Financial Exploitation of Specified Adults

Financial Exploitation- Seniors

FINRA created a hotline for seniors who had questions or concerns about their brokerage accounts. One of the major issues that was highlighted by these investors was suspected financial exploitation. In order to address this issue, FINRA created Rule 2165 which is titled Financial Exploitation of Specified Adults.

Specified Adults   According to FINRA’s rule, the term specified adult is defined as:

  • Any person who is age 65 or older
  • Any person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders the person unable to protect their interests. This determination should be based on the facts and circumstances that are observed in the firm’s business relationship with the person.

To assist these specified adults, FINRA also established a process by which a firm could respond to situations in which it has a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. The process includes the appointment of a trusted contact person.

Trusted Contact Person    Firms may now contact a customer’s designated trusted contact person and, when appropriate, place a temporary hold on a disbursement of funds or securities from a customer’s account. A trusted contact person must be age 18 or older and would be essential in assisting the firm in protecting the customer’s account and its assets and also responding to possible financial exploitation.

The trusted contact person’s name and contact information (mailing address, phone number, and email address) would be a part of the customer account information that should be obtained when a member firm opens or updates an account. Although the trusted person’s contact information is not required to open the account, a firm should make a reasonable effort to obtain it.

Financial Exploitation According to FINRA’s rule, financial exploitation includes:

  • Wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or
  • Any act or omission taken by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to:
    • Obtain control, through deception, intimidation, or undue influence, over the specified adult’s money, assets or property; or
    • Convert the specified adult’s money, assets or property

Temporary Hold    The rule permits a firm to place a temporary hold on the disbursement of a specified adult’s funds or securities, but not to their transactions in securities. Although the hold will not apply to a customer’s sell orders, if there is a reasonable belief of the existence of financial exploitation, it will apply to any request for the proceeds of a sale to be sent to another person. The temporary hold will apply to both a single disbursement and a transfer of an entire account (ACATS transfer). However, if the firm places a hold on an account, it must allow disbursements if there is no reasonable belief of financial exploitation (e.g., normal bill paying).

Account Movement Between Accounts at the Same Firm    The temporary hold also applies to the transfer of assets from one account to another account at the same brokerage firm. For example, the temporary hold applies when a relative or friend of an account owner is attempting financial exploitation and initiates the transfer of assets to her account which is held at the same brokerage firm.

Reasons for the Hold    If a member firm places a temporary hold, the rule requires the firm to immediately initiate an internal review of the facts and circumstances that caused it to reasonably believe that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted.

Notification of the Hold    By no later than two business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, the member firm must provide notification, either orally or in writing (which may be electronic), of the temporary hold and the reason for the hold. The notification must be provided to:

  • All parties who are authorized to transact business in the account, unless a party is unavailable or the firm reasonably believes that one party has engaged, is engaged, or will engage in the financial exploitation of the specified adult; and
  • The trusted contact person(s), unless this person is unavailable or the firm reasonably believes that the trusted contact person(s) has engaged, is engaged, or will engage in the financial exploitation of the specified adult

The intent of the rule is to prohibit a firm from dealing with the person(s) who might be exploiting the specified adult. For example, if the adult child of a senior investor is the trusted contact person who might be misappropriating funds, it is not prudent for this person to be contacted.

Before placing a temporary hold, it is recommended for the firm to first attempt to resolve the situation with the customer. However, if the temporary hold is placed, the firm is required to notify the trusted contact person. Once a temporary hold is initiated, the firm is permitted to terminate it only after contacting either the customer or the trusted contract person and discussing the situation. The customer’s objection to the temporary hold or information obtained during the discussion with the customer or trusted contact person may be used by the firm when determining whether the hold should be placed or lifted.

Time Period for the Temporary Hold    A temporary hold will expire by no later than 15 business days after the date that it was first placed on the account unless it was otherwise terminated or extended by another authorized regulatory entity. If a member firm’s internal review of the facts and circumstances supports its reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted, the firm may extend the temporary hold for an additional 10 business days, unless otherwise terminated or extended by another authorized regulatory entity.

Supervision    The rule requires a member firm’s written supervisory procedures to identify the title of each person who is authorized to place, terminate, or extend a temporary hold on behalf of the firm and also requires that any such person be an associated person of the member firm who serves in a supervisory, compliance or legal capacity. This rule may also be considered a safe harbor when a customer is attempting to transfer his entire account, and the firm stops the transfer by instituting a temporary hold. However, as stated earlier, the firm must have a reasonable belief that the transfer is being initiated for financial exploitation.

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