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FINRA Proposes New Rules Designed To Protect Elderly Investors

December 28, 2016

The Financial Industry Regulatory Agency (FINRA) has recently submitted to the U.S. Securities Exchange Commission a rule change proposal designed to provide more protection for elderly investors.

As recently reported by the Investment News, the new rules modify FINRA’s rules that require its members to maintain the confidentiality of their customer’s financial information. According to FINRA, the new rules are intended to do the following:

(1) Amend FINRA Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer’s account; and (2) adopt new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers.

The rule change reflects the difficult reality faced by many financial advisors when their elderly-investor clients begin to exhibit signs of diminished capacity or undue influence from potential elder abusers. Unlike estate planning attorneys whose interactions with elderly clients may occur in frequently, financial advisors typically have regular interaction with their clients to update them on the status of their accounts or obtain the authority to enter specific transactions if the customers’ accounts are non-discretionary. Although financial advisors could report potential elder abuse to Adult Protective Services, APS’s response varies widely from county to county. Now, advisors can contact the person their customer designated as their “trusted contact person.”

There may be an unintended consequence to this rule change. We believe that financial advisors may now be dragged into potential conservatorship proceedings as witnesses. In our experience, brokers have typically declined to participate on the grounds of customer related privacy. With this rule change, the privacy objection loses its impact.

In addition, whether brokers contacted the “trusted contact person” will be evidence about which they may be questioned in elder abuse cases and FINRA arbitrations.

Despite these risks, we believe that FINRA’s desire to protect elderly investors, even from themselves, is a laudatory goal. Whether this rule accomplishes that goal or mires its members in protracted probate and elder abuse litigation, or subjects them to liability for failing to follow through with a contact to the trusted person, remains to be seen.

None of the individuals are actual clients, witnesses, attorneys, or parties to actual legal proceedings. Any resemblance to actual persons, living or dead, or actual events is purely coincidental. The individuals who appear on the accompanying photos are dramatizations of fictional clients, witnesses, attorneys, or other parties.


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