Finra boosts focus on senior investors, with rule changes going into effect next year
The SEC in March gave its approval for the Financial Industry Regulatory Authority (Finra) to adopt Finra Rule 2165 and related amendments to Finra Rule 4512 to tackle the increasingly high-profile issue of the financial exploitation of seniors and other at-risk individuals. The changes become effective on February 5, 2018.
Rule 2165 will permit – but not require – Finra member firms ‘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.’Amendments to Rule 4512 will require firms ‘to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account.’ The two rules are interrelated: using the Rule 2165 safe harbor requires that firms notify the trusted contact person – ie, Rule 4512 – of the ‘specified adult’ where there is a reasonable belief of financial exploitation.
Finra has significantly increased its focus on senior investors over the past two years. First, it issued a joint report with the SEC in early 2015. This was followed by the launch of its Securities Helpline for Seniors, the topic’s rising prominence in Finra’s annual examination priorities letters, and the adoption of Rule 2165 and the Rule 4512 amendments. This scrutiny is expected to increase, with a focus on related sales practice exams and subsequent enforcement actions.
Rather than repeat the rule change details, this article outlines practical steps firms may want to consider as they prepare for their implementation. We offer a deceptively simple three-stage process that firms can use to answer the important question:‘A-R-E’ you ready for February? If not, what can you do to prepare?
Step 1: ‘A’ is for acquiring knowledge – externally and internally
The first step for any firm looking to take advantage of the Rule 2165 safe harbor or preparing for the trusted contact amendments is to gain as much knowledge as possible about both rules. We call this ‘external knowledge acquisition’.
A great starting point is to read the related regulatory releases published by Finra, along with any of the publicly available reports cited in those releases. A considerable amount of information is available on Finra’s website, with items such as notices, guidelines, investor education pieces and news releases on senior investors all housed on one page. Reading and analyzing this information will give firms insight into Finra’s regulatory concerns and exam priorities. Firms should use this information to craft internal policies and procedures to address those concerns.
Firms should also look to acquire knowledge internally by examining their own business models for potential susceptibility to financial exploitation of vulnerable adults. For example, are there particular products that are more likely to be bought by senior investors? Are the firm’s branch locations in geographic areas inhabited by a larger population of seniors?
It is critical to acquire both internal and external knowledge before moving to the next step.
Step 2: ‘R’ is for raising awareness
Once a firm has established a preliminary internal and external knowledge base, the next step is to raise awareness at the firm on the issues it has identified. Many firms have already designated one person, or a team, as dedicated to senior investor issues. That team is charged with raising awareness, through training and education of both sales and supervisory staff, of the concerns raised by the findings in the knowledge acquisition phase.
This is a particularly critical step for firms wishing to use the safe harbor in Rule 2165, because the rule requires that a training program be in place before being used by a firm. Ideally, training would be based on issues identified in step one, and can include topics such as:
- Identifying diminished capacity in customers and in registered representatives
- Best practices for documenting instances of financial exploitation
- Risks of certain financial products for elderly customers.
Step 3: ‘E’ is for executing a plan
The third important step firms can take to prepare for February 2018 is to use their knowledge and awareness to execute a concrete plan addressing the issues identified in those first two steps. For example, Rule 2165 requires that firms relying on it ‘establish and maintain written supervisory procedures reasonably designed to achieve compliance with this rule, including, but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of specified adults.’
In other words, firms must have a plan in place in order to take advantage of the safe harbor. In addition to updating written supervisory procedures and compliance manuals, firms may wish to consider:
- Revising account forms to reflect new requirements of amended Rule 4512
- Creating internal task forces dedicated to senior investor issues
- Establishing working relationships with state financial regulators, local law enforcement and non-profit organizations to continue building on steps one and two.
Clifford Kirsch is a partner and Sarah Razaq Sallis is an associate with Eversheds Sutherland (US) LLP
