Bates Research | 07-08-21
Temporary Holds and Other Developments to Address Senior and Vulnerable Investor Financial Exploitation
Early last month, FINRA proposed new amendments to rules on the financial exploitation of seniors and other vulnerable individuals. Rule 2165 ("Financial Exploitation of Specified Adults") permits a firm to place a temporary hold on the disbursement of funds or securities from the accounts of adults over 65 or from anyone who the firm “reasonably believes” has an impairment that renders the individual “unable to protect his or her own interests.” The proposed amendments would (i) extend the time allowed to place a temporary hold on a disbursement of funds or securities under certain conditions and (ii) allow the placement of a temporary hold on securities transactions where there is a reasonable belief of financial exploitation. The changes have implications for state rules protecting seniors as well.
The SEC, FINRA and NASAA (“North American Securities Administrators Association “) also recently announced a joint training program designed to help firms comply with Senior Safe Act requirements. This resource is intended to be used by firms to train associated persons on how to detect, prevent, and report financial exploitation of senior and vulnerable adult investors. The presentation has compliance implications for firms seeking to utilize FINRA’s safe harbor rule 2165. Here is a closer look.
Proposed Amendments to Rule 2165
In the proposal, FINRA reinforces the fact that Rule 2165 is “the first uniform national standard for placing temporary holds on disbursements to address suspected financial exploitation.” The safe harbor created by the rule protects firms from liability under FINRA’s rules on standards of commercial honor and principles of trade (Rule 2010) and improper use of customers’ securities or funds (Rule 2150), among others. To take advantage of the safe harbor, firms must satisfy a number of conditions—identified as “safeguards” under the rule proposal—including, (i) notification of the hold and the reason for the hold to all parties authorized to transact business on the account, (ii) the initiation of an internal review of the facts and circumstances that formed the basis for believing there was a case of financial exploitation, (iii) written supervisory procedures and required recordkeeping, (iv) the escalation of a hold to higher authorities within the firm, (v) the development of training policies or programs reasonably designed to ensure rule compliance, and (vi) record retention available upon FINRA request.
FINRA Rule 2165 became effective on February 5, 2018, and has undergone near constant review during its relatively short history. From its inception, there has been debate on the length of permissible holds, on coverage (i.e., holding disbursements of funds or securities as distinct from transactions of securities—the latter is not allowed under the Rule), and on the relationship between the Rule and state law (see Bates post from 1/31/18). Based on feedback from a retrospective rule review initiated in August 2019 (see Bates post from 9/19/19), FINRA first proposed rule amendments to extend the hold period and to allow temporary holds on securities transactions as well as disbursements (see Bates post from 11/5/20). The substance of the new proposal is largely based on comments from the earlier retrospective rule review and comments from the December 2020 proposal.
FINRA’s proposed new amendments to Rule 2165 would make two significant changes and follow from the above initiatives. The first would be to permit an extension of a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30 business days if the firm reported the matter to a state regulator or agency or a court of competent jurisdiction. FINRA concluded that the extension would “provide member firms with additional time to resolve matters and for APS [Adult Protective Services] agencies, state regulators and law enforcement to conduct thorough investigations.” In connection with this extension, FINRA is requiring that the firm “retain records of the reason and support for any extension of a temporary hold, including information regarding any communications with or by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.”
Second, FINRA is proposing to amend the rule to allow a firm to place a hold on transactions in securities. FINRA agreed with commenters who argued that “executing a related transaction may result in significant financial consequences for the customer (e.g., adverse tax consequences, surrender charges, the inability to regain access to a sold investment that has been closed to new investors or trading by a perpetrator in inappropriate high risk or illiquid securities)."
FINRA also noted that 34 states already allow firms to place some form of hold on securities transactions. The regulator concluded that as a result, some customers are afforded greater protection than others. Applying the rule to securities transactions is a significant change and, as FINRA points out, would establish “the first uniform national standard” for placing holds on these transactions based on suspected financial exploitation.
FINRA emphasized that the six safeguards highlighted above effectively prevent the misapplication of the rule and that the benefits of the proposal outweigh any disruption caused by the hold. Specifically, FINRA stated that while “customers may be affected by temporary holds, the costs of financial exploitation can be devastating to customers, particularly older customers who rely on their savings and investments to pay their living expenses and who may not have the ability to offset a significant loss over time.”
Comments are due within 21 days of their publication in the Federal Register.
Regulators Offer Joint Program on Senior Financial Exploitation
Consistent with the safeguards contained in FINRA Rule 2165, the training presentation jointly developed by the SEC, FINRA and NASAA titled “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors” is intended to help firms comply with requirements under the Senior Safe Act. That Act protects investment advisors and broker-dealers, among others, from liability in any civil or administrative proceeding for reporting a case of potential exploitation of an older adult. The new program is important, because a key condition to take advantage of the Rule 2165 safe harbor (noted earlier) is that employees and firms provide and receive training on how to identify and report exploitative activity against seniors before making a report. Firms looking to lock down that condition of the Rule should review the new presentation carefully.
The proposed amendments extending the time allowed to place a temporary hold and to apply temporary hold provisions to securities transactions expand the ability of firms to intervene when they identify potential financial abuse of vulnerable investors. According to FINRA, the rule has already demonstrated its effectiveness, and these amendments will broaden a firm’s reach in the fight against senior exploitation. Tying the newly announced training presentation to the safeguard provisions should not go unnoticed. With greater discretion comes closer examination, and firms that utilize the safe harbor provisions should be sure to comply with the conditions (especially regarding training). Bates will continue to keep you apprised.
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