The SEC Division of Investment Management (the “Division”) granted no-action relief permitting mutual funds and their SEC-registered transfer agents to delay disbursement of proceeds from the mutual fund accounts of elderly or otherwise vulnerable adult shareholders (“Specified Adults“) if financial exploitation is suspected.
As previously covered, FINRA recently issued a rule allowing a FINRA member broker-dealer to place a temporary hold on the disbursement of funds or securities from a Specified Adult’s account if the relevant broker-dealer has a “reasonable belief” that the account holder is being financially exploited. In a letter to the Division, the Investment Company Institute stated that a mutual fund’s transfer agent “may be best positioned” to spot the financial exploitation of Specified Adult shareholders, since the transfer agent serves as the point of contact for shareholders. In response, the Division agreed not to recommend enforcement action against mutual funds or their SEC-registered transfer agents if they delay for more than seven days the disbursement of redemption proceeds under circumstances leading to the reasonable belief that financial exploitation “has occurred, is occurring, has been attempted, or will be attempted.”
Lofchie Comment: Given the legal uncertainty of the FINRA Rule (it is not clear how it can override either SEC requirements or state law requirements), the SEC should also issue at least a no-action letter or, better, still, a formal exemption from SEC rules regarding customer funds that would expressly permit broker-dealers to put a hold on customer funds where abuse is suspected.