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By: Theodore C. Peters
In 2007, FINRA issued Regulatory Notice 07-43, which served as a “reminder” that member firms and registered persons had a heightened obligation to senior investors. At that time, NASD Rule 2310 required that in recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that customer, based on “the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” The rule also required that before executing a recommended transaction, the member firm was required to make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.” While Rule 2310 did not explicitly refer to a customer’s age or life stage, Reg. Notice 07-43 notified members that “both are important factors to consider in performing a suitability analysis.” FINRA Rule 2111, adopted in 2014, replaced NASD Rule 2310, and now clearly references the need for consideration of a customer’s age.
In October 2015, FINRA issued Reg. Notice 15-37, which requested comment on proposed rules relating to the financial exploitation of seniors and other vulnerable adults. The proposed rule amendments added a new rule (FINRA Rule 2165 – Financial Exploitation of Specified Adults) and proposed an amendment to an existing rule (FINRA Rule 4512 – Customer Account Information). Rule 2165 would permit “qualified persons” who reasonably believe that financial exploitation is occurring to place temporary holds on disbursements of funds or securities from the accounts of “specified adults.” The amendment to Rule 4512 would require firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer’s account. By definition, a “specified adult” is a natural person age 65 or older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
In March 2017, FINRA issued Reg. Notice 17-11, confirming that the SEC had approved (1) the adoption of new FINRA Rule 2165 to permit members to place temporary holds on disbursement of funds or securities under certain circumstances; and (2) amendments to FINRA Rule 4512 to require members to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account. While the provisions of Rule 2165 are permissive (a member firm has the ability, but no obligation, to place a temporary hold), the requirements of Rule 4512 are mandatory (thus requiring member firms to make reasonable efforts to gather trusted contact information).
The new rules became effective on February 5, 2018.
If you have any questions or would like more information, please contact Ted Peters at [email protected].