By Ryan C. Young & Matthew T. Boos
On March 30, 2017, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 17-11, announcing a February 5, 2018, effective date for FINRA’s new rules aimed at addressing financial exploitation of seniors.
The new FINRA rules represent just the latest in increased efforts among regulators in the investment community to protect senior investors. Similar efforts have been implemented by the Securities and Exchange Commission (SEC), North American Securities Administrators Association (NASAA) and individual states, including Minnesota.
The new rules, which were approved by the SEC, implement two key changes to protect senior investors. First, amendments to Rule 4512 will require member firms and associated persons to make “reasonable efforts” to obtain the name and contact information for a trusted contact person. Second, new Rule 2165 will permit, but not require, member firms to place temporary holds on customer accounts when there is a reasonable belief of financial exploitation.
Amended Rule 4512 – Trusted Contact Person
The amendment to FINRA’s Rule 4512 requires member firms make reasonable efforts to obtain the name and contact information for a trusted contact person (1) when opening a customer’s account, or (2) when updating account information to an existing account that was opened prior to the effective date of the amendment (i.e., an account that was opened prior to February 5, 2018). The amendment also requires the member firm 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.
Importantly, the amendment does not prohibit a member firm from opening an account where the customer fails to provide the information, so long as the member firm took “reasonable efforts” to obtain such information.
Regulatory Notice 17-11 provides that “[a]sking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the rule’s requirements.”
The trusted contact person is “intended to be a resource for the member in administering the customer’s account, protecting assets and responding to possible financial exploitation.”
New Rule 2165 – “Safe Harbor” for Temporary Holds on Disbursement of Funds
FINRA’s new Rule 2165 permits a member firm “that reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a ‘specified adult’ customer.”
The Rule does not create any obligation to withhold a disbursement of funds. Instead, the Rule is intended to provide member firms and associated persons with a “safe harbor” from FINRA Rules that generally prohibit withholding of funds (e.g., FINRA Rules 2010, 2150 and 11870).
The safe harbor only applies to “specified adult” customers who are defined as either:
- a natural person age 65 and older, or
- a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
To invoke the safe harbor, a member firm or associated person must have a reasonable belief of financial exploitation. “Financial exploitation” is broadly defined to include:
- the wrongful or unauthorized taking, withholding, appropriation or use of a specified adult’s funds or securities; or
- 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:
- obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or
- convert the specified adult’s money, assets or property.
Other Efforts to Protect Senior Investors
The new FINRA rules are just one of the latest efforts by regulators in the investment community to protect senior investors.
In its 2017 Examination Priorities, the SEC indicated it will be “focusing on senior investors and retirement investments.” Among other things, the SEC’s focus on senior investors will include evaluating “how firms manage their interactions with senior investors, including their ability to identify financial exploitation of seniors.” The Examination Priorities advise that “[e]xaminations will likely focus on registrants’ supervisory programs and controls relating to products and services directed at senior investors.”
In February 2016, the North American Securities Administrators Association (NASAA) – an international investor protection organization – voted to adopt a new model act designed to protect senior investors from financial exploitation. Among other things, the model act creates mandatory reporting requirements where a securities broker or investment adviser has a reasonable belief financial exploitation has been attempted or has occurred. The model act would apply to investors aged 65 and older as well as certain vulnerable adults. The model act will be delivered to states that may choose to implement the act as legislation or regulation.
To date, Minnesota has not gone so far as to impose mandatory reporting requirements on investment advisers, securities brokers or broker-dealers. However, Minnesota has enacted legislation requiring that financial institutions cooperate in investigations of the financial exploitation of senior investors (Minn. Stat. 626.557, Subd. 5a), imposing criminal liability for financial exploitation of senior citizens (Minn. Stat. 609.2335) and imposing increased civil liability where an individual or entity engages in deceptive acts that involve a senior citizen, defined as an individual 62 years or older (Minn. Stat. 325F.71).
- Amended Rule 4512 will require member firms make reasonable efforts to obtain contact information for a “trusted contact person” beginning February 5, 2018, either upon (1) opening an account, or (2) updating a client’s account information for accounts opened prior to February 5, 2018.
- New Rule 2165 provides member firms with a “safe harbor” mechanism to place temporary holds on specified customer’s accounts where there is a reasonable belief of financial exploitation.
- FINRA’s new rules underscore regulators’ increased focus on the financial exploitation of senior investors and vulnerable adults.