As the world becomes more technologically complex, financial exploitation has become more common. Senior citizens and people with certain disabilities are often 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 is designed to help 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 typically choose a close family member or friend who is at least 18 years old. Providing a trusted contact person is not required to open an account, but it’s strongly recommended for most accounts (institutional accounts are generally the exception). An investor can name different trusted contacts for different accounts, or use the same person across all accounts.

If a representative suspects exploitation, fraud, or diminished capacity, the firm should reach out to the trusted contact person. Normally, privacy rules prohibit sharing non-public information with third parties without trading authorization. However, FINRA rules allow limited disclosure to a trusted contact when it’s needed to address a concern. 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

You don’t need to memorize the exact boundaries of what can be shared. For exam purposes, assume the representative can share enough account information to explain the concern and help protect the customer.

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

A firm may contact the trusted contact any time exploitation is suspected. However, if the firm places a hold on the account (discussed below), FINRA requires the firm to contact the trusted contact person within two business days.

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. At this stage, the firm’s key requirement 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 activity in a customer’s account can create liability.

For example, imagine a representative mistakenly restricts a customer’s account while the customer is requesting a trade. If the restriction wasn’t actually warranted (e.g., the representative interpreted mild confusion as diminished capacity), the customer could bring the firm to arbitration to recover losses tied to the missed opportunity (e.g., the customer wanted to buy a stock, but the hold prevented the purchase and the price increased shortly after).

To reduce this risk, firms typically have policies requiring representatives to contact a supervisor before placing restrictions on customer accounts.

During this 15-business-day period, the firm investigates whether the hold is necessary. The firm’s internal review, combined with discussions with the trusted contact person, helps determine whether the restriction should remain in place. If the firm decides the hold isn’t necessary, it 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 extend the restriction for an additional 10 business days.

In March 2022, FINRA updated this rule to allow the hold to continue for another 30 business days if authorities (typically local or state police) have been notified. Some firms found the original 25-business-day total hold (15 initial + 10 additional days) wasn’t enough to resolve certain situations, because the hold could only continue beyond that point with a court order*. Obtaining a court order often takes longer than a few weeks.

With this rule change, firms can now extend the hold so that transactions and/or disbursements may 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 third-party fraud and exploitation, representatives should be cautious about recommending certain investments to this type of client. FINRA refers to these as “red flag investments.” While a higher-risk investment could be suitable in a specific situation, the following recommendations from a financial professional will consistently draw 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

Ask what these recommendations have in common: they can expose an older investor to losses, long lockups, or complicated features that are hard to evaluate.

For example, borrowing against a home to invest (mortgaging for investment purposes) increases financial pressure and can magnify losses. Variable insurance products often require many years (sometimes a decade or more) to produce adequate results, which may not match an older investor’s time horizon.

In general, accounts owned by senior citizens should be handled with extra care, and aggressive recommendations should be avoided. Many elderly customers live on a fixed income and may not have time to recover from significant losses.

Fake titles & certifications

Financial professionals should not use made-up certifications to increase credibility. For example, you shouldn’t call yourself a “Senior Investment Specialist.” There is no such professional title, and using it may lead elderly clients to believe you hold a special designation that doesn’t exist.

Those who 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:

• Certified financial planner (CFP)
• Chartered financial analyst (CFA)
• Chartered financial consultant (ChFC)
• Certified Investment Management Analyst (CIMA)

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