Client Alert: SEC Approves Rules to Protest Against Financial Exploitation of Seniors (17-11)

  • Effective February 5, 2018, new FINRA Rules 2165 (Financial Exploitation of Specified Adults) and 4512 (Customer Account information) will protect seniors and other specified adults from financial exploitation.

    The definition of “specified adult” in Rule 2165 covers those investors who are particularly susceptible to financial exploitation, among which are natural persons aged 65 or older and natural persons aged 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

    FINRA defines financial exploitation as “(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”.

    The reason for this amendment and the new rule is the fact that the elderly population is growing rapidly and the financial service sector can expect a significant increase in elder financial exploitation attempts. According to FINRA, approximately 10,000 Americans will turn 65 every day over the next decade, with their investment accounting for more than 75 percent of all financial assets in the United States. This makes seniors a prime target for financial exploitation.

    The amendments to Rule 4512 and new Rule 2165 involve two key protections for seniors and other vulnerable investors. First, member firms will be required to make reasonable efforts to obtain the name and contact information of a “trusted contact person” for a customer’s account. Opening and maintaining an account without contact information of a trusted third-party is then not prohibited, as long as the member made a reasonable attempt to obtain the information.

    Second, under Rule 2165 member firms will be allowed to place a temporary hold on the disbursement of funds or securities where there is a reasonable belief of financial exploitation. New Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on the suspicious disbursement of funds or securities from the account of a specified adult customer. The Rule does not apply to transactions in securities.

    In case of a temporary hold in accordance with Rule 2165, the member immediately has to:

    (1). initiate an internal review of the facts and circumstances that caused the member to reasonably believe that a situation of financial exploitation of the specified adult is given,

    (2) provide notification of the hold and the reason for the hold to the trusted contact person and all parties authorized to transact business on the account, including the customer, no later than two business days after the date that the member first placed the hold,

    (3) from this general rule, the member has to make an exception in the case when he reasonably believes, that the trusted contact person is somehow involved in the financial exploitation of the customer.

    (4) A member has to retain records evidencing the notification, except for the situation when he reasonably believes that doing so would cause even more harm to the specified adult. Rule 2165 requires the member to retain records related to compliance with the rule, which shall be readily available to FINRA upon request.

    (5) The temporary hold would not expire later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by an order of state regulator or agency or court of competent jurisdiction. However the member has to extend the temporary hold for additional 10 business days if the member’s internal review of the facts and circumstances supports its reasonable belief of the financial exploitation.

    Conclusions:

    Compliance with these new Senior Protection Rules will require the following actions:

    (1) Supervisory personnel will need additional training.

    (2) Firms should review and revise WSP’s.

    (3) Supervisors will need to document their internal reviews to support their “reasonable belief”, use approved “hold notification” forms and retain such records.

    (4) Coordination with counsel to seal or hold extensions should be considered.

    Paul Lieberman has more than three decades of experience preparing and revising policies and procedures, developing effective supervision structures, leading and coordinating internal investigations and defending regulatory enforcement proceedings before the SEC, FINRA and state securities departments/commissions.

    Laura K. Kues assisted in the preparation of these Alerts. Laura graduated from Johannes Gutenberg University in Mainz (Germany) in June 2015 (First State Exam) with the priority area in Competition Law Intern at Eaton & Van Winkle, LLP (USA) during the 2017 German legal clerkship at the district court of Mainz (Germany).

    © Eaton & Van Winkle, LLP, 2017. All rights reserved. This memorandum was prepared as a service to clients and friends of the firm to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice.