New and Amended FINRA Rules Protecting Seniors from Financial Exploitation

What would you do as a firm if you suspected that a customer’s child was misappropriating funds from his elderly parents’ financial accounts? Or if the compliance department noticed a pattern of suspicious transactions from a customer’s account, and that customer was an adult with some mental impairment? Amended FINRA Rule 4512 and new FINRA Rule 2165 empowers firms to help protect seniors and other vulnerable adults from unauthorized disbursements from their accounts in two ways: (1) allowing the firm to contact a “trusted contact person” and (2) allowing the firm to place a temporary hold on disbursements from the customer’s account. These new FINRA Rules are effective February 5, 2018.

Amended Rule 4512 and the “Trusted Contact Person”
Rule 4512, regarding Customer Account Information, was amended to add subparagraph (a)(1)(F), which subject to Supplementary Material .06, requires the firm to take reasonable steps to obtain the name and contact information for a “trusted contact person” – think of it as an “emergency contact” – whom the firm may contact about the customer’s account. Generally, asking the customer to provide this information will be considered reasonable efforts under Rule 4512, even if the customer does not ultimately provide the name and contact information for a trusted contact person. The firm should document the efforts it undertakes to obtain this information.

Supplementary Material .06 to the Rule describes the types of information that the firm may call upon the trusted contact person to address, including “possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or …” if the firm places a temporary hold on disbursements from the account under Rule 2165.

New Rule 2165 and Temporary Holds on Disbursements
New Rule 2165, Financial Exploitation of Specified Adults, authorizes members to take immediate action to stop or prevent suspected financial exploitation of certain customers, defined as “specified adults,” by authorizing the firm to place a temporary hold on disbursements from the customer’s account if it reasonably suspects financial exploitation. Rule 2165 has four key parts: (1) it defines the customers who may be considered “specified adults” and what is “financial exploitation,” (2) authorizes and defines the scope of temporary holds, (3) imposes supervisory obligations, and (4) imposes recordkeeping obligations on the firm.

Rule 2165 was designed to protect two classes of customers as “specified adults”: any person older than age 65 and any person over age 18, whom the member firm reasonably believes has a mental or physical impairment that makes it impossible for the individual to protect himself. As to customers with a “mental or physical impairment,” member firms are not expected to obtain information or know to a medical degree of certainty that a customer has such an impairment. Instead, Supplementary Material .03 to Rule 2165 states that the member need only have a “reasonable belief” of an impairment based upon “facts and circumstances observed in the member’s business relationship with the [customer.]” While there is no recordkeeping requirement associated with a determination of an impairment, should the need arise, the firm or financial advisor should be able to articulate whatever facts and circumstances led him or her to believe a customer is a “specified adult” protected by Rule 2165.

“Financial exploitation” is defined to include a broad class of activities, many of which firms and financial advisors are likely already equipped to identify, including the following:

  • Wrongful or unauthorized taking of a specified adult’s funds or securities;
  • Abusing a power of attorney or guardianship to obtain control over or convert the specified adult’s money or property; or
  • Using deception, intimidation, or undue influence to obtain control over a specified person’s assets.

The Temporary Hold Process
If a member reasonably suspects or discovers financial exploitation, the member may immediately place a temporary hold on the customer’s accounts to prevent the disbursement of funds or securities from the account. Note, however, that the temporary hold would not undo a sale of securities, but it would temporarily prevent the disbursement of the proceeds of that sale.

If a member imposes a temporary hold, it must notify any party authorized to transact business on the account and the trusted contact person within two business days of imposing the hold. Except that, if the party or trusted contact person is engaged in the suspected financial exploitation, he or she need not be notified under the Rule. The firm must keep records of the suspect transaction and any notice it provides of the imposition of the hold. The firm may terminate the temporary hold at any time, but if it does not, Rule 2165(b)(2) imposes a 15 business day time limit on the hold – if it is not terminated within 15 days, or extended by a regulator or the courts, it automatically expires.

Once the hold is in place, the member is required to commence an immediate internal review of the facts and circumstances that led to the temporary hold. The firm’s internal review should be documented and the records retained to comply with paragraph (d) of Rule 2165. If the internal review process supports the firm’s finding of financial exploitation, then the firm may extend the temporary hold for another 10 business days. After that, the temporary hold will expire, unless extended by a regulator or the courts.

Supervision and Recordkeeping Requirements
As expected, Rule 2165 requires the firm’s written supervisory procedures to contain policies and procedures to comply with Rule 2165.  Rule 2165(c) also requires WSPs to contain procedures and processes “related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults” and to identify the “title of each person authorized to place, terminate or extend a temporary hold.” The persons who may place, terminate, or extend a hold must serve in a supervisory, compliance or legal capacity.

Finally, Rule 2165 imposes specific recordkeeping requirements on the firm, which protect both the customer and the firm.  The firm must keep records of the suspect disbursement request, finding that financial exploitation is afoot, the name of whomever authorized the hold, copies of notifications provided to the customer or trusted contact person, and the firm’s internal review.

Firms and financial advisors have been trained for years to keep their eyes open for the possible exploitation of senior customers and vulnerable adults. Amended Rule 4512 and new Rule 2165 empowers firms to take quick action to prevent their customers from suffering financial losses from their accounts at the hands of wrongdoers. So, when a financial advisor suspects a family member of attempting to take advantage of an older customer, or the compliance department identifies unusual transactions in a vulnerable client’s account, the firm can protect the customer from suffering financial losses and help reduce the risk to the firm of arbitration or litigation concerning the exploitation of its customers.

Posted in FINRA, Uncategorized | Tagged ,

Federal District Court Enjoins DOL From Implementing or Enforcing BICE’s Prohibition on Class Action Waivers Against Thrivent

On November 3, 2017, the United States District Court, District of Minnesota issued a preliminary injunction against the DOL, enjoining the DOL from implementing or enforcing the BICE’s class action waiver prohibition against Thrivent Financial for Lutherans. The Court’s Order in Thrivent Financial for Lutherans v. R. Alexander Acosta, Secretary of Labor and United States Department of Labor, Case No. 16-cv-3289 (D. Minn.), is here.

Under the provisions of the full BICE (if the full BICE ever comes into effect), financial institutions must enter into written contracts with retirement advisers, acknowledging the financial institution’s status as a fiduciary and containing numerous other onerous written obligations and disclosures. Although the Best Interest Contract required by the BICE would be permitted to include individual arbitration agreements, the Best Interest Contract would not be allowed to include a waiver of a customer’s right to file or participate in a class action in Court.

The DOL previously conceded back in July that this prohibition on class action waivers violates the Federal Arbitration Act (the FAA).

Thrivent sued the DOL, asserting that the BICE’s bar on class action waivers violates the FAA and exceeds the DOL’s statutory authority. Thrivent sought: (i) a declaratory judgment that the BICE’s requirement that Best Interest Contracts must permit class actions in court violates the FAA and the Administrative Procedure Act; and (ii) a permanent injunction prohibiting the DOL from enforcing that provision.

On November 3, 2017, the District Court granted Thrivent’s motion for a preliminary injunction. The Court found that, because the DOL has conceded that the prohibition on class action waivers in the BICE violates the FAA, Thrivent had a reasonable likelihood of success on the merits.

After issuing the preliminary injunction, the Court then stayed the case, in light of the DOL’s ongoing reconsideration of the DOL Fiduciary Duty Rule and the BICE.

So, while this specific requirement of the BICE is almost certainly dead, it remains to be seen what portions of the full BICE, if any, will ever come to fruition.

Posted in BICE, Capital Markets, Department of Labor (DOL), Uncategorized | Tagged , , , , ,

It is Increasingly Unlikely We Will Ever See Full Implementation of the DOL Fiduciary Duty Rule or the BICE

The DOL Rule’s application of a fiduciary standard to persons who make recommendations to retirement investors has been in effect since June 9, 2017. Since that time, it has become increasingly unlikely that full implementation of the Rule or the BICE will ever see the light of day.

On November 2, 2017, the DOL’s proposal to delay full implementation of the Rule and the BICE was posted by the OMB. The delay rule, which must be approved by the OMB, would delay full implementation of the DOL Rule and the BICE yet again, from January 1, 2018, until July 1, 2019. Insiders expect the  OMB to approve the delay rule quickly, perhaps in only a week or two. Assuming the OMB approves the delay rule, the DOL will be authorized to publish the final delay rule in the Federal Register and the newest delay will take effect.

Meanwhile, the full BICE’s prohibition on class action waivers was dealt another blow, when the United States District Court for the District of Minnesota preliminarily enjoined the DOL from implementing or enforcing the prohibition against Thrivent, in Thrivent Financial for Lutherans v. R. Alexander Acosta, Secretary of Labor and United States Department of Labor, Case No. 16-cv-3289 (D. Minn.). The Court’s decision, which will be the subject of a separate blog post, is here.

If full implementation of the DOL Fiduciary Rule and the BICE is delayed to July 1, 2019, that means that the transition versions of the Rule and the BICE will apply until June 30, 2019 (if not indefinitely). Under the transition versions:

  • Firms and advisers are fiduciaries to the extent they give investment advice to retirement investors; and
  • They are subject to the Impartial Conduct Standards, which require firms and advisers to:
    • Provide advice that is in the retirement investors’ best interest (i.e., recommendations that are prudent and loyal);
    • Charge no more than reasonable compensation; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

The DOL has previously cautioned that it “expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the Impartial Conduct Standards.” DOL May 2017 Conflict of Interest FAQs at p. 5.

So, while firms and advisers may breathe a sigh of relief that the full DOL Rule and BICE (with their onerous written disclosure and investor communication obligations) look to be pushed back yet again, firms and advisers should remember that the transition period of the Rule and the BICE is still in force.

Accordingly, firms especially should have in effect:

  • Written policies and procedures acknowledging their status as fiduciaries to the extent they give investment advice to retirement investors; and
  • Written policies and procedures implementing the Best Interest standard and Impartial Conduct Standards.

Firms and advisers are also encouraged to ensure that their E&O policies cover breach of fiduciary duty claims and alleged violations of the DOL Rule.

Posted in BICE, Capital Markets, Department of Labor (DOL), E&O Coverage, Fiduciary Duty Rule

ALERT: Eighth Circuit — Notice Under Claims Made Policy Was Not “As Soon As Practicable” Even Though Provided Within Policy Period

Common business insurance policies, such as those providing Errors and Omissions and Directors and Officers coverage, are issued on a “Claims Made” basis. This means that, unlike “occurrence”-based policies which cover injury that takes place during the policy period (regardless of when a claim relating to such incident is made or the negligent conduct occurred), these policies provide coverage for “claims” that are made against the insured during the policy year. “Claims” has been interpreted by the Eighth Circuit to mean not only formal lawsuits or proceedings but also any communication showing that the claimant blames the insured and expects the insured to take an action or pay to fix the problem.

These policies typically contain strict notice provisions, require prompt notice as a “condition precedent” to coverage. A common notice provision requires that the claim be made “as soon as practicable, but in no event later than [a certain number of] days after the end of the policy period.”

In a recent case, the Eighth Circuit, interpreting Minnesota law, held that a seven-month delay in providing notice to the carrier was not “as soon as practicable,” even though notice was provided within the policy period. In Food Mkt Merch., Inc. v. Scottsdale Indem. Co., 857 F.3d 783 (2017), the appellate court treated “as soon as practicable” as a separate condition precedent. In other words, even if notice is given during the policy period or within 60 days after termination, this may not fulfill the “as soon as practicable” condition. Rather, the Eighth Circuit noted that whether notice was given “as soon as practicable” is a fact question, and a claim may not be timely even if the insurer is given notice within the policy period. The facts of this case may make it distinguishable from the more typical scenario.

Nonetheless, in light of the broad definition of “Claim,” coupled with the strict notice requirement, Insureds with “Claims Made” must be vigilant an analyze every demand for action promptly to determine whether to give notice to their carrier. If an Insured fails to give notice of a demand-style communication “as soon as practicable,” coverage for a later more formal proceeding based on that preceding demand may be waived.


Susan Gelinske and Lauren Lonergan contributed to this post.


Posted in Insurance, Uncategorized | Tagged , , , ,

States May Be Enacting Their Own Fiduciary Duty Rules: Are You Covered Under Your E&O Policy?

With full implementation of the DOL Fiduciary Duty Rule pushed back to July 1, 2019, questions linger as to whether the Rule will survive at all and, if so, to what extent. Now, state agencies and lawmakers are stepping into the breach to enact their own fiduciary duty rules for the financial services industry.

Nevada, for example, enacted a new law that subjects certain brokers and advisers to the state’s fiduciary duty rule. Connecticut has also passed a law requiring companies administering municipal 403(b)s, a type of defined-contribution plan not covered by ERISA protections, to disclose to each retirement-plan participant information regarding conflicts of interests and fees. There are reports that New York, New Jersey and Massachusetts may follow suit with their own fiduciary duty rules.

In light of these developments, you may want to consider whether your firm’s E&O policy will cover claims involving state fiduciary duty rules. (We previously discussed issues involving the DOL Fiduciary Duty Rule and your E&O coverage here.)

It may be wise to revisit any endorsement negotiated with your insurer to make sure it covers not only actions relating to the DOL Rule but also any similar statute, rule, or regulation requiring brokers and agents to adhere to a “best interest” rule or fiduciary standard.

Remember – it is always better to ask questions about your coverage before you need it.

Posted in Department of Labor (DOL), E&O Coverage, Fiduciary Duty Rule, Uncategorized | Tagged , , ,

DOL Moves Step Closer to 18-Month Delay on Fiduciary Duty Rule and BICE

On August 28, 2017, the Office of Management and Budget (OMB) approved the Department of Labor’s (DOL) proposal to delay the full applicability dates of the Fiduciary Duty Rule and the Best Interest Contract Exemption (BICE). The proposal still must be finalized by the DOL.

The DOL will now release a proposed rule in the Federal Register with a comment period. The DOL’s proposed rule will delay for 18 months—from January 1, 2018, to July 1, 2019—full implementation of the Fiduciary Duty Rule, the BICE and other related rules (including PTE 84-24).

The full text of the proposed delay rule, when it is available, should be instructive. Industry participants will clearly scour the full proposal for clues as to whether this latest delay is a deliberate step towards full or significant repeal of the Rule’s most onerous provisions (especially the Best Interest Contract), or whether this is just another kick down the road with no clear plan for the future of the Rule.

Posted in Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged , , , , ,

DOL Seeks Additional Delay on Fiduciary Duty Rule and BICE

The Department of Labor (DOL) is seeking once again to delay final implementation of the Fiduciary Duty Rule and the Best Interest Contract Exemption (BICE), leading to further speculation as to whether the full Fiduciary Duty Rule or BICE will ever see the light of day.

On August 9, 2017, the DOL submitted to the Office of Management and Budget (OMB) proposed amendments to the Fiduciary Duty Rule, the BICE, and other related rules (including PTE 84-24), which would delay the full applicability dates of those rules another 18 months — from January 1, 2018, to July 1, 2019.

Of course, the real question is whether this is yet another slow step towards full or significant repeal, especially for the BICE.

After all, much rejoicing was heard back on July 3, when the DOL appeared to concede before the Fifth Circuit Court of Appeals that the BICE’s prohibition on class action waivers violates the Federal Arbitration Act and admitted in its papers (here at p. 59) that “the government is no longer defending this specific condition.” However, the government maintained then that the “invalidation of the anti-arbitration condition does not justify invalidation of the BIC Exemption or of the fiduciary rule as a whole.” Brief at pp. 59-60.

But now, the DOL is hesitating on the Rule and the BICE again, this time for another 18 months. The text of the latest proposed delay rule does not yet appear to be publicly available, which is a shame. After all, the full text of the first delay rule, that initially extended the applicability 60 days, from April 10, 2017 until June 9, 2017, was 60+ pages long and contained a lot of very interesting clarification from the DOL.

Regardless, it seems clear, at least, that the DOL wants time to consider the comments submitted in response to its Request for Information (see our blog post here), complete the analysis demanded by President Trump in his Presidential Memorandum (see our blog post here), and perhaps even to cooperate with the SEC on a uniform standard to apply to all investor accounts.

The proposed delay rule is now up for review before the OMB.



Posted in Administration, Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged