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FINRA Close to Filing Fraud Rule for ‘Vulnerable’ Investors

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The Financial Industry Regulatory Authority plans to file “imminently” with the Securities and Exchange Commission for approval its proposed Rule 4512 to help block elderly and vulnerable investors from financial exploitation, Susan Axelrod, FINRA’s head of regulatory operations, said Wednesday.

Speaking on a panel at the National Society of Compliance Professionals annual meeting in Washington, Axelrod noted along with Joseph Snyder of the Philadelphia Corporation for Aging, that it’s not just about protecting “senior” investors these days, but all investors that fall into the “vulnerable” category—those with diminished capacity, disabilities, and even those in the military.

(Related: SEC Launches New FINRA Inspection Team )

“We don’t think of it just as seniors; it’s got to be much broader,” Axelrod said. “I don’t think we define age limit” when categorizing those who face fraud.  

Snyder agreed, stating: “Everyone who’s aging is a vulnerable investor,” adding that vulnerable investors includes those with an impairment.

The FINRA plan—which received 40 comments—would require member firms to “make reasonable efforts” to obtain the name of and contact information for a trusted contact person for a customer’s account by amending Rule 4512 (Customer Account Information).

The rule would also allow advisors/brokers to place a temporary hold on transactions that could be fraudulent by creating a new FINRA Rule 2160 (Financial Exploitation of Eligible Adults), and applies to investors aged 65 or older as well as investors 18 and older who have a mental or physical impairment that renders them unable to protect their own interests.

Michael Rufino, head of member regulation at FINRA, noted on a Monday panel when speaking about the self-regulator’s proposed rule that “examinations are probably down the road, but the rule has to be finalized.”

Axelrod told reporters after her remarks that FINRA’s Securities Helpline for Seniors, which launched last April, has received 6,700 calls to date. Top call concerns from investors of all ages as well as professionals in the industry seek information on education, variable annuities, as well as BrokerCheck, she said.

Axelrod’s comments come a day before FINRA and the Securities Industry and Financial Markets Association hold a two-day joint event Thursday and Friday in Washington on protecting senior investors from exploitation and irreparable financial loss.

The North American Securities Administrators Association’s membership voted in February to adopt a model act designed to protect vulnerable adults from financial exploitation, including allowing broker-dealers or advisors to impose an initial delay of disbursements from an account of an eligible adult for up to 15 business days if financial exploitation is suspected.

Since publication of the Model Act, two states – Alabama and Indiana, have enacted statutes that contain provisions similar to those found in the Model Act including mandatory reporting to state securities regulators along with Adult Protective Services. Vermont has also adopted the Model Act by regulation. A fourth state – Louisiana – has passed legislation that protects voluntary disclosures. This legislation goes into effect January 1, 2017.

Snyder noted that 26 states now require “some sort of mandatory” reporting of elder abuse to APS, with some being “specific about the financial industry” frauds. But Snyder and Axelrod both agreed that training to help advisors and brokers to detect signs of abuse is key. 

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