Finra has filed a proposed rule with the Securities and Exchange Commission that would allow brokers to report suspected financial exploitation of seniors and other vulnerable investors.
The measure, sent to the SEC on Wednesday and announced today, requires brokers to make “reasonable efforts” to identify a “trusted contact” for investment accounts. It also permits them to prevent the disbursement of funds from the account and notify the contact person if the broker suspects the client is a victim of financial abuse.
Brokers could freeze accounts of clients who are 65 or older or older than 18 and have a mental or physical impairment that “renders the individual unable to protect his or her own interests,”
the rule states.
The Finra board of governors authorized filing the proposal to the SEC a year ago. Since then, Finra received 40 comments on the proposal. The SEC must approve the rule before it can go into effect. The agency could subject it to another comment period and modify it.
“Moving forward with this [rule] will be a good thing for the industry and for investors,” Susan Axelrod, Finra executive vice president for regulatory affairs, told reporters on Thursday on the sidelines of a National Society of Compliance Professionals conference in Washington.
The rule was inspired in part, Finra said, by the organization's Securities Helpline for Seniors. The initiative, launched in April 2015, has garnered 6,700 calls, elevating awareness of the risks seniors face.
The Finra rule is advancing while
several states have approved a model rule developed by the North American Securities Administrators Association.
The NASAA measure requires that financial advisers notify Adult Protective Services and state regulators if they detect senior abuse. It also provides protections for reporting and for withholding funds.
Finra's rule is less demanding than NASAA's, indicating that
tension over whether to require advisers to report abuse will remain.
Although compliance experts praised the goal of the Finra rule, they worry about how it would work in practice.
Jason Gottlieb, partner at Morrison Cohen, said brokers are not medical and psychology experts, yet they would have to determine whether a client is being exploited.
“I'm concerned about potential liability and exposure to lawsuits or Finra arbitration if the financial institutions don't make the right call,” Mr. Gottlieb said. “The safe harbors may not be sufficient. It puts firms in a difficult position.”
Todd Cipperman, principal of Cipperman Compliance Services, called the rule “very paternalistic.”
“It comes from a good place, but putting it on the broker to police serious competency questions may be asking too much of them,” Mr. Cipperman said.
The rule could also place brokers in the middle of family squabbles, said Laura Anthony, founding partner of Legal and Compliance. For instance, what if the client wants to make a loan to one family member but the trusted contact is another family member who opposes it?
“It has the potential to create a lot of conflict they have not thought through,” she said.
Ms. Anthony also is leery of the responsibility being placed on brokers. “Is this another fiduciary obligation?” she said.
Ultimately, Mr. Cipperman foresees SEC approval of the rule.
“In my experience, once a rule goes to the SEC, it's because there have been discussions internally,” he said.
