New FINRA Rules Clamp Down on the Financial Exploitation of Senior Investors

By: Norka Lecca

Seniors lose an estimated $36.5 billion each year to financial abuse. Aiming to combat this statistic, the Financial Industry Regulatory Authority (“FINRA”) imposed two new rules, Rule 4512 and Rule 2165, which became effective on February 5, 2018. These rules encompass the first uniform, national standards to protect senior investors.

The financial exploitation of seniors has become an increasingly significant problem, especially with the aging of the U.S. population. It is estimated that there will be over 79 million people aged 65 or older by 2040, which is more than twice as many as in 2000. An investor’s age and life stage make up vital components of an investment profile; therefore, firms must carefully consider these factors to meet their regulatory obligations.

FINRA has long prioritized the protection of senior investors from financial exploitation. FINRA is particularly concerned with the suitability of the recommendations given to senior investors, communications specifically targeting senior investors, and potentially abusive sales practices or fraudulent activities targeting senior investors. As such, FINRA has engaged in senior investor education and outreach, provided guidance to its member firms on how best to advise senior investors, assessed its member firms’ policies and practices regarding senior customers, and encouraged its member firms to review and enhance their policies and procedures to consider the issues common to many senior investors. In 2015, FINRA launched the Securities Helpline for Seniors, which allows older investors to receive assistance regarding concerns with their brokerage accounts and investments from FINRA staff. FINRA’s Securities Helpline for Seniors has brought certain issues related to financial exploitation of senior investors to the forefront, leading to the conclusion that member firms must be quicker and more effective at addressing suspected financial exploitation of seniors.

The new FINRA rules provide member firms with improved ways to respond to situations where they reasonably believe that financial exploitation has occurred, is occurring, or will occur. Rule 4512 requires FINRA member firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a customer’s account or when updating account information. Requiring a trusted contact person from the customer provides member firms with a resource when administering the customer’s account, protecting customer assets, and responding to possible financial exploitation.

Rule 2165 permits a member firm to place a temporary hold on a disbursement of funds or securities from a senior customer’s account if it reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted. This provision will allow member firms to investigate the situation and reach out to the customer, the trusted contact, and if necessary, law enforcement, before disbursing funds when there is a reasonable belief of financial exploitation.

The SEC approved the new rules in February 2017. Since then, FINRA has met with member firms, issued guidance, and encouraged the development of policies and procedures needed for the application of the new rules.