FINRA Rule 2165 - Financial Exploitation of Specified Adults

The final topic in this unit shifts from tax rules to investor protection. FINRA Rule 2165 gives broker-dealers the authority to place temporary holds on account disbursements when they suspect a vulnerable customer is being financially exploited.

Who Are "Specified Adults"?

FINRA Rule 2165 applies to accounts held by specified adults, which includes two groups:

• Senior investors: Customers age 65 or older
• Impaired adults: Customers age 18 or older with a mental or physical impairment that renders them unable to protect their own interests

Temporary Holds on Disbursements

When a firm has a reasonable belief that financial exploitation is occurring (or has been attempted), it can place a temporary hold:

• Initial hold: up to 15 business days
• Standard extension: an additional 10 business days if the firm has reported the matter to a state agency or regulator and the investigation is ongoing (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, for a maximum of up to 55 business days total

Think of it this way: The firm can pause a suspicious disbursement or trade while it looks into the situation. The hold is limited to the specific activity under suspicion; unrelated account activity continues.

Scope of the hold:

• The hold applies to disbursements (outgoing transfers, withdrawals, wire transfers)
• As of the 2022 amendment (effective March 17, 2022), the hold also applies to securities transactions (buys and sells)
• The hold is limited to the specific disbursement or transaction suspected of being part of exploitation, not the entire account

Exam Tip: Gotchas

• The hold covers BOTH disbursements and securities transactions since the 2022 amendment. Pre-2022 the rule applied only to disbursements. The old "disbursements only" framing is a common distractor.
• Default max: 25 business days. With state-authority reporting: up to 55 business days (additional 30 days added by the 2022 amendment).

Notification Requirements

The firm must provide notification when placing a hold:

• Immediate notification to the trusted contact person
• Notification to all parties authorized to transact on the account
• The firm must retain records of the hold, the reasons for it, and the resolution

Trusted Contact Person (FINRA Rule 4512)

FINRA Rule 4512 works alongside Rule 2165:

• Firms must make reasonable efforts to obtain the name and contact information of a trusted contact person when opening or updating an account for a natural person
• The trusted contact may be contacted regarding:
  • Potential financial exploitation
  • Concerns about the customer's health
  • Confirming contact information

Key limitation: The trusted contact does not have trading authority or account access. They are an emergency contact, not an authorized party.

Exam Tip: Gotchas

• The trusted contact person has NO trading authority or account access. They can only be contacted for information; they cannot place trades or make account decisions.
• Firms must make "reasonable efforts" to obtain a trusted contact, but the customer is not required to provide one. The firm cannot refuse to open an account if the customer declines.