FINRA Issues FAQs on Rules Relating to Financial Exploitation of Seniors and Other Vulnerable Adults
The Financial Industry Regulatory Authority (FINRA) has published frequently asked questions (FAQs) for complying with new FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information) (collectively, New Rules).1 The New Rules become effective on February 5, 2018.2
The New Rules were developed to provide FINRA member firms (Firms) with a mechanism for quickly responding to situations where a broker-dealer has a reasonable basis to believe that financial exploitation of vulnerable adults has occurred or will be attempted. Rule 2165 allows Firms to “place a temporary hold on a disbursement of funds or securities from the Account of a Specified Adult” if the firm has a reasonable belief regarding financial exploitation of a customer, while Rule 4512 requires Firms to make reasonable efforts to implement a “trusted contact” system into their customer accounts.
As background, the New Rules were proposed for comment in October 2015, in an effort to combat a growing problem of the financial exploitation of adults over 65. Following the comment period, FINRA submitted the proposed New Rules to the U.S. Securities and Exchange Commission (SEC) in October 2016, and the SEC approved a final version of the New Rules in February 2017. For further information, please refer to Dechert OnPoint, SEC Publishes for Comment FINRA Proposal to Combat Financial Exploitation of Seniors and Other Specified Adults.
A further effort to combat the financial exploitation of adults over 65 is making its way through Congress. On January 29, 2018, the House passed the Senior Safe Act, which encourages Firms to disclose suspected financial exploitation of seniors to appropriate agencies, by granting immunity from any civil or administrative proceeding for the disclosure if it was made by certain trained employees in good faith and with reasonable care.3
The FAQs cover three main topics: temporary holds under Rule 2165, the trusted contact requirement under Rule 4512, and disclosure requirements under Rule 4512.
Temporary Holds under Rule 2165
Temporary Holds on Transactions in Securities Not Permitted (Q.1.1)
Rule 2165 permits a Firm to place a temporary hold on the disbursement of “funds or securities” from the account of a ‘‘specified adult,’’4 if the Firm reasonably believes that financial exploitation may be occurring. The FAQs distinguish between securities transactions and the disbursement of assets, including securities, and clarify that Rule 2165 does not apply to a customer’s order to purchase or sell securities. Rule 2165 does, however, permit a Firm to place a temporary hold on the proceeds from a securities transaction if the firm reasonably believes the customer is being financially exploited.
Permissible Degree of Temporary Holds on Disbursements from Customer Accounts (Q.1.2, Q.1.3)
A temporary hold on a disbursement is also permissible in the case of a disbursement between different accounts at the same Firm.
The FAQs clarify that when questionable disbursements involve less than all of the assets of a customer, a “blanket hold” cannot be placed on the customer’s entire account, and that each disbursement request should be analyzed individually. Even when a questioned disbursement involves all the assets of the account in question, the Firm must permit the transaction unless it reasonably believes financial exploitation is involved. The FAQs provide, however, that it is permissible for a Firm to place a temporary hold on an entire account while still permitting legitimate disbursements, provided that the Firm has “procedures reasonably designed to permit legitimate disbursements.”
Extension of Temporary Holds (Q.2.1)
Rule 2165 limits a temporary hold to 15 business days after first placed by the Firm, with a possible extension of an additional 10 business days upon a Firm’s internal review that supports a reasonable suspicion of financial exploitation.
The FAQs confirm that the expiration date can be extended beyond the above-mentioned periods, if requested by a state agency or regulator investigating the matter. A request from a state agency or regulator need not be a formal order. The Firm does not have to report such a request to FINRA, but should keep a record of the request.
Trusted Contact under Rule 4512
Qualifications for the Trusted Contact (Q.3.1)
Rule 4512 requires a Firm to make reasonable efforts to obtain the name of and contact information for a trusted contact for its customer accounts, who must be a natural person at least 18 years old. Importantly, FINRA notes in the FAQs that asking a customer for the name and contact information of a trusted contact is sufficient to satisfy the reasonable efforts requirement of Rule 4512. The FAQs clarify that FINRA does not expect Firms to verify the age of the trusted contact.
Except for age, the FAQs note that FINRA does not impose any other qualifications on a trusted contact and does not preclude “joint accountholders, trustees, individuals with powers or attorney and other natural persons authorized to transact business on an account from being designated as trusted contacts.”
Application of Trusted Contact Requirement to All Non-Institutional Accounts (Q.3.2, Q.3.3)
The trusted contact requirement does not apply to institutional accounts as defined in Rule 4512, but it does apply to the accounts of non-natural persons that do not meet the definition of “institutional account” in the rule. In response to Firm’s questions, FINRA clarified that any authorized agent (e.g., an officer, partner, or trustee) can satisfy the “trusted contact” requirement, so long as the Firm provides the disclosure required by Supplementary Material .06(a) to Rule 4512.
The FAQs note that Firm can use trusted contact information, if provided, beyond situations involving suspected financial exploitation, and indicate that “the trusted contact is intended to be a resource for [Firms]” (for example, to discuss with the trusted contact relevant issues in accordance with Supplementary Material .06(a) to Rule 4512, as discussed further below).
Trusted Contact Requirement for Accounts in Existence Prior to Effective Date (Q.3.4, Q.3.5)
The FAQs clarify that Firms are not required to immediately obtain trusted contact information for existing accounts upon the effectiveness of the amendments to Rule 4512, but may do so when Firms update their account information, “either in the course of the [Firm’s] routine and customary business or as otherwise required by applicable laws or rules.” The FAQs note that Firms should make reasonable efforts to collect trusted contact information the first time they update existing account information after the February 5, 2018 effective date.
After a Firm’s initial effort to collect trusted contact information, Rule 4512 requires Firms to make reasonable efforts to obtain or update such information for accounts subject to the periodic update requirements of Rule 17a-3 under the Securities Exchange Act of 1934. With respect to accounts that are not subject to Rule 17a-3, the FAQs suggest that Firms consider asking customers to provide or update, as applicable, their trusted contact information periodically or when there is reason to believe that the customer’s situation has changed.
In cases where a customer has multiple accounts, a customer can choose to designate a single trusted contact, or different trusted contacts for different accounts.
Required Disclosure to Customers and Permissible Disclosure to Trusted Contacts (Q.4.1, Q.4.2)
Supplementary Material .06(a) to Rule 4512 requires Firms to disclose in writing to their customers “at the time of account opening … that the [Firm] or an associated person of the [Firm] is authorized to contact the trusted contact person and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165.”
The FAQs confirm that Rule 4512 does not mandate any specific form of written disclosure – for example, the disclosure could be in an account application or a separate document provided to the customer, and may be in an electronic format. The FAQs state, however, that the disclosure must include the information specified in Supplementary Material .06(a) to the rule. The SEC confirmed that disclosures to a trusted contact are because they are made with the customer’s consent or authorization and to protect against fraud or unauthorized transactions, or to comply with legal requirements. Nevertheless, the FAQs remind Firms that their written disclosure should be drafted so that a customer clearly understands that s/he is consenting to the Firm providing identified categories of information to the identified trusted contact.
Footnotes
1) Frequently Asked Questions Regarding FINRA Rules Relating to Financial Exploitation of Seniors (January 3, 2018).
2) FINRA Regulatory Notice 17-11: SEC Approves Rules Relating to Financial Exploitation of Seniors (March 2017).
3) Senior Safe Act, H.R. 2255, 115th Cong. § 1 (2018).
4) A “specified adult” under Rule 2165(a) is (A) a natural person age 65 and older or (B) a natural person age 18 and older who the Firm reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
