FINRA Proposes Longer Hold Periods to Combat Suspected Financial Exploitation of Seniors

Commentary by Steven Lofchie and Conor Almquist

FINRA proposed amendments to FINRA Rule 2165 ("Financial Exploitation of Specified Adults") that would permit a broker-dealer to impose a longer hold period on a senior investor's account. The longer hold period would allow for further time to address suspected financial exploitation. The proposed amendments follow an August 2019 retrospective review of FINRA Rules that impact senior investors (see previous coverage).

The proposed amendments to Rule 2165 would allow an additional 30-day hold period (beyond the currently permissible 25-day hold period) if the suspicious activity has been reported to a state agency or an appropriate court. FINRA reported that its survey of member firms had provided evidence that the 25-day hold period was generally insufficient for firms to determine whether a customer was being financially exploited. Additionally, the amendments would allow firms to impose a hold on transactions in securities. FINRA also stated that the amendments would enable greater collaboration between authorities and regulators of different jurisdictions, which would be to the benefit of customers who may be financially exploited.

In addition to proposing to amend the holding period, FINRA provided a summary of information on red flags indicating the decline in the cognitive ability of customers, and as to the implementation of procedures for dealing with the problems resulting from such declines.

Comments on the proposed amendments must be submitted by December 4, 2020.

Commentary

In some respects, the most interesting aspect of Rule 2165, even as it exists now, is that it purports to authorize broker-dealers to decline to follow a customer's instructions as to the customer's assets - even where there is no legislative authority. FINRA and the SEC ought to press Congress or the States to adopt authorizing legislation, so that broker-dealers are not vulnerable to litigation.

In addition, FINRA should require broker-dealers to report all holds put on customer accounts to FINRA so that appropriate information may be collected. Finally, consideration should be given to the establishment of an insurance fund to protect broker-dealers that put a hold on accounts from the potential of litigation.

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Commentary

The proposed amendments to Rule 2165 are a positive step in the ongoing fight against elder exploitation. FINRA's retrospective review indicates the effectiveness of empowering firms to take actions to prevent suspected financial exploitation of senior investors, and the proposed amendments respond directly to feedback from firms on how to improve the rule. Expanding firms' ability to place temporary holds beyond disbursements to transactions in securities addresses a notable gap in the rule. While some firms have indicated that their customer agreements currently permit placing such holds, expanding this ability to all firms may have a significant positive impact.

It is also notable that, while some firms suggested extending Rule 2165 to situations where firms have reasonable belief that a customer has cognitive decline or diminished capacity, FINRA declined to do so. This seems prudent, as placing a hold on an account is a financially significant action. While using Rule 2165 to combat suspected exploitation has presented some clear challenges, expanding the rule to include cognitive decline may open Pandora's box.

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