FINRA recently filed proposed new regulations regarding broker-dealer compliance with the SEC to: (1) amend FINRA Rule 4512 (Customer Account Information) to require member firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account; and (2) adopt new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit FINRA registered broker-dealers to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.
According to FINRA’s filing with the SEC, financial exploitation of seniors and other vulnerable adults is a serious and growing problem. Moreover, studies indicate that financial exploitation is the most common form of elder abuse. Financial exploitation can occur suddenly, and once funds leave an account they can be difficult, if not impossible, to recover, especially when they ultimately are transferred outside of the United States. Broker-dealers need more effective tools that will allow them to quickly and effectively address suspected financial exploitation of seniors and other vulnerable adults.
FINRA’s proposed rule change would provide member firms with a way to quickly respond to situations in which they have a reasonable basis to believe that financial exploitation of vulnerable adults has occurred or will be attempted. FINRA believes that a member can better protect its customers from financial exploitation if the member can: (1) place a temporary hold on a disbursement of funds or securities from a customer’s account; and (2) notify a customer’s trusted contact person when there is concern that, among other things, the customer may be the victim of financial exploitation. FINRA registered broker-dealers would need to amend their compliance policies and procedures and provide their registered representatives with appropriate training to address these requirements. Firms must also ensure that they establish supervisory controls reasonably designed to ensure the related policies & procedures are being followed.
In order to maintain full compliance with FINRA Rule 4512, FINRA registered broker-dealers would be required to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer’s account. While the proposed rule change does not specify what contact information should be obtained, a mailing address, telephone number, and email address for the trusted contact person may be the most useful information. It is important to note that the proposal does not prohibit member firms from opening and maintaining an account if a customer fails to identify a trusted contact person as long as the member made reasonable efforts to obtain a name and contact information.
The proposed rule change would also permit a member firm that reasonably believes that financial exploitation may be occurring to place a temporary hold on the disbursement of funds or securities from the account of a “specified adult” customer; however, the proposed rule change creates no obligation to withhold a disbursement of funds or securities where financial exploitation may be occurring.
As stated previously, FINRA believes that certain “specified adults” may be particularly susceptible to financial exploitation. Proposed Rule 2165 would define a “specified adult” as: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. Supplementary Material to proposed Rule 2165 would provide that a member’s reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member’s business relationship with the person. The proposed rule change would define the term “account” to mean any account of a member for which a “specified adult” has the authority to transact business.
Registered representatives and broker-dealers must take reasonable care to protect these persons from being exploited by a person intent on hurting them. Protecting seniors and other vulnerable adults is not only important because it is going to be a regulatory requirement; it is just the right thing to do.