FINRA Increases Emphasis on Protection of Senior and Vulnerable Investors from Financial Exploitation

Financial Institutions Law Alert

 

In response to the recent increase in financial exploitation of seniors and other at risk investors, FINRA recently announced that it is conducting a review of the effectiveness and efficiency of its rules and administrative processes designed to help protect at risk investors from financial exploitation. See FINRA Regulatory Notice 19-27 (Aug. 9, 2019). In the Notice, FINRA highlights Rules 2165 (Financial Exploitation of Specified Adults), 3240 (Borrowing From or Lending to Customers), 4512 (Customer Account Information), and 4530 (Reporting Requirements), along with its Sanction Guidelines, as existing avenues for protecting senior and vulnerable investors and potential areas for change. As explained below, FINRA’s focus centers both on rules related to temporary holds on at risk customers’ accounts and on its efforts to limit the potential for misconduct by registered persons in dealing with at risk investors.

FINRA Rule 2165 permits a member firm to place a temporary hold for up to 25 days on a disbursement of funds or securities from a senior or vulnerable investor’s account when the firm reasonably believes that financial exploitation has occurred or will be attempted. In the Notice, FINRA seeks input into the following issues related to Rule 2165:

  • Whether Rule 2165’s safe harbor should be extended beyond disbursements to include securities transactions;

  • Whether Rule 2165 should be extended to cover instances in which a firm has a reasonable belief that a customer is unable to protect his or her interests due to an impairment but there is no evidence of exploitation;

  • Whether Rule 2165’s temporary hold time period should be extended; and

  • Whether FINRA should create a means to obtain an extension on the hold period.

Additionally, FINRA is exploring adding a Rule 2165-related problem code for Rule 4530’s reporting requirements and issuing guidance on when complaints related to temporary holds should be reported on Forms U4 and U5.

In addition to potential temporary hold-related changes, FINRA is questioning the need for further restrictions for registered persons servicing at risk customers’ accounts. FINRA is concerned with the potential for misconduct when lending arrangements or positions of trust (i.e., beneficiary, executor, trustee, or power of attorney) develop between registered persons and customers. Currently, FINRA Rule 3240 prohibits lending arrangements between registered persons and customers unless certain limited circumstances are met and procedures are followed. FINRA questions whether this rule has been effective in addressing potential misconduct in lending arrangements between registered persons and at risk customers and whether any modifications should be made to the rule. FINRA also is considering making the following changes to further protect at risk customers:

  • Prohibiting or limiting the ability of registered persons to be named a beneficiary, executor, power of attorney, trustee or similar position of trust on the account of a non-family member customer; and

  • Amending its Sanction Guidelines to add as a principal consideration whether a victimized customer is 65 or older or is otherwise considered an at risk investor.

FINRA requests comments on whether changes to address the financial exploitation of senior and vulnerable investors are appropriate by October 8, 2019. Because Bressler’s Senior and Vulnerable Investor Group closely follows developments in laws and regulations related to senior and vulnerable investors, we have been anticipating the proposed changes listed in the Notice. For more information on state laws and reporting obligations related to senior and vulnerable investors, please visit Bressler’s 50 state survey of senior/vulnerable investor laws.