Bates Research,Practice Alerts - 04-11-17

SEC Gives Final Approval to FINRA Rules Protecting Seniors and Tools for Firms to Respond

The Securities and Exchange Commission gave final approval to a FINRA proposal to protect senior investors and shield financial firms from liability when reporting suspected fraud against elderly clients. We have been covering this proposal through its many stages (see previous Bates Research posts). Effective February 8th 2018, new FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information) will require full compliance.

According to FINRA Notice 17-11, the new rules provide a way for member firms “to respond to situations in which they have a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted.” New rule 2165 concerns the ability to contact a customer’s designated “trusted contact person,” and the amendments to rule 4512 govern the ability to place a temporary hold on disbursement of funds or securities from a customer’s account, and to provide financial institutions and advisors with the authority and responsibility to act to protect senior investors.

"Trusted Contact Person"

Rule 4512 will now require members to make reasonable efforts to obtain the name of, and contact information for a “trusted contact person” for a customer’s account. There are a number of explicit disclosures and requirements for someone to be named a trusted contact person. 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.

“Specified Adults,” Funds Disbursements, Authorized Persons

Rule 2165 will permit members to place temporary holds of up to 15 days on disbursements of funds or securities from the accounts of “specified adult” customers.  A “specified adult” is either: (a) a person aged 65 or older; or (b) a person who the firm reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. The hold only applies to “suspicious disbursements” and not, for example, to the buying and selling of securities within an account. The Rule provides a member firm with a safe harbor from FINRA when it exercises the discretion to place holds on disbursements. Though amended Rule 2165(b) is not at all clear about the standards by which a firm may determine the mental condition of a client, brokerage firms are encouraged to provide their customer-facing employees with training on how to recognize signs of diminished capacity, cognitive decline, financial impairment or financial exploitation.

Rule 2165 will also require that a firm’s supervisory procedures identify the title of each associated person authorized to place, terminate or extend a temporary hold on behalf of the firm and that such authorized persons serve in a supervisory, compliance or legal capacity. In the event that a hold is placed on a suspicious disbursement, the rule will require that the firm immediately initiate an internal review of the facts and circumstances, and the firm must provide both an oral or written notification of the 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.

State Mandates and Congressional Action

The demographic realities of an aging boomer generation and the consequent growing opportunity for financial exploitation are driving regulators and policy makers to take action. An increasing number of states have either enacted or are in the process of adopting variations of the NASAA Model Act to Protect Seniors and Vulnerable Adults (see: NASAA Model Seniors Act, Adopted Jan. 22, 2016). The Model Act mandates notification to state regulators and Adult Protective Services when there is a “reasonable belief” that financial abuse of seniors is occurring. There are some differences among states regarding the mandatory nature of the notifications, and from the safe harbors afforded to firms that must make state-mandated notifications.  These must be taken into account.  But, current U.S. congressional efforts may offer certain additional protections. In January, U.S. Senator Susan Collins (R-ME) reintroduced the Senior$afe Act of 2017, a bill that would “provide immunity from suit for certain individuals who disclose potential examples of financial exploitation of senior citizens.” With the implementation of the FINRA requirements scheduled for February 2018, the steady adoption by state legislatures of the NASAA Model Act, and the likely adoption of congressional protections, firms should be making the necessary adjustments in policy and procedures to be ready to take a much more active role in protecting seniors. 

Bates looks forward to continuing our coverage of developments in this space. For more information about Bates Group’s experts, including senior investor consulting and testifying experts, please email us at contact@batesgroup.com or call 503-670-7772.

Disclaimer

The information provided on this website is for information purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.

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