Bates Research - 10-26-16

FINRA Issues Proposed Rule To Protect Senior Investors

Guest Post by Alex Russell and Geoff Winkler.


Last week we focused on the important topic of elder and diminished capacity investors through a Q&A with elder investor expert Joe Thomas. Our timing couldn’t have been better, because FINRA announced (on the same morning our post went live) that it has sent a proposed new rule and rule amendments to the SEC that would allow for better protection of senior investors.   

The rule changes would require firms to make reasonable efforts to obtain contact information for a trusted third party for a client’s account. As mentioned in last week’s post, they are also proposing rules that would permit firms to temporarily hold funds or securities, delaying disbursement when there is a reasonable belief that financial exploitation is taking place.

A key driver in shaping the proposed rulemaking came from information received from the hotline that FINRA established for senior investors in 2015. As noted by Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, “…the helpline has received calls highlighting some of the issues firms are facing when it comes to senior investors, including how firms respond when they suspect a senior customer is being exploited.” According to The Wall Street Journal, the hotline has received about 6,700 calls since its launch and callers have been assisted in recovering $2.4 million (in voluntary reimbursements).

While most would agree that the proposed rule is well intentioned, there are some in the industry that believe that asking finance professionals to be responsible for determining competency of their clients places them in a difficult position since they are not medically trained to make these determinations. Another concern of the industry is the potential conflict that may occur between family members where the senior investor may want to make a gift to one family member, but the trusted third party opposes the gift and the financial institution is caught in the middle.   

FINRA’s board of governors first authorized filing the proposed rule with the SEC a year ago, after a comment period from October 15 to November 30 of last year generated 40 comment letters. At least one aspect of those comment letters that does not appear to have led to a modification of the proposed rule is related to notification as suggested by NASAA. The NASAA Model Act to Protect Seniors and Vulnerable Adults requires notification of both Adult Protective Services and state regulators if elder financial abuse is suspected and provides legal protection to those to firms that make such notifications, but FINRA chose not to adopt that requirement.

The SEC must approve the proposed rule changes, after which FINRA may open another comment period prior to the rule going into effect.

Here is the full proposed rule.


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