In March, FINRA published Regulatory Notice 17-11 Financial Exploitation of Seniors announcing that the SEC had approved FINRA’s proposals for addressing financial exploitation of seniors. Regulatory Notice 17-11 covers the new FINRA rule 2165 (Financial Exploitation of Specified Adults) as well as amendments to FINRA Rule 4512 (Customer Account Information). Both will be effective February 5, 2018.
FINRA Rule 2165 Financial Exploitation of Specified Adults follows NASAA guidelines that have been discussed in this Committee’s previous newsletter articles. The rule permits member firms to temporarily stop a disbursement of funds when there are concerns that a client, who qualifies under the rule as a specified adult, is the victim of financial exploitation. The rule creates a safe haven from several FINRA rules that had previously forced the firm to make the disbursement in a timely manner despite those concerns. The firm has 15 days to investigate the matter and if it has reasonable cause to believe that a crime is being committed, it can delay the disbursement for an additional 10 days.
The rule describes a “specified adult” as someone over the age of 65 or someone over the age of 18 which the firm reasonably believes cannot protect their own best interest due to mental or physical impairment.
The rule also requires that the member firm notify all parties authorized to transact business on the account of the hold along with the reason. The firm can refrain from notifying any authorized party that is suspected of perpetrating the exploitation.
Underpinning Rule 2165 is the assumption that there will be someone to notify who can assist in stopping the exploitation. The approved amendments to FINRA Rule 4512 address this by requiring member firms to make a reasonable effort to obtain the name and contact information for a “trusted contact person”. This is supposed to occur when a new account is opened or when personal account information is being updated. By requiring the member firm to disclose to the client that FINRA requires them to ask for the information, the amendment seeks to alleviate any discomfort an advisor might have in asking for trusted contact person information.
Regulatory Notice 17-11 notes that there are several situations where it could see an advisor reaching out to the trusted contact person beyond concerns of elder exploitation. It lists being unable to reach a client because they may be hospitalized or if there is concerns that the client has started to suffer from diminished mental capacity.
These are good first steps but the whole industry needs to develop procedures for an assortment of aging issues. For one thing, Rule 2165 does not cover trades. What do you do if your conservative client calls and leaves trade orders with your staff that are completely contrary to the client’s current allocation? Call your custodian or broker and ask them what their procedure would be if you were concerned that a client is suffering diminished capacity. The answer I got was that they take it on a case by case basis. While FINRA’s rules are a good first step, there are still a lot of issues surrounding aging clients that the entire financial industry needs to stop taking on a case by case basis.
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