Financial Exploitation of Specified Adults
The final topic in this unit addresses how firms protect vulnerable investors. FINRA Rule 2165 gives broker-dealers a specific tool (the temporary hold) to intervene when financial exploitation is suspected.
FINRA Rule 2165: Temporary Hold on Disbursements
- FINRA Rule 2165 permits a member firm to place a temporary hold on a disbursement of funds or securities (and on securities transactions) from the account of a specified adult when financial exploitation is reasonably suspected
- This was the first uniform national standard for addressing suspected financial exploitation in brokerage accounts
Who Is a Specified Adult?
| Category | Definition |
|---|---|
| Senior investor | A customer who is age 65 or older |
| Impaired adult | A customer age 18 or older with a mental or physical impairment that renders them unable to protect their own interests |
Requirements for Placing a Hold
- The firm must have a reasonable belief that financial exploitation has occurred, is occurring, or has been attempted
- The person authorizing the hold must be an associated person serving in a supervisory, compliance, or legal capacity
- The firm's written supervisory procedures must identify the titles of persons authorized to place, terminate, or extend holds
Duration of the Hold
| Phase | Duration |
|---|---|
| Initial hold | Up to 15 business days |
| Standard extension | Up to 10 additional business days (25 business days total) |
| Further extension (2022 amendment) | Up to 30 additional business days if the matter has been reported to a state regulator, agency, or court of competent jurisdiction (up to 55 business days total) |
- The standard extension is available if the firm has reported the matter to a state regulator or agency and has not been notified that the hold is inappropriate
- The additional 30-business-day extension was added by the 2022 amendment (effective March 17, 2022) and is contingent on the matter being reported to a state authority or court
- The hold may also be terminated or extended by a court of competent jurisdiction
What the Firm Must Do During a Hold
- Continue to follow the customer's instructions regarding transactions other than the suspected disbursement
- The hold applies to the specific disbursement or transaction under suspicion, not the entire account
Exam Tip: Gotchas
- A temporary hold applies to the specific disbursement or transaction under suspicion, not the entire account. The firm must continue following the customer's instructions for unrelated activity.
- Default maximum: 25 business days (15 initial + 10 extension). With state-authority reporting: up to 55 business days (additional 30 days added by the 2022 amendment). Only supervisory, compliance, or legal personnel can authorize holds.
- The hold applies to BOTH disbursements and securities transactions. Pre-2022 it applied only to disbursements; the 2022 amendment expanded it to cover securities transactions as well.
Trusted Contact Person (FINRA Rule 4512)
- Under FINRA Rule 4512, firms must make reasonable efforts to obtain the name and contact information of a trusted contact person when opening or updating a customer account
- The trusted contact person is NOT given authority over the account
- They serve as a resource for the firm to contact if:
- The firm suspects financial exploitation
- The firm observes signs of diminished capacity
- The firm needs to confirm the customer's health status or current contact information
- The customer may, but is not required to, designate a trusted contact person
Key distinction: The trusted contact person is an information resource for the firm, not a decision-maker or account holder.
Exam Tip: Gotchas
- Specified adult = age 65+ OR age 18+ with mental/physical impairment. Both categories qualify for temporary hold protection under Rule 2165.
- Trusted contact person has NO authority over the account. The exam may try to imply the trusted contact can make decisions or transactions. They cannot.
- The customer is not required to designate a trusted contact person. Firms must make reasonable efforts to obtain the information, but the customer can decline.