Bates Research - 09-19-19

FINRA Requests Feedback on Senior Financial Protection Rules

FINRA is asking its members a series of questions about the utility of rules and processes to curb financial exploitation of senior investors. In a new Regulatory Notice, FINRA asks for feedback about the experiences member firms are having applying Rule 2165 (temporary holds on disbursements) and Rule 4512 (trusted contacts) that were put in place just last year, as well as Rule 3240 (borrowing from, and lending to customers). FINRA indicated that responses to its questions will be evaluated as part of its retroactive rule review process and will be used to consider whether “additional tools, guidance or changes” are necessary.

Bates Research closely follows regulatory and enforcement developments on senior financial fraud. The growing utilization of Suspicious Activity Reports (SARs) is changing regulators’ understanding of the scope and nature of the problem by increasing the data available for measurement and analysis. As highlighted in the latest FINRA Notice, these studies “indicate that financial exploitation of seniors is often perpetrated by strangers, family members and caregivers—rather than by broker-dealers or other financial services organizations—[but] broker-dealers and other financial services organizations have an important role to play in protecting senior investors.” According to FINRA, the rules under review provide a way for member firms to deal with situations where there is “a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted.” In this article, we recap those rules and consider the questions posed by FINRA in its latest Notice.

FINRA Rule 2165

FINRA Rule 2165 permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. (FINRA provided guidance on this rule in a FAQ published in January 2018.) The hold only applies to “suspicious disbursements” and not to the buying and selling of securities within an account.

Rule 2165 provides a member firm with a safe harbor from FINRA enforcement when the firm exercises discretion to place holds on disbursements. The Rule also prescribes certain supervisory procedures, the automatic initiation of an internal review of facts and circumstances, and oral and written notification of any hold (including the basis for the determination) to all parties authorized to effect transactions in the account within two business days. The temporary hold may only be extended by the firm for an additional 10 business days if so ordered by a state regulator, agency or court of competent jurisdiction.

FINRA is seeking comment on the safe harbor provision of Rule 2165, specifically, whether it should (i) apply to transactions in securities; and (ii) be extended “to apply where there is a reasonable belief that the customer has an impairment that renders the individual unable to protect his or her own interests…irrespective of whether there is evidence that the customer may be the victim of financial exploitation by a third party.” FINRA is also asking for comments on whether the temporary hold period should be extended, whether there should be a different mechanism to obtain an extension, and for examples of unintended consequences when placing or attempting to place a temporary hold on disbursements of funds. Finally, FINRA is asking for feedback on the reporting of Rule 2165 incidents including whether further guidance is needed to address Forms U4 and U5 reports.

FINRA Rule 4512

FINRA Rule 4512 requires members to make reasonable efforts to obtain the name and contact information for a “trusted contact person” when a customer account is opened or updated. There are a number of explicit disclosures and requirements for someone to be named a trusted contact person. For example, the trusted contact person must be at least 18 years old and must be formally authorized by the client to assume the responsibility to address possible financial exploitation, to confirm specifics about the customer’s current contact information or health status, or to identify any legal guardian, executor, trustee, or holder of power of attorney.

FINRA is now seeking information on firms’ experiences with Rule 4512. In particular, FINRA wants to know the methods by which firms have been obtaining trusted contact person information, the receptivity of clients to any outreach, and related examples including any experience of identified senior financial abuse where the firm did not have trusted contact information.

FINRA Rule 3240

In addition to these Rules, the agency is also reviewing FINRA Rule 3240 which covers permissible lending arrangements between registered persons and customers. The Rule prohibits borrowing money from or lending money to customers “unless the member firm has written procedures,” and then only under narrow conditions. Rule 3240 requires notification to the firm by a registered person entering into such an arrangement and for the firm to pre-approve it in writing. Because of the potential for misconduct as it relates to seniors, FINRA is asking whether any modifications should be made to the rule.

Additional Important Inquiries

In related inquiries, FINRA is asking whether it should consider prohibitions or limitations on allowing registered persons to be named beneficiaries, executors, powers of attorney, or trustees on the accounts of non-family member customers. FINRA is also asking for feedback on whether to amend its Sanctions Guidelines to incorporate as a “principal consideration” the customer’s age or impairments when determining appropriate sanctions.

Conclusion

The increasing awareness of the extent and severity of senior financial exploitation brings with it an urgency to take regulatory action. Such action may translate into a further tightening of the regulations, additional supervisory requirements and greater oversight. Bates Compliance Managing Director Robert Lavigne says: “even though FINRA is performing a retroactive rule review, it will expect member firms to have a fully matured senior investor program in place. This is a good time for firms to review and tighten their procedures relating to the protection of senior investors.”

The reply period for the FINRA inquiries runs until October 8, 2019. Bates will continue to keep you apprised.


Learn how to protect your company and its most vulnerable investors with Bates Investor Risk Assessment. For a broad view of the changing federal and state legislative and regulatory landscape on senior investors, download our complimentary white paper. For more information concerning financial issues related to vulnerable and senior investors, senior investor expert witnesses, financial crimes, damages analysis, and compliance solutions, please contact Bates Group today.

 

Coming Up:

Look for Bates Compliance leaders at the SIFMA C&L Charlotte Regional and the IAA Leadership Conference in Nashville. 

Bates Compliance is a proud sponsor of the 2019 NSCP National Conference, October 21-23 at the Hilton Baltimore. Booth #33

Robert “Bob” Lavigne will be discussing the broader questions and compliance implications of the FINRA rules at the upcoming SIFMA Internal Audit Annual Conference, October 27-30 in Miami.

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