FINRA Requests Comment on Senior Protection Rules

FINRA is conducting a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation. More specifically, FINRA is interested in finding out whether additional tools, guidance or changes to FINRA rules or administrative processes are appropriate to further address suspected financial exploitation and other circumstances of financial vulnerability for senior investors.

Despite FINRA’s best efforts to prioritize the protection of senior investors, recent reports indicate that “financial exploitation of seniors has been increasing, in terms of both magnitude and impact.” In the Notice, FINRA summarizes the rules and administrative processes that most directly apply to financial exploitation of senior investors and inquires about a number of questions related to addressing financial exploitation.

FINRA is looking for feedback on the following questions:

Rule 2165

1.) Should Rule 2165’s safe harbor be extended to apply to transactions in securities, in addition to disbursements of funds and securities? If so, how should changes in security prices be addressed (e.g., where a hold is terminated: (i) by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction; or (ii) upon a determination that there is not financial exploitation)? Are there other implications of extending the safe harbor to transactions?

2.) Should Rule 2165’s safe harbor be extended to apply where there is a reasonable belief that the customer has an impairment that renders the individual unable to protect his or her own interests (e.g., a cognitive impairment or diminished capacity), irrespective of whether there is evidence that the customer may be the victim of financial exploitation by a third party? What burdens would be placed on member firms and their registered persons if the safe harbor were extended in this way?

3.) Should FINRA extend the temporary hold period in the rule or create a different mechanism to obtain an extension? If so, for how long? How frequently has your firm placed a temporary hold pursuant to Rule 2165 and what has been the duration of any holds? When a hold was placed, did the firm’s internal review find support for the reasonable belief of financial exploitation that prompted placing the hold?

4.) Has your firm identified any unintended consequences when placing or attempting to place a temporary hold on disbursement of funds or securities from an account under Rule 2165?

Rule 4512

5.) To gain a better understanding of the effectiveness of the trusted contact provision in Rule 4512: what methods have firms used in seeking to obtain trusted contact person information? What methods have firms found most helpful in obtaining such information? What have been the response rates from new and existing customers in providing the trusted contact person information?

6.) Has your firm suspected financial exploitation of a customer, but not had the trusted contact person information? If so, what did your firm do, if anything? Has your firm sought assistance from trusted contact persons, and, if so, was this outreach constructive?

Reporting Requirements

7.) Should FINRA develop a dedicated Rule 2165-related problem code for use in meeting reporting requirements pursuant to FINRA Rule 4530?

8.) Is guidance needed to address when complaints related to placing a temporary hold pursuant to Rule 2165 should be reported on Forms U4 and U5? To what extent have registered persons received complaints in situations relating to disbursement holds, and have they been reportable complaints? Rule 3240

9.) Has Rule 3240 been effective in addressing potential misconduct in lending arrangements between registered persons and their senior customers? Has Rule 3240 been effective more generally as an investor-protection measure?

10.) Should the types of permissible lending arrangements in Rule 3240 be modified or should the rule cover a broader range of lending arrangements or relationships?

11.) Should the rule address borrowing and lending arrangements that were entered into prior to the existence of a broker-customer relationship?

12.) Should Rule 3240 apply for a specified period following an individual ceasing to be a customer (colloquially, a cooling-off period) of the firm or where a customer is reassigned to a different registered representative?

Sanctions Guidelines

13.) Should FINRA amend the Sanctions Guidelines to add as a principal consideration the fact that a victimized customer is a “specified adult” (i.e., a person 65 or older or a person 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests)?

General Effectiveness, Challenges and Economic Impact

14.) Has each rule (mentioned above) effectively addressed the problem(s) it was intended to mitigate? To what extent has the original purposes of, and the need for, a rule been affected by subsequent changes to the risk environment, the markets, the delivery of financial services, the applicable regulatory framework, or other considerations? Are there alternative ways to achieve the goals of a rule that FINRA should consider?

15.) What has been your experience with implementation of Rules 2165, 3240, 4512 and 4530 related to senior investors, including any ambiguities in the rule or challenges to comply with it?

16.) What have been the economic impacts, including costs and benefits, of the rules mentioned above? To what extent do the costs and benefits have a disproportionate impact on firms based on size and business model? Have the rules led to any negative unintended consequences?

17.) Should FINRA require additional disclosure or heightened supervision for any particular product or investment strategy that is marketed to senior investors?

18.) Can FINRA make rules, guidance or attendant administrative processes related to senior investors more efficient and effective? If so, how?

19.) What additional guidance, tools or resources would be helpful to firms or the investing public to address suspected financial exploitation and other circumstances of financial vulnerability for senior investors? Are there areas where FINRA or the FINRA Investor Education Foundation should conduct additional research or publish additional materials to promote greater awareness and education?

20.) Are there other approaches, policies, rules, programs or partnerships not discussed herein that are within FINRA’s jurisdiction and mandate that would further benefit senior investors?