Bates Research | 11-05-20
FINRA Proposes Senior Rule Amendments to Extend Hold Period on Senior Accounts and Permit Holds on Transactions in Securities
Based on feedback from a retrospective rule review initiated in August 2019, FINRA proposed rule amendments intended to strengthen the ability of member firms to address suspected financial exploitation of seniors and other vulnerable individuals. The proposed amendments directly affect FINRA Rule 2165 (“Financial Exploitation of Specified Adults”). That rule permits a firm to place a temporary hold on the disbursement of funds or securities from the accounts of adults over 65 or from those who the firm “reasonably believes” has an impairment that renders the individual “unable to protect his or her own interests.” The proposed amendments would permit a broker-dealer to impose a longer hold period on a senior investor's account and to expand coverage to include holds on transactions in securities. FINRA seeks comments by December 4, 2020. Here’s a closer look.
The Current Rule
As Bates described previously, FINRA Rule 2165 provides a firm with a safe harbor from FINRA enforcement when the firm exercises discretion to place holds on disbursements. Currently, the rule permits members to place temporary holds of 15 business days on the disbursement of funds or securities, with an extension of an additional 10 business days “provided that the member's internal review of the facts and circumstances supports the member's reasonable belief that financial exploitation has occurred or so ordered by a state regulator, agency or court of competent jurisdiction.” The rule does not currently apply to transactions in securities. FINRA FAQ 1.1. explains that Rule 2165 would not apply, for example, to a customer’s order to sell shares of stock; (but would, if the request was disbursement from the proceeds of a stock sale.)
Rule 2165 also prescribes certain supervisory procedures (including escalations and the development of training policies or programs,) the automatic initiation of an internal review of facts and circumstances, and oral and written notifications of any hold (including the basis for the determination) to all parties authorized to effect transactions in the account within two business days.
The FINRA Proposal
Based on feedback from its broad retrospective review, FINRA concluded that the (extended) 25-day hold period was an insufficient amount of time for firms to determine whether a customer was being financially exploited. According to the results of the review, some 53 percent of respondents reported that, for a variety of reasons, they were unable to resolve a suspicious matter within the 25-business-day period. The proposed amendments would extend the period to allow an additional 30-day hold period if the suspicious activity has been reported to a state agency or an appropriate court. (Notably, NASAA wanted to retain the current period, “which aligns with the hold period provided in the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation.” (See Bates’ article here). FINRA said it considered longer hold times but that 30 days represents a reasonable balance and would provide the additional time to enable greater collaboration between authorities and regulators of different jurisdictions.
FINRA’s proposed amendments would also allow firms to impose a hold on transactions in securities, thereby closing a significant gap from the existing rule. After noting that many firms and states permit a hold on transactions, FINRA stated that its proposal would “create the first uniform, national standard for placing holds on transactions related to suspected financial exploitation.”
Cognitive Decline Red Flags
FINRA noted that they considered extending Rule 2165 to instances where firms may have reason to believe that a “customer has cognitive decline or diminished capacity but [where] there was no evidence of financial exploitation.” FINRA chose not to extend the rule in these circumstances, but it did offer a set of best practices provided by firms to address the issue. These include: training to identify red flags of cognitive decline; the collation of information on a trusted contact person; documenting and escalating suspected cognitive decline for further review; additional supervision of related customer accounts; and protocols for reporting matters to law enforcement, among others.
Request for Comments
FINRA requested that firms not only consider the proposed approach, but also alternative approaches to the longer holds and the extension of Rule 2165 to securities transactions. Specifically, FINRA asked for additional data or anecdotes on “unintended consequences when placing or attempting to place a temporary hold on disbursement of funds or securities from an account,” and whether there are any material economic impacts to investors, issuers and firms that are associated specifically with the proposal.
Additional Action
In a subsequent Notice issued on October 20, 2020, FINRA’s National Adjudicatory Council (“NAC”), the organization’s “appellate tribunal for disciplinary cases,” revised its Sanctions Guidelines to “expressly contemplate a customer’s age or physical or mental impairment that renders the individual unable to protect his or her own interests.” The NAC said that its changes to the guidelines were made to be consistent with FINRA Rule 2165. Further, the NAC stated that it added these aggravating (or mitigating) factors for sanctions to reflect “explicit consideration of elder abuse and [the NAC’s] general experience with imposing more stringent sanctions in cases involving senior investors or mentally impaired customers.” The revised guidelines are effective immediately.
Conclusion
The safe harbor of Rule 2165 permits firms to be ever more proactive on behalf of their clients when identifying a suspicious transaction on accounts held by vulnerable investors. The proposal expands the ability of the firm to act on its own discretion over a customer’s account disbursements and, now, securities transactions. FINRA makes clear that affording firms this expanded discretion over customer accounts is a balancing act. FINRA is seeking input as to whether they are drawing the line in the right place. Bates will continue to keep you apprised.
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