At-Risk Investors

For some time now, NASAA, FINRA and the SEC’s Division of Enforcement have been focused on cases involving sales of securities to at risk investors, including senior citizens.  In various published remarks, NASAA representatives have noted that approximately one-third of the enforcement actions in recent years have involved sales made to senior citizens.  In October 2016, FINRA filed with the SEC proposed rules that would amend Rule 4512 and adopt new Rule 2165.  These proposals address a number of the concerns raised by FINRA’s Notice to Members 15-37.

The FINRA proposal would amend existing customer account information rules to require brokers to attempt to obtain the name and contact information for a “trusted contact person” upon opening an account. A broker would not be required to attempt to obtain the name of or contact information for a trusted contact person for accounts in existence prior to the effective date of the proposed rule change until the time that it updates the information for the account either in the course of its normal business, or until it is otherwise required to do so under applicable laws or rules.

Under proposed Rule 2165, brokers would have the benefit of a “safe harbor” enabling them to place a temporary hold for up to 25 business days (unless sooner terminated or extended by other regulators or agencies) on a disbursement of funds or securities, and to notify a customer’s trusted contact, if they have a reasonable belief that financial exploitation is occurring.  Financial exploitation is understood under the proposed rule to include the wrongful or unauthorized taking, withholding, appropriation, or use of the specified adult’s funds or securities; or any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding the specified adult, to obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or convert the specified adult’s money, assets or property.  A broker-dealer could rely on the safe harbor when the firm has a reasonable belief that financial exploitation is occurring in accounts owned by investors aged 65 or older, or by investors 18 and older with mental or physical impairments that render them unable to protect their own interests. Under the proposed rules, a member firm’s written supervisory procedures must identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the broker.

A hold may be placed on suspicious “disbursements,” but not on “transactions.”  The proposed rules would not create a “duty” to place temporary holds on any disbursements. Instead, they would protect firms that comply with the requirements of the safe harbor when they exercise discretion in placing such a hold.

Rule 2165 would require member firms to “establish and maintain written supervisory procedures reasonably designed to achieve compliance” with the rule, including “procedures related to the identification, escalation and reporting of matters” related to financial exploitation.

Following the comment period, the SEC will be required to approve the FINRA rules with any amendments made that are responsive to industry comment.  The FINRA proposal should be viewed as part of the continued focus on at risk investors, including senior investors, and it is fair to anticipate that the SEC, FINRA and NASAA will include transactions involving senior investors as among their priorities for 2017.


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