Effective Feb. 5, the Financial Industry Regulatory Authority amended Rule 4512 (Customer Account Information) and adopted new Rule 2165 (Financial Exploitation of Specified Adults) in an effort to address the “serious and growing problem” of the financial exploitation of senior and other vulnerable investors. The adopted rule changes allow member firms to quickly respond to situations in which they have a reasonable basis to believe that a senior or otherwise vulnerable investor has been exploited financially by allowing members to (1) notify a customer’s designated trusted contact person when a concern arises that the customer may be the victim of financial exploitation and (2) place a temporary hold on disbursements of funds or securities from a customer’s account.
Trusted Contact Person
FINRA Rule 4512, which governs the information members must obtain and maintain in connection with each customer account, now requires members to make reasonable efforts to obtain for non-institutional customers the name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer’s account. Rule 4512 does not require a customer to provide trusted contact information. Supplementary Material .06 to amended Rule 4512 (1) requires members, at the time a non-institutional account is opened, to disclose in writing to the customer that the member or an associated person of the member is authorized to contact the trusted contact person and disclose certain information about the customer’s account and (2) provides that a member’s inability to identify a trusted contact person shall not prevent a member from opening or maintaining an account for a customer, provided that the member makes reasonable efforts to obtain that information.
Temporary Hold on Disbursements
In conjunction with the amendments to Rule 4512, FINRA Rule 2165 takes effect on Feb. 5. Rule 2165 permits member firms to place a temporary hold on the disbursement of funds or securities from the account of a natural person age 65 and older, or a natural person age 18 and older who, based on facts and circumstances observed in the member’s business relationship with the customer, has a mental or physical impairment that renders the individual unable to protect his or her own interests (specified adult), in certain circumstances where the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted. Members are required to provide oral or written notification of the temporary hold on disbursements to all parties authorized on an account and the trusted contact person (as designated under Rule 4512) unless an authorized party or trusted contact person is unavailable or the member reasonably believes the party or trusted contact person has engaged, is engaged or will engage in the financial exploitation of the specified adult. Members are also required to immediately conduct an internal review of the facts and circumstances underlying the temporary hold and to lift the temporary hold not later than 15 business days after the date on which it was placed, unless that period of time is extended as provided in Rule 2165(b)(3).
Rule 2165’s Limited “Safe Harbor” Provision and Additional Considerations
As noted in FINRA Regulatory Notice 17-11, Rule 2165 does not create an obligation to withhold disbursements from the accounts of specified adults. Accordingly, the Supplementary Material to Rule 2165 provides members and their associated persons a limited safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers’ Securities or Funds) and 11870 (Customer Account Transfer Contracts) when a member exercises discretion in placing temporary holds on the account of a specified adult in a manner consistent with the rule (safe harbor provision). However, member firms and their associated persons should consider the following:
- Civil Liability – The safe harbor provision does not extend to protect member firms or associated persons from civil liability based on the (1) member’s decision to place a temporary hold on an account, (2) member’s decision that a temporary hold is not appropriate, or (3) due diligence process underlying those decisions.
- Untrustworthy Trusted Contact Person – The safe harbor provision does not protect member firms or associated persons from liability resulting from the actions of a trusted contact person who has engaged or subsequently engages in the financial exploitation of the account holder, notwithstanding the member’s reasonable belief that the trusted contact person has not engaged in such conduct.
- Reporting Requirements – The safe harbor provision does not extend to (1) complaints about an associated person relating to actions taken pursuant to Rule 2165 that would otherwise be reportable on a registered representative’s Form U4 or (2) a member’s reporting requirements pursuant to FINRA Rule 4530.
- Supervision and Other Regulatory Regimes – Because the safe harbor provision in Rule 2165 is limited to providing relief from regulatory enforcement based on the three rules enumerated therein, the provision does not apply to member firms’ supervisory responsibilities under FINRA Rules 3110 and 3120. The provision also does not protect member firms from state enforcement actions.
The amendments to Rule 4512 and adoption of Rule 2165 provide member firms with additional tools to more effectively address the financial exploitation of senior and other vulnerable investors. However, in developing and updating the relevant policies and written supervisory procedures, members should carefully evaluate their obligations under the rule changes and consider the limitations of the safe harbor provision to avoid unintended consequences of actions taken thereunder.
For additional information, please refer to Frequently Asked Questions Regarding FINRA Rules Relating to Financial Exploitation of Seniors.