SEC Allows Temporary Mutual Fund Redemption Delays When Financial Exploitation of Seniors Is Suspected
Investment Management Update
Date: June 28, 2018
With the increasing number of baby boomers reaching age 65 and older, the Securities and Exchange Commission’s (SEC) Office of Compliance and Examinations views protecting senior investors as a top priority. The financial exploitation of senior or otherwise vulnerable investors (Specified Adults) is a serious and growing problem. Staff at the SEC and the Financial Industry Regulatory Authority (FINRA) have expanded efforts aimed at protecting Specified Adults from financial exploitation.
On June 1, 2018, the SEC’s Division of Investment Management issued a no-action letter stating that mutual funds and their SEC-registered transfer agents may temporarily delay the disbursement of redemption proceeds from Specified Adults’ mutual fund accounts if there is suspicion of financial exploitation.
Section 22(e) of the Investment Company Act of 1940 provides that a mutual fund company generally must pay redemption proceeds to a shareholder within seven days of receiving the shareholder’s redemption request. In a letter requesting no-action relief, the Investment Company Institute (ICI) sought assurance from the SEC that no enforcement action would be recommended under Section 22(e) if a transfer agent temporarily delays for more than seven days the disbursement of redemption proceeds from a Specified Adult’s mutual fund account when there is a reasonable suspicion of financial exploitation.
In its request, the ICI noted that transfer agents may want to protect these shareholders from financial exploitation in the same manner and to the same extent that broker-dealers may do so under FINRA Rule 2165, which permits broker-dealers to place a temporary hold on the disbursement of funds from a Specified Adult’s account if the broker-dealer has a “reasonable belief” that the account holder is being financially exploited. The ICI stated that transfer agents “may be best positioned” to detect financial exploitation of Specified Adult shareholder accounts, since the transfer agent may serve as the fund’s point of contact for shareholders.
The SEC staff agreed not to recommend enforcement action under Section 22(e) against a mutual fund or its SEC-registered transfer agent that temporarily delays redemption proceeds under the following conditions:
- The transfer agent has made reasonable efforts to obtain the name of and contact information for a “trusted contact person” who may be contacted about the customer’s account, and it has disclosed to the customer that the trusted contact person may be contacted to address possible financial exploitation.
- The transfer agent must have a reasonable belief that financial exploitation of a Specified Adult who holds mutual fund shares in a direct-at-fund account (an account held with the mutual fund and serviced by the fund’s transfer agent), has occurred, is occurring, has been attempted or will be attempted.
- The transfer agent must provide notification of the temporary hold and the reason for the temporary hold to all parties authorized to transact business on the account and the trusted contact person, unless the transfer agent has a reasonable belief that the trusted contact person will engage in the financial exploitation of a Specified Adult. This hold will expire within 15 business days of when the transfer agent first placed the hold, unless terminated or extended by a state regulator or agency.
- The transfer agent must initiate an internal review of the facts and circumstances that caused it to reasonably believe that the financial exploitation of a Specified Adult has occurred, is occurring, has been attempted or will be attempted. If the internal review supports the transfer agent’s reasonable belief of financial exploitation, the temporary hold may be extended for no longer than 10 business days.
- The transfer agent must then hold the delayed redemption proceeds in its Demand Deposit Account.
- The transfer agent must establish and maintain written procedures reasonably designed to achieve compliance with the terms and conditions set forth in the ICI’s incoming letter.
- The fund must establish, as part of its Rule 38-1 compliance policies and procedures, escalation and periodic reporting protocols under which the transfer agent will provide the fund with information regarding instances in which the transfer agent relied upon the no-action relief.
This letter encourages more mutual funds and transfer agents to think critically about protecting their senior clients from financial exploitation while also exhibiting the SEC’s openness toward taking steps to address the serious issues facing Specified Adults.
FOR MORE INFORMATION
For more information, please contact:
Andrew J. Davalla
Donald S. Mendelsohn
Latashia Love (Capital University Law School, class of 2019) contributed significantly to this article. Latashia is a Thompson Hine summer associate; she is not admitted to the practice of law. Please contact Julia Zerman to learn more about our summer program.
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