Despite limited regulatory requirements to intervene, broker-dealers face exposure to discipline and liability claims when elderly clients fall victim to financial exploitation.

In an environment of increased financial fraud, senior citizens are particularly vulnerable customers.  The financial exploitation of elderly investors poses significant compliance and litigation risks for broker-dealers, who are increasingly drawn into after-the-fact disputes seeking to allocate responsibility for losses incurred in such frauds.  When fraudsters persuade elderly investors to deplete their brokerage accounts, customers may blame the brokerage firm for insufficient safeguard efforts after the fraud is revealed, even if customers themselves mislead their brokers on the intended source of outflows.  Firms may face potential liability for failing to detect or prevent seniors from unknowingly transferring funds from their brokerage accounts to fraudsters. 

While defrauded elderly investors have achieved limited success pursuing claims in federal and state courts, FINRA arbitration panels have demonstrated a willingness to impose liability on broker-dealers under various legal theories, including negligence, breach of fiduciary duty, and FINRA rule violations.  Further, broker-dealers also face exposure though regulatory discipline for failure to supervise client accounts adequately.  These arbitration awards and enforcement actions signal a trend that warrants attention from broker-dealers and compliance professionals.

Though federal and state court decisions directly addressing broker-dealer liability for third-party elder financial abuse remain limited, parallel litigation against banking institutions offers valuable precedent for potential claims in the securities industry.  These banking cases typically involve elderly plaintiffs alleging that their bank acted negligently by failing to intervene when third parties exploited their accounts. 

Since banks ordinarily do not owe fiduciary obligations to depositors in routine banking relationships, these claims generally proceed under common law negligence theories based on a duty of care arising from various adult protection statutes.  For instance, this duty may arise for bankers and broker-dealers alike from state Adult Protective Services acts or state acts based in whole or in part on the North American Securities Administrators Association Model Act to Protect Vulnerable Adults from Financial Exploitation (“NASAA Model Act”).  While 39 states have adopted legislation or regulations similar to or based on the NASAA Model Act, state implementations vary significantly—some jurisdictions impose mandatory reporting requirements to Adult Protective Services,¹ while others provide discretionary reporting authority,² creating a patchwork of regulatory obligations across different markets. 

Claims based on these statutes require a showing that the institution possessed actual knowledge of, or reasonable suspicion regarding, the third-party exploitation of their elderly clients. For example, in Arberman v. PNC Bank, Natl. Assn., the Eleventh Circuit upheld the dismissal of an elderly woman's negligence claim against PNC Bank, even though she had made unusual withdrawals totaling over $400,000 to give to fraudsters.  No. 23-10182, 2023 WL 3910573 (11th Cir. June 9, 2023). The court found that the plaintiff failed to establish that PNC knew of or reasonably suspected the financial exploitation was occurring, highlighting the high evidentiary burden plaintiffs face in proving bank or broker-dealer liability in federal and state courts.  Id.

A review of FINRA enforcement actions and arbitration awards suggests regulators and arbitrators may be more likely than courts to find broker-dealers liable for failing to intervene to protect their elderly clients. 

In the years since FINRA’s initial guidance on voluntary best practices for protecting senior investors in Regulatory Notice 07-43, FINRA has expanded both its guidance on best practices and the tools available to firms to safeguard their senior clients.  For instance, Regulatory Notice 22-31 (December 2022) clarified Rule 4512’s trusted contact requirements and outlined circumstances permitting client information disclosure to third parties, while identifying compliance best practices.  Further, FINRA Rule 2165 outlines how members and their associated persons may exercise discretion in placing temporary holds on disbursements of funds or securities from the account of elderly clients they suspect may be victims of financial fraud.  In combination, FINRA Rules 2165 and 4512 provide broker-dealers with the ability—but not the mandatory obligation—to contact trusted persons when suspected financial exploitation occurs. Though these rules do not compel mandatory action, recent enforcement actions and arbitration decisions suggest that inaction may carry legal consequences. 

In light of FINRA’s provision of tools and guidance to safeguard especially vulnerable elderly customers, regulators are even more likely to see unheeded red flags as a discipline-worthy failure in a broker-dealer’s primary responsibility of customer protection.  For example, FINRA suspended and fined a registered representative for executing a $50,000 transfer from an elderly client’s account despite being informed by the client’s long-term care facility that she suffered from advanced dementia and lacked capacity to manage her affairs.³ Even before the implementation of FINRA Rule 2165, FINRA suspended and fined a firm and its Chief Operating Officer after finding that the firm and COO failed to establish adequate supervisory systems and ignored multiple red flags when one of its employees transferred an elderly client’s securities to his own account without authorization.⁴ These FINRA enforcement actions underscore that regulatory discipline can result not only from direct misconduct but also from supervisory failures, including inadequate policies and procedures, failure to investigate warning signs, and lack of appropriate escalation protocols, and demonstrate that firms must establish and maintain robust supervisory systems designed to identify and respond to red flags indicating potential elder financial abuse, such as unauthorized transfers, unusual account activity, or concerns about a client’s diminished capacity. 

FINRA arbitration awards indicate a similar pattern.  Arbitrators have been willing to grant an award in at least one case on claims including breach of fiduciary duty and negligence despite the firm having provided employee training on elder abuse detection that closely followed FINRA’s guidance at the time⁵ and the advisor having encouraged the client to contact family or police about suspected fraud because privacy rules in place at the time prohibited third-party notifications.  The arbitrators found these interventions were insufficient, and faulted the firm for not taking additional protective steps.⁶

A proactive approach may offer firms protection when facts and circumstances permit.  Specifically, FINRA Rule 2165 provides safe harbor protection from enforcement actions under Rules 2010 (Just and Equitable Principles of Trade), 2150 (Improper Use of Customers’ Securities or Funds), and 11870 (Customer Account Transfer Contracts), when firms properly implement Rule 2165 procedures after elder financial exploitation is suspected.  These procedures include account holds, abiding by the temporary hold time requirements, notifying authorized parties and the listed Trusted Contact Person (collected under Rule 4512), and conducting an internal review. 

Additionally, the Senior Safe Act (2018) offers protection when privacy obligations create barriers or uncertainty around reporting suspected financial exploitation to authorities.  The Act provides civil and administrative immunity for firms and certain employees who report suspected senior financial exploitation to a “covered agency”⁷ after receiving appropriate training.

As fraudulent schemes become more common and sophisticated and elderly investors remain vulnerable targets, broker-dealers must navigate the delicate balance between their duty to protect customers and their obligation to honor legitimate client instructions, all while facing potential regulatory and civil exposure. The regulatory environment increasingly expects firms to serve as gatekeepers and whistleblowers against financial exploitation, particularly when elderly customers are involved.  Because victimized investors often suffer from diminished capacity and firms are theoretically equipped with procedural safeguards, arbitration panels and regulators may be inclined to side with the elderly. 

Given arbitrators’ potential receptivity to investor claims, prudent firms may wish to consider a more proactive approach to supervision of senior investor accounts.  Firms should review current elder protection protocols and consider enhanced training programs on prompt identification of financial exploitation, implementation of temporary holds, and notification to a trusted contact to protect their customers and leverage existing regulatory safe harbors.

¹  Twenty-six states have adopted mandatory reporting:  Alabama, Alaska, Arkansas, California, Colorado, Georgia, Hawaii, Indiana, Kansas, Maine, Maryland, Michigan, Missouri, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, Texas, Utah, Vermont, West Virginia, Wyoming. https://www.nasaa.org/industry-resources/senior-issues/model-act-to-protect-vulnerable-adults-from-financial-exploitation/ 

²  Thirteen states have adopted discretionary reporting: Arizona, Connecticut, Delaware, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, Montana, Nebraska, New Hampshire, South Carolina, Virginia. In states where disclosure is discretionary, these statutes typically shield the disclosing party from administrative or civil liability that might arise from the disclosure or for any failure to notify the customer of the disclosure. https://www.nasaa.org/industry-resources/senior-issues/model-act-to-protect-vulnerable-adults-from-financial-exploitation/ 

³  Department of Enforcement v. Jarrett Carter Thomas, FINRA Letter of Acceptance, Waiver, and Consent, No. 2023079639201.

⁴  Department of Enforcement v. Newport Coast Securities, Inc., and Kristopher Charles Kessler, Order Accepting Offer of Settlement, No. 2010025708501.

⁵  FINRA Regulatory Notice 07-43 “urge[s] firms to review and, where warranted, enhance their policies and procedures . . . in light of the special issues that are common to many senior investors,” including financial abuse of senior investors. The Notice highlights in particular the voluntary practices some firms can adopt to address these sensitive issues, such as employee training, seeking customer designation of a secondary contact, and procedures for reporting suspected abuse.

⁶  The award was later vacated on grounds that one arbitrator failed to disclose participation in a different conservancy proceeding regarding similar factual circumstances. 

⁷  The Senior Safe Act defines the term “covered agency” to include a state financial regulatory authority (including a state securities regulator or law enforcement authority and a state insurance regulator); a state or local adult protective services agency; the SEC; an SEC-registered national securities association (e.g., FINRA); a federal law enforcement agency; or any Federal agency represented in the membership of the Financial Institutions Examination Council.  SEC Press Release 2019-75 “SEC, NASAA, and FINRA Issue Senior Safe Act Fact Sheet to Help promote Greater Reporting of Suspected Senior Financial Exploitation.” https://www.sec.gov/newsroom/press-releases/2019-75 

Anna Warfield also contributed to this article.