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The Essential Senior Investor Protection Tools: FINRA Rules 2165 and 4512

May 03, 2022

Every year, millions of seniors become victims of financial exploitation, resulting in billions of dollars in losses. That's just one reason why the protection of these investors is a top priority for FINRA.

On this episode, we hear from FINRA’s Office of General Counsel’s Jeanette Wingler and Jim Wrona about how FINRA Rules 4512 and 2165, the first uniform national senior investor protection standards, can help broker-dealer firms and representatives protect their senior and other vulnerable adult customers.

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Resources mentioned in this episode:

Rule 2165

Rule 4512

Episode 16: How FINRA Rules Get Made (and Reviewed)

Securities Helpline for Seniors®

FINRA Foundation

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:26

Kaitlyn Kiernan: Every year, millions of seniors become victims of financial exploitation, resulting in billions of dollars in losses. That's just one reason why the protection of these investors is a top priority for FINRA. On this episode, we hear how FINRA rules 4512 and 2165, the first uniform national senior investor protection standards, can help broker-dealer firms and representatives protect their senior and other vulnerable adult customers.

00:34 – 00:43

Intro Music

00:36 - 01:05

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome to the show today two individuals from FINRA's Office of General Counsel. Joining us for the first time is Associate General Counsel Jeanette Wingler and coming back to the show for a second run is Vice President and Associate General Counsel Jim Wrona. Jeanette and Jim, welcome to the show. So, to begin, can you both introduce yourselves and tell us a bit about your backgrounds and your responsibilities within OGC? Jeanette, can we start with you?

01:05 - 01:34

Jeanette Wingler: Sure, Kaitlyn. Thanks for having me. I'm Jeanette Wingler, I'm an attorney in FINRA's Office of the General Counsel. I've been with FINRA since 2014. I was previously in private practice at a law firm. I get the opportunity to work on FINRA's rulemaking and policy functions in a few different areas, cybersecurity research analyst conflicts, business continuity planning and, last but certainly not least, senior and vulnerable adult investors.

01:34 - 01:36

Kaitlyn Kiernan: And Jim, how about you?

01:37 - 01:56

Jim Wrona: Hi, Kaitlyn. It's so good to be here with you and your audience today to talk about this important topic. So, a little bit about me, I'm also with FINRA's Office of General Counsel. I primarily work on policy, rulemaking and interpretive matters across a broad spectrum. But one of my areas of focus, as with Jeanette, is on the protection of senior investors.

01:57 - 02:09

Kaitlyn Kiernan: And now before we dig into some of the recent changes to FINRA's rules for senior investor protection, can you tell me what the FINRA rules that we're talking about are and at the highest level, what they say?

02:10 - 03:35

Jim Wrona: Sure. So, there are two FINRA rules that are particularly relevant to the protection of senior investors that I'd like to discuss today. The first is FINRA Rule 2165, which allows a broker-dealer to place a temporary hold on a disbursement of funds or a transaction if there's a reasonable suspicion of financial exploitation of a senior. The second is a provision in FINRA Rule 4512 that requires broker-dealers to ask customers for information about trusted contacts, essentially someone that the broker-dealer could reach out to for a variety of reasons, for the more mundane, such as if the broker-dealer is having difficulty reaching the customer. To the more serious, such as when there is concern about financial exploitation of a senior. And I do want to mention that although the FINRA temporary hold and trusted contract provisions that I just mentioned are critical tools in the fight against elder financial abuse, and those are going to be the focus of our discussion today, your listeners should be aware that we impose many other significant industrial protection obligations, together with robust examinations and enforcement efforts. And of course, the SEC, other federal agencies, the states, investor protection advocates, and broker-dealers are also key partners in helping to safeguard senior assets. So, we're talking about 2165 and 4512, but there's a lot more to the story.

03:36 - 03:45

Kaitlyn Kiernan: Thanks for that, Jim. And can you walk us back in time? How did FINRA's focus on seniors and other vulnerable adult investors come about?

03:46 - 07:25

Jim Wrona: Yes. 10,000 baby boomers in the US turn 65 every day. So let that sink in. 10,000 baby boomers in the US turn 65 every day. That's a remarkable statistic. And there's a host of studies about increasing fraud and financial exploitation of this group of investors and on how seniors lose their money once they're targeted. And that's a really bad combination.

Well, FINRA has always cared about senior investors. I mean, we didn't just wake up one day and say, hey, what about seniors? But we became laser focused several decades ago. So, we sat down in those early days, and we asked ourselves, what do we do as an organization to ensure senior investors are protected? So first, we make sure to examine broker-dealers for potential problems involving senior investors. Second, we make sure to enforce our rules. And as I mentioned, we have many important rules that protect investors, including seniors, from misconduct by broker-dealers and their financial professionals. Third, we highlight important senior issues for broker-dealers and their customers and published guidance reports. And then fourth, we launched the Securities Helpline for Seniors, which is a toll-free number for senior investors and their family members can get assistance from specially trained FINRA staff about concerns with brokerage accounts.

And those were effective actions in guarding against misconduct by broker-dealers and their financial professionals, who we have jurisdiction over. But what happens when financial exploitation of a senior doesn't involve those parties? And increasingly, we began to realize that there are many instances where seniors were victimized not by broker-dealers, but by third parties. Sometimes it's a relative, sometimes a caregiver, sometimes well-known scams a lottery scam or an IRS scam or romance scam. The problem is we don't have jurisdiction over those outside third parties. And these are heartbreaking stories.

And I remember being in my office around 7:30 one night and my phone rings. And it's one of those times where you say to yourself, do I pick it up or do I let it go to voicemail? Well, I picked it up and it was a family member of a woman who was the victim of a lottery scam. She was told that she had won the lottery, but she had to prepay the taxes to get her winnings. She'd sent the money to a bank account in the U.S. and from there it was immediately transferred to an account in Eastern Europe. The woman was in the early stages of dementia. The money was gone forever. The family was devastated.

And you can't hear those stories firsthand and not want to do something. So, we thought, how can we more effectively help broker-dealers protect their customers from these outside scammers over whom we don't have jurisdiction? So, we collaborated with the SEC, with the states, with industry leaders, with investor protection advocates to learn how we could help broker-dealers more effectively protect senior investors.

And from our discussions, kind of two things emerge as the biggest problems in addressing elder financial abuse in those situations. First, who can the broker contact in this situation if the account holder hasn't designated someone as having power of attorney? Can they reach out to a customer's relative or close friend? And there are privacy laws such as Reg SP that limit what you can say and to whom. Second, could a firm delay a transfer without violating FINRA rules while investigating the matter or decided how best to handle the situation? Normally, we want firms to adhere to customer instructions. The problem is, once the money leaves, it's never coming back. It's gone. So, our senior rules that we're here to talk about today address both those issues.

07:26 - 07:49

Kaitlyn Kiernan: Thank you, Jim. It is heartbreaking when you hear these stories, especially with seniors who, like you mentioned, with the example, if they're in the early stages of dementia, they don't have the ability to work and earn the money back. So that's particularly challenging for this group. Now, Jeanette, can you walk us through some of the specifics of the senior protection rules that were implemented in February of 2018?

07:50 - 10:11

Jeanette Wingler: I want to start with talking about our trusted contact person provision. And as Jim said, this is really trying to provide a tool for firms where they have concerns about the customer, but it's also making sure to respect the privacy and integrity of the individual customer. So, what that rule requires is it requires firms to make reasonable efforts to obtain the name and contact information for a trusted contact person. So, what does that mean in practice? It means that the firm is required to ask. We understand that some customers are not comfortable naming a trusted contact, or they may just not have somebody who can serve that role in their life. So, the rule does allow firms to have onboard the customer or retain customers who don't have a trusted contact person as long as they've requested that information. And we've really found that that trusted contact is a powerful tool when firms have it and helping to administer the customer's account.

So, I think it's important to recognize that it is that tool, but it's also to think about what is it not? So, the trusted contact does not provide the authority to transact on the account. It's not equivalent of a power of attorney. So that's something that FINRA as an organization, we paired with the SEC and with the states to provide information to firms and to customers, educating customers about the trusted contact and what the trusted contact person is not.

And so, the other rule is Rule 2165. And so that allows a firm, when there's a reasonable belief that a customer is being financially exploited, to place a temporary hold on either a disbursement or a securities transaction for the period of time provided in the rule. And what it is, is a safe harbor under FINRA rules to allow the firms to use their discretion to place that hold.

And so, we recognize that placing even a temporary hold is a significant step for the firm and for the customer. So, there's a number of safeguards that are baked into the rule that firms are required to use. Those are things like they need to provide training if they anticipate using the temporary hold rule. They also are required to notify the customer's trusted contact person if they do place a hold. They're also required to keep records related to placing the hold.

10:12 - 10:19

Kaitlyn Kiernan: And do you have any success stories you can share or examples of how these rules are being used to protect customer assets?

10:20 - 11:19

Jeanette Wingler: Yeah, and our experience has been through our regulatory program and in talking to firms that firms have been using these holds judiciously when they do believe that a customer is being financially exploited. And we have shared some of the stories around the successful use of these holds and I'm happy to share a few more here as well. And there are circumstances where firms have used a temporary hold to save customers in a number of different financial exploitation situations, including a customer who was going to lose $50,000 in financial exploitation from a brother-in-law, as well as a customer who was going to lose $200,000, which represented two-thirds of the investors account related to a lawsuit scam. And as Jim was saying before, when you hear those stories, it really makes you think about the significance of the rule and the ability of firms to place the temporary hold.

11:19 - 11:34

Kaitlyn Kiernan: And hearing you talk about this, it sounds like there's just also such an important with the brokers asking their customers if they're doing something out of character, why are you doing this? What is the motivation for such a sudden, drastic shift in behaviors?

11:34 - 12:18

Jeanette Wingler: And Kaitlyn, I think that gets back to the reasonable belief part of the rule. There needs to be a basis for why you think the customer's being financially exploited, and that can be any range of things. And we really think this is going to be a facts and circumstances specific analysis, but it could be anything from there's now a very suspicious third person who's coming to meetings with the customer and wanting to understand the customer's financial situation. Or it could be circumstances where the customer's trading or disbursement patterns are significantly different than anything the customer has ever done in the past. And so those are the types of red flags that firms have seen, and they follow up with an investigation.

12:19 - 13:13

Jim Wrona: It's interesting, Kaitlyn, that what you just mentioned really emphasizes the importance of the trusted contact, because we've seen a number of instances where the broker identifies a potential scam for some of the red flags that Jeanette just mentioned and talks to the customer and the customer doesn't want to believe that they're being scammed. And to reach out to a trusted contact, to have another ally to talk to the customer about the scam, can be really helpful. So, for instance, sometimes it's the romance scams and they don't want to believe that the person that they met online is really trying to take advantage of them, or a well-known scam like the IRS scam where you can have this other trusted person say what you're being taken advantage of and it can be really, really helpful to have that trusted contact information at that point.

13:14 - 13:38

Kaitlyn Kiernan: It just emphasizes that while FINRA does its best with these rules and helping give the tools to the brokers, it's really the brokers that are on the frontlines of the protection of their senior investors. And Jeanette, what would happen if a firm placed a hold, but during the firm's investigation they found out there was a reasonable explanation, and they weren't being exploited. What would happen in that type of situation?

13:38 - 13:51

Jeanette Wingler: Well, in that circumstance, I think once the firm no longer had a belief that the customer is being financially exploited, they should lift the hold and either execute the transaction or make the disbursement.

13:52 - 14:08

Jim Wrona: And those are some of the best stories, because then everything's working the way it should work. They investigate. They learn that their initial judgment was off. And then they lift the hold, and everybody can go on their merry way and the money's safe. It's all working the way it should.

14:09 - 14:22

Kaitlyn Kiernan: And if we had a registered representative listening today and they felt hesitant to take advantage of Rule 2165 because they suspect fraud or other abuse, but they're not entirely sure. But what do you want to say to them?

14:23 - 15:23

Jeanette Wingler: Well, I would say, we recognize that you're in a challenging position, because if you believe that your customer is being exploited, I do think that you have risk on either side of that decision. If you choose to place the temporary hold because you believe there's exploitation and there is exploitation happening, the customer still may be upset about it either because they refuse to believe that it is a scam, that can be one example, or they continue to just want to pursue the course of action that they're in. But on the other hand, if you believe that the customer's being financially exploited, but yet you disburse the money, there's also, I think, risk associated with that decision. I think for me personally, if I was a rep facing that, I would rather still have the money in the account and face that situation than face the situation where the money has left the account and now the customer or the customer's family is upset because you didn't stop the behavior.

15:24 - 15:31

Kaitlyn Kiernan: And like you mentioned earlier, a lot of times when that money leaves the account, it's very quickly gone forever and there's no getting it back.

15:32 - 15:44

Jim Wrona: And Jeanette, you and I, both worked at large law firms before we came to FINRA, and I can tell you as a former litigator, you want that money there and defend that action rather than have the money gone. That's a tougher position to be in.

15:45 - 16:05

Kaitlyn Kiernan: And Jim, despite how relatively new rule 2165 is, the rule underwent an almost immediate retrospective rule review. We did have a podcast previously about the retrospective rule review process that we can link to. But why did this happen so soon after the implementation of a brand-new rule?

16:06 - 16:55

Jim Wrona: Retrospective rule reviews are an important component of our regulatory program. They're a chance for us to assess whether rules are effective. Are they performing as expected? Do they, in practice, address identified concerns in the least burdensome manner? And retrospective rule reviews are very in-depth assessments with considerable input from both internal and external stakeholders. So that would include investor protection advocates, other regulators, the industry. But you're right to point out that it's unusual to have a retrospective review of rules that are only a few years old, but to our thinking, the protection of seniors was too important to wait. We weren't about to sit around and celebrate our successes. We really wanted to keep the momentum going. We wanted to know was there even more that we could do to help senior investors?

16:56 - 16:59

Kaitlyn Kiernan: And Jeanette, what was the outcome of the review?

16:59 - 19:25

Jeanette Wingler: Well, we ended up making a couple of amendments to Rule 2165 based on what we heard as part of the retrospective review. The first part related to extending the rule to the underlying securities transaction. And when we initially adopted Rule 2165, we did hear from firms that it would be helpful to have it not only apply to the disbursement but to the underlying transaction. I think for us we wanted to get some experience with the rule. We also wanted firms to have some experience with the rule before we extended it.

But there's a couple of things that happened in the intervening years. One was we saw how firms were applying the rule. We saw the help that it was giving to customers. There's also a number of states that adopted statutes that were similar to the FINRA rule that applied to not only disbursements but also securities transactions. So that was an important development. And we do think that there is harm to the customer if you execute a suspicious transaction, even if the money doesn't leave the account. That customer could face significant tax consequences, for example. Or it could be a situation where you sell out of a long-held position that may be closed and then the customer is unable to get back into that investment. So, we think that's an important protection for customers.

And the second amendment we made was to extend the temporary hold period. Previously in the rule, the hold was for up to 25 business days. What we heard was that can be helpful for certain types of suspicious behavior. So, some types of activity can be resolved more quickly. But what we heard was that particularly if there was exploitation by a family member or a caregiver and you needed to involve adult protective services or the court system, the 25 business days was just not enough time. And we also heard that from Adult Protective Services, who said that when they're looking at a matter, they need more time than that to investigate. So, we've extended the whole period out for up to an additional 30 business days, so that's 55 business days total. But that last extension is only available to the extent that the firm has reported the matter out to APS, law enforcement, the states, the courts.

19:26 - 19:34

Kaitlyn Kiernan: Got it. So still just 25 business days if the investigation remains internal, but longer if you're bringing in those third parties.

19:34 - 19:56

Jeanette Wingler: Yeah. You get the additional 30 business days if you've referred it out. But I will just want to say, in terms of reporting, we also recognize that many states require reporting of suspected financial exploitation. And so FINRA expects firms to comply with those state requirements about reporting suspected financial exploitation.

19:56 - 20:14

Kaitlyn Kiernan: Just to wrap things up a little bit. What do you think this course of developments from the initial rule implementation in 2018 through the retrospective review process shortly thereafter and then the implementation of changes in 2022, what do you think that has to say about FINRA's rulemaking process?

20:15 - 20:56

Jim Wrona: I think it says we're committed to protecting investors. We're thoughtful, collaborative and we're nimble. We identified concerns with elder financial abuse, and we took a series of actions to effectively address it. Look, is FINRA a thought leader in the space? You betcha we are. But we didn't do it alone. So, we worked closely with the SEC, with the states, with investor protection groups and with the industry. And all of those players were key to getting all of this done. We worked together to create the first national standards, tools, really, that the broker-dealers can use to better protect senior investors. Then we worked together to strengthen those tools even more. I can't think of a better example of the effectiveness of our rulemaking process.

20:57 - 21:10

Kaitlyn Kiernan: And you mentioned these are tools for the broker-dealer community. How does our structure as an SRO, a self-regulatory organization, play into this and allow us to talk with firms and help make these rules stronger?

21:11 - 22:17

Jim Wrona: I think it's extremely beneficial. And so even before we start engaging in rulemaking, we're talking to our advisory committees, some of whom are made up of industry members. We're talking to our membership. We're talking to them through examinations, we're talking to them informally, and they feel comfortable coming to us when there are issues that arise.

I've been engaged in a lot of rulemaking over the years and there are varied opinions, and you have to consider all of those opinions. I've never been involved in a rulemaking like this where everybody's on board. Everybody wants to help protect senior investors. Other than the fraudsters, there's not a lot of pro-financial exploitation of seniors out there. So, everybody was on board. There were differences around the margins, but in terms of the main goal, everybody was supportive. But having those early discussions with the advisory committees and the other broker-dealers to say to us, look, here are problems that we're seeing, we need help. And that was, I think, crucial in getting this done effectively and quickly.

22:19 - 22:28

Kaitlyn Kiernan: And Jeanette, are there any other rules or resources FINRA provides to help protect senior investors and other vulnerable adult investors that are worth highlighting here today?

22:29 - 22:58

Jeanette Wingler: This is an area that we believe in deeply, and we're committed to providing resources for firms and for customers. So just to name a few other things, we have our Securities Helpline for Seniors, which launched in 2015. We also have the important work of the FINRA Foundation and our Investor Education group, which provides important tools, studies of customer behavior, as well as resources that customers can use to better understand investing.

23:00 - 23:34

Kaitlyn Kiernan: Well, thank you, Jim and Jeanette, for joining me today to talk about centers. Very important work in protecting senior investors. I hope our listeners learn some valuable information here today. And listeners, if you don't already, you can subscribe to FINRA, unscripted, wherever you listen to podcasts. And if you have any feedback on today's episode or ideas for future episodes, you can email us at [email protected]. Today's episode was produced by me Kaitlyn Kiernan, engineered by John Williams. A special thanks to Mike Rote. Until next time.

23:34 – 23:40

Outro Music

23:40 – 24:07

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24:07 – 24:13

Music Fades Out

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