New Year, New FINRA Financial Exploitation Rules

FINRA rules for protection against financial exploitation for seniors and other specified adults are effective February 5, 2018. The two primary rule changes are:

1. A new rule (Rule 2165) granting permission for firms to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is suspicion of financial exploitation.
2. An amendment to the Customer Account Information Rule (Rule 4512) that requires firms to attempt to obtain a trusted contact person for a customer’s account.

Rule 2165

Through this rule, FINRA permits firms to place temporary holds on disbursements of funds or securities from accounts of “specified adults” when financial exploitation is suspected.

• “Specified adults” are natural persons age 65 and older, or persons age 18 and older who the firm believes have mental or physical impairments that impact their ability to protect their own interests.
• The hold cannot apply to securities transactions, i.e. no hold on an order to sell stock; just disbursements of shares or funds from an account. It should only apply to the portion of the account that is questionable – i.e. no “blanket holds” unless the disbursement involves the entire account.
• Before applying a hold, a firm should try to resolve the matter with the customer.
• If a disbursement is held, the firm must notify the customer, all persons authorized to transact business for the account and the trusted contact person no later than 2 business days after the hold was placed. The mailing of a letter, sending an email, or placing a telephone call and leaving a message within the two-business-day period are acceptable means of notification.
• The hold must expire not later than 15 business days after it was placed, unless it was terminated or extended by a state regulator or court; however, if the firm believed exploitation occurred, it could extend the hold for an additional 10 business days.
• Firms must have written supervisory procedures that address financial exploitation, the hold process, etc., must keep records of the circumstances, name and title of person who authorized the hold and the notifications made. They must also train associated persons on these topics.
• The person who oversees this process must be an associated person of the firm who serves in a supervisory, compliance or legal capacity

Amendments to 4512

These amendments require member firms to make reasonable efforts to obtain the name of and contact information for a “trusted contact” when opening accounts of non-institutional customers.

• The trusted contact must be 18 or older, but a member firm is not required to verify age.
• FINRA recommends firms to gather address, phone and email for this trusted contact.
• The trusted contact may be consulted to gather information about the specified adult beyond concerns of financial exploitation, i.e. to confirm whereabouts of client if contact attempts fail, to confirm health status, identity of any legal guardian, executor, trustee or holder of a power of attorney. But, firms are reminded to be cautious in releasing information in compliance with Reg S-P.
• An account can be opened if customer refuses to provide trusted contact information.
• Firms must provide written disclosure (electronic is permissible) to the customer at the time of account opening regarding the purpose of the trusted contact and information that may be shared, even if trusted contact information is not provided.
• Firms must attempt to update existing accounts with a trusted contact and provide written disclosure as part of their normal account update process.

Series Exam Impact

The requirements from the new rule and amendments will impact all FINRA licensing exams administered after February 5, 2018.

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