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FINRA Proposes Amendments to Rule 2165 to Further Combat Suspected Financial Exploitation of Seniors and Vulnerable Adults

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  • Posted on: Oct 12 2020

As we have noted, the financial exploitation of seniors is a significant problem (e.g., here, here, here, here, and here). For many regulators, it is a top priority. [Recently, we spoke about the issue here.] FINRA is one such regulator.

To help combat the financial exploitation of seniors, FINRA enacted Rule 2165 (“Financial Exploitation of Specified Adults”) (here). Among other things, the rule permits a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring.

[This Blog wrote about the rule here and here.]

In August 2019, FINRA commenced an assessment of the effectiveness and efficiency of the rules and administrative processes that were intended to protect senior investors from financial exploitation. According to FINRA, the assessment indicated that FINRA’s efforts to protect seniors have been helpful and effective, but those efforts could be improved. Accordingly, the review suggested some additional tools, guidance and rule changes that could be used to enhance the fight against the financial exploitation of seniors.

Based on the feedback FINRA received during the review, the regulatory agency is proposing amendments to Rule 2165 to extend the hold period and to allow temporary holds on securities transactions (here).

As noted, Rule 2165 permits a member firm to place a temporary hold on a disbursement of funds or securities from the account of a “specified adult” customer when the firm reasonably believes that financial exploitation of that adult has occurred, is occurring, has been attempted or will be attempted. 

According to FINRA, temporary holds on disbursements have played a critical role in providing member firms a way to respond to suspicions of financial exploitation before the customer loses money. FINRA’s review found Rule 2165 to be an effective tool in the fight against financial exploitation. However, it also found that an extension of the hold period and the placement of temporary holds on transactions would be appropriate and beneficial.

The proposed changes to Rule 2165 will provide member firms with an additional 30 business days to hold the disbursement of funds if the member firm reports suspicious activity to a state agency or a court of competent jurisdiction. Currently, the rule provides that the hold period may be terminated or extended by a state agency or a court of competent jurisdiction. In FINRA’s review, respondents indicated that the current hold period was insufficient to investigate whether a senior customer was the victim of financial exploitation. Approximately 53 percent of respondents participating in the review stated that they had been unable to resolve a matter within the 25-business day period. Approximately 35 percent indicated that it took on average 26-50 days to resolve the matter and approximately 59 percent of respondents indicated that it took on average 51-100 days to resolve the matter. 

In addition to the foregoing, the proposed amendments will allow member firms to place a hold on securities transactions when there is a reasonable belief that the customer is being financially exploited. Currently, the rule does not apply to transactions in securities, though it does allow member firms to stop funds or securities from leaving a customer’s account. Nevertheless, some member firms have included in their customer agreements the ability to place holds on transactions in securities, as well as disbursements of funds or securities, when financial exploitation is suspected. Approximately 25 percent of respondents indicated that their customer agreements currently permit placing temporary holds on transactions when financial exploitation is suspected.

FINRA also explained that the proposed changes to the rule would enable greater collaboration and interaction with authorities or regulators on a local, state or national level.

Interestingly, FINRA declined to extend Rule 2165 to situations where a firm has a reasonable belief that the customer has an impairment, such as diminished capacity, that renders the individual unable to protect his or her own interests, even though there is no evidence of financial exploitation. FINRA explained that such a situation was beyond the purview of rulemaking: “[r]ather than rulemaking, FINRA is summarizing the information obtained about member firms’ procedures and practices in this area in this Notice to assist other member firms and investors.” Instead, FINRA identified a number of red flags that indicate diminished capacity or cognitive decline. Notably, some member firms indicated that their customer agreements provide that the firm may place a temporary hold on transactions in securities or disbursements of funds or securities when the firm suspects a customer is suffering from cognitive decline or diminished capacity.

Finally, FINRA noted that it considered various alternatives to the proposed rule amendments. First, FINRA considered proposing different hold period extensions, ranging from no extension to an extension of up to 75 business days. FINRA also considered not extending Rule 2165 to transactions, but rather keeping the temporary hold option only for disbursements. Ultimately, FINRA settled on the proposed amendments because they struck “an appropriate balance between regulatory burden, investor protection and investor choice.”

Anyone wishing to submit comments to the proposed amendments must do so by December 4, 2020.

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