United States: SEC Approves FINRA's Rules To Protect Seniors From Financial Exploitation

On March 30, 2017, the SEC approved the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) (see our related blog post about the proposal). Among other things, Rule 2165 permits brokers to place holds on disbursements of funds or securities from the accounts of "specified adult" customers. Specified adults include those 65 and older or those 18 and older who the broker "reasonably believes has a mental or physical impairment that renders that individual unable to protect his or her own interests."

Rule 2165 provides brokers 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). Rule 2165 also amends FINRA Rule 4512 (Customer Account Information) to require that brokers make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer's account.

Rule 2165 and amended Rule 4512 become effective on February 5, 2018.

Scope of the Amendments and New Rule

Among other things, amended Rule 4512 requires brokers 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 or when updating account information for a non-institutional account in existence prior to February 5, 2018. The amendments do not prohibit brokers from opening and maintaining an account if a customer fails to identify a trusted contact person as long as the broker makes reasonable efforts to obtain the information. FINRA notes that asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the Rule's requirements.

According to FINRA, the trusted contact person is intended to be a resource for the broker in administering the customer's account, protecting assets and responding to possible financial exploitation.

Temporary Hold on Disbursement of Funds or Securities

Among other things, Rule 2165 permits (but does not require) a broker to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if

  • the broker reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted;
  • the broker, not later than two business days after the date that the broker first placed the temporary hold on the disbursement of funds or securities, provides notification orally or in writing (which may be electronic) of the temporary hold and the reason for the temporary hold to certain enumerated persons; and
  • the broker immediately initiates an internal review of the facts and circumstances that caused the broker to reasonably believe that the financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.

Rule 2165 broadly defines "financial exploitation" to include

  • the wrongful or unauthorized taking, withholding, appropriation or use of a specified adult's funds or securities; or
  • any act or omission taken by a person, including through the use of a a power of attorney, guardianship or any other authority, regarding a specified adult, to
  • obtain control, through deception, intimidation or undue influence, over the specified adult's money, assets or property; or
  • convert the specified adult's money assets or property.

As we previously noted, however, FINRA's guidance to brokers in handling the accounts of elderly investors, including as to issues such as suitability of investments, is significantly broader.

Rule 2165 also prescribes certain supervision and record retention requirements, and brokers relying on it must develop and document training policies and procedures reasonably designed to ensure that associated persons comply with its requirements.

FINRA's NAC Revises Sanction Guidelines

On April 10, 2017, FINRA announced that the National Adjudicatory Council ("NAC") revised the Sanction Guidelines to include coverage for financial exploitation of vulnerable individuals or individuals with diminished capacity. The Sanction Guidelines also include three new guidelines relating to systemic supervisory failures, borrowing and lending arrangements, and short interest reporting.

The revised Sanction Guidelines are available here, and are effective immediately.

Our Take

According to FINRA, approximately 10,000 Americans will turn 65 every day over the next decade, and their collective investments account for more than 75 percent of all financial assets in this country. As we have previously discussed, the SEC and FINRA identified protecting senior financial investors as examination priorities. While Rule 2165 and the accompanying amendments to Rule 4512 take the apparent position that financial professionals are an initial line of defense against exploitation, brokers could face challenges in implementing the changes, including with the decision-making discretion afforded to them with respect to the "reasonable belief" elements of the rules.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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