SEC Approves FINRA's Rules To Protect Seniors From Financial Exploitation

On March 30, 2017, the SEC approved the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) (see our related blog post about the proposal). Among other things, Rule 2165 permits brokers to place holds on disbursements of funds or securities from the accounts of "specified adult" customers. Specified adults include those 65 and older or those 18 and older who the broker "reasonably believes has a mental or physical impairment that renders that individual unable to protect his or her own interests."

Rule 2165 provides brokers with a safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts). Rule 2165 also amends FINRA Rule 4512 (Customer Account Information) to require that brokers make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer's account.

Rule 2165 and amended Rule 4512 become effective on February 5, 2018.

Scope of the Amendments and New Rule

Among other things, amended Rule 4512 requires brokers to make reasonable efforts to obtain the name of, and contact information for, a trusted contact person upon the opening of a non-institutional customer's account or when updating account information for a non-institutional account in existence prior to February 5, 2018. The amendments do not prohibit brokers from opening and maintaining an account if a customer fails to identify a trusted contact person as long as the broker makes reasonable efforts to obtain the information. FINRA notes that asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the Rule's requirements.

According to FINRA, the trusted contact person is intended to be a resource for the broker in administering the customer's account, protecting assets and responding to possible financial exploitation.

Temporary Hold on Disbursement of Funds or Securities

Among other things, Rule 2165 permits (but does not require) a broker to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if

the broker reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted...

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