SEC Approves FINRA Rule Intended to Prevent Financial Exploitation of Senior Citizens

As the American economy shifted away from defined company pension plans and towards individualized private investment plans, such as 401(k) plans, an increasing amount of financial responsibility has been placed on the individual. An array of brokers, financial planning, and retirement firms have seized on this opportunity to offer a growing cohort of Americans sound financial advice for today and for the future. Firms may focus on estate planning, retirement planning, investing for the future, or all of the above.

However, despite the fact that most financial firms act well within the bounds of their ethical and legal duties, complaints regarding the financial exploitation of senior citizens has pushed FINRA to issue new rules. These rules are intended to reduce the opportunity for fraud and self-dealing by financial advisors. However, these new rules do require compliance efforts by both individual advisors and firm managers. These new rules and expectations of FINRA members are set forth in Regulatory Notice 14-11 published in March 2017.

New FINRA Rule Sets Forth Amendments to Rule 4512

FINRA rule 4512 is an already existing FINRA rule. Under the rule, new amendments require brokers and financial advisors to engage in additional steps and inquiries upon the opening of a new account. The amendments to Rule 4512 introduce a requirement for FINRA members to engage in reasonable efforts to obtain the name of and contact information of a 3^rd party “trusted contact person” at the time the account is opened. A similar obligation to update contact person information exists when the information on a non-institutional account. Reasonable efforts would typically be satisfied by asking the customer for this information.

The amendments to Rule 4512 set forth additional safeguards to protect against fraud and exploitation. The amendments also create a duty to disclose in writing the fact that information regarding potential fraud or financial exploitation can be provided to this third-party contact person. Essentially, the amendments to this rule seeks to prevent and avoid unauthorized changes to an account. Similarly, the rule is intended to prevent changes to the account secured through the exploitation of an elder.

Guidance Sets Forth Duties under new FINRA Rule 2165

New FINRA Rule 2165 sets forth a new temporary hold period that can be placed on a financial account when fraud or exploitation was attempted or is suspected to have occurred or is occurring. When invoked, a specific, temporary hold should be placed on the account to bar the disbursement of funds or securities from the account of a “specified adult” customer. However, the rule does not create an obligation to withhold a disbursement of funds or securities. Furthermore, it is essential to note that if the firm or advisor does act to place a temporary hold, safe harbor from provisions of Rule 2010 is likely available.

Furthermore, Rule 2165 requires FINRA members to engage in initial compliance work. Entities that anticipate utilization of a temporary hold must establish and maintain adequate, written procedures that are likely to achieve compliance with all provisions of the rule. For one, the procedures must identify, by name and title, each person with authority to authorize or extend a hold. Other record keeping requirements include:

1. Requests for disbursement that may constitute financial exploitation of a specified adult and the resulting temporary hold
2. Instances where a reasonable belief that financial exploitation has occurred, is occurring, has been attempted or will be attempted when a hold is placed on disbursement.
3. Notifications sent to the parties.
4. Following an internal review, records regarding the facts and circumstances supporting the member’s reasonable belief that the financial exploitation has been attempted or has occurred.

These obligations set forth the basics regarding these amended and new FINRA rules. Affected firms, brokers, and advisors are encourage to seek guidance regarding compliance for particularized situations.

Work with an Experienced FINRA Lawyer in Maryland

Complying with all FINRA rules and regulations requires constant attention and diligence. For more than 20 years, attorney William Heyman has provided careful guidance to firms, advisors, and fiduciaries. To schedule a confidential consultation at the Baltimore-based Law Office of William S. Heyman, please call (410) 305-9287 or contact the firm online today.