FINRA Receives SEC Approval on Rules Regarding Financial Exploitation of Seniors

Senior Issues Law Alert

On March 30, 2017, FINRA announced that the U.S. Securities and Exchange Commission (SEC) approved FINRA’s rule proposal addressing financial exploitation of certain investors. Currently, FINRA’s rules do not explicitly authorize brokerage firms to contact a non-account holder or to place a temporary hold when financial exploitation is suspected. The newly adopted rule, FINRA Rule 2165 (Financial Exploitation of Specified Adults), will address this issue by permitting brokerage firms to place a temporary hold on the distribution of funds or securities when there is a reasonable belief that a “specified adult” may be subject to financial exploitation. Rule 2165 defines “specified adults” as (1) persons age 65 and older and (2) persons age 18 and older who the member firm reasonably believes has a mental or physical impairment. Notably, Rule 2165 creates no obligation to withhold a disbursement of funds or securities. FINRA Rule 2165 will become effective on February 5, 2018.

Moreover, in conjunction with this new rule, the SEC also approved FINRA’s proposed amendments to FINRA Rule 4512 (Customer Account Information). The amended version, which also becomes effective on February 5, 2018, will require brokerage firms to make “reasonable efforts” to obtain the name and contact information for a trusted contract person upon the opening of a customer’s account. The amendment will also require that the member firm disclose to the customer in writing that the firm is authorized to contact the trusted contact person and disclose customer information in order to address potential financial exploitation.

According to FINRA Regulatory Notice 17-11, “[w]ith the aging of the U.S. population, financial exploitation of seniors is a serious and growing problem. . . . The amendments to Rule 4512 and new Rule 2165 provide members with direction consistent with FINRA rules to respond to situations in which they have a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. Members can better protect their customers from financial exploitation if they have the ability to contact a customer’s designated trusted contact person and, when appropriate, place a temporary hold on a disbursement of funds or securities from a customer’s account.”