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How Broker-Dealers Can Help Stop Client Exploitation

By Rita Raagas De Ramos September 29, 2017

Finra is empowering broker-dealer firms to put temporary holds on the accounts of customers who they believe are victims of financial exploitation – specifically seniors and adults who are mentally or physically impaired.

Finra Rule 2165, entitled “Financial Exploitation of Specified Adults,” 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. The rule will become effective on February 5 next year.

Although the rule says the temporary hold is on disbursements of funds and securities from an account, broker-dealer firms sharing their plans in preparation for compliance with the rule say they will temporarily freeze the client's entire account because it would be too difficult – even impossible in some cases – to hold just a disbursement. Plus, they say freezing the entire account would be an additional safeguard to ensure the client's money is preserved.

“Broker-dealers, probably more so than any profession, can put a dent in financial exploitation," James Wrona, an associate general counsel at Finra, told representatives of broker-dealer compliance and legal teams earlier this month at a Sifma seminar about senior investor protection rules. “You know your customer. You are in a unique position to help, and we want to give you the tools to do that.”

Although the rule was created out of the need to better protect seniors – among the priorities identified by Finra for 2017 – it actually 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.

Wrona noted Finra purposefully used a “broad definition” of financial exploitation in Rule 2165. It includes the wrongful or unauthorized taking, withholding, appropriation, or use of the specified adult’s funds or securities, or any act or omission taken by a person to obtain control over a specified adult’s money, assets or property through deception, intimidation or undue influence.

Sifma general counsel Ira Hammerman estimates that seniors suffer at least $2.9 billion in losses annually because of financial exploitation.

“Financial abuse may be perpetrated by anyone – a professional con artist, a paid caregiver, a stranger or casual acquaintance, even a son, daughter or other family member,” according to Sifma.

In Finra Rule 2165, 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.

Around 10,000 Americans will turn 65 every day over the next decade. Investors in this age group make up more than 75% of the financial assets in the U.S., according to Finra. More than 41 million people in the U.S. – or more than 13% of the population – were 65 years or older in 2011, and that number is expected to rise to 79 million by 2040, the regulator adds.

Finra says its helpline for seniors – launched in April 2015 – received more than 9,200 calls in its first two years of operation and made it possible to return around $4.3 million to senior investors. The toll-free phone number was created so that senior investors – and people calling on their behalf – can get assistance from Finra or raise concerns about issues with brokerage accounts and investments. Callers to the helpline have ranged in age from 17 to 102 years old, and the average age is 70. Florida, California and New York have the highest number of callers relative to the rest of the country.

When Finra has no jurisdiction over the issue, it refers the caller to the appropriate regulator or agency. In the helpline’s first two years, Finra referred nearly 650 matters to state, federal and foreign regulators, and more than 130 matters to Adult Protective Services in 16 states under mandatory reporting laws. APS is a social services program provided by state and/or local governments nationwide.

Wrona said he found himself picking up the phone once and the caller was a woman, “crying, upset, speaking in broken speech,” telling him her mother-in-law, who was suffering from Alzheimer’s disease, had been victimized. The mother-in-law, who was living in Ohio, was told by a caller she had won a sweepstakes but needed to pre-pay taxes before she could claim her winnings. She withdrew the money from her broker-dealer account, wired it to an account in Minnesota, and then the money quickly vanished in Eastern Europe.

“It’s one thing when you’re hearing this in the abstract. But I was talking to a real person whose mother-in-law lost everything,” Wrona said.