Stock Broker Rules Protect Older Investors

Many clients have savings invested with securities brokers/dealers.  These companies and advisers are regulated by the Financial Industry Regulatory Authority (FINRA).  FINRA is not part of the government, but is a not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.

Many older clients have also read accounts of savings being taken by scammers or greedy family members.  In 2018, the new FINRA Rule 2165 (Financial Exploitation of Specified Adults) became effective to permit “members” (broker/dealers) to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.  In addition, amendments were enacted to FINRA Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person (“trusted contact”) for a customer’s account.

Some highlights of these rules are:

Placement of Temporary Holds

Members may not place a temporary hold on a stock or securities transaction under Rule 2165.  Rule 2165 allows a member to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted.  (A temporary hold must expire no longer than 15 days after imposed, unless extended as noted below.)  But 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 Rule 2165 could apply to the disbursement of the proceeds where the customer is a specified adult and there is reasonable belief of financial exploitation.

May a member that has a reasonable belief of financial exploitation of a Specified Adult regarding a disbursement or disbursements place a temporary hold or restrictions on an entire account if the member permits legitimate disbursements from the account?  FINRA has stated that, where a questionable disbursement involves less than all assets in an account, placing a temporary hold or restrictions on an entire account but allowing legitimate disbursements from the account is consistent with Rule 2165 and members may proceed in such a manner as long as they have procedures reasonably designed to permit legitimate disbursements.

Under Rule 2165, a member that has a reasonable belief of financial exploitation of a Specified Adult investor may place a temporary hold on a disbursement from an account to another account at the same member.

Extensions of Temporary Holds

Rule 2165 allows a member to extend a temporary hold upon a state agency’s or court’s request to do so. The state agency would not have to issue a formal order. In addition, Rule 2165 does not require a member to report a state agency’s request to FINRA. However, the member would need to maintain a record of the state agency’s request.

Trusted Contact

The “trusted contact” is intended to be a resource for the member in administering the customer’s account, protecting assets and responding to possible financial exploitation. To this end, Rule 4512(a)(1)(F) requires that the trusted contact be a natural person age 18 or older.  FINRA would not expect a member to verify the age of a designated trusted contact. Other than age, Rule 4512 does not restrict any natural persons from being named as trusted contacts. For example, Rule 4512 does not prohibit joint accountholders, trustees, individuals with powers of attorney and other natural persons authorized to transact business on an account from being designated as trusted contacts.

The requirement in Rule 4512(a)(1)(F) to make reasonable efforts to obtain the name and contact information for a trusted contact upon the opening of a non-institutional customer’s account or when updating account information for an existing non-institutional account applies to all non-institutional accounts.

Because the trusted contact is intended to be a resource for the member, Rule 4512 permits contacting the trusted contact and disclosing information about the customer’s account beyond Rule 2165 or suspected financial exploitation. Specifically, the member or an associated person is authorized to contact the trusted contact and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165.  As the SEC noted in its approval order, moreover, a member’s communications made pursuant to the trusted-contact provision would be consistent with other securities regulations.

Rule 4512 does not require that a customer provide the trusted-contact information. The rule states that “the absence of the name of or contact information for a trusted contact person shall not prevent a member from opening or maintaining an account for a customer, provided that the member makes reasonable efforts to obtain the name of and contact information for a trusted contact person.” Accordingly, a member is required to make reasonable efforts to obtain the trusted contact name and contact information. However, if the customer declines to provide the information or fails to respond to the member’s efforts to obtain the information, the member can open or maintain the customer’s account. Asking a customer to provide the name and contact information for a trusted contact (e.g., in an account opening form) constitutes reasonable efforts to obtain the information and satisfies the Rule 4512 requirements.

A member is not required to seek to obtain the trusted-contact information for accounts in existence prior to the effective date of the amendments to Rule 4512 (“existing accounts”).  However, a member is required to seek to obtain the trusted-contact information for existing accounts when the member updates the information for the account either in the course of the member’s routine and customary business or as otherwise required by applicable laws or rules.  Where a customer has more than one account, a member may seek to obtain the trusted contact information for the accounts collectively (e.g., in one update letter for all of the accounts), provided that each of the affected accounts is clearly identified to the customer. Because the trusted-contact requirement applies at the account level, a customer with more than one account may provide a single trusted contact for all accounts or different trusted contacts for different accounts.

These rules should serve to assure older investors – and their trusted children – that their stock brokers have rules designed to protect them from financial exploitation.  This provides peace of mind that those accounts are secure.

No Comments Yet.

Leave a comment