FINRA has recently announced the SEC approval of new Rule 2165 and amendments to FINRA Rule 4512 to address a longstanding problem within the securities industry: the financial exploitation of senior investors. “These rules will provide firms with tools to respond more quickly and effectively to protect seniors from financial exploitation. This project included input and support from both investor groups and industry representatives and it demonstrates a shared commitment to an important, common goal – protecting senior investors,” said Robert W. Cook, FINRA President and CEO.
According to FINRA, approximately 10,000 Americans will turn 65 every day over the next decade, with their investments accounting for more than 75 percent of all financial assets in the United States. These assets, along with rising life expectancies and the possible diminished reasoning abilities that sometimes accompany the normal aging process, make seniors a prime target for financial exploitation. As the elderly population continues to grow rapidly, the financial services sector can expect a significant increase in senior financial exploitation attempts. Regulators view financial professionals as a first line of defense against threats to this vulnerable group of investors. Both FINRA and the SEC have identified senior financial exploitation as examination priorities.
Beginning in February 2018, FINRA Rule 2165 allows firms to place a temporary hold on funds and securities for “specified adults” when there is reasonable belief of financial exploitation. Secondly, amendments to FINRA Rule 4512 (Customer Account Information) requires firms to make “reasonable efforts” to acquire the name and contact information for a trusted contact person for a customer’s account, who can be reached if financial abuse or fraud is suspected.
The definition of “specified adult” covers those investors who are particularly susceptible to financial exploitation. The “specified adult” may be either a person aged 65 or older or a person aged 18 or older who the financial professional reasonably believes has a mental or physical impairment that leaves the individual unable to protect his or her own interests. Supplementary Material to the rule provides additional guidance on “reasonable belief” factors.
New Rule 2165 includes a broad definition of “financial exploitation.” Financial exploitation would include, but is not limited to: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission taken by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.
Under the amended Rule 4512, firms are not prohibited from opening and maintaining an account if a customer fails to identify a trusted contact person, so long as the member firm makes reasonable efforts to obtain the information. Per FINRA guidance, asking a customer to provide the name and contact information for a trusted contact person would, generally speaking, constitute reasonable efforts and would satisfy the rule’s requirements. The trusted contact person is intended to be a resource for the firm and its associated persons in administering the customer’s account, protecting assets and responding to possible financial exploitation. A firm may use its discretion in relying on any information provided by the trusted contact person. Further, a firm has the discretion as to whether or not it will notify an individual that he or she was named as a trusted contact person.
The amendments to Rule 4512 and new Rule 2165 will provide member firms with a way to respond to situations in which they have a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. Per the FINRA rule announcement, firms will be able to better protect their customers from financial exploitation if they have the ability to contact a customer’s designated trusted contact person and, when appropriate, place a temporary hold on a disbursement of funds or securities from a customer’s account.
For more information, please review FINRA Regulatory Notice 17-11 via the link below:
http://www.finra.org/sites/default/files/Regulatory-Notice-17-11.pdf