Protecting vulnerable investors | Rules & ethics

As the world becomes more technologically complicated, more people experience financial exploitation. Senior citizens and people with certain disabilities tend to be the most affected. In FINRA’s own words:

Each day for the next 12 years, an average of 10,000 Americans will turn 65. Con artists tend to target older people, in part, because they are more likely to have built up nest eggs, according to the FBI. And the U.S. Department of Justice estimates that $3 billion is stolen or defrauded from millions of elderly Americans every year.

Representatives are obligated to protect specified adults from financial exploitation, fraud, and the consequences of diminished capacity. FINRA defines specified adults as:

Any person age 65 or older
Any person age 18 or older who the member firm believes has a mental or physical impairment that renders the individual unable to protect their own interests

Definitions

Diminished capacity: Inability to perform regular duties or responsibilities due to mental conditions (e.g., dementia)

Protecting specified adults is accomplished through these best practices:

Adding trusted contact persons
Enacting transaction & fund disbursement holds
Avoiding red flag investments
Using legitimate titles & certifications only

Trusted contact persons

FINRA Rule 2165 aims to protect investors from exploitation and fraud. When opening a brokerage account, firms must ask investors to provide a trusted contact person, which the Securities and Exchange Commission (SEC) defines as:

A “trusted contact person” is a person that you authorize your brokerage firm to contact if your broker has a reasonable belief that your account may be exposed to possible financial exploitation or fraud.

Investors should identify a close family member or friend at least 18 years old for this role. Although the addition of a trusted contact person is not required to open an account, it’s highly recommended for all accounts (unless it’s an institutional account). Additionally, investors may choose different contact persons for various accounts or use the same person for all accounts.

The firm should reach out to the trusted contact person if exploitation, fraud, or diminished capacity is suspected. While general privacy rules prohibit divulging non-public information to third parties without trading authorization, FINRA rules allow for some information to be disclosed to this person. According to a FINRA FAQ on this topic:

The [firm] or [representative] is authorized to contact the trusted contact and disclose information about the customer’s account to address possible financial exploitation, to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney

Don’t be concerned with the specifics, but assume a representative can provide enough account information to adequately inform the trusted contact person of the situation. These are some example scenarios:

Client seems to be experiencing symptoms of dementia
Client’s “friend” helps withdraw large sums of money
Client’s “friend” encourages investments in unsuitable securities
Client wires significant amounts of money to unaffiliated third parties

While firms can communicate with the trusted contact person any time exploitation is suspected, FINRA requires contacting them within two business days if a hold is placed on the account (discussed below).

Transaction & fund disbursement holds

FINRA allows firms to temporarily restrict a specified adult’s account(s) if financial exploitation, fraud, or diminished capacity is suspected. Both transactions and disbursements can be prohibited initially for 15 business days. The firm’s only requirement at this point is to inform the trusted contact person within two business days.

Sidenote

Escalating prior to restriction

While firms can restrict accounts in certain situations, representatives should generally escalate to a supervisor before taking any action. Prohibiting certain actions in a customer’s account can create liability. For example, what if a representative mistakenly restricts a customer’s account as they’re requesting a trade? If the prohibition was not actually mandated (e.g., the representative believed a customer was displaying diminished capacity when they were just slightly confused), the customer could bring the firm to arbitration to recoup any money because of the lost opportunity (e.g., they wanted to buy a stock, but the hold prevented them and the price increased shortly after).

To avoid these problems, firms generally create policies requiring their representatives to contact a supervisor before placing restrictions on customer accounts.

During this 15-business-day period, firms research to determine if the hold is necessary. Combining the firm’s internal research with their discussions with the trusted contact person helps determine if the hold is necessary. If deemed unnecessary, the firm may remove the restriction at any time. If no resolution is reached after the 15 business day hold or if the exploitation continues, the firm may move to extend the restriction an additional 10 business days.

In March 2022, FINRA updated this rule to allow the hold to be continued for another 30 business days if authorities (typically local or state police) have been notified. Some firms found the initial 25 business day total hold (15 initial + 10 additional days) was insufficient to resolve some situations, as the hold could only continue with a court order*. Oftentimes, obtaining court orders takes longer than a few weeks. With the change to this rule, firms can now extend the hold, allowing for transactions and/or disbursements to be prohibited for a total of 55 business days (15 initial + 10 additional + 30 more days if authorities are notified).

*Court orders can restrict accounts for unlimited periods of time.

Red flag investments

In addition to protecting senior investors from fraud and exploitation from third parties, representatives should avoid recommending certain investments to this type of client. FINRA refers to these as “red flag investments.” While some riskier investments could be suitable in unique situations, the following recommendations from a financial professional will always catch FINRA’s attention and scrutiny:

Using a mortgage for investment purposes
Recommending variable insurance products
Recommending complex products
Products with limited or no liquidity
Using retirement savings for risky investments

How could borrowing funds against the investor’s home and investing those funds (mortgaging for investment purposes) be considered prudent? Or recommending variable insurance products that generally require several years (if not a decade or more) to provide adequate returns? Generally speaking, financial professionals should treat accounts owned by senior citizens with care and avoid aggressive investments. Many elderly customers live on a fixed income and don’t have time to make up for significant losses.

Fake titles & certifications

Financial professionals should not use made-up certifications to bolster their credibility. For example, you shouldn’t call yourself a “Senior Investment Specialist.” There is no such professional title, and the title may make your elderly clients think you have a special designation that doesn’t exist. Those that create fake designations related to senior citizens are subject to regulatory penalties and possible criminal charges. Examples of false designations include:

Senior investment specialist
Certified senior adviser
Qualified elder consultant
Registered senior citizen planner

Several legitimate designations may be referenced if someone has passed the necessary qualifications. These include:

Abuse of the elderly or disabled is terrible, but it happens every day. Financial professionals must protect their customers as much as possible. You must escalate the issue to your supervisor if you notice exploitation in any form. From there, your firm’s management will decide the course of action.

Key points

Trusted contact person

Close friend or family member of the investor
May be contacted if the representative suspects exploitation, fraud, or diminished capacity
Must be at least 18 years old

Fund disbursement holds

Firm may restrict transactions & withdrawals if suspecting fraud or exploitation
Original hold is 15 business days
May extend hold another 10 business days if additional time is needed
May extend hold another 30 business days if authorities are notified

“Red flag” investments

Investments with:
- High risk
- Low liquidity
- Complex components
Generally avoid recommending these to senior investors

Unethical activities with senior investors

Creating fake designations

Elder abuse

Abuse of a senior citizen in some form
Must be reported if suspected