Take-Away: I previously reported on FINRA rule 2165 which was effective on February 5, 2018. In response to a follow-up question that I received, this rule does not mandate a report of suspected financial exploitation by the investment advisor.

Background: In February of this year FINRA announced two new rules.

  • Trusted Person: FINRA rule 4512 requires a financial professional to obtain the name of a trusted person from a client over the age 65 years, or a younger client who the financial professional reasonably believes has a mental or physical impairment that renders the individual unable to protect his/her own interests.
  • Vulnerable Client: FINRA rule 2165 addresses the financial exploitation of a vulnerable client (age 65 and up).
  • Financial Exploitation: Financial exploitation is defined as the wrongful or unauthorized taking, withholding, appropriation or use of the vulnerable client’s funds or securities. Within the scope of this rule is any act or omission, including through the use of a power of attorney or conservatorship to: (i) obtain control, through deception, intimidation or undue influence over the vulnerable client’s money, assets or property; or (ii) the conversion (taking) of the vulnerable client’s money, assets, or property. [FINRA Rule 2165(a)(4).]
  • Account Freeze: A financial professional can take action to freeze a transaction or a vulnerable client’s account for 15 business days and alert others, including the trusted person (unless he/she is the perceived perpetrator) so that additional action can be taken to protect the vulnerable client when there is a reasonable basis to suspect that financial exploitation has taken place or is taking place.
  • Immunity: This rule provides immunity to the professional investment advisor, or broker office, for any good faith disclosures made with regard to suspected financial exploitation of a vulnerable client.
  • Reporting: However, this rule does not mandate such reporting of suspected financial exploitation by the investment advisor, which may ultimately make it a ‘toothless’ rule.

Michigan: There are a couple of Bills floating around Lansing which, if passed as legislation, would be comparable to these FINRA rules on the financial exploitation of vulnerable adults.

Thoughts: We need to remember that the capacity of an individual may vary over time. Depending on the health challenges, the particular individual’s mental capacity, and thus vulnerability, may change at different times of the day, how the individual feels that particular day verses other days, when the individual last took their medications, and other external factors. Cognitive fatigue, which is common among many neurological conditions, might slow an individual’s speed to process and express their thoughts, but not necessarily their capability to understand financial transactions. As such, we need to be cautious about generalizing about an individual’s mental capacity, and their vulnerability to financial exploitation by another. Physical appearance, for example, may not correlate with their cognitive ability. All of which may be why a financial professional is not mandated to report situations of suspected financial exploitation in the context of an individual client’s mental capacity.