Protecting seniors: Mixed reviews for Finra’s rule changes

Mutual fund and insurance industry groups have welcomed but pressed for changes to the latest regulatory initiative aimed at protecting retirement-age investors and other vulnerable adults – a hot-button compliance issue that is attracting attention from state and federal authorities, as well as Congress.

The Financial Industry Regulatory Authority (Finra) in early November proposed rule changes that would oblige its member firms to make reasonable efforts to get the name and contact information of a trusted contact person for a customer’s account.

The self-regulatory organization also proposed a new Rule 2165 that would allow firms to put a temporary hold on a disbursement of funds or securities, if they have a reasonable belief that financial exploitation is taking place, and notify the trusted contact that this had been done. Finra’s existing rules do not explicitly allow firms to contact a non-account holder or to place a temporary hold on disbursements in such circumstances.


MUTUAL FUNDS
In a recent comment letter, the Investment Company Institute (ICI) gave its broad support to the plans and welcomed what it described as a number of tweaks to proposals Finra originally issued in October 2015. Among other things, Finra revised its proposal to limit the purposes for which firms reach out to a trusted contact person, protect the account holder’s privacy by restricting who firms can contact regarding concerns with the account, and limit concerns with the number/duration of freezes placed on an account, the mutual fund industry group said.

But ICI also expressed concerns about the regulatory project. ‘We continue to believe… that Rule 2165 should expressly provide that a member must terminate a temporary hold as soon as the member’s internal review of the facts and circumstances that were the basis for the hold do not support a reasonable belief that financial exploitation is occurring or being attempted,’ wrote ICI associate general counsel Tamara Salmon.

As it stands, the proposed rule would allow a temporary hold to be terminated within 15 business days only by a state regulator, agency or court, Salmon said. The industry group would like firms to be able to cancel the hold quickly if they come to a ‘reasonable belief’ that there is no problem. ICI also urged Finra to require members’ written supervisory procedures to include provisions designed to ensure firms lift a temporary hold as soon as practicable after they conduct an internal review and find the hold is not warranted.

Firms are also worried about being hit with ‘frivolous actions or claims’ based on their not imposing a hold, ICI warned. To ease such concerns, the group recommended that Finra add language to its proposal affirming that a firm’s failure to impose a hold will not be deemed an abrogation of its duties under the self-regulatory organization’s rules.


INSURANCE INDUSTRY
Similarly, the Insured Retirement Institute (IRI) expressed broad support for the thrust of Finra’s plans, but also raised concerns. For example, IRI president and CEO Catherine Weatherford wrote in a separate letter that the proposal appears to limit the scope of discussions with trusted contact people to simply confirming the potential victim’s contact information, health status and legal representatives, and providing notice of temporary holds.

‘IRI and its members believe firms should have the discretion to disclose and discuss any information relevant to the investigation to the trusted contact person,’ Weatherford said. The group’s members include life insurance companies, broker/dealers, banks and asset management firms.

Among other things, Finra’s plan is also too limited in scope by dealing with holds on disbursements, Weatherford suggested. ‘Seniors and other vulnerable adults can also potentially be harmed by, for example, investment reallocations, beneficiary changes, transfers to a joint account, execution of other brokerage instructions and other account activities,’ she said. As such, IRI called for the proposal to be revised so that firms can delay any financial transaction they reasonably believe will result in financial exploitation.


STATES AND CONGRESS
Finra is not the only regulator tackling seniors’ protections. The issue is rapidly taking on greater significance as millions of investors reach retirement. At the state level, the North American Securities Administrators Association (NASAA) has designed a model law that Missouri, Alabama, Louisiana, Vermont, Washington State and Indiana have already introduced.

NASAA’s model legislation includes mandatory reporting by individuals at broker-dealers and investment advisers. The law’s reporting component obliges covered agents within covered firms to ‘promptly notify Adult Protective Services… and the commissioner of securities’ for their state if they reasonably believe a senior or vulnerable adult investor is being exploited. The legislation provides immunity from civil liability to individuals who make such reports, provided they act in good faith and are ‘exercising reasonable care’.

At the federal level, the US House of Representatives has passed the Senior Safe Act, which also gives certain individuals immunity if they disclose potential examples of financial exploitation of senior citizens. The legislation is now being considered by the Senate banking committee. The SEC has also been looking closely at what registered firms are doing in the area.