RIA Compliance Blog
In October 2015, the Financial Services Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a proposal (“Proposal”) to amend its Customer Account Information Rule (“Rule 4512”) and to adopt a new Financial Exploitation of Specified Adults Rule (“Proposed Rule 2165”). Based on a study published in 2011 and a survey published in 2013, FINRA determined that financial exploitation of seniors and other vulnerable adults is a serious and growing problem that must be addressed. As of now, a small number of states have already enacted legislation that is designed to help detect and prevent financial exploitation of seniors. As discussed previously, the North American Securities Administrators Association (“NASAA”) recently adopted a model act that is intended to provide states with guidance for drafting legislation or regulations to protect seniors and other vulnerable adults from financial exploitation.
FINRA, however, believes there needs to be a uniform, national standard regarding a financial institution’s obligations in helping to prevent financial exploitation of seniors and other vulnerable adults. Thus, FINRA first published its Proposal in October 2015 and requested comments on it. After receiving 40 comment letters from both individuals and institutions, FINRA filed the Proposal with the Securities and Exchange Commission in October 2016. The SEC began a comment period on November 7, 2016, and it will end on November 28, 2016.
The proposed amendments to Rule 4512 and Proposed Rule 2165 pertain to the accounts of “Specified Adults.” A “Specified Adult” is defined as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Thus, the Proposal applies to accounts held by seniors and other vulnerable adults.
Proposed Rule 2165 also provides guidance on what financial exploitation is. Proposed Rule 2165(a)(4)(A) defines “financial exploitation” as “the wrongful or unauthorized taking, withholding, appropriation, or use of a Specified Adult’s funds or securities.” Proposed Rule 2165(a)(4)(B) further provides that financial exploitation includes acts or omissions, including through the use of power of attorney or guardianship, to gain control over a Specified Adult’s money, assets, or property, or to convert the Specified Adult’s money, assets, or property.
Rule 4512(a)(1)(F), one of the proposed amendments to Rule 4512, provides that a FINRA member shall maintain, “subject to Supplementary Material .06, name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer’s account; provided, however, that this requirement shall not apply to an institutional account.” Supplementary Material .06(a) provides that pursuant to Rule 4512(a)(1)(F), a FINRA member should provide written disclosure to a customer that states that the member and its associated persons are permitted to communicate with the trusted contact person and to share with the trusted contact person information about the customer’s account to address possible financial exploitation.
Supplementary Material .06(b) provides that if a FINRA member does not have the name of or contact information of a trusted contact person, that member is not automatically prohibited from opening or maintaining an account for a Specified Adult. However, the member is required to make reasonable efforts to obtain the name of and contact information for a trusted contact person. Furthermore, Supplementary Material .06(c) provides that with respect to any account subject to SEA Rule 17a-3(a)(17)’s requirements to occasionally update customer records, a member shall make reasonable efforts to obtain or update the name of and contact information for a trusted contact person.
Another component of the Proposal is that it would permit FINRA members to place a temporary hold on disbursement of funds or securities from a Specified Adult’s account. In order to do so, a member is required to have a reasonable belief that financial exploitation of the Specified Adult is occurring, has been attempted, or will be attempted, according to Proposed Rule 2165(b)(1)(A). Proposed Rule 2165(b)(1)(B) provides that following a member’s placement of the temporary hold, the member must provide written notification, within two business days, to all parties authorized to transact business on the account, and the trusted contact person. However, disclosure to the trusted contact person is not required if the trusted contact person is unavailable or if the member reasonably believes that the trusted contact person has engaged or will engage in financial exploitation of the Specified Adult. Moreover, the member must conduct an internal review of the facts and circumstances that caused the member to reasonably believe that the Specified Adult is being or is about to be financially exploited.
Proposed Rule 2165(b)(2)-(3) provides that any temporary hold on disbursements will typically expire no later than 15 business days after the member places the temporary hold on the disbursements. State regulators or agencies of competent jurisdiction, as well as courts of competent jurisdiction, are authorized to terminate the temporary hold sooner than 15 business days or extend it for longer than 15 business days. The member may extend the temporary hold for no more than 10 business days if the member’s internal review supports the member’s reasonable belief that financial exploitation has taken place, is taking place, or will take place.
Proposed Rule 2165(c) provides that members who will rely on the Proposed Rule should implement written supervisory procedures to ensure compliance. These procedures should include procedures detailing the identification, escalation, and reporting of matters related to financial exploitation. They should also identify the title of each person who will have the authority to place, terminate, or extend a temporary hold.
With regards to recordkeeping, Proposed Rule 2165(d) provides that members are required to keep records relating to compliance with Proposed Rule 2165. Such records should include requests for disbursements that may constitute financial exploitation, the finding of the reasonable belief that financial exploitation was present that warranted the temporary hold, the name and title of the person authorizing the temporary hold, notifications made to relevant parties, and the internal review of facts and circumstances pursuant to Proposed Rule 2165(b)(1)(C).
Supplementary Material .01 provides that Proposed Rule 2165 provides members with a safe harbor from FINRA Rules 2010, 2150, and 11870 “when members exercise discretion in placing temporary holds on disbursements of funds or securities from the Accounts of Specified Adults under the circumstances denoted in the Rule.” This seems to indicate that members who place temporary holds on disbursements will be protected from potential lawsuits if they exercise reasonable discretion. However, the Proposal itself does not explicitly state this. This indicates that further comment may be necessary in order to provide an adequate safe harbor from potential lawsuits.
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