Ethics Center: Business Ethics

Advisor Alert: New FINRA Tools on the Books for Fighting Senior Financial Abuse

Financial advisors who work the senior marketplace are no strangers to the topic of senior financial abuse. For years, advisors and their FMOs, RIAs, broker-dealers, financial institutions, and regulators have grappled with the problem of how to protect seniors against people they know who steal their money.

But positive change is afoot. The U.S. Senate is considering a bill to protect elderly investors. Its Senior Safe Act is designed to shield advisors, brokers, and bankers from liability when they report suspected senior financial abuse to authorities. Last year, the Consumer Financial Protection Bureau (CFPB) issued a set of best practices for banks and credit unions to prevent, recognize, report, and respond to senior financial abuse.

Then in March 2017, the Securities and Exchange Commissions approved proposed FINRA rule changes (Regulatory Notice 17-11) that address senior investor protection.

FINRA’s proposal involved two key changes, which will go into effect in February of 2018. First, it requires securities brokers to make reasonable efforts to secure the name and contact information for a trusted contact for all client accounts. Second, it allows financial institutions to place a hold on the disbursement of client funds or securities when they suspect senior financial exploitation.

Although these measures are great, none will forever end senior exploitation. That’s because greed is embedded in human nature, and senior affluence puts targets on their backs. So what should financial advisors do now? Get knowledgeable.  Specifically, learn about the new FINRA trusted-contact and transaction-hold requirements, as well as about how to identify and respond to suspected abuse. This article will discuss the FINRA rules; a follow-up piece will provide guidance on how to respond when you suspect one of your senior clients is being victimized.

The starting point? Know exactly what you’re dealing with. So what is senior financial exploitation? Experts define it as an unauthorized, illegal, or inappropriate use of an older adult’s financial assets by someone in a position of trust. Perpetrating such an act can be both a criminal and civil act, which is becoming increasingly common among all sectors of U.S. society. In fact, according to the MetLife Study of Elder Financial Abuse (June 2011), one in five adults age 65 or older have reported some form of financial abuse, amounting to a collective economic loss of $2.9 billion.

FINRA Speaks

Given the scope of the problem, FINRA's actions come none too soon. They involve two separate changes. First, the securities regulator has amended an existing rule, FINRA Rule 4512 (Customer Account Information) to mandate that all financial advisors and institutions obtain the name of, and contact information for, client trusted contacts. The goal: to make sure an advisor or other firm representative can address suspected abuse with someone other than the client.

The amended rule also requires firms to disclose at account opening that a member or other firm employee might contact the trusted person to discuss potential abuse. During this contact, firms may verify a client’s current contact information, health status, or the identity of any legal guardian, executor, trustee, or holder of a power of attorney.

FINRA also enacted a new rule to further strengthen the industry’s ability to counter senior financial abuse.  Under FINRA Rule 2165, Temporary Hold on Disbursement of Funds or Securities), firms will now have the ability to suspend a financial transaction if they suspect financial exploitation has occurred or is occurring. The rule doesn’t require a suspension; it simply gives firms a safe harbor from several FINRA rules that specify how financial transactions must be handled (Rules 2010, 2150, and 11870). If the firm places a hold, it then must begin an internal review of the facts that prompted the hold. It must also provide notice of the hold and its rationale to the trusted contact, as well as to all other parties authorized to request account transactions. According to the new rule, the hold must expire no later than 15 business days after its initiation unless terminated or extended by an authorized regulatory body or court.

Will these measures place a burden on financial advisors or their firms? Many observers suggest they won’t. All they do is require FINRA members to make reasonable efforts to obtain the name of a trusted contact person at account opening. If the client refuses or otherwise fails to provide this information, the firm can go ahead and establish the account anyway.  Simply asking for the information constitutes “reasonable efforts” under the FINRA rule. Still, asking clients for their trusted contact might spark a discussion of why it’s necessary. This might be a fruitful or unfruitful discussion based on the client’s circumstances. But on its face, it should not become a barrier to effective account opening.

The trickier aspect is when to request a hold on a client transaction. Some advisors worry that this might force them to “play doctor” or embroil them in family disputes. Indeed, this can prove troublesome, which we’ll discuss in the second part of this article.

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.