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FINRA Seeks SEC Approval of Amendments to Rule 2165 in the Fight Against the Exploitation of Seniors and Vulnerable Investors

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  • Posted on: Jun 14 2021

As we have noted previously, the financial exploitation of seniors is a significant problem (e.g.herehereherehere, and here). For many regulators, it is a top priority. [Ed. Note: Last year, we spoke about the issue here.] The Financial Industry Regulatory Authority, Inc. (“FINRA”) is one such regulator.

To help combat the financial exploitation of seniors and vulnerable adults, 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 herehere and here.]

In August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect seniors and vulnerable adults from financial exploitation. The retrospective review indicated that Rule 2165 had been an effective tool in the fight against financial exploitation, but supported amendments to permit member firms to: (1) extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm reported the matter to a state regulator or agency or a court of competent jurisdiction; and (2) place a temporary hold on a securities transaction where there was a reasonable belief of financial exploitation.

Currently, 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. The Rule defines a “specified adult” as a natural person: (1) age 65 and older; or (2) age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. See Rule 2165(a)(1). The member firm’s reasonable belief is to be based on the facts and circumstances observed in the member firm’s business relationship with the person.

Under the current version of the Rule, the temporary hold expires not later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction or extended pursuant to Rule 2165(b)(3), which permits an extension of the hold for up to an additional 10 business days. Importantly, a temporary hold may be placed on a particular suspicious disbursement(s) (e.g., a payment related to a commonly known scam, such as a lottery scam) but not on non-suspicious disbursements (e.g., a regular mortgage payment or assisted living facility payment).

Notably, the Rule does not apply to transactions in securities. The retrospective review indicated that even if a temporary hold were placed on a disbursement out of the customer’s account, executing a related transaction could 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 surveyed member firms about their experience with Rule 2165. The survey revealed that member firms needed additional time to conduct investigations and resolve matters. Approximately 53% of the firms that responded to a survey on the Rule stated that they had been unable to resolve a matter within the 25-business day period. The most common reason was that the matter was under consideration by a state agency (such as APS) or a court. Other common reasons included: (1) the customer did not respond to inquiries from the firm; or (2) the customer did not believe that he or she was being financially exploited. For matters that took longer to resolve than the 25-business day period, approximately 35% of the survey respondents indicated that it took on average 26-50 days to resolve the matter and approximately 59% of survey respondents indicated that it took on average 51-100 days to resolve the matter. 

With the benefit of the review, FINRA proposed the amendments to Rule 2165. By these proposed changes, FINRA seeks to provide member firms with additional time to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations, and to extend the temporary hold on the disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm reported the matter to a state regulator or agency or a court of competent jurisdiction. According to FINRA, if enacted, the proposed amendments will create the first uniform national standard for placing holds on securities transactions related to suspected financial exploitation. 

FINRA explained that the proposed amendments will promote investor protection by allowing additional time for member firms to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations of suspected financial exploitation. FINRA said customers would benefit from the extension because it would provide additional time for a member firm to obtain a positive identification of financial exploitation and prevent the disbursement of funds due to suspicious activities within the account. FINRA further explained that the proposed rule changes could prevent harm to exploited customers, such as being subject to adverse tax consequences, early withdraw penalties or investments that do not align with their investor profiles. 

Anyone wishing to submit comments to the proposed amendments must do so within 21 days of their publication in the Federal Register. 

The proposed rule changes can be found here

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