FINRA Rules 2165 (Financial Exploitation of Specified Adults) and parts of 4512 (Customer Account Information) became effective on February 5, 2018 and implemented a framework to permit broker-dealers to place a temporary hold on disbursement requests upon reasonable belief of financial exploitation of seniors and other “Specified Adults.” The framework imposes certain requirements on broker-dealers, but it also enables them to intervene, when necessary, to combat financial exploitation of elderly clients and others who may be suffering from diminished cognitive capacity.
FINRA recently amended Rule 2165 to permit firms to take the following steps beginning on March 17, 2022:
1. Placing a temporary hold on a securities transaction where there is a reasonable belief of financial exploitation (subject to the same terms and restrictions applicable to a temporary hold on disbursements of funds and securities currently permitted under the rule); and
2.Extending a temporary hold on a disbursement or transaction for an additional 30 business days if the member reports the matter to a state regulator or agency or a court of competent jurisdiction (“state authority”) (beyond the current maximum of 25 business days, for a total of 55 business days).
Rule 2165 is designed to work in conjunction with Rule 4512, which requires (in part) that firms make reasonable efforts to obtain the name of and contact information for a trusted contact person.
These amendments serve as a further reminder that FINRA remains highly focused on and committed to enabling its members to protect senior and vulnerable investors. In fact, FINRA highlighted these issues in its annual exam and risk monitoring report. FINRA noted the value of establishing specialized groups or appointing individuals to handle situations involving elder abuse or diminished capacity, guiding the development of products and practices focused on senior customers, and firm outreach focused on protecting senior customers. FINRA continually highlights senior investor protection concerns within the industry, including flagging high pressure sales tactics, sales of speculative or complex products, powers of attorney or trustee power held by brokers, brokers as named beneficiaries, and rollovers from qualified plans to nonqualified accounts.
Rule 2165 provides member firms and their associated persons with a safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts) when exercising discretion in placing temporary holds.
FINRA’s framework provides a level of assurance that disclosing information to a trusted contact person will not violate applicable privacy regulations. FINRA considers disclosures to a trusted contact person pursuant to Rules 2165 and 4512 to be consistent with Regulation S-P, because the disclosures would be made with customers’ consent, to protect against fraud or unauthorized transactions, or to comply with federal, state, or local laws, rules and other applicable legal requirements. FINRA cited to 2013 Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, issued by the SEC and several other federal regulators, which “clarifies that reporting suspected financial abuse of older adults to appropriate local, state, or federal agencies does not, in general, violate the privacy provisions of the [Gramm-Leach-Bliley Act] or its implementing regulations,” including Regulation S-P. SEC staff confirmed the accuracy of this interpretation during discussions with FINRA prior to the 2018 rollout. Nevertheless, FINRA has urged its members to use discretion in disclosing information to a trusted contact person, including consideration of privacy requirements outside of the U.S. that may apply.
Rule 2165 currently permits firms to place temporary holds on disbursements of funds or securities upon reasonable belief that a customer is being financially exploited. As of March 17, 2022, Rule 2165 will also permit (but not require) firms to place a temporary hold on securities transactions under these circumstances. The added flexibility is designed, in part, to avoid subjecting customers to significant, negative consequences stemming from an exploitative trade instruction (e.g., adverse tax consequences, early withdrawal penalties (such as surrender charges), or the inability to regain access to a sold investment that was subsequently closed to new investors or trading by a perpetrator in inappropriate high risk or illiquid securities). This change creates the “first uniform national standard for placing holds on securities transactions related to suspected financial exploitation.”
Rule 2165 currently permits a firm to place a temporary disbursement hold on a specified adult customer’s account for up to 25 business days if the criteria set forth under the rule are satisfied, unless a state authority terminates or extends the hold. The temporary hold presently authorized by Rule 2165 expires after 15 business days, unless a state authority otherwise terminates or extends it (subject to a firm’s ability to extend it for an additional 10 business days if the firm’s “internal review of the facts and circumstances…supports [its] reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted”).
As of March 17, 2022, a firm may place a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30 business days if the matter has been reported by the member to a state authority. This will provide additional time for (i) firms to resolve the matters and (ii) state authorities to conduct thorough investigations. Consequently, firms may maintain disbursement or transaction holds for up to 55 business days.
Firms are required to retain records of the reason and support for any extension of a temporary hold, including information regarding any communication with or by a state authority (e.g., a state authority’s request for an extension). These records must be made readily available to FINRA if requested.
A long road lies ahead before the epidemic of elder financial exploitation is eradicated. However, FINRA’s enhanced framework represents a step in the right direction. FINRA will continue to surveil for potential elder exploitation from external sources, as well as within a firm, including gaps in supervisory or compliance programs. Awareness and communication within firms are key factors in preventing elder financial exploitation, as is rigorous training of personnel and robust policies, processes, and procedures.