Myth Versus Reality: New Rule 2165 and Temporary Holds on Disbursements

The regulators are trying. They want to help advisors protect aging clients from financial abuse. They don’t want you to fear doing something wrong if you refrain from handing over assets to what looks like an abuser. But not living in the real world of how to stop abuse by determined abusers has its disadvantages. The new rule tells you who is at risk (elders and other impaired adults). It tells you that you just need a reasonable suspicion of abuse, not unquestioned evidence. It tells you what a temporary hold is and how long it can be: 15 days, 25 at max. Sounds ok. Until you actually know how long it takes for the legal steps to halt abuse.

Here at AgingInvestor.com we see this problem in the world of families and those who want to rip them off, not from inside an institutional setting or financial services firm. The world from here looks different from what FINRA imagines. There is usually no way anyone can stop abuse in 15 days or even in 25. We explain. In a real case, the kind this rule is designed to affect, we worked with family in an unfortunately typical situation of an unscrupulous son trying to squeeze money out of his 90 year old father who had dementia. The advisor had seen the pattern. He knew the son never did well on his own and he had been given handouts from dad for years. Dad, whom we’ll call Joe, lived in a nursing home. He needed help with everything and his memory was shot. He was easily confused. Yet his advisor never questioned his ability to effect financial transactions. But when the son, we’ll call Jake, brought his frail father into the advisor’s office demanding $50,000 plus access to the cash management account, the advisor was sure it was abuse. He knew his client was too confused to disagree with Jake. The advisor dragged his feet and didn’t provide the check his client had asked for, pushed by Jake, Over a month later, he felt obligated to give his client the $50K, which of course Jake got right away from Joe. The advisor didn’t have Rule 2165 but he knew that Joe’s daughter Rhoda was the appointed person as power of attorney and successor trustee. He didn’t have permission to contact her, so he did it, as he said “on the QT”. Rhoda was upset. She called us for advice. She found us through her own advisor who had the sense to send her to a resource who could answer her questions and guide her.

First we looked at the trust and what it said about Joe being removed as trustee or resigning as such. Two doctor’s letters were needed, verifying that he was no longer competent to manage finances if he was to be removed as trustee. We advised her to get those letters asap. Rhoda lived out of state from Joe. She found the doctors and flew into town to take him to the appointments. Fortunately the doctors were able to say that Joe had indeed lost his capacity for handling his money. A couple of weeks after the appointments, Rhoda got the letters she needed. She then had to take them to Joe’s estate planning attorney, who met with her and eventually gave her a Certificate of Trust, showing that she was now the successor to Joe and was in charge of his money. She then had to get the Certificate to his advisor’s firm, which had to review it and after two weeks, they accepted it. Only then was Rhoda able to stop any further disbursements from Joe’s account without her permission. Her brother was furious. His gravy train had stopped. The advisor had sent a debit card for the cash management account Joe requested under pressure to Rhoda, not to Joe. Rhoda destroyed it. Abuse stopped in its tracks.

Reality check: this scenario of stopping abuse involved a lawyer, an elder willing to go to two doctors, the cooperation of two doctors, travel between states, the approval of the Certificate of Trust with Rhoda’s name on it through a process by the advisor’s firm and a lot of time spent by Rhoda. The entire matter of protecting Joe from abuse took three months. Rule 2165 supposedly authorizes advisors to “take immediate action” when abuse is reasonably suspected. What is myth rather than reality is how long it takes to actually protect the elder and stop a predator. This was a case of undue influence by Jake who had a history of manipulating his father. And the new rule would not have helped at all. Jake would have happily waited for a mere 15 days to get his hands on the cash. Rhoda couldn’t possibly get Joe removed as his own trustee without the doctors’ letters. This sort of prerequisite of needing doctors to verify incapacity is commonly required in typical trusts. Perhaps the drafters of Rule 2165 never had to go through the process described here in their own lives. If they had, the new rule would provide for a 90 day authorization to hold transactions, rather than a maximum of 25 days. Maybe going forward when the myth gives way to reality, the rule will be revised. For now it is inadequate.