Posted by: Mitch Crabbe, Securities Content Specialist
Published: February 6, 2018
Last year (02/2017), the Financial Industry Regulatory Authority (FINRA) proposed new FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amendments to FINRA Rule 4512 (Customer Account Information). The Securities Exchange Commission (SEC) approved them both in March 2017. The new rules became effective on February 5, 2018.
These two rules tie together topics of concern FINRA has expressed over several years as a way to ensure firms pay closer attention to seniors, and potentially other specified adults, who have been described as “easy targets,” underserved and, most often, the main victims of fraud and abuse.
Rule 2165, at its core, allows a securities firm to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the firm has a reasonable belief a questionable request has been made regarding financial exploitation of a customer.
The amendments to Rule 4512 require firms to make reasonable efforts to implement a “trusted contact” system into their customer accounts.
We believe these two rules together will not only represent best practice planks, which will impact the industry in a much-needed positive direction, but will also be an important consideration for all those preparing to take securities exams. The depth of support needed to show compliance on an individual exam is yet to be determined. However, based on the current regulatory framework and an aging population, their significance cannot be overlooked.
Any firm with retail customers is expected to abide by the tenants of the regulations, but due to the fact these are new rules, they may not have made it into our printed material in time to be added to the study material. As such, we are preparing to add this content into our digital delivery systems via updates on the students online Dashboard.
New Rule 2165 permits a member that reasonably believes that financial exploitation
to place a temporary hold on the disbursement of funds or securities from the account of a “specified adult” customer.
The rule does not mandate or require a firm to withhold a disbursement of funds or securities. It actually creates a “safe harbor” from activities which, without new rule 2165, would otherwise be violations when withholding, even temporarily, a requested disbursement from a client’s account. In essence, it allows the firm to step back from a disbursement request and ask, “Does this request fall into what is a normal or expected request”? In other words, when members exercise discretion in placing temporary holds on disbursements of funds or securities from the accounts of specified adults, the new rule offers a response.
A couple of definitions are useful to see as well, since they are new terms to the regulations.
It is important to note, a temporary hold pursuant to the rule may be placed on a particular suspicious disbursement(s), but not on other, non-suspicious disbursements. Rule 2165 does not apply to transactions in securities. For example, Rule 2165 would not apply to a customer’s order to sell his shares of a stock. 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, then the rule could apply to the disbursement of the proceeds where the customer is a “specified adult” and there is reasonable belief of financial exploitation.
The amendments to Rule 4512 require members 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 a non-institutional account in existence prior to the effective date of the amendments. The trusted contact person is intended to be a resource for the member in administering the customer’s account, protecting assets, and responding to possible financial exploitation.
The amendments do not prohibit members from opening and maintaining an account if a customer fails to identify a trusted contact person, as long as the member makes reasonable efforts to obtain the information. Asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the rule’s requirements.
After identifying nine series exams with common content (6, 7, 22, 57, 79, 82, 86/87, 99), FINRA has decided to restructure their licensing process next year. The common content will be tested in the new Securities Industry Essentials (SIE) exam. Download this free guide to learn more about how the new securities licensing process will work, the rationale for the change, proposed SIE exam content, and how it could change hiring and recruiting practices.