Here’s What a ‘Trusted Contact’ Is, and Isn’t: FINRA Exec

While the broker-dealer industry is making strides at getting customers to appoint a trusted contact for their investment accounts, more work is needed, a Financial Industry Regulatory Authority exec says.

A FINRA Investor Education Foundation survey in December found that only 38% of respondents reported having authorized a trusted contact — a number that’s too low, Jim Wrona, vice president and associate general counsel at FINRA, said during a recent FINRA podcast.

“A trusted contact will be vital when you have a customer that’s a victim of financial abuse or that might be suffering from diminished capacity,” he said.

Two FINRA rules were set up in 2019 to address the issue — FINRA Rule 4512 (Customer Account Information) and FINRA Rule 2165 (Financial Exploitation of Specified Adults).

FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact.

“The trusted contact person is intended to be a resource for the member in administering the customer’s account, protecting assets and responding to possible financial exploitation,” according to FINRA.

In December, FINRA issued Regulatory Notice 22-31 to emphasize the importance of trusted contacts.

FINRA Rule 2165 “permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on a securities transaction or disbursement of funds or securities from the account of a ‘specified adult’ customer.”

Some firms “have prioritized this [trusted contact] issue, and they’ve been very successful at getting positive response rates” from clients, Wrona said on the podcast. “But to be frank, there’s a level of commitment by firms that varies. So, at some firms there hasn’t been enough emphasis on the importance of trusted contacts.”

There’s also “a variety of reasons why customers are not opting to provide a trusted contact,” Wrona said, which includes misunderstandings of the role of the trusted contact, privacy  concerns as well as procrastination.

“Education really is key,” Wrona said. “Providing simple information about what a trusted contact is, and I think, even more importantly, what a trusted contact is not.”

The trusted contact, Wrona pointed out, “can’t make trades in the customer’s account. I think that’s one thing that customers kind of misunderstand. They can’t make decisions about the customer’s account.”

Being a trusted contact “does not make them power of attorney, legal guardian, trustee or executor,” Wrona explained. “It’s really used in very limited circumstances. It’s incredibly important [that] firms get that message out.”

FINRA, Wrona continued, did this via Reg Notice 22-31, “but we also collaborated with NASAA, with the SEC, on a campaign really to get that word out.” There is a web page that provides details on how a trusted contact can help customers.

A trusted contact is also valuable if there’s a reasonable belief that financial exploitation is occurring. Particularly “when we’re talking about romance scams, having a trusted contact, having another person as an ally to help convince the customer that they are being victimized is really, really important,” Wrona said. “In other instances, a trusted contact can be helpful on concerns around diminished capacity.”

Wrona relayed a recent situation in which a firm that suspected a customer was suffering from diminished capacity “reached out to the trusted contact, who was the niece, and she was able to get her uncle the help that he needed. And it turned out that, in fact, he was suffering from dementia, and it stopped some inappropriate trading activity that he was starting to engage in.”

Sign outside a FINRA building in Rockville, Maryland. Photo: FINRA