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Question

Difficulty: HardFinancial Exploitation of Senior Investors and Vulnerable Adults

A registered representative suspects potential financial exploitation of an 82-year-old account holder who requests an immediate liquidation of $150,000 in blue-chip stocks and an outward wire transfer of the cash proceeds to an unverified foreign account. Under FINRA Rules 2165 and 4512, which of the following statements regarding the member firm's regulatory obligations and permissible compliance actions are correct?

  1. The firm may place a temporary hold on the outbound wire disbursement of funds while continuing to execute the customer's trade order to liquidate the securities.Answer
  2. Upon placing a temporary disbursement hold, the firm must provide notification and the reason for the hold to all authorized account holders and the designated trusted contact person within two business days.Answer
  3. C
    FINRA Rule 2165 permits the firm to place a temporary hold on trade executions in addition to fund disbursements to prevent portfolio liquidation.
  4. D
    FINRA Rule 4512 mandates that a member firm must refuse to open a customer account if the applicant declines to disclose a designated trusted contact person.

Answer

The firm has regulatory authority under FINRA Rule 2165 to place a temporary hold on fund disbursements while allowing securities trades to be executed, and must notify authorized account holders and the trusted contact person within two business days of placing the hold.
Under FINRA Rule 2165, member firms have safe harbor protection to place temporary holds on disbursements of cash or securities from accounts belonging to specified adults (individuals aged 65 and older, or adults aged 18 and older with mental or physical impairments) when financial exploitation is reasonably suspected. This hold applies strictly to disbursements, meaning the firm can hold the outbound wire transfer while allowing underlying stock trade executions to proceed. Furthermore, when a hold is implemented, the firm must notify all authorized account holders and the designated trusted contact person within two business days, provided the trusted contact is not suspected of involvement in the financial exploitation.

Step-by-Step Solution

1
Analyze FINRA Rule 2165 scope regarding disbursements versus transactions.
Rule 2165 allows member firms to place a temporary hold on the disbursement of funds or securities when financial exploitation is suspected. However, the rule explicitly does not cover trade executions. Therefore, holding the wire transfer while executing the trade order is compliant.
Temporary holds protect assets from leaving the account improperly while respecting the customer's legal right to execute trades within their portfolio.
2
Evaluate FINRA Rule 2165 notification timing requirements.
The firm is required to notify all individuals authorized to transact on the account as well as the designated trusted contact person (unless suspected of exploitation) within two business days of initiating the hold.
Prompt notification ensures transparency and allows designated representatives to investigate or resolve potential threats to the vulnerable adult.
3
Evaluate FINRA Rule 4512 trusted contact requirements.
While member firms must make reasonable efforts to request trusted contact details at account opening, customers are not required to provide one to open or maintain an account.
Disclosing a trusted contact is optional for the account owner.

Key Concept

FINRA Rules 2165 and 4512 regarding disbursement holds, trade executions, and trusted contact disclosures for specified adults.
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Topics

Financial Exploitation of Senior Investors and Vulnerable Adults