SEC No-Action Letter Addresses Financial Exploitation of Clients

On June 1, 2018, the Securities and Exchange Commission’s Division of Investment Management issued a No-Action Letter to the Investment Company Institute.  The ICI asked the Division to assure that it would not recommend enforcement against a mutual fund or its transfer agent if the transfer agent temporarily withheld a disbursement from a “Specified Adult’s” mutual fund account based on a reasonable suspicion that the Specified Adult is being or is about to be financially exploited.  According to FINRA Rule 2165, which is cited in the No-Action Letter, a “Specified Adult” is “a natural person age 65 and older; or … a natural person age 18 and older and who the transfer agent reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” 

The ICI sought the requested assurance because financial exploitation of Specified Adults, especially seniors, is a critical problem that has increased over the years.  The ICI’s request pointed out that other regulatory and advocacy organizations, such as the Financial Industry Regulatory Authority and the North American Securities Administrators Association, have taken measures to help ensure that the financial institutions they regulate will be protected from enforcement action if they take reasonable steps to prevent financial exploitation of seniors and other vulnerable adults.

For example, just last year FINRA adopted FINRA Rule 2165, which “enables a FINRA member (i.e., a broker-dealer) who has a reasonable belief that financial exploitation of a Specified Adult has occurred, is occurring, has been attempted, or will be attempted, to place a temporary hold on the disbursement of funds or securities from the Specified Adult’s account.”  The ICI pointed out the fact that in some instances, a mutual fund holds a mutual fund account without any intermediaries, and the fund’s transfer agent services the account.  In such situations, the fund transfer agent may be the most well equipped to prevent financial exploitation of seniors and other vulnerable adults who hold accounts with the mutual fund.  As a result, the fund transfer agent might want to be able to protect seniors and other vulnerable adults in a manner similar to that prescribed in FINRA Rule 2165.

The Division agreed and concluded that it would not recommend enforcement against a mutual fund or its transfer agent if the transfer agent temporarily withholds a disbursement from a senior or other vulnerable adult if the transfer agent reasonably suspects that financial exploitation is taking place or is about to take place.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.