The SEC recently approved FINRA’s proposed rule aimed at preventing fraud and abuse of senior investors. On March 30, FINRA issued Regulatory Notice 17-11, setting the effective date for the new rule as February 5, 2018. The notice provides for the adoption of new FINRA Rule 2165, which will permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. It also provides for amendments to FINRA Rule 4512, requiring members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account. FINRA proposed the new rule in response to concerns over abuse of the rapidly growing number of aging baby boomers.
In addition, several states have also recently adopted or proposed legislation aimed at protecting elderly or vulnerable persons’ investment interests. On March 27, Mississippi’s governor approved an amendment to the Mississippi Securities Act, which provides additional post-registration requirements for certain broker-dealers and investment advisers relating to “vulnerable persons.” The Mississippi Vulnerable Persons Act defines vulnerable persons as a person whose ability to perform the normal activities of daily living is impaired due to a mental, emotional, physical or developmental disability or dysfunction, or brain damage or the infirmities of aging. Investment advisers and broker-dealers are required to notify the Department of Human Services if they know or suspect a vulnerable person has been or is being abused, neglected, or exploited. The amendment further requires them to notify the Secretary of State’s Office and will allow them to notify a third party or delay disbursements if they reasonably believe financial exploitation has been attempted or has occurred. The amendment, along with its immunity provisions, aims to encourage firms to report potential financial exploitation as early as possible.
A proposed amendment to the Tennessee Securities Act increases penalties for violations wherein senior citizens and adults with certain mental or physical dysfunctions are victims, among other changes. The amendment requires certain individuals to notify the commissioner if they reasonably believe that financial exploitation of a “designated adult” has been attempted. It also allows a broker-dealer or investment adviser to delay a disbursement from a designated adult’s account in the case of suspected financial exploitation. The Act defines a designated adult to include persons 65 years of age or older. TN HB0304, setting forth these amendments, was introduced on January 31, 2017, and has been placed on the Insurance and Banking Committee calendar for consideration on April 4, 2017. TN SB1192, also setting forth these amendments, was introduced on February 9, 2017, and has also been placed on the Senate Finance, Ways and Means Committee calendar for consideration on April 4.
Proposed amendments to the Texas Securities Act are also aimed at protecting vulnerable adults and elderly persons from financial exploitation and abuse. The amendments require certain persons to notify the broker-dealer or investment advisor of any suspected financial exploitation of vulnerable adults or elderly persons, who is then required to investigate the suspected exploitation. They also require the dealer or advisor to adopt certain internal policies to facilitate the notification process and outline requirements for transaction holds involving an account of a vulnerable adult. TX HB3921, setting forth vulnerable adult amendments, was introduced on March 10, 2017. TX SB2067, also setting forth vulnerable adult amendments, was introduced on March 10, 2017, and was referred to the Senate Business and Commerce Committee on March 28, 2017, where it remains pending. TX HB3224, setting forth elderly persons amendments, was introduced on March 7, 2017. TX HB3972 also sets forth elderly persons amendments and was introduced on March 10, 2017.
Given the recently proposed FINRA rule, other states are likely to follow by enacting additional legislation aimed at preventing the exploitation of elderly and vulnerable investors.