Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...
By Patricia Solfaro
Patricia Solfaro is of counsel in the Securities practice at Bressler, Amery & Ross. She has nearly 20 years of in-house and external experience counseling broker-dealers, investment advisers, custodial firms and registered representatives on a wide array of legal, compliance, regulatory and business matters. Prior to joining Bressler, Ms. Solfaro was Managing Director and Head of Compliance for Barclays Wealth and Investment Management US. She is reachable at email@example.com
It is projected that the number of Americans 65 years of age or older will double to 71.5 million by 2030. Moreover, the Baby Boomer generation is expected to control over 70% of the nation’s disposable income within the next five years and stands to inherit an additional $15 trillion. Baby Boomers will therefore transfer approximately $30 trillion in wealth to the next generation. Given these astonishing numbers, it is no surprise that regulators, industry groups, and financial firms alike have made the protection of senior investors a focal point.
Earlier this year, the Securities and Exchange Commission approved the following proposed Financial Industry Regulatory Authority rule changes regarding the financial exploitation of seniors:
Rule 2165 and the amendments to Rule 4512 become effective February 5, 2018. These new rules will allow members to more quickly and effectively address suspected financial exploitation of seniors and other specified adults.
Trusted Contact Person (Rule 4512 amended)
Reasonable Efforts to Obtain Trusted Contact Person Information
Rule 4512 details specific account information that members must obtain. The amendment to Rule 4512 requires that, when opening a non-institutional customer account or when updating account information for a non-institutional customer account, members make reasonable efforts to obtain the name and contact information of a trusted contact person (age 18 or older) who may be contacted about the customer’s account.
Disclosure to Customer of Member’s Authorization to Contact Trusted Contact Person
When opening a non-institutional customer account or when updating account information for a non-institutional customer account, members must disclose to the customer in writing that the member or its associated person is authorized to contact the trusted contact person and disclose certain account information for the purposes of addressing possible financial exploitation, including to confirm:
Disclosure is required even if a customer fails to identify a trusted contact person. A member is not required to notify a trusted contact who has been named, but such notice is permissible.
Temporary Hold on Disbursement of Funds or Securities (New Rule 2165)
Safe Harbor for Temporary Hold When Reasonable Belief of Financial Exploitation
The new Rule 2165 creates a limited safe harbor for members to place a temporary hold on the disbursement of funds or securities from the account of a “specified adult” customer if the member reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted. A “specified adult” is: (1) a natural person age 65 and older or (2) 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. The temporary hold may be placed on any account for which the specified adult has the authority to transact business. However, the hold may only be placed on a particular suspicious disbursement, and may not be placed on any other non-suspicious disbursements. Further, the hold is limited to disbursements and does not apply to security transactions.
Financial Exploitation Broadly Defined
FINRA has defined financial exploitation to include:
Requirements if a Temporary Hold is Placed
If a member places a temporary hold on a suspicious disbursement of funds or securities, the member must:
Time Limitation for Temporary Hold
Absent formal termination or extension of the hold by the member, a state regulator, agency, or court of competent jurisdiction, temporary holds pursuant to Rule 2165 expire no later than 15 business days after the date the hold was initiated. In addition, a member may extend the hold an additional 10 business days if its internal review of the facts and circumstances support its reasonable belief that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.
Rule 2165 Record Retention Requirements
Records reflecting the following must be retained pursuant to Rule 2165:
Rule 2165 Supervision and Compliance Requirements
No new or revised rule is complete without mandating the establishment and maintenance of written supervisory procedures reasonably designed to achieve compliance, as is the case with Rule 2165. Written supervisory procedures specifically require: (1) procedures regarding the identification, escalation, and reporting of matters related to the financial exploitation of specified adults and (2) identification of the title of each person authorized to place, terminate, or extend a temporary hold, and that each such person is an associated person of the member who serves in a supervisory, compliance, or legal capacity. Training is also required and must be reasonably designed to ensure compliance with the Rule. The training policy and/or program must be documented.
Ensuring compliance with the February 5, 2018 effective date is just one step member firms need to take to further protect their senior investor and specified adult client population. Given existing regulations and the amount of new legislation evolving in this area, members will need to determine how this initiative should sit within a broader supervisory and compliance program surrounding senior and specified adult customers.
There are some tricky aspects to these new and revised rules. How should members respond when it suspects a specified client is being victimized? When should a hold actually be placed on a client disbursement? How does a member go about making a determination of diminished capacity? How do these requirements square with existing and proposed federal and state legislation? Even though FINRA has not mandated a reporting obligation, what are the state reporting obligations? What is the actual scope of the safe harbor?
Now is the time for firms to develop a holistic, comprehensive supervisory and compliance program that not only comports with relevant laws, rules, and regulations, but, perhaps even more importantly, aligns with a firm’s core value to protect seniors and proactively combat their financial exploitation. Additional areas to consider when developing a comprehensive program include marketing, suitability, and red flags procedures.
Guidelines regarding diminished capacity are also warranted. Consideration should be given to privacy requirements as well. Both firms and clients alike stand to benefit from a thoughtful, well-designed program.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)