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Trusted Contact Rule

Thursday, February 15, 2018

FINRA has adopted an amendment to FINRA Rule 4512 (Customer Account Information) (the “Trusted Contact Rule,”), effective February 5, 2018, which requires member firms to adopt protocols for making reasonable efforts to obtain the name and contact information of a “trusted contact.” Under the amended rule, member firms are required to make a reasonable effort to obtain the name and contact information for a trusted contact person upon the opening of an account and whenever updating account information. Implementation of the amended rule comes on the heels of FINRA Rule 2165 and NASAA’s Model Act to Protect Vulnerable Adults from Financial (the “Model Act”), which were previously adopted to assist Broker-Dealers and Investment Advisers in protecting the elderly and other vulnerable adults from financial exploitation.

Procedurally, the amended rule means that financial advisors should obtain, at account opening, the name of a trusted contact who could be contacted by the member broker-dealer and the advisor in the event that financial exploitation is suspected. FINRA member firms, meanwhile, are required to make written disclosure to the customer during the account opening process that the member and the advisor are authorized to contact the trusted contact and disclose information about the customer’s account to:

  • Address potential financial exploitation issues.
  • Confirm the specifics of the customer’s current contact information.
  • Obtain health status.
  • Acquire the identity of a legal guardian, executor, trustee, or power of attorney holder on the account.

Pursuant to this new rule, a member can place a temporary hold on the disbursement of funds or securities of a “specified adult”—particularly an adult over age 65, but also someone over 18 who has a mental or physical impairment that renders the individual unable to protect his or her own interest—if the member has a reasonable belief that financial exploitation has occurred. If a hold is placed, the member must:

  • Provide notification, including the reason for the hold, to the trusted contact and customer no later than two business days after the hold was placed;
  • Retain records of the notification;
  • Barring certain exceptions, expire the hold within 15 business days10 after the hold was placed; and
  • Adopt written supervisory procedures and a training program relating to the placement of such holds on a customer’s disbursement of funds or securities.

Importantly, the Adviser and related persons should NOT agree to serve as the trusted contact for any client. The Model Act permits the Adviser to notify a previously-designated third-party (and requires the Adviser to notify relevant governmental authorities) if the Adviser reasonably suspects financial exploitation. The Adviser does not qualify as a “third-party.” Moreover, allowing the Adviser or its related persons to serve as the trusted contact eliminates the additional source of information the adviser needs to address the above-listed concerns and comply with the Model Act’s notice requirements.

Pursuant to the Trusted Contact Rule and related rules/legislation, Red Oak is recommending amendments to the Written Supervisory Procedures needed by Advisers/Broker-Dealers to comply with the Trusted Contact Rule and to establish best practices for serving elderly and other vulnerable clients.

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