The U.S. Financial Industry Regulatory Authority (FINRA) is proposing a set of rule changes that aim to expand the use of industry tools designed to prevent the exploitation of retail investors.
In a filing with the U.S. Securities and Exchange Commission (SEC), FINRA is proposing to revise a couple of existing rules to modernize investor protections for seniors and other vulnerable clients, and to adopt a new rule that makes additional fraud prevention tools available for all customers.
Criminals are increasingly deploying sophisticated tactics using technology and artificial intelligence, “making it more difficult for both member firms and investors to identify scams,” FINRA said.
This has driven a “rapid evolution and proliferation of fraud schemes that can victimize investors regardless of age, capacity or sophistication,” the self-regulatory organization added.
Citing the growing threat of investment scams, FINRA is now seeking to expand the ability of industry firms to prevent harm to investors from investment scams by beefing up its rules designed to facilitate early detection and intervention.
To that end, FINRA is proposing rule changes that are intended to increase the adoption of the practice of investors naming “trusted contacts” that firms and reps can turn to in various situations to help protect clients — such as in cases of suspected financial exploitation, or when concerns arise about a suspected decline in an investor’s cognitive ability.
To enhance the use of this tool, FINRA is proposing to allow firms to rebrand the role as an “emergency contact” and providing flexibility for firms to use these contacts for all of an investor’s accounts at the firm (including future accounts alongside existing accounts).
FINRA is also proposing to revise the rule that allows a firm to put a temporary hold in clients’ accounts to guard against suspected financial exploitation. It wants to expand the maximum hold period from 55 days to 145 days, subject to certain safeguards — setting conditions for firms to extend temporary holds.
In its filing, the SRO said that the practice of applying temporary holds has proven effective at preventing investor harm, but that, in certain cases, the 55-day limit poses a challenge.
“While many financial exploitation situations are resolved within the existing framework,” the filing said, FINRA is proposing to extend the maximum hold periods in instances where law enforcement, adult protective services or other agencies get involved, and it takes longer to investigate the suspected abuse.
Finally, the SRO is also proposing a new rule that would provide brokerage firms with a safe harbour to put a temporary 10 day hold on any client’s account in cases of suspected fraud — this new authority would be available for all clients, regardless of age, or concerns about diminishing mental capacity.
FINRA said that the proposed new rule is intended to “prevent customer losses by giving member firms a brief intervention window to facilitate outreach by the member firm to the customer (away from perpetrator influence).”
By providing a “speed bump” before a suspicious transaction is completed, the SRO is hoping to prevent investor losses to fraud by giving firms time to collect more information, educate clients and allow investors to change their minds before proceeding with a transaction.