FINRA Rule 2165: Protecting Seniors by Freezing Assets

In 2018, FINRA adopted FINRA Rule 2165 to combat extremely high incidences of elder financial abuse[1]. In 2020, Elder Fraud claimed over 100,000 victims, summing up to losses of nearly $1 billion. According to a report by the Internet Crime Complaint Center (IC3), the 60+ demographic was hit the hardest, both in the number of complaints as well as by total loss. The second-hardest-hit consort was the age group 50 – 59, followed by 40 – 49.

The year 2020 saw an enormous spike in elder financial abuse. Unfortunately, the trend only seems to have continued in 2021. Although the number of reported incidents in 2021 for the 60+ demographic was lower at 92,371, total losses came in at a whopping $1.68 billion for that demographic alone.

2018: FINRA Adopts Rule 2165

It is for this reason that the SEC approved FINRA Rule 2165 in 2018, and an amendment to rule 4512. These two rules specifically protect natural persons over 65 years, or adults over 18 years who have a mental or physical impairment that prevents them from being able to fully protect their interests.

Rule 2165 confers certain rights on FINRA members to temporarily block transactions or disbursements that the member believes are fraudulent, or that might lead to fraud in the future.

Let’s take a detailed look at FINRA Rule 2165 and how it is designed to protect seniors and their funds.

FINRA Rule 2165 in plain English:

Under FINRA rule 2165, the “Specified Adult” is either a natural person of over 65 years or an adult of over 18 years who has a physical or mental impairment that prevents them from being able to protect their own interests. 

A “member” is a registered member of FINRA[2], such as a financial advisor or a firm, or any other professional who is registered with FINRA. (Investors should always deal only with FINRA-registered advisors.)

Through the rule, a member has the right to place a hold on a transaction or disbursement if he or she believes that financial exploitation is, or might soon be, at play. The rule specifically defines financial exploitation as:

• Unauthorized taking, withholding, or appropriation of funds or securities.
• Fraudulently attempting to take control of a specified person’s funds through undue influence, coercion, deception, and other means explicitly defined in the rule.
• Fraudulently converting a specified adult’s assets.

Freezing Assets Under FINRA Rule 2165

When a member suspects that financial exploitation is at play, they have the full right to place a temporary hold on the disbursement of funds, or the transaction.

When doing so, the member must maintain full documentation which specifies:

• The request for disbursement or for the transaction which the member believes to be fraudulent.
• The finding of the reasonable belief of financial exploitation, whether that exploitation has already occurred or would occur later as a result of the transaction.
• Name and title of the person authorizing the hold.
• Notifications to relevant parties as defined in the rule (these include a trusted contact as specified in FINRA Rule 4152, and all parties authorized to act on the specified adult’s account).
• Any reasons for extending the hold.

How Long is the Hold Time Under FINRA Rule 2165?

The initial hold will expire 15 business days after being initiated unless it is either canceled or extended by:

• A state regulator or agency
• A court
• The member who imposed the hold in the first place, under the circumstances delineated below.

Can the Initial Hold Period be Extended?

The member can extend the hold under the following circumstances:

• The member has found by a subsequent and immediately initiated internal review that the hold was indeed valid. In this case, they can extend the hold by a further 10 business days.
• After finding by internal review that there is indeed suspicion of fraud or attempted fraud, the member must inform a state regulator or agency, or a court of competent jurisdiction. If the member has so reported the incident to these respective authorities, then the member can extend the hold by a further 30 business days.

Supervisory Procedures Under FINRA Rule 2165

Rule 2165 requires that there be proper supervisory procedures in place to ensure compliance with this rule.  The supervisory procedures must include the name and title of all persons authorized who can place such restrictions on an account. These persons must be associated persons of the member (such as employees) and serve in a compliance, supervisory, or legal capacity in the firm.

Other Important Points to Remember About FINRA Rule 2165

• The rule does not give a right to members to place a hold on an entire account, only on the suspected transactions. If, however, the transaction affects the account’s entire value, then the hold will effectively be on the entire account. Essentially, FINRA requires that legitimate transactions continue to go through (such as for regular bill payments) while the suspicious transactions are paused.
• Members can refrain from providing notifications to interested parties (such as the trusted contact) when the member believes that interested party is a party to the suspected financial exploitation.
• There is no specific designation on who the trusted contact must be, although natural persons should be 18 years or older. The trusted contact could also be a joint account holder, trustee, or someone with Power of Attorney. The member is not required to validate the age of a trusted contact.
• A customer is not obliged to provide a trusted contact, and can decline to do so at their own peril. The FINRA member would not be penalized for failing to obtain the details of a trusted contact when a customer opens an account, so long as the member has at least requested this information.

Getting Help if You were a Victim

If you feel that you or someone you know has been a victim of elder fraud, it is advisable to seek legal advice immediately.