As the American population ages and 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:
Protecting specified adults is often handled through these best practices:
FINRA Rule 2165 aims to protect investors from exploitation and fraud. When opening a brokerage account, firms 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.
For this role, investors typically choose a close family member or friend who is at least 18 years old. Adding a trusted contact person is not required to open an account, but it’s strongly recommended for most accounts (unless it’s an institutional account). An investor can name different trusted contacts for different accounts, or use the same person for all accounts.
A firm should reach out to the trusted contact person if it suspects exploitation, fraud, or diminished capacity. 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 potential exploitation. 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 information to alert the trusted contact and help address the concern.
Here are common situations where contacting the trusted person may be appropriate:
A firm may contact the trusted contact person 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 person within two business days.
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.
During this 15-business-day period, the firm investigates to determine whether the hold is necessary. The firm’s internal review, combined with discussions with the trusted contact person, helps it decide whether to keep or remove the restriction.
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 initial 25 business day total hold (15 initial + 10 additional days) was insufficient to resolve certain situations, because the hold could otherwise continue only with a court order*. Often, obtaining a court order 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.
In addition to protecting senior investors from third-party fraud and exploitation, representatives should be cautious about recommending certain investments to these clients. 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:
These recommendations raise concerns because they can combine high risk, complexity, long time horizons, and limited liquidity - features that may not fit the needs of many older clients. For example, borrowing against a home to invest can magnify losses, and variable insurance products often require many years to produce adequate results.
In general, treat accounts owned by senior citizens with extra care and avoid aggressive strategies. Many elderly customers live on a fixed income and may not have time to recover from significant losses.
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 have 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:
Several legitimate designations may be used if someone has met the required qualifications. These include:
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.
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