February 5, 2018

Securities Alert: New FINRA Rules Create Protocols for Handling Suspected Financial Exploitation of Customers

As the average age of Americans increases, regulators and legislators continue to focus on laws designed to protect senior investors.  Two recent changes to revised FINRA Rule 4512 and new Rule 2165 give member firms tools to protect seniors and other vulnerable persons from financial exploitation.  These rule changes take effect today.

Rule 4512: Adding a Trusted Contact Person to the Customer’s Account

FINRA Rule 4512 now requires member firms to make reasonable efforts to add a “trusted contact person” to all existing and new accounts.  A trusted contact person can be any person over the age of 18.  The trusted contact person does not need to be a relative and does not need to have power of attorney over the account.  Firms must inform the customer, in writing, that the firm may disclose information to the trusted contact person when the firm suspects financial exploitation.  (Existing accounts may be updated at the time of the next required account update.  For new accounts, FINRA has provided a short form and long form  new account application template reflecting the rule change.)

Rule 2165: Members May Place a Temporary Hold on Disbursement of Securities or Funds to Investigate Whether  Financial Exploitation Exists

FINRA has added Rule 2165 to its senior investor protection arsenal.  Rule 2165 allows, but does not obligate, a member firm to place a temporary hold (15 business days) on the disbursement of cash or securities (including an ACAT transfer request) from an account if the firm reasonably believes that the customer is being financially exploited and if the customer is (1) over 65 years old or (2) over 18 years old and the firm reasonably believes that the customer has a mental or physical impairment that makes the customer unable to protect their own interest.  (Rule 2165 does not apply to transactions such as an order to purchase or sell securities.)  Rule 2165 provides firms discretion to place the temporary hold on the subject account without running the risk of violating FINRA Rules 2010 (broadly requiring members to maintain high standards of commercial honor), 2150 (prohibiting improper use of a customer’s securities) and 11870 (requiring members to expedite and coordinate a customer’s request to transfer securities to another  member firm).

Under Rule 2165, “financial exploitation” means:

  • The wrongful or unauthorized taking, withholding or appropriation of funds or securities; or
  • Any act or omission by a person, including through the use of a power of attorney, or other authority, regarding a person protected by Rule 2165 to control the customer’s money, assets or property through deception, intimidation or undue influence, or to convert the customer’s money, assets or property.

When a firm places a temporary hold on a disbursement under Rule 2165, the firm must, within two business days, notify all parties authorized to transact business in the account and the “trusted contact person” of the existence of the temporary hold and the reasons for it.  Additionally, the firm must immediately initiate an internal review of the facts that caused the firm to reasonably believe that financial exploitation has occurred, is occurring, or is likely to occur.  The firm may extend the temporary hold for an additional 10 business days if the firm concludes that the hold is justified.

Firms’ Additional Responsibilities under Rules 4512 and 2165

Rules 4512 and 2165 impose the following additional requirements on firms:

  • FINRA encourages firms to try to work out the concerns with the customer prior to placing the desired disbursement on hold;
  • FINRA requires firms to integrate the policies and procedures of placing a hold on customer funds or securities into their written manuals;
  • FINRA requires training to be provided to the appropriate personnel concerning these Rules;
  • FINRA requires that the individual at the firm with the authority to place the hold on the disbursements be a licensed supervisor; and
  • When a firm places a “hold” on the disbursement of funds or securities, the firm is required to investigate the circumstances and document its findings.  This documentation must be kept in a readily available location for FINRA inspection upon request.

Action To Be Taken in the Event the Firm Reasonably Believes Financial Exploitation Has Occurred or Is Occurring

If a firm has reasonably concluded that a senior or vulnerable investor has been or is being financially exploited and the issue cannot be resolved by taking the steps outlined above (for instance, when the customer’s “trusted contact person” is the very person the firm suspects of financial exploitation), neither FINRA Rule 4512 nor Rule 2165 provides guidance to firms regarding “next steps.”  Similarly, neither FINRA Rule 4512 nor Rule 2165 gives firms immunity from administrative or civil liability for the decision to place a temporary hold on the disbursement of funds or securities, or for the consequences of the firm’s decision to delay disbursement.

Member firms and associated persons obviously want to protect senior investors and vulnerable adults from financial exploitation but equally obviously do not want to risk liability as a result of the decision to impose a hold on the disbursement of funds or securities under Rule 2165.  Keesal, Young & Logan suggests that if member firms cannot resolve their concerns about potential financial exploitation of a senior investor or vulnerable adult, firms should consider consulting with appropriate authorities (such as police, state or federal securities regulators, or social services) and seek legal counsel.

For the full text of Rules 4512 and 2165 and interpretive materials to assist with these rules, please see the links below:

Keesal, Young & Logan Securities Litigation Group

This information has been prepared by Keesal, Young & Logan for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between you and Keesal, Young & Logan. You should not act upon this information without seeking professional counsel.