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Elder financial abuse is a serious problem in the securities industry. While family members are the most likely to perpetrate elder financial abuse, financial professionals are also frequent perpetrators. Financial professionals may even take advantage of their relatives, using the pretext of their professional duties. Regulatory rules offer some protection against elder financial abuse, but many seniors have had to turn to securities lawyers to obtain a fair settlement following fraudulent conduct by a financial professional.

Regulatory Rules Aimed at Preventing Elder Financial Exploitation

Regulators have many rules in place designed to curtail elder financial exploitation, but these rules may not go far enough, as the SEC Elder Financial Exploitation White Paper highlights.

FINRA Rule 4512: Customer Account Information and Trusted Contacts

For instance, under FINRA Rule 4512, representatives of financial firms must make reasonable efforts to know the trusted contact person of each account. The trusted contact is the person the firm can contact if they suspect elder financial abuse. Rule 4512 also allows brokers to reach out to the trusted contact if they suspect their client may be suffering from cognitive decline.

Representatives must ask for trusted contact information, but investors are not required to provide it. Without a trusted contact person, the financial professional may not be able to directly alert a member of the investor’s family if they suspect fraud or another form of exploitation.

FINRA Rule 2165: Financial Exploitation of Specified Adults

FINRA Rule 2165 allows brokers to place a hold on disbursements if they suspect financial exploitation, but there is no requirement for them to do so, even if they have strong suspicions. This rule is meant to stop fraudsters and wayward family members from spending the elderly person’s money without express permission.

One FINRA Bar alleges that a broker “converted” over $130,000 from his elderly mother’s brokerage account to pay for his living expenses.

FINRA Rule 3240

FINRA Rule 3240 often comes up in cases of financial elder abuse. Rule 3240 places restrictions on financial professionals borrowing from or lending to their customers. FINRA states these rules are in place because “Such loans have the potential for abuse of customers, especially older investors.”

One Acceptance, Waiver, and Consent agreement dated December 23, 2022, alleges that a broker violated FINRA Rule 3240 when he helped a 69-year-old investor transfer money to her account in order to facilitate a $200,000 loan. He allegedly made payments on the loan from February 2020 through December 2021 but did not make payments after this period. The AWC alleges the broker could not provide a reasonable explanation as to why he had stopped making payments on the loan to his elderly customer, who had health issues.

FINRA Rule 3241

FINRA Rule 3241 is also meant to prevent brokers from taking advantage of their elderly clients. This rule prohibits a broker from becoming their client’s beneficiary unless they are the broker’s immediate family member.

FINRA Rule 2111: The Suitability Rule

Securities lawyers often help investors recover following violations of the Suitability Rule, or FINRA Rule 2111. The rule states that brokers must take their customer’s financial needs into account, including their age and investment horizon – i.e., how long an investor can afford to have their funds tied up in a security. Elderly investors who rely on their investment portfolio for income will likely not get the financial security they need from a high-risk, illiquid investment that takes years to mature.

If an elderly person relies on their stock broker or investment adviser to provide them with investment recommendations, a securities attorney could argue that the financial professional failed to uphold their duty to recommend suitable securities. If an arbitration panel agrees, the defrauded senior could recover their losses, possibly with added interest.

Examples of Elder Financial Exploitation in the Securities Industry

There are many examples of financial professionals allegedly taking advantage of elderly clients. According to FINRA’s dispute resolution statistics, 188 investor arbitrations alleged elder financial abuse in 2021, making it one of the top 15 controversies in FINRA disputes. (Arbitration is the dispute resolution process that brokerage firms often require investors to use instead of suing in civil court.)

Temporary Bar following Allegedly Unsuitable Recommendations

The Arkansas Securities Department barred John Townshend on February 15, 2022, following allegations that he had recommended unsuitable investments. He allegedly sold $650,000 in annuities to two elderly Arkansans who were in poor health. He then allegedly used the money to invest in an unregistered private fund that he owned and operated. He was barred for 180 days but as of April 19, 2023, he is a registered investment adviser with Palm Beach Capital Corporation.

Brokerage Firms Failure to Supervise

Brokerage firms can also face consequences for elder financial abuse. Under FINRA Rule 3110, firms are required to supervise their brokers and transactions in customers’ accounts.

FINRA alleges that between August 2006 and May 2013, Fidelity failed to prevent or detect the conversion of more than $1 million from investors. A former broker, who has since been convicted of a felony, successfully posed as a Fidelity representative. She was able to open joint accounts with senior citizens and updated account preferences so that communications about these accounts went to her email. In the Acceptance, Waiver, and Consent agreement, FINRA alleged that the firm should have noticed that several unrelated accounts were making transfers to the same account.  

As part of the terms of the AWC, Fidelity consented to a $500,000 fine.

Allegations by Beneficiaries

It is not always the elderly investor making the allegations against the broker. Beneficiaries can also file complaints against brokers and seek to recover lost funds. In one complaint against a Morgan Stanley broker, beneficiaries alleged that the broker took $375,000 from an elderly client without oversight. The firm denied the dispute, but investors may still consult with a securities attorney following a denial. The firm’s denial is not necessarily the final word and the dispute may still enter arbitration. 

What if the Elderly Person Does Not Want to Report Their Broker?

Often, an elderly investor may not want to get their broker in trouble, perhaps because they consider the financial professional as a trusted friend. Concerned family members, friends, or caregivers can still make reports to the appropriate authorities. FINRA has a direct helpline for seniors:  844-574-3577. Elderly investors may also want to reach out to a securities attorney for a free case evaluation.