Financial Exploitation of Specified Adults

The final topic in this unit shifts from tax rules to investor protection. The financial-exploitation hold rule gives broker-dealers the authority to place temporary holds on account disbursements and securities transactions when they suspect a vulnerable customer is being financially exploited.

Who Are "Specified Adults"?

The rule applies to any account for which a specified adult has authority to transact business, not only an account titled in that adult's own name. A specified adult falls into two groups:

• Senior investors: Customers age 65 or older
• Impaired adults: Customers age 18 or older whom the firm reasonably believes has a mental or physical impairment that renders them unable to protect their own interests (the firm needs only a reasonable belief based on observed facts, not medical certainty)

What counts as financial exploitation? The wrongful or unauthorized taking, withholding, appropriation, or use of the specified adult's funds or securities, or an act OR OMISSION by a person (including one using a power of attorney or guardianship, or any other authority over the specified adult) that obtains control through deception, intimidation, or undue influence, or that converts the specified adult's assets.

How Long Can a Temporary Hold Last?

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

• Initial hold: up to 15 business days
• Standard extension: an additional 10 business days if the firm's internal review of the facts and circumstances supports its reasonable belief that exploitation is occurring (25 business days total)
• Further extension: up to 30 additional business days if the internal review continues to support the reasonable belief AND 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)
• 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. The "disbursements only" framing is a common distractor.
• Maximum hold: up to 55 business days (15-day initial hold + 10-day extension + a further 30 days once the matter is reported to a state authority). The 25-day figure (15 + 10) is only an intermediate cap, not the maximum.

What Notification Is Required When a Hold Is Placed?

The firm must begin its internal review of the suspected exploitation immediately, but notification of the hold itself works on a different clock:

• The firm must notify the trusted contact person and all parties authorized to transact on the account no later than 2 business days after first placing the hold, stating the reason for the hold
• Notification may be oral or written (including electronic)
• The firm may skip notifying a specific party or the trusted contact if it reasonably believes that person is involved in the exploitation, or if that person is unavailable
• The firm must retain records of the hold, readily available to FINRA upon request, including the underlying disbursement or transaction request suspected of exploitation, the name and title of the associated person who authorized it, the reasons for it, the notifications made, the internal review, and support for any extension

Safe harbor: A firm that exercises this hold authority consistent with the rule is protected from FINRA's general standards, improper-use, and account-transfer rules for the hold itself. This gives firms cover to act on a reasonable suspicion without fear of a separate rule violation for delaying the customer's own instructions.

Exam Tip: Gotchas

• Notification is due within 2 business days, not immediately. Only the internal review must start immediately. The exam may offer "immediate notification" as a distractor for the notification requirement itself.

What Supervisory Procedures Does the Rule Require?

• A firm relying on the financial-exploitation hold rule must maintain written supervisory procedures (WSPs) reasonably designed to achieve compliance, including identifying, escalating, and reporting suspected exploitation
• The WSPs must name the title of each person authorized to place, terminate, or extend a hold; that person must be an associated person acting in a supervisory, compliance, or legal capacity
• The firm must develop and document training reasonably designed to ensure associated persons comply with the rule

Trusted Contact Person

The customer-account-information rule works alongside the financial-exploitation hold rule:

• Firms must make reasonable efforts to obtain the name and contact information of a trusted contact person, who must be age 18 or older, 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. Missing trusted-contact information does not stop a firm from opening OR maintaining the account.

What Should You Check on Exam Day?

• Placing a hold requires a reasonable belief of exploitation; the firm is never required to place one.
• Maximum hold: 55 business days (15-day initial hold, plus a 10-day extension if the internal review supports the belief, plus a further 30 days once the internal review still supports the belief AND the matter is reported to a state regulator, agency, or court). A state authority can otherwise extend or terminate the hold.
• Notification to the trusted contact and authorized parties, stating the reason for the hold, is due within 2 business days, not immediately; the internal review is what starts immediately.
• The financial-exploitation hold rule requires written supervisory procedures naming who may place holds, plus documented associated-person training, and gives the firm a safe harbor from other FINRA rules for a hold placed consistently with the rule.
• The trusted contact person must be 18 or older and has no trading authority or account access; they exist only to be contacted.