The Financial Regulatory Authority (FINRA) came out with new Regulatory Notice 22-21 last week, which advises brokerage firms regarding fraudulent account transfers. FINRA’s Regulatory Notices are meant to alert brokerage firms to potential regulatory and compliance issues and direct them on what their obligations are. The account transfer fraud which FINRA warns member firms about is a type of identity theft where an individual is pretending to be an existing account holder at a brokerage firm, and requesting that the account be moved to a new brokerage firm, where the fraudster then drains the account. Such account transfers are handled through the Automated Customer Account Transfer Service (ACATS), an automated system administered by the National Securities Clearing Corporation, that facilitates the transfer of customer account assets from one firm to another.
The fact that FINRA felt the need to publish Regulatory Notice 22-21 means that these fraudulent account transfers are becoming a more significant issue in the brokerage world, which is a risk to the client of losing all of the client’s account assets at a particular brokerage firm.
In addition to stealing the customer’s identity information, the fraudster also needs to have the customer’s account information for the customer’s brokerage account. In this day and age, a bad actor can open a brokerage account online without ever having human interaction. Once the new account is open, the fraudster will then provide the new brokerage firm with a Transfer Instruction Form (TIF), which firm will then process the TIF and submit it through ACAT. If everything goes smoothly for the fraudster, the real account of the person whose identity was stolen will then be entirely transferred to the new account, which the fraudster had previously opened. The account is then the fraudster’s to control.
Brokerage firms have regulatory obligations to prevent identity theft generally, and account transfer fraud specifically. Such obligations include a brokerage firm’s obligation to verify the identity of each customer, establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious activity, and to conduct ongoing customer due diligence, including monitoring to identify and report suspicious transactions. There are many identity theft red flags that brokerage firms are required to monitor, but often do not adequately do so.
If a client’s account has been fraudulently transferred, a customer may have significant legal recourse against the firms that allowed and enabled such a transfer. If you believe that you have been the victim of account transfer fraud, attorney Jeffrey Feldman would be happy to have a free initial consultation with you, where Mr. Feldman can advise on the likelihood of being able to recover stolen funds from the brokerage firms that allowed the fraud to occur.