“It happens to everyone, of every age, and victims ought not be ashamed.”
Since 2014, financial institutions have reported to the federal government over 180,000 suspicious activities targeting older or vulnerable adults, totaling more than $6 billion, as the result of investment scams, telemarketing schemes, online scams, lottery or prize scams, grandparent scams, and romance scams. Consumer Financial Protection Bureau, Office of Financial Protection for Older Americans, Suspicious Activity Reports on Elder Financial Exploitation: Issues and Trends (Feb. 2019). (Feb. 2019). Approximately 70 percent of MSB filings were related to scams. Romance, relative in need, and lottery/sweepstake scams were the most common types of scams described in these filings.”
“Elderly people can also be duped into new romantic or platonic relationships with unscrupulous people who seek to obtain money. In 2020, these types of scams resulted in over $280 million in losses to adults over 60 years of age.” Protecting Elders from Financial Abuse, Wealth Management (June 14, 2022).
As stated above, in 2019, the CFPB and FinCEN issued a memorandum to financial institutions to combat elder financial exploitation highlighting “the critical role that financial institutions play in detecting, and responding, and preventing elder financial exploitation, as well as the important role of the filing of Suspicious Activity Reports (“SARs”) as part of these efforts.
In 2017, the Consumer Financial Protection Bureau (“CFPB”) and the Financial Crimes Enforcement Network (“FinCEN”), issued a memorandum to financial institutions and law enforcement to combat elder financial exploitation, which highlighted the “critical role that financial institutions play in detecting, responding and preventing elder financial exploitation.” Id. at 3. According to the Report, “approximately 70 percent of filings were related to scams. Romance, relatives in need, and lottery/sweepstake scams were the most common types of elder financial abuse described in these filings.” Id. at 6.
Not long thereafter, in March 2017, the United States Securities & Exchange Commission approved the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a “reasonable belief of financial exploitation.” Regulatory Notice 11-17 (March 5, 2017).
In March 2017, the United States Securities & Exchange Commission approved the amendment of FINRA Rule 2165 (Financial Exploitation of Specified Adults) and FINRA Rule 4512 (Trusted Contacts and Customer Account Information). The amendments to these Rules became effective February 5, 2018. (SR-FINRA-2016-039 eff. Feb. 5, 2018).
The Duties of Securities Broker-Dealers
FINRA Rule 2165, with respect to the Financial Exploitation of Specified Adults, provides that securities broker-dealers or member firms and their associated persons, are required “to immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.” (emphasis added). FINRA Rule 2165(b)(1)(C) Adopted by SR-FINRA-2016-039 eff. Feb. 5, 2018.
Under the new Rule 2165, a “Specified Adult” not only includes senior citizens, but also includes any “natural person age 18 and older, who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Rule 2165 (a)(1)(a). According to guidance provided under the new Rule, “a member’s reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member’s business relationship with the natural person.” Regulatory Notice 17-11 (March 30, 2017) and Regulatory Notice 22-05 (February 15, 2022)(“‘Specified Adult’ in Rule 2165 covers those investors who are particularly susceptible to financial exploitation”).
The amendments to Rule 4512 require members “to make reasonable efforts to obtain the name of and contact information for a “trusted contact person’ upon the opening of a customer’s account or when updating account information for an account in existence prior to the effective date of the amendments (existing account). Rule 4512(a)(1)(F) provides that the broker-dealer or “member or an associated person of the member is authorized to contact the trusted contact person and disclose information about the customer’s account to address 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 as otherwise permitted by Rule 2165.” Rule 4512(a)(1)(F).
FINRA Rule 2165(c)(1) also requires that member firms “shall establish and maintain written supervisory procedures” including, “but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults,” and that as part of a firm’s “Account Monitoring” responsibilities under the Rule that firms monitor surveillance reviews and exception reports that focus on transaction types that are inconsistent with prior account activity” as part of the firm’s “Know Your Customer” obligations. Regulatory Notice 20-34 (October 5, 2020).
FINRA Rule 2165(b)(1)(C), regarding the Financial Exploitation of Specified Adults, requires that the firm “immediately initiates an internal review of the facts and circumstances that caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.” FINRA, Protecting Seniors From Financial Exploitation (March 17, 2022).
In addition to the general supervisory and recordkeeping requirements of Rules 3110, FINRA Rule 2165(c)(1) requires that members shall “establish and maintain written supervisory procedures reasonably designed to achieve compliance with this Rule, including, but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults.”
The violation of these rules, and the duties associated with these rules, also supports a finding of negligence. See, e.g. Miley v. Oppenheimer & Co., 637 F.2d 318, 333 (5th Cir. 1981)(industry rules are “excellent tools against which to assess in part the reasonableness or excessiveness of a broker’s handling of an investor’s account”); Lang v. H. Hentz & Co., 418 F. Supp. 1376, 1383-84 (N.D. Tex. 1976) (NASD Rules provide evidence of the standard of care a member should have); Kirkland v. E.F. Hutton and Company, Inc., 564 F. Supp. 427 (E.D. Mich. 1983)(violation of Rule considered in determining negligence).
As stated above, in 2019, the CFPB and FinCEN issued a memorandum to financial institutions to combat elder financial exploitation highlighting “the critical role that financial institutions play in detecting, responding, and preventing elder financial exploitation.”
As part of its Know-Your-Customer obligations, securities broker-dealers and their registered representatives have a duty to be vigilant and investigate transactions or withdrawals from customer accounts which may be inconsistent with the customer’s investment practices.
The “Account Monitoring” responsibilities under Rule 2165 require that firms perform reviews and monitor exception reports that focus on transaction types that are inconsistent with prior account activity, and report suspected abuse.
Violation of the “Customer Protection Rule”
Under the “Customer Protection Rule,” SEC Rule 15c3-3, securities broker-dealers have a regulatory responsibility to safeguard and protect customer funds and securities from third parties. Securities broker-dealers also have a responsibility to protect customer funds and securities from fraud. See also, Regulatory Notice 12-05, Customer Account Protection (January 2012).
The “the transmittal of funds, including wires or checks, or securities from customer accounts to third-party accounts where the transmittal that would result in a change of beneficial ownership.” See, e.g. NYSE Rule 401
By permitting the transfer of funds from a customer account to the account of a “third party,” which are the product of a fraud, or fraudulent activity, may be a violation of the“Customer Protection Rule.” See also, Regulatory Notice 9-24 (Nov. 2009)(“FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or assets from customer accounts, including instructions from an investment adviser or other third party purporting to act on behalf of the customer”); FINRA Regulatory Notice 12-05 (Jan. 2012)(“firms must have adequate policies and procedures to review and monitor all disbursements it makes from customers’ accounts, including but not limited to third-party accounts, outside entities or an address other than the customer’s primary address”). See, e.g. Trottier v. Morgan Stanley Smith Barney, FINRA Arbitration No. 15-02910 (May 31, 2017)(Customer awarded $396,623 in compensatory damages, interest, costs and attorneys’ fees for pursuant to pursuant to Section 15657.5 of the Code for assisting, and failing to detect, or prevent the conversion of an elderly customer’s funds by a third party), vacated on other grounds, Superior Court of California, County of Los Angeles, Docket No. 170178 (Dec. 11, 2017), affirmed, Court of Appeals, 2nd. App. Dist, 4th Div., Appeal No. B287643 (June 21, 2019).
Recover Your Losses
If you or someone you know has been the victim of a romance scam, or investment scam, telemarketing scheme, online scam, lottery or prize scams, or grandparent scams, you should consult with an attorney immediately to determine your rights and obligations. All claims have time limitations, and the failure to act may result in the permanent loss of any such claims.
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.