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George F. Bearup, J.D. Senior Legal Trust Advisor

3-Aug-18

FINRA Draws the Line on Elder Abuse

Take-Away: We all know that elder abuse is on the rise in our society. The Financial Industry Regulatory Authority (FINRA) took note of this problem and in February it implemented new rules in an effort to better protect vulnerable elderly adults from the financial exploitation by others.

Background: Over the years FINRA has adopted rules that it intends to better protect investors. FINRA has adopted rules that observe high standards of commercial honor and just and equitable principles of trade (Rule 2010), identified the improper use of a customer’s account or funds (Rule 2150) and it imposes a requirement that a customer’s directions with regard to trades and purchases will be expedited. (Rule 11870.) But few FINRA aspirational rules in the past dealt with situations where there was a reasonable belief that financial exploitation of a client had occurred, or had been attempted,  by another individual. Now, in Regulatory Notice 17-11, FINRA member firms will be required to develop policies that are designed to prevent elder abuse, empower member firms to take the steps needed to protect vulnerable adults, and mandate training of a member’s financial advisors with regard to detecting financial elder abuse. These positive steps take the form of two new FINRA rules.

FINRA Rule 4512: This rule is intended to create a proactive environment to establish steps should a concern arise during the life of a client’s account with the advisor about financial exploitation. The rule requires member firms to take reasonable efforts to secure the name and contact information for a ‘trusted contact person’, age 18 or older, who may be contacted about the client’s account. [Rule 4512(a)(1)(F).] As a consequence, if a FINRA advisor believes that an elderly client is being exploited, he/she may contact this ‘trusted contact person’ and express their concerns. This will require the written authorization of the client to directly communicate with the ‘trusted contact person’, including the disclosure of the client’s account information in order to fully address the perceived financial exploitation with the ‘trusted contact person.’

FINRA Rule 2165: This rule requires member firms to implement policies and procedures with respect to elder abuse. Importantly, the rule empowers a firm to temporarily refuse to implement transactions in light of possible financial abuse or misappropriation from a client’s account. Specifically,  this rule protects the advisors from running afoul of other FINRA rules, such as the FINRA rule that requires the firm and its advisor to ‘follow the client’s directions.’ Many definitions and restrictions are a part of Rule 2165:

  • Protected Adult: The client must be 65 years of age or older (the adult), or any person of any age who has a mental or physical impairment;
  • Financial Exploitation: This term includes  the wrongful or unauthorized taking, withholding, appropriation, or use of the protected adult’s funds or securities . It also includes any act or omission by a person, including through the use of a power of attorney, with regard to the protected adult, to either: (i) obtain control through deception, intimidation or undue influence over the protected adult’s money, assets or property; or (ii) convert (steal) the protected adult’s money, assets or property.
  • Reasonable Belief: The advisor may form a reasonable belief of financial abuse based on the facts and circumstances observed in the business relationship with the protected adult.
  • Temporary Hold on Disbursements: If the advisor has a reasonable belief that financial exploitation of a protected adult has occurred, is occurring, has been attempted, or will be attempted, then the firm is permitted to place a temporary hold on a disbursement of funds or securities from the protected adult’s account, subject to a notice requirement (described next.) The temporary hold remains in place and is effective for not more than 15 days after the date the hold on disbursement of funds or securities occurred, unless terminated earlier, or extended, by a state regulatory agency or a court order. Note: The temporary hold is only on disbursements from the protected adult’s account, not on orders to sell securities; however, any sales proceeds that result from a pending sale of securities are then subject to the temporary hold.
  • Notice: Within two business days after imposition of the temporary hold, the firm must provide oral or written notice of the temporary hold, including the reason for the temporary hold, to: (i) all parties authorized to transact business on the protected adult’s account, unless that ‘other’ party has engaged, is engaged, or will be engaged in the financial exploitation of the protected adult; and (ii) the ‘trusted contact person’, unless that ‘trusted contact person’ is reasonably believed to be the person who has engaged, is engaged, or will engaged in the financial exploitation of the protected adult.
  • Internal Review: While the temporary hold is in place the FINRA member firm is required to immediately initiate an internal review of the facts and circumstances that caused the advisor to reasonably believe that financial exploitation has occurred or is about to occur. If that internal review ends up supporting that initial belief of financial exploitation, then the temporary hold may be extended by the firm for an additional period, not to exceed 10 business days.
  • Record Retention: The FINRA member firm is required to retain records related to compliance with this Rule, which must be readily available to FINRA. These records include: (i) the request for disbursement that might constitute financial exploitation of the protected adult; (ii) the finding of the reasonable belief that financial exploitation had, or was about to occur; (iii) the name of the advisor who authorized the temporary hold; (iv) the notifications required by the rule (summarized above); and (v) the immediate internal review of the facts and circumstances made by the FINRA member firm.
  • Safe Harbor: Due to the other rules that FINRA member firms and their advisors are required to follow [summarized in the Background paragraph above] FINRA created a safe harbor when member firms exercise discretion to place temporary holds on  the disbursement of funds or securities from a protected client’s account. [FINRA Rule Supplementary Material 2165.01.]

Conclusion: No one knows if these new rules will be all that effective in the battle to combat the financial abuse of elders. Obviously what facts give one advisor a reasonable belief may not provoke a similar conclusion by another financial advisor, so there will be a lot of subjectivity involved in the implementation of Rule 2165. Nevertheless, FINRA’s recognition of the problem of financial exploitation of elders and its adoption of its temporary hold rule, along with mandated training of member employees to detect financial exploitation,  are positive first steps.