort to obtain the information of a trusted contact person for all non-institutional customer accounts. (The “reasonable effort” standard may be satisfied by simply asking the customer.) If a customer does not provide this information notwithstanding the broker’s reasonable efforts, the account could still be opened and maintained.
For existing accounts, a firm would only need to attempt to obtain the contact information at such time as it updates the account information, either in the course of the firm’s ordinary business, or as otherwise required by law.
The trusted contact person must be at least 18 years old, and must not be authorized to transaction business on behalf of the account.
What May Be Disclosed to a Trusted Contact Person
The types of information that could be disclosed by the firm to the trusted contact person include the relevant customer’s current contact information, health status, and identity of any legal guardian, executor trustee, or holder of a power of attorney. Under proposed Rule 2165, the trusted contact person could also be notified of a temporary hold on disbursements of funds or securities.
Administration, Supervision and Training
Under the proposed rules, firms would be required to update their disclosures for new accounts, so as to indicate the types of information that may be disclosed to a trusted contact person. Firms will also be required to maintain records relating to their compliance with the new rules, including their findings that financial exploitation may be occurring.
Firms will also be required to establish supervisory procedures to achieve compliance with the rules. The procedures must include the identification, escalation and reporting of financial exploitation. Firms will also need to develop training policies or programs to ensure compliance with the rules.
More About the Safe Harbor and Imposing a Hold
The permitted hold is a “safe harbor” provision. A hold need not be imposed; however, firms that do so in accordance with the new proposed rules would be in compliance with FINRA’s rules. (In contrast, obtaining the account information about trusted contact persons would be required in all cases.)
Accordingly, the proposed rules place an interesting choice on firms: if they do impose a hold, it is possible that the hold could be challenged by the accountholder, which could generate questions as to whether the firm fully complied with the requirements. For example, did the firm have a reasonable basis to believe that exploitation was occurring? Was the finding appropriately escalated? Did the firm have appropriate policies and procedures? Was the firm timely in making its required notifications? Ironically, especially in cases that aren’t so clear-cut, a firm may find the safer course to be not to impose a hold. However, for those firms that are prepared to go the extra mile to help their vulnerable accountholders, the proposals would provide a basis and a safe harbor for doing so.