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FINRA to Propose Action on Exploitation of Elderly Investors

Posted in FINRA Enforcement, Fund Regulation

On September 17, 2015, FINRA announced that it would propose rules to help member firms protect seniors and other vulnerable adults from financial exploitation. The proposal would create a safe harbor enabling broker-dealer firms to place a temporary hold on a disbursement of funds or securities, and to notify a customer’s trusted contact, when the firm has a reasonable belief that financial exploitation is occurring.

The proposal would amend FINRA’s customer account information rule to require firms to make reasonable efforts to obtain the name and contact information for a trusted contact person upon opening a customer’s account. In addition, the proposal would create a new FINRA rule permitting firms to place temporary holds on disbursements of funds or securities from the accounts of investors aged 65 or older where there is a reasonable belief that financial exploitation is taking place. The proposal would also apply to investors 18 and older if they have mental or physical impairments that render them unable to protect their own interests and there is a reasonable belief that financial exploitation is taking place.

The new rules would not create a “duty” to place temporary holds on disbursements. Instead, it would protect firms that comply with the safe harbor when they exercise discretion in placing such a hold.

FINRA expects to issue the proposed rules during the next several weeks. The proposed rules will be subject to public comment and SEC review.

The proposed rulemaking follows OCIE’s and FINRA’s joint April 2015 report that focused on sales of investment products to seniors. Our discussion of that report may be found at the following link: http://www.mofo.com/~/media/Files/Newsletter/2015/05/150501StructuredThoughts.pdf. The report identified a variety of problematic issues arising from sales to senior investors. In addition, FINRA has historically recommended that a firm’s procedures and controls take into consideration the age and life stage (whether pre-retired, semi-retired or retired) of their customers. Of particular concern to FINRA is the suitability of recommendations to senior investors, communications targeting older investors, and potentially abusive or unscrupulous sales practices or fraudulent activities targeting senior investors.

The proposed rulemaking activity addresses a narrow set of circumstances involving senior investors where there is a reasonable belief that financial exploitation is taking place. However, FINRA’s guidance to brokers in handling the accounts of elderly investors is significantly broader.