When should advisors halt disbursements?
Q: May a member place a temporary hold on a securities transaction pursuant to Rule 2165?
A: FINRA Rule 2165 was a response to the growing concern of senior investors being defrauded. It’s a fairly recent rule, approved by the SEC in 2017 and effective since February 2018.
Under the new rule, a broker-dealer may place a temporary hold on the disbursement of funds or securities from certain clients’ accounts under certain conditions. It only applies to the accounts of “specified adults” — either individuals age 65 and older, or individuals age 18 and older who the broker-dealer “reasonably believes [have] a mental or physical impairment that renders the individual unable to protect his or her own interests.”
For those specified adults, the member firm can place the temporary hold if the firm “reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted; and, within two business days, the member firm notifies (i) all authorized parties on the account (unless a party is unavailable or the member firm reasonably believes that the party is the one involved in the financial exploitation; and (ii) the trusted contact person(s) (See rule 4512), (unless, again, the trusted contact person is unavailable or the broker-dealer reasonably believes they’re involved in the financial exploitation).
Additionally, the rule requires the broker-dealer to immediately initiate an internal review of the facts that caused the member firm to believe that there is (or will be) financial exploitation of the specified adult. The temporary hold is only good for 15 business days unless extended by a regulator or a court. Depending on the results of the member firm’s investigation, the firm may also extend the hold for another 10 business days.
Having ‘fessed up to improper 12b-1 fee disclosures, dually registered advisors might still be excluded by FINRA.
It may seem like your interests are aligned but there could be conflicts.
So how do you know if you should bring an issue up to compliance with a recommendation that your firm place a hold on the disbursement? The ramifications of doing so when a hold wasn’t warranted, or not placing a hold when one was needed, can have equally damaging results. Some red flags to watch out for include, but are not limited to:
- Sudden reluctance to discuss financial matters.
- Sudden, atypical or unexplained withdrawals or other changes in financial situation.
- Abrupt changes in wills trusts, or power of attorney.
- Changes in beneficiaries on insurance policies or IRAs.
- Increasing lack of contact with, and lack of interest in the outside world.
- Admission of financial or material exploitation or suspected exploitation.
- Concern or confusion about missing funds in account.
- Unusual or first-time wire transfers, especially to foreign countries.
- Fear of eviction or nursing home placement if money is not given to a caretaker.
- Appearance of insufficient care despite having money.
- Reluctance to discuss or disclose the reason for the disbursement in front of a caretaker, especially if the caretaker is reluctant to leave the client alone.
Any one of these red flags alone may not, in and of itself, be reason to place a hold on an account, but taken in context of a particular client, or combined with other factors, they may be valid reasons to at least bring the matter to your compliance department.