Protecting Senior Investors From Exploitation: FINRA Rule 3241

Senior investors are often especially vulnerable to exploitation by those who are obligated to protect their financial interests: financial advisors and brokers who provide financial advice and manage their investments. In a recent study, one in twenty cognitively-intact seniors have reported being victimized financially by professionals. The actual figure may be much higher, as people are frequently embarrassed to admit they have been swindled.

Remember, too, that those numbers represent cognitively intact adults. While we don’t have figures available regarding financial exploitation of cognitively-impaired seniors by unscrupulous advisors, the percentage is almost certainly greater, due to the greater vulnerability of that population.

When you think of financial exploitation of older adults, you may imagine phone or online scams, door-to-door salesmen peddling services or goods they don’t deliver, or even family members. You probably don’t think of financial planners and investment professionals, who are supposed to be bound by legal and ethical obligations to their clients.

Unfortunately, financial exploitation by fiduciaries and advisors is not uncommon. The Financial Industry Regulatory Authority (FINRA) has taken a decisive measure to address the financial exploitation of seniors: Rule 3241.

What is FINRA Rule 3241 and How Does It Protect Senior Investors?

FINRA is an independent, nongovernmental organization. It creates and enforces rules that govern its members, registered broker-dealer firms and brokers throughout the United States. Part of the organization’s mission is to “safeguard the investing public against fraud and bad practices.”

One outgrowth of this ongoing effort to promote ethical behavior in the industry is Rule 3241, which takes effect on February 15, 2021.

The FINRA rule prevents members from taking advantage of senior clients by requiring them to decline being named as a beneficiary, trustee, executor, or agent under power of attorney for the client.

In the event a member is appointed executor, trustee, or agent, they must report the appointment in writing to their firm before receiving any fees or other benefits. The firm must then evaluate the situation and decide whether it is appropriate for the member to act in that capacity. If the firm approves the appointment, the member may receive no financial gain for acting in the appointed capacity, other than reasonable and customary fees and charges for someone serving in that capacity.

Factors a firm must consider in assessing whether a broker or other registered person being named a beneficiary or fiduciary is appropriate include:

  • Any potential conflicts of interest the appointment would create;
  • How long the customer and registered person had had a relationship, and the type of relationship;
  • The age of the customer;
  • The size of a bequest to the registered person relative to the size of the customer’s estate;
  • Whether the registered person has been named a beneficiary on other customer accounts or received other bequests from customers;
  • Whether the facts and circumstances observed in the relationship suggest that the customer has a physical or mental impairment that makes them vulnerable to exploitation;
  • Any facts that would indicate improper conduct regarding the customer or their account;
  • Any facts suggesting that the registered person has exercised or could exercise undue influence over a customer.

In short, the new FINRA rule prevents brokers from being faced with a conflict of interest in which they might take financial advantage of older clients who rely on their guidance. The rule does not apply to broker relationships with customers who are members of their immediate families: in other words, a broker would not be prevented from being a beneficiary of her father’s estate or serving as the executor of the estate.

Why Was Rule 3241 Necessary?

Most firms and financial institutions already had their own rules in place to prevent the conflicts of interest that can arise when a broker acts in a position of trust for a client. What emerged, however, was that unscrupulous brokers were finding and exploiting loopholes in these rules.

For example, a financial advisor forbidden from acting as a trustee for a customer or client might transfer the client to another advisor in their firm, perhaps just “on paper,” to avoid any appearance of impropriety. Another trick would be to encourage a client who wanted to name the broker as a beneficiary to name the broker’s spouse or child instead.

In any case, there has been a clear need for additional measures to be put in place to protect senior investors. Prior to enacting Rule 3241, FINRA had established a hotline (844-574-3577) on which senior investors could report suspicions of improper conduct or breaches of trust. In the first six months, the hotline received over 2500 calls.

No single rule can prevent all broker misconduct or financial exploitation. But FINRA Rule 3241 is an important step which conveys to members and consumers its dedication to ethical service.

If you have questions about FINRA, Rule 3241, or financial exploitation of seniors, please contact Gudorf Law to schedule a consultation.