protect thY eLDers: finra ruLe 2165
Securities Section
Chairs: Rob Jamieson – Wiand Guerra King & Matthew Schwartz – Cole Scott Kissane
family and friends cannot be
the only defense against
financial exploitation,
fox guarding the hen-house.
M
s. Doe, age 70,
has been a client
of financial
advisor Mr. Dough
for thirty years. Ms. Doe is a
conservative investor who only
makes scheduled withdrawals.
One day, Ms. Doe requests that
30 percent of her investments be
liquidated and then makes a series
of unprecedented withdrawals.
Mr. Dough suspects financial
exploitation, but he is hesitant
to unilaterally freeze a client’s
self-directed account contrary
to explicit requests. The firm
reports the abuse. By the time the
authorities investigate, however,
the damage is done.
FINRA members regularly face
such predicaments, pushing the
issue of financial exploitation of
the elderly to the forefront of the
industry’s collective conscience.
So it is no surprise that one of
FINRA’s recent rule additions,
Rule 2165, is designed to prevent
financial exploitation by allowing
FINRA members to temporarily
prevent withdrawals on an account
when the FINRA member
reasonably believes financial
exploitation is occurring.
Such developments were, quite
literally, just a matter of time.
The population is getting older.
In 1900, there were 3.1 million
people over the age of 65; by 2010,
that number had grown to over 40
M AY - J U N E 2 0 1 8
because they are often the
|
HCBA LAWYER
million, or from roughly four to
13 percent. 1 And sadly, according
to the National Center on Elder
Abuse, roughly 10 percent of all
elders are abused in some form,
with financial exploitation costing
at least $2.9 billion annually. 2
Worse, it is not just fake
Nigerian princes to blame: Up to
34 percent of instances of financial
exploitation are perpetrated by
family and friends. 3 It is clear that
family and friends cannot be the
only defense against financial
exploitation, because they are often
the fox guarding the henhouse.
Instead, financial advisors are
often in a unique position to
help protect their customers since
they regularly have long-standing
relationships with their clients, and
they might be the first to notice
“abnormal” transactions associated
with financial exploitation.
But FINRA members were
rightfully reticent to take unilateral
action. Before the guidance and
safe harbor provided by Rule
2165, members faced a “damned
if you do, damned if you don’t”
predicament. If members froze
an account when they suspected
foul play, they could face claims if
the securities held in the account
dropped in value while the account
was frozen. If firms did not freeze
an account, they could face claims
that they should have prevented
withdrawals on an account when
they suspected exploitation.
Enter FINRA Rule 2165, which
hopes to strike a happy medium
and allow members to freeze
withdrawals on accounts for which
they suspect financial exploitation,
but still allow positions in the
account to be sold if the market
conditions require.
Rule 2165 will not prevent all
financial exploitation of the elderly,
nor will it prevent all claims made
against member firms. Rule 2165
is limited in that it can only be
invoked for customers over 65 or
otherwise impaired. And it only
allows accounts to be held for
15 business days. But even with
these limitations, Rule 2165
provides a basis for firms to act
to prevent abuse.
U.S. Census Bureau (2011), The
Older Population: 2010. Retrieved
from https://www.census.gov/prod/
cen2010/briefs/c2010br-09.pdf
2 https://ncea.acl.gov/whatwedo/
research/
statistics .
html#20
3 Id.
1
Author:
Josef Y. Rosen –
GrayRobinson,
P.A.
67