FINRA implements rule changes to help members protect senior clients
The Securities and Exchange Commission (SEC) recently approved a proposed Financial Industry Regulatory Authority (FINRA) rule that would allow broker-dealers to delay disbursements when they suspect elder exploitation. The SEC also approved a rule revision that would require them to make reasonable efforts to obtain contact information for a trusted contact of their clients.
According to the SEC release approving the rule, FINRA’s experience with the FINRA Securities Helpline for Seniors highlighted the problems of financial exploitation of seniors and other vulnerable adults, problems that are exacerbated as the U.S. population ages. In a recent press release, FINRA released some statistics about the helpline, which received 9,200 calls in its first two years. Over 130 of these resulted in referrals to Adult Protective Services.
The FINRA rule comes as various states implement similar legislation aimed at curbing financial exploitation. Many of the state statutes are based off of a model statute the North American Securities Administrators Association (NASAA) released and a similar statute passed in Missouri in 2015.
FINRA Rule 4512 Modification
The revised FINRA Rule 4512, which becomes effective Feb. 5, 2018, requires that firms “make reasonable efforts to obtain” and update the name of, and contact information for, a trusted contact person. There is no requirement that firms absolutely obtain a trusted contact, only that firms make “reasonable efforts” to do so. The rule also includes an ongoing obligation, requiring firms to make “reasonable efforts” to obtain or update a trusted contact when otherwise updating the account information. The trusted contact person must be at least 18 years old.
The rule does not dictate what information firms should keep to demonstrate their compliance with the rule or what contact information should be obtained from a trusted contact. According to the SEC release, FINRA believes this is a feature, not a bug, because it allows firms flexibility to achieve compliance as they see fit. FINRA is updating its new account application template to reflect these rule amendments.
The rule requires several updates to firms’ systems, policies, and procedures. First, obviously, the firm must now seek, collect, and maintain information on a trusted contact person. Second, at the time of account opening, firms must disclose that the firm and its associated persons are authorized to contact the trusted contact person:
- to 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; and
- as otherwise permitted by Rule 2165 (which is further detailed below).
For accounts opened before Feb. 5, 2018, firms are required to provide the disclosure when updating the account information.
New FINRA Rule 2165
The new FINRA Rule 2165 allows, but does not require, a firm to place a temporary hold on a disbursement of funds or securities if it “reasonably believes” that financial exploitation of the certain clients “has occurred, is occurring, has been attempted, or will be attempted.” The rule applies to clients that are “Specified Adults,” which are those who are 65 or older or those who are over 18 and reasonably believed to be unable to protect their own interests because of a mental or physical impairment. In addition to this reasonable belief, the firm must
- provide notification of the temporary hold and the reason for it to all parties authorized to transact business on the account and any trusted contact specified on the account, except to anyone believed to be engaged in financial exploitation; and
- Immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe financial exploitation was occurring.
The rule creates a safe harbor from FINRA Rules 2010, 2150 and 11870, so FINRA will not, for example, claim that a temporary hold constitutes the “improper use of a customer’s securities or funds” under Rule 2150.
The temporary hold expires not later than 15 business days after it is initiated, provided that it may be extended an additional 10 business days (25 business days total) as long as the member’s internal review supports the reasonable belief that financial exploitation is occurring or may be attempted. The rule does not explicitly state that a hold must be removed when a firm no longer has a reasonable belief that financial exploitation is occurring, but FINRA has made clear that it expects that a firm would terminate the hold.
Members who rely on the new rule must implement written supervisory procedures reasonably designed to comply with the rule, including “procedures related to the identification, escalation, and reporting of matters related to the financial exploitation of Specified Adults.” The procedures also have to identify the title of each person authorized to place, terminate, or extend a temporary hold; each person authorized to do so must serve “in a supervisory, compliance, or legal capacity.” Members who rely on the rule must also implement “training policies or programs reasonably designed to ensure that associated persons comply” with the rule.
The rule also requires that firms retain records demonstrating compliance with the rule at each step in the decision-making process:
- Disbursement request that may constitute financial exploitation and the resulting hold;
- the finding that financial exploitation is likely has occurred underlying the decision to place a temporary hold;
- the name and title of the associated person that authorized the temporary hold;
- the notifications required by this rule; and
- the internal review required by this rule.
In the circumstance where a temporary hold is terminated, the rule does not specify that the name of the associated person terminating must be retained or the findings undergirding that decision. Perhaps this simply reflects the fact that the rule does not require temporary holds to be implemented or maintained or perhaps it is subsumed with the concept of the internal review. Either way, it is best to maintain the information.
These rules are generally similar to the legislation working its way through state legislatures, and they provide a large part of FINRA’s policy response to the difficulties of dealing with financial exploitation of older Americans. They can help firms deal with the issue, but it is important, given the extensive record keeping requirements, that firms be revising policies, procedures, and application forms now to be in compliance next February.
If you have questions about the new rules or how best to comply, please contact the attorneys in Greensfelder’s Securities & Financial Services group.