Wall Street’s New Trick to Separate You From Your Money?

Kristin Orman By Kristin Orman, Research Analyst, The Oxford Club

Market Trends

Are you over the age of 65? If so, the Financial Industry Regulatory Authority (FINRA) has officially named you a “vulnerable adult.”

You’re now the target of a new rule FINRA has set forth designed to protect “vulnerable adults” from financial exploitation and fraud. It’ll apply if you work with a registered broker or financial advisor to manage your finances.

Before it goes into effect, you must understand how it works and your rights.

Critics of the rule argue that it’s well-intentioned but flawed because it doesn’t mandate training on how to spot financial exploitation. I tend to agree.

I first wrote about this regulation a year ago. At that point, it was just a proposal that FINRA released for public comment.

But the idea’s progressed since then. Right now, the Securities and Exchange Commission is reviewing the rule. Odds are in favor of its approval.

Targeting the Elderly

FINRA’s purpose is to regulate the brokerage industry. But we’ve all heard stories about unscrupulous brokers or have maybe even experienced one firsthand. So it’s clear that there’s still work to be done.

If you have any doubts about the trustworthiness of your broker or advisor, you’ll want to pay close attention.

When Rule 2165 (Financial Exploitation of Specified Adults) gets approved, it’ll permit FINRA members to respond quickly if they reasonably suspect that a senior citizen client is the victim of financial exploitation.

Specifically, it’ll allow them to place “temporary holds on disbursements of funds or securities” from these customers’ accounts. They’ll be able to freeze funds in the client’s account for up to 15 business days.

Keep in mind that the parameters defining what may constitute “a reasonable belief of financial exploitation” are vague… perhaps intentionally so.

The key element is that under the new rule, you could find yourself without access to the funds in your account. At this point, it’s unclear as to what cold, hard evidence a broker would have to supply to meet the “reasonable belief” standard.

But we know that brokers, advisors and brokerage firms will be required to comply with an internal review of the evidence leading them to believe their client was at risk of financial exploitation. If the investigation supports the belief, the hold may be extended for an additional 10 days.

The firm will have two days to notify the client and anyone else authorized to trade in the client’s account.

You won’t want to be caught off guard by an account hold, so make sure to ask about your firm’s communication procedures regarding the new rule. If there’s no exploitation taking place, it could be a big inconvenience to lose access to your cash.

If you aren’t comfortable with the answer you get from your broker or advisor, it may be time to find another firm. Or take your account in house and manage it yourself.

Who Do You Trust?

The new rule also involves a potential privacy concern you need to be aware of.

It requires that firms make a “reasonable effort” to obtain the name and contact information of a “trusted contact person” for clients over the age of 65.

The firm, broker or advisor may contact that person if they suspect you and your money are being exploited.

What most folks don’t realize is that naming a trusted contact person is optional. It’s not required. Firms will have to ask for it and make a reasonable effort to acquire it, but clients do not have to supply one.

Deciding whether or not to name a trusted contact person will depend on your personal preferences. If your mental acuity is declining, appointing a close family member or friend to look after the well-being of your finances may make sense.

But many folks in their 60s, 70s, 80s and 90s are fully capable on their own. If you fall into this category, you may view a trusted contact person as a violation of your privacy – rather than an additional layer of security.

Just know, the decision is totally up to you.

If you’re not comfortable with your broker potentially sharing your financial information with anyone else, don’t give them a name. It’s easy to circumvent this part of the regulation as long as you know your rights.

Fox Guarding the Henhouse

The financial abuse of seniors is a serious issue. Seniors lose $3 billion a year to fraud.

FINRA gets an “A” for effort when it comes to fighting exploitation, but its new regulations are far from perfect.

I expect we will see more rules and, hopefully, additional investor education in the future.

But until then, now you know how to make the best of the impending regulatory environment.

Good investing,