In October 2016, FINRA filed with the SEC proposed rules designed to help brokers protect seniors and other vulnerable adults from financial exploitation. The proposal would amend existing customer account information rules to require brokers to attempt to obtain the name and contact information for a “trusted contact person” upon opening an account. Brokers would have the benefit of a “safe harbor” enabling them to place a temporary hold on a disbursement of funds or securities, and to notify a customer’s trusted contact, if they have a reasonable belief that financial exploitation is occurring.
The proposal follows FINRA’s September 2015 Notice to Members 15-37 (“NTM 15-37”) (see our related blog post). The proposed rules revise the prior proposal set forth in NTM 15-37 in some respects, based on feedback from public comments.
Under the proposed rules, a broker-dealer could rely on the safe harbor when the firm has a reasonable belief that financial exploitation is occurring in accounts owned by investors aged 65 or older, or by investors 18 and older with mental or physical impairments that render them unable to protect their own interests.
Scope of the Proposal
Under the proposal, a hold may be placed on suspicious “disbursements,” but not on “transactions.” For example, a customer order to sell a security would not be subject to a temporary hold. However, a disbursement of the proceeds from that sale to another person could be the subject of a temporary hold.
Importantly, the new rules would not create a “duty” to place temporary holds on any disbursements. Instead, they would protect firms that comply with the requirements of the safe harbor when they exercise discretion in placing such a hold.
The proposed rules address a narrow set of circumstances involving senior investors (and others) 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, including as to issues such as suitability of investments, is significantly broader.
Obtaining Trusted Contact Person Information
FINRA stated that it believes that “asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the proposed rule change’s requirements.” A broker would not be required to attempt to obtain the name of or contact information for a trusted contact person for accounts in existence prior to the effective date of the proposed rule change until the time that it updates the information for the account either in the course of its normal business, or until it is otherwise required to do so under applicable laws or rules.
Revisions Compared to NTM 15-37
FINRA revised the proposed rules based upon comments received. In particular:
- Who Can Be a Trusted Contact Person: Unlike NTM 15-37, the proposal permits a person who is authorized to transact business on an account, such as a spouse or a trustee, to serve as a customer’s trusted contact person.
- Whom a Broker Must Contact: In order to help address privacy concerns, the new proposal remove NTM 15-37’s proposed requirement that the broker contact an immediate family member of the relevant adult, if that person is not a designated trusted contact person.
- Shortening of Follow-Up Temporary Hold Periods: The proposed rules shorten the permitted hold periods after an initial 15-business-day period from 15 additional business days to 10 additional business days.
- Relevant Governmental Agencies: The new proposal expands the list of entities that may terminate or extend a temporary hold period to state regulators and state agencies.
- Written Supervisory Procedures (“WSPs”): Under the new proposal, a broker’s WSPs must identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the broker.
Potential Effective Date
The proposed rules must be approved by the SEC before they can be implemented. Although the proposed rules would therefore not be effective until at least Q3 2017, brokers should begin to consider which of their policies and procedures, including account-opening forms and WSPs, will need to be updated to appropriately comply with the new rules.