Two FINRA rule changes designed to prevent the exploitation of seniors and other vulnerable adults took effect on February 5th.
The changes amended FINRA Rule 4512 (“Customer Account Information”) and created new FINRA Rule 2165 (“Financial Exploitation of Specified Adults”). Accordingly, firms are now (i) required to make reasonable efforts to obtain the name of a trusted contact person for a senior or other vulnerable customer with an account, and (ii) permitted to place temporary holds on disbursements of funds or securities from the accounts of certain customers when the firm has a reasonable suspicion that these customers are being financially exploited. FINRA also published responses to Frequently Asked Questions to help firms prepare for and adjust to the changes.
The rule changes were approved by the SEC in March 2017.
Lofchie Comment: The protection of seniors is an issue of large and increasing social importance. However, it would be better if this issue were addressed by federal or state law, rather than by SRO regulation. The FINRA rule “permitting” broker-dealers to put a hold on disbursements is complicated in cases where such a hold would not be sanctioned by state law. Conversely, the failure of a firm to exercise its “authority,” however questionable, may put the firm at risk from FINRA or an investor.
In light of the above conflicting considerations, firms need to think carefully about the procedures they put in place with respect to new Rule 2165. Firms should give particular care as to how decisions are documented.