Vulnerable Person Abuse Protections Coming To FINRA In 2018

by Tonkon Torp LLP

Tonkon Torp LLP

Similar to the Oregon legislature's recent changes to ORS Chapter 59, intended to protect "vulnerable persons" against financial exploitation, FINRA has implemented changes to its rules effective February 5, 2018, intended to protect "specified adult" customers against financial exploitation. Under amended FINRA Rule 4512 (Rule 4512) FINRA members must try to obtain a third-party contact person when accounts are opened or updated. This third-party may be contacted when financial exploitation is suspected. Additionally, when financial exploitation is suspected, new FINRA Rule 2165 (Rule 2165) allows FINRA members to place temporary holds on suspicious disbursements and, if the hold is placed, requires them to conduct internal reviews of the facts and circumstances surrounding the suspicious disbursement. Although the purpose of the changes to the FINRA rule is similar to the purpose of the changes to ORS Chapter 59, there are key differences of which FINRA members should be aware when operating in Oregon.
Amendments to FINRA Rule 4512
Amendments to Rule 4512 require FINRA members to make reasonable efforts to obtain a "trusted contact person" age 18 or older who may be contacted about the customer's account. The FINRA member must meet this obligation whenever it opens, or updates the information on, a non-institutional customer's account.
To meet the new Rule 4512 requirements, a FINRA member need only ask a customer to provide the name and contact information for the trusted person. Additionally, the FINRA member must disclose, in writing, to the customer that the member or an associated person is authorized to contact the trusted contact person and disclose certain information about the customer's account in certain circumstances.

The trusted contact person may be contacted, among other instances, when required under FINRA Rule 2165 (discussed below).
New FINRA Rule 2165
Rule 2165 permits a FINRA member to place a temporary hold on the disbursement of funds or securities from the account of a "specified adult" customer if the member reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted, and requires an immediate internal review of the facts and circumstances surrounding this reasonable belief if a temporary hold is placed. To understand the scope of this rule, it is necessary to understand how FINRA defines "specified adult" and "financial exploitation."
Rule 2165's definition of "specified adult" is similar to the ORS definition of "vulnerable person." A "specified adult" is defined to include (A) a natural person age 65 and older, or (B) a natural person age 18 and older who the FINRA member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. The FINRA member's reasonable belief about a natural person's impairment may be based on its business relationship with that person.
Rule 2165's definition of "financial exploitation" is similar to the ORS definition, and includes: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission taken by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult's money, assets or property; or (ii) convert the specified adult's money, assets or property.
Similar to ORS Chapter 59, disbursement delays under Rule 2165 are not required. For FINRA members that choose to place a temporary hold on suspicious disbursements, Rule 2165 provides a safe harbor from FINRA rules that otherwise prohibit members from placing discretionary temporary holds on disbursements, provided that the requirements of the rule are met.
Before placing temporary holds on disbursements under Rule 2165, a member must first establish and maintain written supervisory procedures reasonably designed to achieve compliance with the rule. Once these procedures are in place, a temporary hold may be placed if the member (i) reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted; (ii) provides notice; and (iii) immediately initiates an internal review of the facts and circumstances that caused the member to reasonably believe that the financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted. With respect to the first requirement, Rule 2165 temporary holds may be placed on suspicious disbursements only. The notice and internal review requirements require further discussion.
Rule 2165 requires the FINRA member to notify the trusted contact person and all parties authorized to transact business on the account within two business days after the date on which the member first places the temporary hold on the disbursement. The notification must advise that the temporary hold is in place and include the reason for the hold. Similar to ORS Chapter 59, Rule 2165 does not require notification to a trusted contact person or a party authorized to transact business on an account if the member reasonably believes that the person has engaged, is engaged, or will engage in the financial exploitation of the specified adult. Rule 2165 also excuses notification if the party to be notified is unavailable.
The temporary hold must expire no later than 15 business days after the date on which the member first places the temporary hold on the disbursement, unless otherwise terminated or extended by an order of a state regulatory or agency, or court of competent jurisdiction. Additionally, if the mandatory internal review of the facts and circumstances that led to the member's reasonable belief that financial exploitation has occurred, will occur, has been attempted or will be attempted supports the member's reasonable belief, the member may extend the temporary hold for an additional 10 business days, unless otherwise terminated or extended by an order of a state regulator or agency or court of competent jurisdiction.
Rule 2165 requires members to retain specified records related to their compliance with the rule, including records of the internal review, and records of request(s) for disbursement that may constitute financial exploitation and the resulting temporary hold. These records must be readily available to FINRA upon request.
Having now explored Oregon law and FINRA rule changes addressed at protecting vulnerable persons against financial exploitation, our next article will discuss federal legislation aimed at protecting the elderly against exploitation and financial abuse.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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