Has your financial firm inquired lately about you naming a “trusted contact”?
There has been a recent renewed effort by the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA), along with the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy (SEC OIEA), to encourage financial firms to reach out to their customers to have them name a trusted contact as a means of increasing investor protection.
FINRA President and CEO Robert Cook took the position that everyone should have a trusted contact: “All investors can benefit from adding a trusted contact to their account – having one or more trusted contacts provides another layer of security on the account and puts the financial firm in a better position to help keep the account safe.”
But what exactly is a trusted contact? And what are the trusted contact’s limitations?
Asking About A Trusted Contact
The “trusted contact” concept came to the forefront in 2018, when FINRA, which regulates the brokerage industry, added amendments to customer account information rule 4512 that required brokerage firms to ask their retail customers to provide a name and contact information for a trusted contact person. The amendments came at the same time as a new FINRA rule, 2165, allowed members to place temporary holds on disbursements of funds or securities from customer accounts when there was a reasonable belief that there was financial exploitation of the customer.
The amendments to rule 4512 did not prohibit a firm from opening or maintaining an account if the customer did not provide a trusted contact. While the firm is required to ask, the customer has the right to decline to provide such information.
What Is The Role Of A Trusted Contact Person?
The idea behind a trusted contact person is that it gives a firm someone to contact about your account if problems arise – for example, the firm is having a problem getting in touch with you, or the firm has a concern about potential fraud related to your account.
FINRA states, “A trusted contact may be a family member, attorney, accountant or another third-party who you believe would respect your privacy and know how to handle the responsibility.”
What things can be discussed with a trusted contact? When the proposed amendments were under consideration, SIFMA (the Securities Industry and Financial Markets Association) provided a letter of comments, stating at one point that FINRA should not “limit the specific information which could be discussed with a designated trusted contact as it may unintentionally restrict a FINRA member firm’s ability to best serve their unique and varying clients. Moreover, as the trusted contact is, as its name implies, a designated contact that is inherently trusted by the individual (and has no authority to transact business on a client’s account), there is little to no danger that any reasonable disclosure would violate a client’s trust or give rise to any material issue.”
Shortly after FINRA enacted the new rule in 2018, the SEC issued an Investor Bulletin on the subject of trusted contacts. In it, the SEC listed “[s]ome reasons your brokerage firm might contact a trusted contact person.” They included:
- Addressing possible financial exploitation or fraud in your account.
- Confirming your current contact information, if your brokerage firm cannot reach you.
- Confirming your current health status, if your brokerage firm suspects you are sick or suffering from diminished capacity.
- Confirming the identity of any legal guardian, executor, trustee or holder of a power of attorney on your account.
Here is an example of one firm’s trusted contact form: “I understand that [the firm] or my advisor may contact the Trusted Contact Person(s) and disclose information about my account to address possible financial exploitation; to confirm the specifics of my current contact information or health status or the identity of any legal guardian, executor, trustee, or holder of a power of attorney; or as otherwise permitted by FINRA rules.”
Notwithstanding this broad grant of disclosure to the trusted contact, there are limits as to what a trusted contact can do.
A joint release by FINRA, the NASAA and the SEC OIEA stated that the trusted contact “cannot make trades in the investor’s account; cannot make decisions about the investor’s account; and does not become a power of attorney, legal guardian, trustee or executor by virtue of being identified as a trusted contact.”
Should You Take Action?
Before you say “yes” to naming a trusted contact, it would be wise to review your firm’s trusted contact form to see what you are agreeing to.
For example, one firm’s trusted contact document indicates it can share “nonpublic personal information,” which includes “financial account information and balances, recommendation for purchase of a security or insurance product, and … personally identifiable financial information (i) provided by a consumer to a financial institution; (ii) resulting from any transaction with the consumer or any service performed for the consumer; or (iii) otherwise obtained by the financial institution.”
It sounds like a lot can be shared by that firm.
Another thing to look for: The trusted contact form could contain a provision that indemnifies the firm in case something were to go wrong. Here’s one example:
“By signing below, I and my heirs agree to indemnify and hold [the firm] … harmless from and against any and all claims, judgments, taxes, fines, penalties, damages, liabilities, costs, and expenses (including but not limited to attorneys’ fees and expert witness fees) incurred by [the firm] as a result of any claim, judgment, or proceeding arising out of or relating to [the firm] contacting, or failing to contact, my Trusted Contact Person(s) identified in this form.”
Before you sign a trusted contact form, you need to make sure that your contact is just that – trusted. You also need to understand the scope of what you are agreeing to, and be sure to ask questions of the firm if you are uncertain about something.
Ideally, a trusted contact can be an effective method for protecting the investor and preventing fraud. But it’s up to you to make sure you are comfortable with the details – and with your trusted contact.
FINRA offers more information about trusted contacts, including a video.
To keep up with topics that I cover, be sure to follow me on the forbes.com site (and if you would like to subscribe, check out the red box at the top right). Write to me at firstname.lastname@example.org. Include your city and state, and mention that you are a forbes.com reader. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future post.