Advisor Alert — FINRA Requests Comments on Proposed Changes to Senior Exploitation Rule
On October 5, 2020, FINRA issued Regulatory Notice 20-34 (the Notice), proposing amendments to FINRA Rule 2165 that would further address matters involving the suspected financial exploitation of senior investors. Specifically, the Proposal seeks to extend the temporary hold period for accounts belonging to senior investors and other specified individuals and to expand the scope of holds from disbursements of funds or securities to also include securities transactions. The Notice stems from a review begun by FINRA in 2019 assessing the effectiveness and efficiency of rules and processes that are designed to help protect senior investors from exploitation.
Rule 2165 (Financial Exploitation of Specified Adults) currently provides FINRA member firms and their associated persons with a safe harbor from Rules 2010, 2150, and 11870 when members exercise discretion in placing temporary holds on disbursements of funds or securities from the accounts of “Specified Adults.” Specified Adults are persons age 65 or older, or persons age 18 and older who are reasonably believed to have certain mental or physical impairments. Currently, members may place temporary holds on the disbursement of funds or securities for up to 25 business days (10 business days plus a 15-business day extension) if the member reasonably believes that financial exploitation of a Specified Adult has occurred, is occurring, has been attempted, or will be attempted. Rule 2165 does not require such holds but grants members the discretion to implement them, provided that certain notification, compliance, and record retention policies are followed. Rule 2165 is structured to provide for customer safeguards so that members do not misapply the rule’s allowance for account holds.
While applicable to all Specified Adults, FINRA’s primary concern in issuing the Notice is the protection of senior investors. FINRA has previously expressed that the protection of senior investors is a “top priority” and recommends that a member firm’s “procedures and controls should take into consideration the age and life stage (whether pre-retired, semi-retired or retired) of their customers.” FINRA is particularly concerned with “the suitability of recommendations to senior investors, communications targeting older investors, and potentially abusive or unscrupulous practices or fraudulent activities targeting senior investors.”
Under the proposed amended version of Rule 2165, the maximum amount time for a hold period would increase from 25 to 55 business days (allowing for an additional 30-business day extension), provided that the member firm has reported the matter to a state agency or a court of competent jurisdiction. The purpose of the extension is to provide member firms with additional time to resolve matters concerning potential exploitation, and for agencies, regulators, and law enforcement to conduct thorough investigations.
Furthermore, the changes would allow member firms to place temporary holds on transactions in securities, in addition to disbursements of funds or securities. This change is based, in part, on recommendations by external stakeholders who advised that even if a firm places a temporary hold on a disbursement out of a customer’s account, allowing for execution of a securities transaction may result in adverse consequences for the customer such as taxes, surrender charges, and the inability to regain access to a sold investment that is no longer available to investors.
FINRA is accepting public comments related to the amendments by or before December 4, 2020. Topics of interest include: alternative approaches; the implications of extending the safe harbor to transactions in securities; whether the temporary hold period should be extended; issues previously identified by members concerning temporary holds; and potential economic impacts.
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including FINRA rules and rule changes affecting member firms and their associated persons. If you have a question regarding this proposal or any other FINRA matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost and confidential consultation.