Protecting Your Senior Clients: Compliance in Advance of the February 5 FINRA Deadline … and Beyond

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BROKER-DEALERS
Patricia Solfaro

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 psolfaro@bressler.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:

  • (1) Amendments to FINRA Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account; and
  • (2) The adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.

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.

New Requirements

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:

  •  the customer’s current contact information;
  •  the customer’s health status; and/or
  •  the identity of any legal guardian, executor, trustee or holder of power of attorney.

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:

  •  The 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:
  • 1. obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or
  • 2. convert the specified adult’s money, assets or property.

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:

  • Immediately: Commence an internal review of the facts and circumstances that led the member to reasonably believe that financial exploitation has occurred, is occurring, has been attempted, or will be attempted.
  • Within two business days of placement of the hold: Notify (orally or in writing) the customer, trusted contact person, and all persons authorized to transact business on the account of the hold and the reason for the hold. Note: such notification is not required if the party is unavailable or reasonably believed to be involved in the financial exploitation.
  • Evidence notification: Members are required to retain evidence of the oral or written notification.

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:

  •  Requests for disbursement that may constitute financial exploitation of a specified adult and the resulting temporary hold;
  •  The finding of a reasonable belief that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted supporting the decision to place a temporary hold;
  •  Name and title of the associated person that authorized the temporary hold;
  •  Evidence of notification of the hold (and the reason for the hold) to the customer, trusted contact person, and all persons authorized to transact business on the account; and
  •  Internal review of the facts and circumstances supporting the member’s reasonable belief that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.

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.

Are You Ready?

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.

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