Two Democratic senators are urging the Financial Industry Regulatory Authority to strengthen security measures to protect against brokerage fraud that could affect millions of investors, according to AdvisorHub.
Senators Elizabeth Warren (Massachusetts) and Ron Wyden (Oregon), ranking minority members on the Committee on Finance, expressed their concerns in a recent letter to FINRA.
They focused on the threat of fraud carried out through the Automated Customer Account Transfer Service (ACATS ). It is an automated system managed by the National Securities Clearing Corporation which allows investors to seamlessly transfer their stocks, bonds, and cash from one brokerage firm to another.
The service is designed to keep brokerages from slowing transfers, but the lawmakers stated that ACATS’ rapid process also gives fraudsters an opportunity to exploit the system’s “weak security measures” before victims can respond.
Warren and Wyden noted that while some firms allow customers to independently block outgoing ACATS transfers, and others will block transfers if requested through customer service, several others offer customers no way to protect their account from fraudulent ACATS transfers. It has been reported that fraudsters can open accounts in victims’ names and use the ACATS system to initiate a transfer and drain their investments before they realize what has happened.
“It is unacceptable that major brokerage firms are putting customers’ life savings at risk of being ripped off by criminals because of inadequate account protections,” the senators said in their letter to Robert W. Cook, the President and CEO of FINRA. “FINRA must step in to protect consumers”.
The senators called for FINRA to require that brokerage firms notify account holders of ACATS requests. FINRA currently recommends this practice. Warren and Wyden also called upon FINRA to require brokerages to protect customer accounts from hackers with strong cyber defenses including phishing-resistant multi-factor authentication technology, such as passkeys.
“[C]riminals are exploiting the complete lack of an outbound verification step by the account holder,” Warren and Wyden wrote in the letter, which said that their reviews of firms’ policies and practices had uncovered “a deeply concerning lack of standardized, consumer-controlled protections across the industry.”
The senators said that trengthening the ACATS process and forcing brokerages to upgrade their cybersecurity standards will eliminate account vulnerabilities for many retail investors.
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