FINRA has sent to the SEC a proposed rule change to help protect seniors and vulnerable adults from financial exploitation: “FINRA is proposing amendments that would require firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. In addition, FINRA is proposing a new rule that would permit firms to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold. The rule change is not effective until approved by the SEC.”
“A small number of states have enacted statutes that permit financial institutions, including broker-dealers, to place temporary holds on “disbursements” or “transactions” if financial exploitation of covered persons is suspected. In addition, the North American Securities Administrators Association (“NASAA”) created a model state act to protect vulnerable adults from financial exploitation (“NASAA model”). Due to the small number of state statutes currently in effect and the lack of a federal standard in this area, FINRA believes that the proposed rule change would aid in the creation of a uniform national standard for the benefit of members and their customers.”
The proposed rule change is quite lengthy. Of course, and assuming that the rule change is approved by the SEC, the real test is how the different FINRA members apply the rule in everyday occurrences, the policies and procedures that they put in place, and the training that they provide to their employees. You will note that FINRA acknowledges that the definitions are broad, which is typical in this area of law – see, for example, the California elder abuse statutes in the California Welfare & Institutions Code and the statutes pertaining to mental capacity and undue influence in the California Probate Code – but those are detailed discussions for other materials – I have given presentations for attorneys, fiduciaries and other professionals on these topics including elder abuse and elder protection, probate court procedures, and fiduciary standards of care.
Below are a couple of the pertinent rule change provisions.
“FINRA believes that “specified adults” may be particularly susceptible to financial exploitation. Proposed Rule 2165 would define “specified adult” as: (A) a natural person age 65 and older; or (B) a natural person 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. Supplementary Material to proposed Rule 2165 would provide that a member’s reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member’s business relationship with the person. The proposed rule change would define the term “account” to mean any account of a member for which a specified adult has the authority to transact business.”
“Because financial abuse may take many forms, FINRA has proposed a broad definition of “financial exploitation.” Specifically, financial exploitation would mean: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.”
In addition to (1) initially attempting to obtain from the client information about a trusted person who the member can contact in possible situations of exploitation, and (2) attempting to contact that trusted person when appropriate, “The proposed rule change would permit a member to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted. A temporary hold pursuant to proposed Rule 2165 may be placed on a particular suspicious disbursement(s) but not on other, non-suspicious disbursements. The proposed rule change would not apply to transactions in securities.” I note that although the proposed rule change would not apply to “transactions in securities,” it would nevertheless apply to a distribution of the post-sale proceeds from an account.
You should also note that the rule change does not require the member to obtain trusted person contact information from the client (it only requires the member to try to obtain that information), nor does the rule change require the member to contact the trusted member in possible situations of exploitation, nor does the rule change require the member to put a temporary hold on the account or transactions in possible situations of exploitation.
I am sure that the proposed rule change goes only as far as it does because members obviously do not want to be liable for alleged failure to act. But FINRA members in California also should already be up-to-speed on the mandated reporter of suspected financial elder abuse provisions at California Welfare and Institutions Code section 15630.1, which in part provide – “(a) As used in this section, “mandated reporter of suspected financial abuse of an elder or dependent adult” means all officers and employees of financial institutions. (b) As used in this section, the term “financial institution” means any of the following: (1) A depository institution, as defined in Section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(c)). (2) An institution-affiliated party, as defined in Section 3(u) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1813(u)). (3) A federal credit union or state credit union, as defined in Section 101 of the Federal Credit Union Act (12 U.S.C. Sec. 1752), including, but not limited to, an institution-affiliated party of a credit union, as defined in Section 206(r) of the Federal Credit Union Act (12 U.S.C. Sec. 1786(r)).”
Additionally, there are separate California mandated reporter of suspected elder abuse requirements at California Welfare and Institutions Code section 15630 which provide that “(a) Any person who has assumed full or intermittent
responsibility for the care or custody of an elder or dependent adult, whether or not he or she receives compensation, including administrators, supervisors, and any licensed staff of a public or private facility that provides care or services for elder or dependent adults, or any elder or dependent adult care custodian, health practitioner, clergy member, or employee of a county adult protective services agency or a local law enforcement agency, is a mandated reporter.”
Some of the proposed rule change provides for pretty interesting reading. See, for example, footnote 14 which provides a possible example: “A customer’s request to change his or her trusted contact person may be a possible red flag of financial exploitation. For example, a senior customer instructing his registered representative to change his trusted contact person from an immediate family member to a previously unknown third party may be a red flag of financial exploitation.”
And of course I will be providing further analysis and updates on this topic. The proposed FINRA rule change has been a long time coming.
Dave Tate, Esq., San Francisco and California