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Difficulty: HardFinancial Exploitation of Senior Investors and Vulnerable Adults

A 68-year-old client with a physical impairment requests two transactions on the same day: liquidating an $85,000 mutual fund position and disbursing the full cash proceeds via cashier's check to a newly added joint account beneficiary. The registered representative reasonably suspects financial exploitation. Under FINRA Rule 2165 and Rule 4512, which course of action is the member firm permitted to take?

  1. Execute the order to liquidate the mutual fund shares, but place an initial temporary hold of up to 15 business days on the cashier's check disbursement while conducting an internal review.Answer
  2. B
    Refuse to execute the mutual fund liquidation order and place a temporary hold on all securities trading in the account for up to 30 calendar days.
  3. C
    Place a temporary hold on both the trade execution and the fund disbursement, provided the firm receives prior written consent from the designated trusted contact person.
  4. D
    Disburse the funds immediately to avoid regulatory non-compliance, while freezing all future trading access in the account.

Answer

Execute the order to liquidate the mutual fund shares, but place an initial temporary hold of up to 15 business days on the cashier's check disbursement while conducting an internal review.
Under FINRA Rule 2165, a member firm that reasonably suspects financial exploitation of a Specified Adult (defined as individuals age 65+ or age 18+ with an impairment) may place an initial temporary hold of up to 15 business days on disbursements of funds or securities. Crucially, this temporary hold applies strictly to disbursements leaving the account and does NOT grant the firm authority to block or delay trade executions (such as liquidating mutual fund shares).

Step-by-Step Solution

1
Determine the customer's eligibility as a Specified Adult under FINRA rules.
The customer qualifies as a Specified Adult under FINRA Rule 2165 because they are a natural person aged 18 or older with a physical impairment that renders them vulnerable.
FINRA Rule 2165 applies to individuals aged 65 and older, as well as adults aged 18 and older with mental or physical impairments.
2
Distinguish between trade execution authority and fund disbursement hold rules.
FINRA Rule 2165 grants authority to place temporary holds strictly on fund or security disbursements, not on trade executions.
The rule protects account assets from leaving the firm while allowing requested market orders to execute normally so the client does not suffer market risk from delayed trade execution.
3
Apply the regulatory timeline constraint for the disbursement hold.
The firm may impose an initial temporary disbursement hold for up to 15 business days while initiating an internal review.
The 15-business-day timeframe provides necessary time for compliance officers to investigate the suspicious activity and notify authorized parties or state regulators.

Key Concept

FINRA Rule 2165 Temporary Disbursement Holds vs. Trade Executions
Estimated Time:1m 30s
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Topics

Financial Exploitation of Senior Investors and Vulnerable Adults