New FINRA Rule 2165 (Financial Exploitation of Specified Adults) and Amendments to FINRA Rule 4512 (Customer Account Information)
America’s population is rapidly aging. The number of US residents over the age of 65 is expected to double over the next 30 years. Today, seniors, specifically baby boomers, control 50% of all existing investable assets across the country.
This portion of the US population has a combined net worth of over $30 trillion. According to a 2016 survey by Public Policy, about one in five Americans over the age of 65 have “been taken advantage of financially in terms of an inappropriate investment, unreasonably high fees for financial services, or outright fraud.”
FINRA has been trying to address this problem in different ways. In 2015, it created a Securities Helpline for Seniors, which is very successful, in terms of the number of people using it. The helpline has shed new light on the prevalence of financial exploitation for this segment of the population.
To address the problem more efficiently and prevent further financial exploitation of seniors, FINRA has just issued a new Regulatory Notice, which amends an existing rule (4512), and creates a new one (2165). Their aim is to target the financial exploitation of “specified adults,” defined as, “(A) a natural person age 65 and older or (B) a natural person age 18 and older who the [FINRA] member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Thus, as per the “B” section, the new regulations will also protect non-seniors with cognitive impairments.
For the purpose of interpreting and implementing the new and amended rules, FINRA defines financial exploitation as follows:
“(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.”
While FINRA now requires action to be taken when financial exploitation of this specific population is suspected, reporting for non-FINRA members is voluntary in many states, for example, in New York.
The North American Securities Administrators Association has recently introduced a model that requires reporting any instance of financial exploitation of the elderly, which has already been adopted by Alabama, Indiana, Louisiana and Vermont.
New FINRA Requirements: Trusted Contact
Under the new regulatory framework, FINRA members must make “a reasonable effort” to obtain the “name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer’s account; provided, however, that this requirement shall not apply to an institutional account.”
The trusted contact can be used to double-check when a broker feels that the customer is making a rush decision that may be affected by a cognitive problem. FINRA members can also contact the customer’s connection when they believe the customer may be suffering from Alzheimer’s disease or any other condition that might render them unable to make sound decisions about their investments.
Although the “trusted contact” amendment to Rule 4512 still allows firms to open an account if the customer has not been able to designate a trusted contact person, it is imperative that firms make “a reasonable effort to obtain that information.”
As it is customary with FINRA, in the event of a violation and ensuing investigation, they will have to see records that such efforts were made.
Temporary Hold on Disbursement
Under Rule 2165, FINRA members can place a temporary hold on a disbursement of funds or securities from a “specified adult’s” account if they have reason to believe that financial exploitation is at play. The rule specifically affects “suspicious disbursements” and it does not apply to transactions in securities.
It wouldn’t apply, for instance, if the customer wanted to sell all his/her shares of stock, but it would if they then asked for the proceeds of the sale to be disbursed out of their account, and the member believed financial exploitation had occurred.
This type of temporary hold expires after 15 business days, but it can be extended by a court, government agency, or state regulator. Additionally, if the member’s reasonable belief regarding financial exploitation is partially substantiated after internal review, FINRA members can extend the hold period for another 10 business days.
FINRA’s recent regulatory notice, in full, can be found on FINRA’s website.
For your 2165 questions or other legal issues relating to financial exploitation of seniors and FINRA’s role therein, give our experienced Securities Lawyers a call or send us a note at Herskovits Law: 212.897.5410 or SUBMIT