Securities Litigation

FINRA Reg. Notice 15-37 (Oct. 2015) requests prompt comment (by November 30) on proposed Rules aimed at detecting and minimizing financial exploitation of seniors and other "vulnerable" adults. The proposals would amend Rule 4512(F) to require Firms' reasonable efforts to obtain name and contact information for a "Trusted Contact" person for newly-opened (or updated) individual accounts. A "Trusted Contact" must be over 18 and not authorized to transact business on the account. With notice to the account holder, Firms would be authorized to notify a "Trusted Contact" to confirm account details, trading authorizations and in the event of a temporary hold in cases of suspected exploitation. Proposed new Rule 2165 would authorize "Qualified Persons" in a Firm to place a discretionary short-term temporary hold on account disbursements in cases of suspected "Financial Exploitation" of "Specified Adults." "Specified Adults" are all those 65 and older, as well as any others with mental or physical impairment that renders them unable to protect their own interests, in the Firm's judgment upon observed facts and circumstances. "Qualified persons" able to place account-holds are supervisory, compliance and legal personnel within the Firm who are reasonably involved with the subject account. "Financial exploitation" is defined broadly, including wrongful acts to control or convert account assets. Implementation of an account hold also would require: (a) immediate internal review; and (b) immediate notification of the account holder, all those authorized to transact business in the account, and the trusted contact (alternatively, immediate family member), in any event not later than two days after the start of the hold. A Rule 2165 account hold would expire in 15 days, subject to a Qualified Person's extension for another 15 days, unless ordered otherwise by a Court. The proposed Rule imposes no requirement for holds, only a safe-harbor for them if followed. Beyond revamping account-opening processes and documentation, the Rule also will require firms to establish and maintain appropriate Written Supervisory Procedures for its implementation, including specified record-retention requirements. The proposed Rules escape the Reg. S-P limitations on disclosure of customer information by asking the customer to authorize the disclosures to designated "Trusted Contacts" and to authorize the hold process as part of the account-opening documents. See Reg. Notice at n. 7. The proposal is modeled after senior-protection statutes adopted by Delaware, Missouri and Washington. See Del. Code Ann. Tit. 31 § 3910 (2015); Mo. Rev. Stat. § § 409.600-630 (2015); Wash. Rev. Code § § 74.34.215, 200 (2015). FINRA hopes the proposed Rule change will spur more states to adopt similar provisions, or move toward the adoption of a Uniform State Law on the issue. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).