FINRA Rule 2165 is a federal securities rule that lets broker-dealers place a temporary hold on suspicious disbursements from a vulnerable adult’s account. It applies to anyone 65 or older, or any adult whose mental or physical impairment prevents them from protecting their own financial interests.
When a broker has reasonable grounds to believe financial exploitation is happening or about to happen, the rule gives them a legal window to pause the transaction and escalate it before real damage is done.
While their broker may be trustworthy, your parents or other elderly loved ones may reach a point where they are no longer able to make sound investment decisions.
A common example of elder financial abuse is when a parent becomes involved in a Ponzi scheme. Another often-seen scenario is when a parent is defrauded into allowing a nefarious third party access to their accounts.Their accounts are quickly drained before an eagle-eyed broker or a caring son or daughter suspects investment fraud.
In such cases, it’s best to consult with an elder fraud attorney so they can help you get the justice you need. FINRA Rule 2165 is designed with folks like senior citizens in mind. The rule helps a broker look out for their vulnerable clients’ interests. It also enables them to do so before losses become catastrophic.
FINRA Rule 2165: Financial Exploitation Defined
FINRA Rule 2165 defines “financial exploitation” as consisting of either of two circumstances. First, Rule 2165 identifies financial exploitation as the wrongful or unauthorized taking or use of a specified adult’s funds or securities.
This first definition is very broad and can encompass many types of financial exploitation.
Second, Rule 2165 defines financial exploitation as any action or omission, including through a power of attorney or a guardianship, to do any of the following things:
- Obtain control over a specified adult’s money, assets, or property through deception, intimidation, or undue influence; or
- Steal the specified adult’s money, assets, or property.
FINRA Rule 2165 only protects “specified adults.” These are vulnerable people who may not be able to make their own financial decisions. FINRA Rule 2165 defines a “specified adult” as:
- A person age 65 or older; or
- A person age 18 or older who has a mental or physical impairment that impacts their ability to look after their own interests.
The financial exploitation definition under FINRA Rule 2165 relates only to actions taken against specified adults. If you do not fit into the category of “specified adult,” you still may have been the victim of securities fraud. If so, it’s important to reach out to an experienced securities fraud attorney as soon as possible.
How FINRA Rule 2165 Protects Vulnerable Adults from Financial Exploitation
FINRA Rule 2165 and its sister rule, FINRA Rule 4512, are administered by the financial industry regulatory authority to help protect senior investors and vulnerable adults from financial exploitation. These rules work together to protect vulnerable investors, including senior investors, by allowing a vulnerable person’s broker to freeze disbursement of funds from an account suspected of financial exploitation.
These protections are part of broader investor safeguards across the securities industry. They also allow a broker to notify a vulnerable person’s important contacts when the broker suspects financial exploitation is taking place.
Preventing the Disbursement of Funds When Financial Exploitation Is Suspected
A broker is able to place a temporary hold on a disbursement of funds or securities from a specified adult’s brokerage account if/when:
- A broker has a reasonable belief of financial exploitation based on facts and circumstances;
- A broker notifies all parties authorized to transact business in the account, as well as the account’s trusted contacts, about the temporary hold and the reason for it; and
- A broker initiates an internal review documenting the member’s reasonable belief and the circumstances observed.
The temporary hold is initially limited, but it can be extended for an additional 10 business days if the internal review justifies it.
The notification to authorized persons on the account can be made orally or in writing (electronic communication is okay) within two business days. Brokers must communicate clearly and quickly about the temporary hold and the reason for the temporary hold.
When working with specified adults, a broker needs to maintain a list of trusted contacts. A trusted contact person must be a natural person and does not have to be a signatory on the account, but can be someone the broker can share important account information with to address possible financial exploitation and help with protecting assets.
Notification is a very important element of Rule 2165 because placing a hold on client funds is no small matter. However, if the broker suspects that the trusted contact is the person perpetrating the fraud, the broker is no longer under an obligation to notify them.
How Long Can a FINRA Rule 2165 Hold Last After the 2022 Updates?
FINRA amended Rule 2165 on March 17, 2022, expanding it beyond disbursements alone, and a FINRA Rule 2165 hold can last up to 55 business days in certain cases because the rule allows an initial 15-business-day pause, a short extension after an internal review, and a longer extension when the situation is reported to a state authority.
Rule 2165 acts as a temporary hold tool. If someone thinks an older person is being tricked out of their money, it lets the broker freeze the account before the cash is gone for good.
At the Law Offices of Robert Wayne Pearce, P.A., our elder fraud attorneys have seen these holds used for more than wire requests, because the updated rule can also apply to a securities transaction as well as disbursements from the customer’s account or adult customer’s account when a specified adult (customer age 65+ or an impaired adult) appears to be targeted.
“Reasonable belief” just means you have real reasons to be worried, not just a gut feeling. Red flags like sudden account liquidations, unfamiliar payees, third-party pressure, or sketchy power of attorney instructions are exactly what qualifies. The updated rule applies where there is potential financial exploitation, a belief of financial exploitation, and signs the exploitation has been attempted or is ongoing. It also addresses the financial exploitation of specified adults, including a hold in a specified adult customer’s account.
While the hold is active, your best next step is to document the “why” behind the movement request, identify the trusted contact person, and ask the firm’s compliance or legal department for the hold notice and review status.
Evidence means protection because clear timelines, call notes, and beneficiary/authority documents can help stop the scam and preserve recovery options. If the matter is reported to state authorities or adult protective services, longer extensions may be available. Coordination with relevant parties matters.
Rule 2165 Amends Other Protections Against Exploitation
The securities and exchange commission adopted FINRA Rule 2165 in February 2018, and FINRA later amended Rule 4512. Previously, Rule 4512 only required brokers to collect and maintain basic personal data about their clients.
Now, brokers are required to make reasonable efforts to obtain and maintain the name of a trusted contact person, who must be a natural person, as well.
This revised rule is a great resource for investors and brokers alike. As the investor population ages, trusted contacts can be an excellent resource for brokers to share concerns about unusual client behavior or diminished capacity to make investment decisions.
The framework also helps when there is an individual unable to protect his or her own interests because of diminished capacity.
Early communication can lead to better results for investors, caregivers, and brokers. It can even prevent financial exploitation in the first place. A trusted contact can also help firms identify or report financial exploitation before losses worsen.
If you suspect your account or a loved one’s account has already been compromised, contact an investment fraud attorney as soon as possible. The sooner you act, the more options you have.
Brokers Are Responsible for Compliance
FINRA member firms now must make decisions about whether their clients have the ability to make financial decisions for themselves. This can be difficult and even embarrassing where brokers and clients have worked together for many years.
Cognitive abilities of aging people and people with disabilities can change dramatically in short periods of time. Determining if and when a client is at risk of financial exploitation is a very delicate task. The responsibility falls on member firms to understand when transactions are legitimate or not. In practice, broker dealers and other associated persons should escalate concerns to supervisors, compliance, or legal when exploitation is suspected.
Cognitive decline is not always obvious, which is why firms must maintain written supervisory procedures and written supervisory procedures should guide these reviews to achieve compliance. Broker-dealers also must train staff to recognize signs of financial abuse and document training policies.
These steps help member firms exercise discretion more consistently when there is suspected exploitation of specified adults.
Contact a Securities Fraud Attorney
If you or a loved one has been financially exploited, you may have a legal right to pursue action against responsible parties. Experience is key in litigating cases like these.
We at The Law Offices of Robert Wayne Pearce, P.A., are eager to help you understand your rights. Robert Pearce has many years of experience in the area of securities fraud. He has arbitrated and mediated hundreds of investment-related disputes in his career.
Our team of experienced investment loss litigators has recovered over $175 million dollars for well-qualified investors. We help investors nationwide and internationally pursue claims for a variety of investment losses and frauds. Contact us today about a free initial consultation on your case.
