FINRA Senior Exploitation Rules

Overview of FINRA Senior Exploitation Rules

The FINRA Senior Exploitation Rules provide firms with the tools to protect senior investors and help firms address risks relating to possible financial exploitation. FINRA Rule 4512 (Customer Account Information) requires firms 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 an existing non-institutional customer account. The trusted contact person is intended to be a resource for the firm in administering the customer’s account, protecting assets and responding to possible financial exploitation or diminished capacity. FINRA notes that firms are not prohibited from opening and maintaining an account if customers fail to identify a trusted contact person, as long as they make reasonable efforts to obtain the information.

FINRA Rule 2165 (Financial Exploitation of Specified Adults) permits a firm to place a temporary hold on a disbursement of funds or securities from the account of a “specified adult”19 customer when the firm reasonably believes that financial exploitation20 of that adult has occurred, is occurring, has been attempted or will be attempted. In order to support firms’ use of such holds to prevent potential financial exploitation, FINRA Rule 2165 provides member firms and their associated persons with a safe harbor from certain other FINRA rules.21 FINRA also issued Regulatory Notice 17-11 (SEC Approves Rules Relating to Financial Exploitation of Seniors) and Frequently Asked Questions Regarding FINRA Rules Relating to Financial Exploitation of Senior Investors to provide additional guidance about these rules and an investor education article to help investors understand the new rules.22 

Firm’s Temporary Hold Protects Senior Investor from Concerning Investments

The daughter of a senior investor requested a disbursement from her father’s account for $35,000 to invest in an offering to build an overseas solar panel energy field and the customer agreed to the disbursement. The firm placed a temporary hold on the disbursement and conducted research and due diligence on the offering, which raised concerns about the legitimacy of the company, the claimed high rate of return and promises to return the customer’s investment in 60-90 days. The firm also referred the matter to relevant regulators to further review the offering.

Retrospective Review of FINRA Senior Exploitation Rules

In Regulatory Notice 19-27 (FINRA Requests Comment on Rules and Issues Relating to Senior Investors), FINRA launched a retrospective review to assess the efficiency and effectiveness of our rules and administrative processes that help protect senior investors from financial exploitation. As part of this review, FINRA is seeking input from both external and internal stakeholders, drawing on the expertise of its advisory committees and other subject-matter experts; and seeking the views and experiences of other stakeholders, including investors, investor advocates, other regulators and regulatory associations, broker-dealer firms, industry associations and the public. Upon completion of this assessment, FINRA will consider next steps, which may include: modifications to existing or proposing new rules, updated or additional guidance, administrative changes or technology improvements, additional tools, educational materials, or additional research or information gathering.

Proposed FINRA Rule to Limit a Registered Person from Being Named a Customer’s Beneficiary or Holding a Position of Trust for or on Behalf of a Customer

Although registered representatives often develop close and trusted relationships with their customers, FINRA has observed conflicts of interest and misconduct when customers name such registered representatives as their beneficiaries, executors or trustees, or ask them to hold powers of attorney or similar positions. In particular, FINRA is concerned about registered representatives’ serving in such roles for senior investors, who may be particularly vulnerable to financial exploitation.

As a result, Regulatory Notice 19-36 (FINRA Requests Comment on a Proposed Rule to Limit a Registered Person from Being Named a Customer’s Beneficiary or Holding a Position of Trust for or on Behalf of Customer) proposes new rulemaking to explicitly limit the ability of a registered person to be named to such positions for accounts of non-family-member customers.23 Proposed new FINRA Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer) would require written notice from the registered person followed by the firm’s review and assessment of whether to approve, approve with conditions, or disapprove the registered person assuming such status or acting in such capacity, including taking into consideration several factors, such as:

  • any potential conflicts of interest in the registered person being named a beneficiary or holding the position of trust;
  • length and type of relationship between the customer and registered person;
  • customer’s age;
  • size of any bequest relative to the size of a customer’s estate;
  • whether, based on the facts and circumstances observed in the member's business relationship with the customer, the customer has a mental or physical impairment that renders the individual unable to protect his or her own interests;
  • any indicia of improper activity or conduct with respect to the customer or the customer’s account (e.g., excessive trading); and
  • any indicia of customer vulnerability or undue influence of the registered person over the customer.

Although the proposed new rule would not prohibit a registered person being named a beneficiary of or receiving a bequest from a customer’s estate, FINRA would expect firms to employ heightened scrutiny in assessing such requests. The comment period for Regulatory Notice 19-36 ended January 10, 2020. Any proposed rule change must be submitted to and approved by the SEC prior to becoming effective.

 

19 See FINRA Rule 2165(a)(1) defines “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.” FINRA Rule 2165.03 provides that “[a firm’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 [firm’s] business relationship with the natural person.”

20 FINRA Rule 2165(a)(4) defines “financial exploitation” as “(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.”

21 FINRA Rule 2165 provides 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).

22 See Protecting Seniors from Financial Exploitation (Apr. 25, 2018).

23 The proposed rule would not apply where the customer is a member of the registered person’s “immediate family.” See proposed FINRA Rule 3241(c); Regulatory Notice 19-36 (FINRA Requests Comment on a Proposed Rule to Limit a Registered Person from Being Named a Customer’s Beneficiary of Holding a Position of Trust for or on Behalf of Customer).