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Difficulty: Very hardFinancial Exploitation of Senior Investors and Vulnerable Adults

A compliance officer at a broker-dealer is reviewing a transaction involving a 69-year-old account holder. The client placed an order to liquidate $100,000 worth of equity securities and instructed the firm to immediately transfer the full cash proceeds via wire to an unverified offshore account. The registered representative handling the account suspects that an unauthorized third party is financially exploiting the client. Under FINRA rules regarding the protection of vulnerable adults, which of the following actions is the firm authorized to take?

  1. Place a temporary hold on the outgoing wire transfer of funds for up to 15 business days while executing the order to liquidate the securities.Answer
  2. B
    Refuse to execute the securities liquidation order and freeze all trading activity in the customer's account for up to 15 business days.
  3. C
    Freeze all account assets and halt both trade executions and fund disbursements for a mandatory minimum period of 30 calendar days.
  4. D
    Execute the wire transfer immediately, as member firms are strictly prohibited from withholding customer disbursements without a federal court order.

Answer

The firm is authorized to place a temporary hold on the outgoing wire transfer of funds for up to 15 business days while executing the order to sell the securities.
Under FINRA Rule 2165 (Financial Exploitation of Specified Adults), a member firm that reasonably suspects financial exploitation of a specified adult (individuals aged 65 and older, or aged 18 and older with mental or physical impairments) is permitted to place a temporary hold on the disbursement of funds or securities out of the account for up to 15 business days. Crucially, this safe harbor applies ONLY to disbursements out of the account (such as an outgoing wire transfer), and does NOT permit the firm to block or refuse trade executions (such as selling stock). Therefore, the firm must execute the requested sell order while placing a temporary hold on the outgoing wire transfer.

Step-by-Step Solution

1
Identify the target individual and qualifying criteria under FINRA Rule 2165.
The client is 69 years old, qualifying as a 'specified adult' (natural person age 65 or older, or age 18+ with physical/mental impairment).
Rule 2165 protections apply specifically to specified adults.
2
Distinguish between fund disbursements and trade executions under FINRA Rule 2165.
The temporary hold authority applies strictly to the disbursement of funds or securities out of an account (the wire transfer), NOT to trade executions (liquidating the stock).
Placing a hold on trade executions could expose the client to market risk, so Rule 2165 intentionally excludes order executions.
3
Determine the maximum initial time frame for the temporary disbursement hold.
The firm can maintain an initial temporary hold on the disbursement for up to 15 business days while conducting an internal review.
FINRA Rule 2165 specifies an initial safe-harbor timeframe of up to 15 business days.

Key Concept

FINRA Rule 2165 Disbursement Holds vs. Order Execution Limits
Estimated Time:1m 30s
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Topics

Financial Exploitation of Senior Investors and Vulnerable Adults