On October 19, the Financial Industry Regulatory Authority (FINRA) filed a notice of proposed rule changes aimed at enhancing protections for senior investors and other vulnerable adults.1 FINRA’s proposed rule changes would increase senior investor protection by requiring firms to make reasonable efforts to obtain a customer’s trusted contact, and allowing firms to temporarily place holds on the disbursement of funds from accounts having a reasonable belief of exploitation.2
The announcement comes on the heels of recent senior investor protection measures taken by FINRA and the Securities and Exchange Commission (SEC), including the National Senior Investor Initiative and FINRA Senior Investor Hotline.
In an attempt to provide firms with the necessary tools to better protect seniors from financial exploitation, FINRA has proposed to amend Rule 4512: Customer Account Information, by requiring firms to make a reasonable effort to obtain a “trusted contact” when opening non-institutional accounts.3 This trusted contact is “intended to be a resource for the member in administering the customer’s account, protecting assets and responding to possible financial exploitation.”4 A trusted contact is an individual, age 18 or older, that the customer authorizes to be contacted for matters related to the client’s account, health status, or the identity of legal guardian, power of attorney, or trustee.5 Notably, member firms would not be prohibited from opening accounts for individuals who fail to identify a trusted contact, so long as the firm makes a reasonable effort to obtain a name and contact information for a trusted contact.6 By providing this disclosure and authorization, firms will be able to better act on suspected issues of elder abuse or client cognitive decline to prevent unauthorized transactions from client accounts.
FINRA’s proposed rule 2165: Financial Exploitation of Specified Adults would provide firms with a safe harbor to place holds on the disbursement of funds from the accounts of “specified adults” where the firm reasonably believes financial exploitation has occurred, is occurring, or is likely to occur.7 A “specified adult” is a person age 65 or older, or age 18 and older who the firm reasonable believes to have a mental or physical impairment rendering the individual unable to protect his or her own interests.8 A temporary hold could last for a maximum of 15 business days after the date when the hold is initially placed, and a firm placing a temporary hold would be required to immediately initiate an internal review and provide notice to the customer no later than two business days after placing the hold.9 To take advantage of this safe harbor, firms should update their supervisory procedures to identify the titles of individuals authorized to place, terminate or extend a temporary hold on behalf of the firm. Individuals placing holds on accounts would be required to be an associated person of the member who serves in a supervisory, compliance or legal capacity.10
As the financial exploitation of senior investors costs seniors an estimated $2.9 billion annually, and with more than 10,000 Americans expected to reach age 65 daily, firms should begin to take note of the increased regulatory focus on senior and vulnerable adult protections.11 In particular, firms should consider taking a more active approach to incorporating senior investor protection initiatives into their compliance programs, including: employee trainings to spot internal and external signs of exploitation or cognitive decline; revised policies and procedures to account for the proposed rules, including escalation processes for contacting trusted contact persons and reviewing temporary holds; as well as the expansion of technology systems to spot anomalies based on investor characteristic and products. Particular focus should be given to areas specific to senior investors or investors with diminished capacity. For example, firms should consider revisiting and standardizing their policies and procedures related to the internal handling of Powers of Attorney, determining the validity of a power of attorney, and any related red flags that might point to financial exploitation. Firms considering updating compliance governance, processes, and technology should consider doing so with the senior investor protection theme and proposed rules in mind.
The announcements from FINRA and SEC were showcased at the FINRA and SIFMA (Securities Industry and Financial Markets Association) Senior Investor Protection Conference held October 20 and 21 in Washington DC,12 where industry experts and medical professionals came together to discuss the rules, the importance of protecting senior investors, and approaches that firms can use to protect their clients from exploitation.
1. “Proposed Rule Change to Adopt FINRA Rule 2165 (Financial Exploitation of Specified Adults),” Financial Industry Regulatory Authority, SR-FINRA-2016-039. Access at: http://www.finra.org/industry/rule-filings/sr-finra-2016-039
2. “Text of Proposed Rule Change [To Adopt FINRA Rule 2165],” Financial Industry Regulatory Authority. Access at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-039.pdf
5. “Text of Proposed Rule Change [To Adopt FINRA Rule 2165],” Financial Industry Regulatory Authority. Access at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-039.pdf
6. “Text of Proposed Rule Change [To Adopt FINRA Rule 2165].” Securities and Exchange Commission. Access at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-039.pdf
11. “Broken Trust: Elders, Family, and Finances,” MetLife Mature Market Institute, Research Study, March 2009. Access at: https://www.metlife.com/assets/cao/mmi/publications/studies/mmi-study-broken-trust-elders-family-finances.pdf?SCOPE
12. “2016 FINRA/SIFMA Senior Investor Conference,” Financial Industry Regulatory Authority. Access at: http://www.finra.org/industry/2016-finrasifma-senior-investor-protection-conference-0
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