SEC Approves New Rules Enabling Financial Advisors to Defend Vulnerable Clients from Exploitation

By Eric Mikkelson and Diana Rosia

Financial exploitation of aging and mentally diminished investors by family members and third parties is on the rise. With America's senior population growing rapidly, this problem may only get worse. More than half of all senior financial exploitation is perpetrated by friends, family members, or caregivers. If an elderly investor suffering from dementia, Alzheimer's disease, or another form of diminished capacity provides instructions to his or her broker for a large, unusual transfer to a third party, inconsistent with that individual's historic estate plan and financial activity, that can raise red flags of serious concern with the financial advisor. But the broker's current tools to investigate and prevent such undue influence have been limited, and fraught with regulatory risk and liability for the advisor. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA) are now giving broker-dealer firms and representatives new tools to protect such clients.

On March 30, 2017, the SEC issued Notice 17-11, approving FINRA's proposed Rule 2165 and amendments to Rule 4512. The rules are designed to protect seniors and adults with physical or mental impairments by providing its broker-dealer members with additional tools to shield individual investors from financial exploitation. Amendments to Rule 4512 will require member firms to make a reasonable effort to obtain the name and contact information of a trusted contact person when updating or setting up new client accounts. Rule 2165 will permit members to place temporary holds on fund disbursements on the basis of a reasonable belief of possible financial exploitation of the investor.

FINRA's Rule 2165 contains protective provisions similar to those in Missouri's existing Senior Savings Protection Act (SSPA), but there are some notable differences relating to the scope and disbursement hold requirements.

Proposed Rule 2165 and amendments to Rule 4512 will go into effect on February 5, 2018. A copy of Regulatory Notice 17-11, including Rule 2165 and amendments to Rule 4512, can be found here.

Rule 4512 Amendments Requires Members to Make a Reasonable Effort to Obtain the Contact Information of a Trusted Contact Person

Rule 4512 contains a list of items relating to investor accounts that members are required to maintain. In addition to the current requirements, the amendments to Rule 4512 will require members to make a reasonable effort to obtain the name and contact information of a trusted individual that the member can contact and notify regarding certain matters relating to a non-institutional investor’s account (trusted contact person). Members will have fulfilled their obligation by requesting the information when opening a new customer account and when updating existing customer records. In the event that the member reasonably believes there is (or has been) possible financial exploitation of an investor covered by Rule 2165, the member may contact the trusted contact person to discuss matters relating to the investor’s account and obtain information regarding the investor’s health status and legal representatives.

New Rule 2165 Grants Members Authority to Place a Temporary Hold on the Disbursement of Funds Based on a Reasonable Belief of Financial Exploitation

FINRA’s Rule 2165 will apply to accounts held by (i) a natural person age 65 and older and (ii) a natural person age of 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 (specified adults). Under Rule 2165, members will be authorized (but not required) to place a temporary hold on disbursements from a specified adult's account on the reasonable belief of possible financial exploitation of that specified adult. Within two (2) business days of placing the hold, the member must notify the trusted contact person and authorized parties on the account. The member will not be required to notify the trusted contact person if the member reasonably believes that the trusted contact person is involved in the financial exploitation. The member will then be required to conduct an immediate investigation into circumstances giving rise to the belief of financial exploitation. The hold will expire within 15 business days unless terminated or extended by a state regulator or agency or by the court. The member will also be able to extend the hold an additional 10 business days if the investigation supports the member’s reasonable belief of the financial exploitation of the specified adult.

While Rule 2165 is permissive, allowing members to place temporary discretionary holds based on a reasonable belief of financial exploitation, the rule does not require that members place such holds. The rule, rather, is intended to provide members with a safe harbor when placing discretionary holds on fund disbursements.

Notable Differences Between Missouri’s Senior Savings Protection Act and the New Rule 2165 and Amended Rule 4512

Missouri's SSPA, like Rule 2165, is permissive and serves as a safe-harbor when broker-dealers place temporary discretionary holds on fund disbursements. Similar to Rule 2165, the SSPA allows Missouri broker-dealers to place a temporary hold on disbursements if the broker-dealer reasonably believes that financial exploitation will occur if funds are disbursed. Despite the similarities, there are number of notable differences between the SSPA and Rule 2165, including:

  • The scope of the SSPA is larger, covering all persons as of the age of 60, while Rule 2165 applies to persons as of age 65.
  • Unlike Rule 2165, the SSPA does not require broker-dealers to conduct an investigation after placing a temporary hold on the disbursement of funds.
  • The temporary hold under the SSPA automatically expires after ten (10) business days (as opposed to fifteen (15) business days under Rule 2165) and can only be extended by the court.
  • Unlike Rule 2165, the SSPA does not give broker-dealers the option of extending the hold. Under the SSPA, only the court can extend a temporary hold.
  • The SSPA, unlike Rule 2165 and amendments to Rule 4512, does not contain a corollary to the trusted contact person. Notices under the SSPA instead are sent to the specified agencies, the customer, and immediate family members.

For more information on the SEC's Notice 17-11, please contact Eric Mikkelson, Diana Rosia or the Stinson Leonard Street contact with whom you regularly work.

Subscribe to Stinson's
News & Insights
Jump to Page

We use cookies on our website to improve functionality and performance, analyze website traffic and enable social media features. For more information, please see our Cookie Policy.