A few weeks ago, I posted a blog about FINRA’s new rule concerning senior investors. My take was largely that the rule made sense, but only to the extent that it provides protections for BDs that encounter the need to share otherwise confidential information about a customer due to concerns about the customer’s health, particularly mental health. Here, Michael covers the basics of the rule. – Alan
Over the past few years, FINRA has obsessively marketed its efforts to protect senior investors. This obsession recently culminated in the SEC’s approval of FINRA Rule 2165 (Financial Exploitation of Specified Adults), effective February 5, 2018. In sum, the Rule allows, but does not require, a firm to place a temporary hold on a disbursement of funds or securities from the account of a “Specified Adult” if the firm reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted. There are a number of steps that a firm must take to comply with the Rule.
Applicability
A temporary hold on the disbursement of funds or securities may be placed only in the account of a “Specified Adult,” which is defined as: (1) a person age 65 and older; or (2) a person age 18 and older who the firm “reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”
The temporary hold applies only to disbursements of funds or securities. The Rule does not permit a firm to place a hold on securities trades, or to not execute a trade.
A temporary hold may be placed in the account of a Specified Adult if the firm “reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.” The Rule broadly defines financial exploitation to include the wrongful or unauthorized use of funds or securities, and any act or omission to wrongfully obtain control over assets or to convert assets.
Notice
Within two business days of placing the temporary hold, the firm must provide notification of the hold to all persons authorized to transact business in the account and the trusted contact person identified under FINRA Rule 4512, unless such persons are believed to be engaged in the financial exploitation.[1]
Internal Review
After placing the temporary hold, the firm must immediately initiate an internal review of the facts and circumstances that caused it to believe that financial exploitation has occurred, is occurring, has been attempted, or will be attempted.
Length of Temporary Hold
The temporary hold may expire no later than 15 business days after being placed. The temporary hold may be extended for no longer than an additional 10 business days, if the firm’s internal review supports a reasonable belief of financial exploitation. A temporary hold may be terminated or extended by a state regulator, agency of competent jurisdiction, or court of competent jurisdiction. A temporary hold also may be terminated by the firm. In Regulatory Notice 17-11, FINRA advised that: “While not dispositive, members should weigh a customer’s or trusted contact person’s objection against other information in determining whether a hold should be placed or lifted.”
Supervision and Training
A firm that implements a temporary hold must have WSPs reasonably designed to achieve compliance with the Rule, including procedures related to the identification, escalation, and reporting of matters related to the financial exploitation of Specified Adults. The WSPs also must identify the title of each person authorized to place, terminate, or extend a temporary hold. The Rule also requires that such persons be associated persons of the firm who serves in a supervisory, compliance, or legal capacity. A firm that uses the Rule also must develop and document training policies or programs reasonably designed to ensure compliance with the Rule.
Recordkeeping
A firm is required to retain records related to its compliance with the Rule. These records must include: (1) the subject disbursement requests; (2) the finding of a reasonable belief of financial exploitation underlying the decision to place the temporary hold; (3) the name and title of the person who authorized the hold; (4) evidence of notification of the hold to the requisite persons; and (5) the aforementioned internal review. These records must be readily available to FINRA, so it is advisable that the records be maintained at a central location.
Safe Harbor?
The Rule provides a safe harbor from certain FINRA Rules when a firm and its associated persons exercise discretion in placing temporary holds consistent with the Rule’s requirements. The Rule explicitly notes that it “does not require members to place temporary holds on disbursements of funds or securities from the Accounts of Specified Adults.”
For those who may believe that an all-encompassing safe harbor actually exists, or that placing a temporary hold is really optional, I remind you that there is no safe harbor from customers’ lawyers asserting claims that you failed to place a temporary hold, as you were permitted to do and should have done. There likewise is no safe harbor from customers’ lawyers asserting claims that you wrongfully placed a temporary hold.
[1] The trusted contact person component of Rule 4512 likewise becomes effective on February 5, 2018.