According to the 2020 Annual Elder Fraud Report released by the FBI Internet Crime Complaint Center (IC3), over 105,301 individuals over 60 years old have incurred over $966,062,236 total loss from some financial scheme or internet fraud. This age range represents the highest hit demographic and has seen a consistent rise in the number of victims and losses since 2015. In response to the enormous impact of elder financial abuse, the SEC has approved FINRA Rule 2165. This is a crucial rule for securities law. To fully understand the importance and function of FINRA Rule 2165, the following terms should be clarified under the definition of the rule:
- A specified Adult is defined as either 1) a natural person aged 65 years or older, or 2) any adult over the age of 18 years who is suffering from a mental or physical impairment that precludes them from being able to protect their financial interests.
- Member is defined as a registered member of FINRA, including, but not limited to, a financial advisor, firm, or any other professional registered with FINRA.
- Financial exploitation is defined as one of the following:
- When an unauthorized person takes, withholds, or appropriates the funds or securities of a specified adult.
- A person attempts to take control of a specified person’s funds through coercion, deception, or undue influence.
- They are fraudulently converting a specified adult’s assets.
FINRA Rule 2165 centers on the idea that a member is given the right to place a hold on a transaction or disbursement if they believe that financial fraud is, or might soon be, at play.
Freezing Assets Under FINRA Rule 2165
As noted above, this rule affords members certain powers over the specific adult’s account. One such capability is freezing a particular adult’s assets if they suspect that financial fraud is at play. FINRA Rule 2165 allows a member to place a temporary hold on the disbursement of funds or transactions on the specified adult’s account. However, it is essential to note that FINRA rule 2165 does not give members the right to place a hold on a specified adult’s entire account unless the suspected fraudulent transaction affects the whole account.
When a member freezes a specific adult’s asset, they are required to maintain complete documentation that includes the following information:
- The particular transaction or request for disbursement that the member believes to be fraudulent.
- That there is a finding of a reasonable belief that financial exploitation is at play, whether it has already occurred or would occur later as a result of the transaction.
- The person’s name and title authorizing the hold on the specified adult’s account.
- If appropriate, provide notifications to interested parties as defined in the rule. Interested parties could include trusted contacts and all parties authorized to act on behalf of the specified adult’s account. However, note that members can refrain from supplying interested parties with any notifications regarding the account if the member believes that the interested party is a party to the suspected financial fraud.
Hold Time Under FINRA Rule 2165 — Financial Elder Abuse
Under FINRA Rule 2165, the initial hold placed by the member will expire fifteen (15) business days after such hold has been initiated unless one of the following entities has either cancelled or extended the hold:
- The court
- A state regulatory agency or board
- The member who imposed the hold in the first place
Extending Initial Hold Period Under FINRA Rule 2165
Under FINRA Rule 2165, the FINRA member can extend the hold under the following circumstances:
- A member can extend the hold by an additional ten (10) business days if they find either by a subsequent or immediately initiated an internal review that a hold is valid.
- If, after finding by an internal review, there is a reasonable suspicion of fraud or attempted fraud committed. In this case, the member must inform a state regulator or agency or a court of competent jurisdiction. If the member has reported the incident to these respective authorities, then the member can extend the hold by thirty (30) business days.
Supervisory Procedures Under FINRA Rule 2165
To ensure compliance, FINRA Rule 2165 requires a proper supervisory procedure in place. Such supervisory procedures must include the name and title of all authorized persons who can place such restrictions on an account. These persons must be associated persons of the member and that they serve in the firm’s compliance, supervisory, or legal capacity. This rule aims to prevent not only elder financial abuse, but also financial abuse in general.
Sources:
https://www.ic3.gov/Media/PDF/AnnualReport/2020_IC3ElderFraudReport.pdf https://www.finra.org/rules-guidance/notices/17-11
