New FINRA Rule 2165 (Financial Exploitation of Specified Adults) and related amendments to existing Rule 4512 (Customer Account Information) become effective February 5, 2018. In connection with the approaching effective date, on Wednesday, January 3, 2018, FINRA released a series of frequently asked questions ( http://www.finra.org/industry/frequently-asked-questions-regarding-finra-rules-relating-financial-exploitation-seniors ) to assist firms in complying with the new rule.
Rule 2165 provides a safe harbor for firms when placing a temporary hold on disbursements from the accounts of “specified adult” customers “where there is a reasonable belief of financial exploitation of these customers.”1 The hold need not be placed on all disbursements from an account, but rather, each disbursement should be analyzed separately. Further, the term of any hold can be extended beyond the period contemplated by Rule 2165(b)(2) (which is fifteen business days) upon the request of an appropriate state agency, such as adult protective services or a securities regulator.
One important clarification is that while Rule 2165 permits limitations on disbursements, firms may not place a temporary hold on a securities transaction pursuant to Rule 2165 because the rule does not apply to transactions in securities. Nevertheless, a disbursement from one account to another at the firm may be subject to a temporary hold where a reasonable belief exists that financial exploitation of a client is occurring. In this regard, the FAQ provides that “a member may place a temporary hold on a request to disburse funds or securities from an account to another account at the member (e.g., where a member receives a request to move funds from a customer’s account to his friend’s account at the member but the member reasonably believes that the customer is being financially exploited).”
In conjunction with the adoption of Rule 2165, FINRA amended Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a “trusted contact person” for a customer’s account. This obligation does not apply to institutional accounts and does not apply to existing accounts until the firm updates the client information in the ordinary course of its business. Moreover, the absence of a trusted contact “shall not prevent a member from opening or maintaining an account for a customer,” provided that the member makes reasonable efforts to obtain a trusted contact, which generally requires asking a customer to provide a trusted contact.
The FAQs also provide color on the circumstances under which a firm may disclose to the trusted contact information about a customer’s account. Firms are permitted under the rules to disclose to the trusted contact information about the customer’s account and to confirm certain information regarding the customer’s health, guardian, trustees, powers of attorney, etc. Communication with a trusted contact should be consistent with the firm’s disclosures to the client and, according to the FAQs, should generally follow “multiple attempts” to contact the customer.
New Rule 2165 and the amendments to Rule 4512 are intended to be a resource for firms in confronting potential financial exploitation of senior investors.
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