Some broker-dealer firms are asking Finra to give them more power to stave off the exploitation of senior investors, according to Robert Cook, the SRO’s CEO and president.
Finra has already put in place — since February last year — several additional protections for senior investors.
The protections include a rule that lets broker-dealer firms place temporary holds on disbursements of funds or securities from the accounts of specified customers if there is reasonable belief of financial exploitation of these customers by third parties.
But some broker-dealer firms are saying this isn’t enough, and are now asking for the power to put a hold on the transaction, according to Cook.
“Firms and others have suggested maybe we tweak those requirements in that rule,” Cook said last month at the 2019 Finra Senior Investors Conference in Washington, D.C.
“One suggestion was that we allow firms to put a hold on transactions in the account — not just disbursements from the account — the concern being that, especially for people who have held assets for a long time, there could be significant tax consequences that could occur if someone was subject to exploitation and sold assets even if they didn’t leave the account,” he added.
Cook said the feedback is among the responses Finra received when it requested comments on its rules aimed at protecting senior investors.
Some broker-dealer firms have asked Finra to lengthen the time they can put a hold on disbursements, according to Cook.
“We’re in the process of going through those comments,” he said.
Cook said the request for comments is part of a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation.
“The industry regulators — we — all have a collective interest in making sure we’re doing a good job on this,” Cook said.
Cook was asked at the conference about the liability of a broker-dealer firm if their senior investor clients are indeed exploited.
The Finra head said there was no single answer to that question.
“I think that’s going to be an incredibly facts and circumstances type of question,” Cook said.
Cook offered some general issues Finra would likely probe, though.
"Among other considerations, our general approach, as with many issues, is going to be: ‘Do you have a reasonable supervisory system in place?’” he said.
“It doesn’t mean you can prevent everything from happening all the time. Sometimes people don’t follow the rules even with a good strong supervisory system. But what we’re really interested in or focusing on is the overall system of controls and supervision around the handling of issues that may affect client assets and clients,” he added.
Senior investor protection
The rule that lets broker-dealers put a hold on disbursements is the "Financial Exploitation of Specified Adults" Finra Rule 2165.
Although the rule was created out of the need to better protect seniors, it covers two sets of adults the self-regulator believes "are particularly susceptible to financial exploitation." These are adults aged 65 and older as well as adults aged 18 and older who have a mental or physical impairment that renders the individual unable to protect their own interests.
Examples of potential perpetrators of financial exploitation include someone with power of attorney, guardianship, or any other authority over the specified adult.
The rule lets broker-dealer firms put the specified customer’s account on temporary hold for 15 business days if they believe the customer is a victim of financial exploitation.
The hold can be extended by the broker-dealer firm for 10 more business days if the firm’s internal review of the facts and circumstances supports its reasonable belief of financial exploitation of the customer.
The hold period and extension can also be terminated or prolonged by order of a state regulator, state agency or court. Finra requires broker-dealer firms to retain records related to compliance with the rule.
That rule is one of two key senior investor protection initiatives put in place by Finra last year.
An amendment to the "Customer Account Information" Finra Rule 4512 requires broker-dealer firms to ask a customer for a trusted contact person. However, the customer will not be required to provide one.
A trusted contact person must be at least 18 years old and can be anyone chosen by the customer — including someone who holds power of attorney, a trustee or a joint account holder.
The broker-dealer firm is expected to ask for the trusted contact person upon the opening of a customer’s account or when updating an existing account’s information.
The broker-dealer firm is also required to disclose to the customer that it will contact the trusted contact person and share information about the customer’s account to address possible financial exploitation as well as to confirm the specifics of the customer’s current contact information, health status or the identity of any legal guardian, executor, trustee or holder of a power of attorney.