Marc J. Ross, Esq. (Partner) and A.R. John Hitchings, Esq. (Associate) Show By the year 2050, the number of U.S. residents 65 and older is projected to more than double – from 41 million to 86 million.[i] Baby Boomers, defined by the U.S. Census as those born between 1946-1964, have begun to retire and control about 50% of the total investable assets in the U.S. – more than $30 Trillion in net household wealth.[ii] Equally significant, by some estimates, one in five Americans aged 65 and older has been victimized by financial fraud.[iii] As wealth continues to concentrate in America’s elderly population, and the elderly population grows ever larger, broker-dealers are increasingly faced with instances of suspected financial exploitation of seniors. Hence, it comes as no surprise that protecting elderly clients from financial abuse and exploitation are a priority for primary regulators such as the Financial Industry Regulatory Authority (“FINRA”). In 2015, FINRA opened its Securities Helpline for Seniors, which provides elderly investors with a toll-free number to call for assistance from FINRA or raise concerns about issues with brokerage accounts and investments. According to FINRA, the helpline is a success but has also served to magnify the depth of the problem of elder financial exploitation. On February 9, 2017, after a lengthy comment and review period, FINRA introduced Rule 2165 and amended Rule 4512. Collectively, these rules aim to provide FINRA Member Firms with new tools to protect senior investors and persons with mental or physical impairments from financial exploitation. Rule 2165 permits a FINRA Member Firm that reasonably believes financial exploitation may be occurring to place a temporary hold of up to 15 business days on the disbursement of funds or securities from the account of a “Specified Adult” customer. A Specified Adult is defined as either: (a) a person age 65 or older; or (b) a person, age 18 or older, who the Firm reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. The Rule creates the ability, but not the obligation, to withhold a disbursement of funds or securities where a Firm reasonably believes that financial exploitation may be occurring. The hold only applies to suspicious disbursements – not to securities transactions (i.e. simply buying and selling stock within an account). Importantly, the Rule provides a Member Firm with a safe harbor from FINRA when it exercises discretion in placing temporary holds on disbursements of funds or securities from the accounts of Specified Adults under these circumstances. Of course, this begs the question of whether a stockbroker is qualified to pass judgment on the mental condition of his or her clients and brokerage firms are encouraged to provide their frontline employees with training on how to recognize signs of diminished capacity, cognitive decline, financial impairment or financial exploitation. The Rule also requires that a Firm’s Written Supervisory Procedures identify the title of each Associated Person authorized to place, terminate or extend a temporary hold on behalf of the Firm. Any such Authorized Person must serve in a supervisory, compliance or legal capacity for the Firm. If a Firm places a hold, the Rule requires the Firm to immediately initiate an internal review of the facts and circumstances that caused the Firm to reasonably believe that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted. In addition, the Firm must provide both an oral or written notification of, and basis for, the hold to all parties authorized to effect transactions in the account no later than two business days after the date that the Firm first placed the hold. Absent an extension from a state regulator, agency or court of competent jurisdiction, the temporary hold may only be extended by the Firm for an additional 10 business days. In concert with Rule 2165, FINRA has amended Rule 4512 to require Member Firms to make a reasonable effort to obtain the name and contact information for a Trusted Contact Person, who must be 18 years or older, upon the opening of a customer’s account. The amended Rule defines the Trusted Contact Person as someone who the customer authorized the Firm to contact and disclose information about the customer’s account to address possible financial exploitation, to confirm specifics about the customer’s current contact information, health status, or to identify any legal guardian, executor, trustee, or holder of power of attorney. While the amendment to Rule 4512 does not prohibit a Firm from opening or maintaining an account if the customer fails to identify a Trusted Contact Person, the Firm must make a reasonable effort to obtain that information. The amended Rule is not retroactive, so for accounts in existence prior to the effective date of the amendment, Firms are only required to attempt to obtain the information for a Trusted Contact Person when they update an account’s profile. The Rule 4512 amendment also requires a Firm to disclose in writing at the time of the account opening that the Firm is authorized to contact the Trusted Contact Person and disclose information about the client’s account to address, among other things, possible financial exploitation. For any account in existence prior to the effective date of the proposed amendment, a Firm would need to provide this disclosure when updating the information for the account. To complicate matters, however, outside of FINRA, reporting requirements for elder financial exploitation vary on a state-by-state basis. For instance, California requires reporting of possible elder financial exploitation immediately or as soon as possible by telephone, followed by a written report within two business days.[iv] On the other hand, reporting of suspected financial exploitation of the elderly is voluntary in New York. Perhaps in an effort to move towards uniformity, the North American Securities Administrators Association recently introduced its Model Act, which has already been adopted by four states (Alabama, Indiana, Louisiana and Vermont). The NASAA’s Model Act contains a mandatory obligation to report potential financial exploitation when there is a “reasonable belief” that such exploitation may be occurring.[v] Firms are encouraged to prepare a quick-reference list of state agency contacts for any state wherein they do business and identify whether each state has mandatory or voluntary reporting requirements. While the implementation date for FINRA Rules 2165 and 4512 is February 5, 2018, Member Firms would be wise to begin updating and upgrading their policies and procedures for handling elderly clients without delay. America’s wealth is not getting any younger. [i] United Nations, Department of Economic and Social Affairs, World Population Prospectus: 2012 Revision, June 2013, http://esa.un.org/unpd/index.htm. [ii] Val Srinivas and Urval Goradia, The Future of Wealth in the United States, Deloitte Center for Financial Services, November 9, 2015. [iii] Public Policy Polling for the Investor Protection Trust, http://www.investorprotection.org/ipt-activities/?fa=research. [iv] Cal. Welf. & Inst. Code § 15630. [v] NASAA Model Legislation Or Regulation To Protect Vulnerable Adults From Financial Exploitation, Adopted January 22, 2016. About The Authors
Marc J. Ross is a founding partner of
Sichenzia Ross Ference LLP. Mr. Ross represents clients (public and private companies, brokerage firms, registered representatives, high net-worth individuals, and hedge funds) throughout the United States, North America, Asia, Europe and Israel. Mr. Ross advises clients on securities, corporate, regulatory and litigation/arbitration matters. In the securities and corporate area, Mr. Ross advises companies, mainly small to mid-cap public companies, with their 1934 Act reporting
requirements as well as their NASDAQ, AMEX and NYSE and other exchange listing and compliance matters. He also assists companies wanting to go public, whether through a reverse merger, initial public offering, or company offering, and advises clients on a wide range of investment and capital raising transactions, including private investments in public equity transactions (PIPEs), initial public offerings (IPOs), registered direct offerings (RDs), and shelf offerings.  Latest posts by Marc J. Ross, Esq. (see all)
Mr. Hitchings' practice is focused on defending claims unique to the financial services industry, including claims for fraud, conversion, unsuitability, churning and unauthorized trading. Mr. Hitchings regularly appears before the Financial Industry Regulatory Authority (FINRA) in all phases of arbitration proceedings. Latest posts by A.R. John Hitchings (see all) What are some of the steps a firm could take to prevent potential exploitation of seniors quizlet?What are some of the steps a firm could take to prevent potential exploitation of seniors? Freeze the account if they expect exploitation. Make a reasonable effort to obtain the name of a trusted contact person. no longer than 15 business days unless a state regulator or agency of jurisdiction extends it longer.
Which of the following records must be kept for only 3 years?Which of the following records must be kept by a broker-dealer firm for three years? Trial balances, usually run at the end of a reporting period to ensure that the firm's credit and debit columns arrive at identical sums, must be kept for three years after the trial balance was run.
What is the Finra Rule 2111?FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.
Who is considered a specified adult?(1) For purposes of this Rule, the term “Specified Adult” shall mean: (A) a natural person age 65 and older; or (B) a natural person age 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.
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How long could a temporary hold be placed on distributions in a seniors account if exploitation is suspected?
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