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BDs Identify Operational Hurdles of Freezing Accounts

By Rita Raagas De Ramos October 10, 2017

Initiating and executing a temporary hold on the accounts of customers who appear to be victims of financial exploitation is anything but easy, according to broker-dealer compliance and legal teams that are preparing for Finra Rule 2165.

The new rule, titled “Financial Exploitation of Specified Adults,” lets broker-dealer firms place temporary holds on disbursements of funds or securities from accounts of specified customers if there is reasonable belief of financial exploitation of these customers by third parties. The rule becomes effective on Feb. 5 next year.

Although the rule says the temporary hold is on disbursements of funds and securities from an account, some 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.

The rule lets broker-dealer firms put the specified customer’s account on temporary hold for 15 business days, starting from the day it was put on hold, if they believe the customer is a victim of financial exploitation. The hold can then be extended by the broker-dealer firm for 10 business days if the broker-dealer 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 stretched by an order of a state regulator, state agency or court. Finra requires broker-dealer firms to retain records related to compliance with the rule.

Internal challenges cited by some compliance experts include operational constraints related to holding client disbursements, the need to either put in place or enhance policies and procedures for reviewing and acting on suspicions of financial exploitation, and documentation of the whole process.

External challenges include dealing with external agencies, such as Adult Protective Services. APS is a social services program provided by state and/or local governments nationwide, and reporting of cases to this agency is mandatory in 16 states. In some cases, neurologists or other kinds of experts may be called to weigh in on the cases.

Client-related challenges include the client’s possible lack of awareness and, in some cases, lack of acceptance that he or she is being financially exploited.

Amanda Demas, senior counsel at the legal, corporate and compliance group of BMO Financial Group, said in September at a Sifma seminar about senior investor protection rules that the company plans to create “a holistic process, from beginning to end” to handle financial exploitation cases and the temporary holds of the affected accounts.

That process starts with determining that there’s financial exploitation and then escalating that concern within the broker-dealer firm.

BMO has customers who interact solely with call centers, for example, and while the call center staff is trained to spot red flags and escalate that, more training might be needed, Demas said.

In particular, BMO would like to spend more time crafting and ironing out escalation procedures. The company is “contemplating” having its advisors escalate financial exploitation cases to their regional managers, who will then escalate the cases, separately, to an internal investigations unit and the legal and compliance team, Demas said. The internal investigations unit would then be responsible for reporting the cases to the state, she said, noting that some states have a mandatory reporting period of within 24 hours of the financial exploitation being discovered.

Demas said BMO is considering giving regional managers the authority to make the final decision on whether a temporary hold should be placed on the account of a specified adult, but this decision should be based on the guidance received from the legal and compliance team.

BMO is also considering the appropriate steps to take when it comes time to lift temporary holds on the accounts of specified adults.

“We are contemplating the stages for the 15 business days and what happens after those days run out,” Demas said. “Some of the things we have to look at is how then do we lift the restriction. It may be APS coming in and establishing guardianship or a family member coming in and establishing a power of attorney … or we would reach out to the trusted contact” of the specified adult.

James Wrona, an associate general counsel at Finra, identified APS as a potential “great resource” to which broker-dealers could refer cases of specified adults who are financially exploited.

Demas said, however, that the level of cooperation BMO expects to receive from APS depends on how responsive the agency is in a specific county, noting that the responsiveness varies.

Wrona acknowledged APS may have its hands full and, thus, may tell broker-dealer firms that it needs more time to look into the cases they have referred to the agency. If that’s the situation broker-dealer firms will face with APS, “I would love to see that in writing even if it’s not necessary,” he said. “You would have to document that.”

The documentation is in part to ensure that broker-dealer firms “don’t take advantage of this safe harbor and freeze assets” without proper cause, he added.


In terms of documenting case notes, such as the reason the temporary hold was initiated and the subsequent developments in the case, “we don’t have an electronic system to keep that in place,” so BMO plans to use its compliance team to “keep the records manually,” Demas said.

Fidelity Investments, meanwhile, plans to proactively reach out to APS even before the rule becomes effective, to discuss the rule and how it can work with APS when cases of financial exploitation of seniors arise, according to Melissa Hegger Shea, the company’s associate general counsel.

Shea anticipates that dealing with these cases might be “a pickle” because there will likely be clients who won’t believe that they are being defrauded because they trust the perpetrator.

Fidelity plans to enhance the policies and procedures it already has in place. Specifically, the company plans to work on the time frame in which the review of the financial exploitation case is conducted, the documentation of that review, and the training for record retention, Shea said.

Retaining records of the request for the disbursement that might constitute financial exploitation, the finding of reasonable belief, and the name and title of the person who authorized the hold on the disbursement will be crucial, she said.

“We have a lot of that now, but it’s not in a clean place all together,” Shea said. “We’re working on updating our document workflow management systems so that we can capture all of those things going forward. It is our intention to take advantage of the safe harbor whenever possible.”

Meanwhile, Wrona said the broker-dealer firms are free to create their own policies and procedures that will help them prepare for Rule 2165.

“Finra is not concerned with semantics,” he said. “We know there are different ways of doing things, and that’s OK.”

Wrona said Finra “won’t second-guess” the broker-dealer firms’ findings of financial exploitation, as long as the firms have policies, procedures and staff training in place before the rule becomes effective on Feb. 5 next year.

“This isn’t a gotcha-type rule. We’re trying to provide a safe harbor for you,” he said. “There’s a lot of flexibility in this rule.”

Wrona said Finra would step in only if it notices a broker-dealer firm is engaging in “sketchy” practices. “For example, if you have an extraordinary number of holds on accounts, we will be asking you about that.”