FINRA Proposes Rules to Protect Seniors from Financial Exploitation

The Financial Industry Regulatory Authority (FINRA) will amend a current rule and adopt a new one, to address financial exploitation of seniors, that will go into effect on February 5, 2018. The need for changes to the rules became clear from calls placed to FINRA’s Securities Helpline for Seniors, a toll-free hotline that investors can call to receive assistance from FINRA or raise concerns about issues with brokerage accounts and investments. Since FINRA initiated the helpline in 2015, there have been a significant number of inquiries from investors with suspicions of financial exploitation of their senior customers. In response, FINRA proposed an amendment to FINRA Rule 4512, which addresses customers’ account information for certain “specified adult[s]”, and adoption of FINRA Rule 2165, which addresses financial exploitation of “specified adult[s]”.

The proposed amendment to FINRA Rule 4512 states that FINRA members are required “to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account.”  FINRA defines a specified adult as “an adult of the age 65 or older and an individual who is 18 or older who the member reasonably believes has a mental or physical impairment that renders the individuals unable to protect his or her own interest.” FINRA, however, does not provide a clear definition for what constitutes “reasonable efforts.”  Additionally, the amended rule will require firms to disclose in writing to customers that the firms are authorized to contact the trusted person and disclose information to that person about the account.

Proposed FINRA Rule 2165 specifies that it will “permit [a] member to place temporary holds on disbursements of funds and securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.” FINRA does not require firms to place a hold on funds, but instead, accords firms the discretion to do so as a safe harbor from certain FINRA rules.  FINRA’s intent in mandating that firms make efforts to identify a trusted contact person is to provide a resource to firms in handling customer accounts. Firms have difficulty in recovering funds that have been inadvertently sent to fraudsters and scam artists. When a firm is suspicious of financial abuse, the firm now will be able to place a hold on the disbursement of funds for no more than fifteen (15) days. However, if, after an internal review, there is reason to believe that there is financial exploitation associated with the account, then the firm can extend the temporary hold for an additional ten (10) days. The firm investigates the matter during the temporary hold, and has two (2) business days from the date of the hold to notify the trusted contact person and all parties authorized to transact business on the account. If it deems it appropriate, the firm may contact law enforcement or adult protective services before disbursing funds.

Prior to implementing the proposed rules, FINRA plans to amend its New Account Application Template, which is a voluntary model brokerage account form that firms can use to design or update their account forms, to capture trusted contact person information. Firms are required to make reasonable efforts to obtain a trusted contact person both during the opening of a new account and when updating a new account.

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