In January 2018, FINRA issued guidance on the provisions of Rule 2165 and the amendments to Rule 4512, which were approved in February 2017. The new requirements are aimed at preventing the financial exploitation of seniors, and are scheduled to take effect on February 5, 2018. The new FAQs principally reiterate prior guidance clarifying the changes. For example, a significant portion of this guidance was previously discussed in the supplemental materials that accompanied the new rules.

Generally, Rule 2165 allows FINRA members to place temporary holds on the disbursement of funds or securities from accounts belonging to customers when there is a “reasonable belief” of financial exploitation. Amendments to Rule 4512 complement this policy by requiring members to make “reasonable efforts” to acquire the name and contact information of a “trusted contact person” for each customer’s account, who can serve as a resource for the member in protecting the account from financial exploitation. The FAQs elaborate on these requirements, advising on their scope and application, in order to assist member firms in their understanding.

The FAQs highlight a number of key points concerning Rule 2165, including:

  • The rule does not apply to securities transactions, but may apply to the proceeds from such a transaction if they were to be disbursed from an account in which there is a reasonable belief of financial exploitation.
  • As stressed in previous FINRA materials, disbursements are to be analyzed separately under the rule, rather than on the basis of an entire account (although an entire account may be restricted if procedures are in place to allow legitimate transactions).
  • A temporary hold under Rule 2165 can be extended at the request of a state agency, which need not be formal; however, FINRA must keep a record of the request.

The guidance further explains the related amendments to Rule 4512, noting:

  • Any natural person 18 years or older may be designated a “trusted contact,” with the intended role of serving as a resource to the member in administering a customer’s account and protecting him or her from financial exploitation.
  • Members are authorized to disclose to trusted contacts certain information about an account in order to confirm the customer’s contact information, health status, or the identity of any legal guardian, executor, trustee, or holder of power of attorney. Members must disclose this authorization to the customer upon opening the account or upon updates to the account by the customer; this disclosure need not take any particular form.
  • The rule’s trusted contact provision applies to all non-institutional accounts, including those of non-natural persons, in which case an authorized agent on the account may be the trusted contact.
  • Members may obtain trusted contact information collectively for customers with multiple accounts.

Additional Materials:

The FAQs can be accessed on FINRA’s website here.

The full text of Rule 2165 can be found here.

The full text of Rule 4512, as amended, can be found here.

We previously discussed these new rules here.