FYI: FINRA FAQs on Exploitation of Vulnerable Adults

FYI: FINRA has posted FAQs addressing new FINRA Rule 2165 (Financial Exploitation of Specified Adults), and amendments made to FINRA Rule 4512 (Customer Account Information), both of which become effective February 5, 2018.

Among the more controversial aspects of Rule 2165 is the safe harbor it provides BD member firms to place a temporary “hold” on a disbursement of customer funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted. Among other things, the FAQs clarify that the safe harbor does not permit member firms to place a “hold” on securities transactions (or example, buy or sell orders). However, if a customer requested that the proceeds of a sale of shares of a stock be disbursed out of his account at the member firm, then Rule 2165 could apply to the disbursement of the proceeds where the customer is a specified adult and there is reasonable belief of financial exploitation.

Under amended Rule 4512, member firms will also now be faced with trying to obtain the name and contact information of a “trusted contact” person for accounts of non-institutional customers. The FAQs provide important guidance relative to who can serve as a “trusted contact” and when and what type of information can be disclosed to them.

The FAQs will be helpful to FINRA member BD firms attempting to comply with the new rules/amendments in the coming weeks. They will also provide valuable “color” as other local, state or federal rules are considered or adopted addressing similar exploitation issues. For now, however, important unresolved issues remain. For example, the new FINRA rules provide a safe harbor for BD member firms that place a “hold” on disbursements consistent with the rules, from actions alleging violations of other specified FINRA rules. Left unresolved is whether those firms could still face actions alleging violations of other federal, state or common law rules or principles for having placed a “hold” on disbursements, even if consistent with FINRA rules. Moreover, other types of organizations, such as investment companies, investment advisers, banks and commodities firms, generally do not have safe harbors protecting them for similar “holds” on client/customer accounts when exploitation is suspected. Federal legislation (such as the “Senior Safe Act”) could potentially help to provide broader and more uniform protection for firms. However, no specific bill has yet been passed by both houses of Congress or signed into law.


* * *