Document ID: SEC-2021-1315-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-09-28T04:00Z

[Federal Register Volume 86, Number 185 (Tuesday, September 28, 2021)]
[Notices]
[Pages 53696-53699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20970]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93103; File No. SR-FINRA-2021-016]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove the Proposed Rule Change To Amend Rule 2165 
(Financial Exploitation of Specified Adults)

September 22, 2021.

I. Introduction

    On June 9, 2021, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change SR-FINRA-2021-016 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder \2\ to amend FINRA Rule 2165 
(Financial Exploitation of Specified Adults) to: (1) Permit member 
firms to place a temporary hold on a securities transaction, subject to 
the same terms and restrictions applicable to a temporary hold on 
disbursements of funds or securities (``disbursements''), where there 
is a reasonable belief of financial exploitation of a ``specified 
adult'' as defined in the rule; \3\ (2) permit member firms to extend a 
temporary hold, whether on a disbursement or a transaction, for an 
additional 30 business days if the member firm has reported the matter 
to a state regulator or agency or a court of competent jurisdiction; 
and (3) require member firms to retain records of the reason and 
support for any extension of any temporary hold, including information 
regarding any communications with, or by, a state regulator or agency 
of competent jurisdiction or a court of competent jurisdiction. The 
proposed rule change was published for comment in the Federal Register 
on June 28, 2021.\4\ On July 20, 2021, FINRA consented to extend until 
September 24, 2021, the time period in which the Commission must 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On August 23, 2021, FINRA responded to the 
comment letters received in response to the Notice.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 9 and accompanying text.
    \4\ See Exchange Act Release No. 92225 (Jun. 22, 2021), 86 FR 
34084 (Jun. 28, 2021) (File No. SR-FINRA-2021-016) (``Notice'').
    \5\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Trading and Markets, Commission, dated July 
20, 2021. This letter is available at https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf.
    \6\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission dated August 23, 
2021 (``FINRA Letter''). The FINRA Letter is available at the 
Commission's website at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf.
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    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \7\ to solicit comments on the proposed 
rule change from interested persons and to institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

Background

    FINRA's proposed rule change would amend Rule 2165, which currently 
permits a member firm to place a temporary hold on a disbursement from 
the account of a ``specified adult'' customer for up to 25 business 
days if the criteria of the rule are satisfied.\8\ A ``specified 
adult'' is someone either age 65 and older, or age 18 and older if the 
member firm reasonably believes that a mental or physical impairment 
has rendered the person incapable of protecting their own interests.\9\ 
According to FINRA, temporary holds on disbursements have played a 
significant role in providing member firms with a way to respond 
promptly to suspicions of customer financial exploitation before a 
customer experiences potentially significant losses.\10\
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    \8\ See infra for a discussion of existing safeguards 
incorporated into Rule 2165.
    \9\ See Rule 2165(a)(1). Supplementary Material .03 to Rule 2165 
provides that a member firm's reasonable belief that a natural 
person age 18 and older has a mental or physical impairment that 
renders the individual unable to protect their own interests may be 
based on the facts and circumstances observed in the member firm's 
business relationship with the person. See Notice at 34086 n.17.
    \10\ See Notice at 34086. For example, according to FINRA member 
firms have placed temporary holds to prevent senior investors from 
losing: (1) $200,000 (representing approximately two-thirds of the 
investor's account) related to a lawsuit scam; (2) $10,000 in a 
lottery scam; (3) $60,000 in a romance scam; and (4) $50,000 to 
financial exploitation by a brother-in-law. Id.
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    A member firm's ability to place a temporary hold on disbursements 
is subject to a number of conditions that are designed to help prevent 
misapplication of the rule.\11\ These

[[Page 53697]]

safeguards would apply equally to the proposed rule change permitting 
temporary holds on transactions. The safeguards include requiring that 
member firms provide notification of both the hold, and the reason for 
the hold, to all parties authorized to transact business on the 
customer's account, including the customer and a trusted contact person 
of the customer, no later than two business days after the day on which 
the firm first placed the hold.\12\ Temporary holds may only be placed 
based on a member's reasonable belief of financial exploitation--for 
example, a customer payment related to a commonly known scam, such as a 
lottery scam.\13\
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    \11\ Id.
    \12\ See Rule 2165(b)(1)(B).
    \13\ See Notice at 34086.
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    Once the temporary hold has been placed, the member firm must 
immediately initiate an internal review of the facts and circumstances 
that caused the firm to reasonably believe that the financial 
exploitation of the specified adult has occurred, is occurring, has 
been attempted, or will be attempted.\14\ Furthermore, the general 
supervisory and recordkeeping requirements of certain FINRA rules \15\ 
require a member firm relying on Rule 2165 to establish and maintain 
written supervisory procedures that are reasonably designed to achieve 
compliance with the rule, including, but not limited to, procedures 
related to the identification, escalation, and reporting of matters 
related to the financial exploitation of specified adults.\16\ With 
respect to associated persons who may be handling the customer's 
account, Rule 2165 also requires that any request for a hold be 
escalated to a supervisor, compliance department or legal department 
rather than allowing the associated person to independently place a 
hold.\17\ In addition, a member firm relying on the rule is required to 
develop and document training policies or programs reasonably designed 
to ensure that such associated persons comply with the requirements of 
the rule,\18\ as well as retain records related to compliance with the 
rule, which must be made readily available to FINRA upon request.\19\
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    \14\ See Rule 2165(b)(1)(C).
    \15\ See Rules 3110, 3120, 3130, 3150, and the Rule 4510 Series.
    \16\ See Rule 2165(c)(1).
    \17\ See Rule 2165(c)(2).
    \18\ See Supplementary Material .02 to Rule 2165.
    \19\ See Rule 2165(d).
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    The proposed rule change would expand upon Rule 2165 in both scope 
and temporal reach by: (1) Expanding the scope of Rule 2165(b)(1) by 
permitting member firms to place a temporary hold on a securities 
transaction, in addition to the already-permitted hold on 
disbursements, where the preexisting conditions of the rule, including 
the member's reasonable belief of customer financial exploitation, are 
met; \20\ (2) permitting firms to extend the maximum time period for 
any temporary hold initiated pursuant to Rule 2165(b)(1) for an 
additional 30 business days beyond the current maximum of 25 business 
days, if the firm has reported the matter to a state regulator or 
agency of competent jurisdiction, or a court of competent jurisdiction; 
\21\ and (3) requiring member firms to retain records of the reason and 
support for any extension of a temporary hold, including information 
regarding any communications with, or by, a state regulator or agency 
of competent jurisdiction or a court of competent jurisdiction.\22\ 
According to FINRA, the proposed rule change is designed to protect 
investors and the public interest by strengthening the tools available 
to FINRA's member firms to combat the financial exploitation of 
vulnerable investors, which presents the potential for significant and 
longstanding harm to those investors.\23\
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    \20\ See proposed Rule 2165(b).
    \21\ Id.
    \22\ See proposed Rule 2165(d).
    \23\ In August 2019, FINRA engaged in a retrospective review to 
assess the effectiveness and efficiency of its rules and 
administrative processes designed to protect senior investors from 
financial exploitation, including Rule 2165. FINRA stated that 
information gathered during the review supported the need for 
additional time for firms to resolve matters arising from suspected 
financial exploitation, as well as extending the rule to allow firms 
to place securities transaction holds. See Notice at 34087.
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Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the 
Account of a Specified Adult)

    With respect to placing holds on securities transactions, FINRA 
indicated that a hold on disbursements may be insufficient to protect 
certain investors from financial exploitation. In support of its 
proposal, FINRA pointed out that even if a temporary hold is placed on 
the resulting disbursement out of a customer's account, the execution 
of the transaction may still subject the customer to significant, 
negative financial consequences.\24\ Additionally, and as noted above, 
the safeguards in Rule 2165 are designed to help prevent misapplication 
of the rule with respect to temporary holds on disbursements, and these 
safeguards would apply equally to temporary holds on transactions.
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    \24\ See Notice at 34087. For example, according to FINRA such 
customers may be subject to adverse tax consequences, early 
withdrawal penalties (such as surrender charges), the inability to 
regain access to a sold investment that was subsequently closed to 
new investors, or unauthorized trading in the customer's account, 
including in inappropriately high risk or illiquid securities. Id. A 
``surrender charge'' is a type of sales charge that must be paid if 
money from a variable annuity is sold or withdrawn during the 
``surrender period''--a set period of time that typically lasts six 
to eight years after the annuity is purchased. See, e.g., 
Commission, Office of Investor Education and Advocacy, Variable 
Annuity Surrender Charges (Glossary), Investor.gov website, (Aug. 
11, 2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/variable-annuity-surrender-charges.
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Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period)

    By increasing the potential maximum duration of the temporary hold, 
whether for disbursements or transactions, from 25 business days to 55 
business days, the proposed rule change would provide member firms with 
additional time to resolve matters arising from suspected financial 
exploitation in instances where the firm has reported the suspected 
exploitation to state regulators, adult protective services (``APS'') 
agencies, or law enforcement.\25\
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    \25\ See Notice at 34087; 34089.
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    FINRA indicated that information it gathered during the 
retrospective review supported the need for member firms to have 
additional time to resolve financial exploitation matters.\26\ Although 
some retrospective review stakeholders and commenters on a FINRA 
regulatory notice \27\ stated that some matters, such as activity that 
generally occurs as a result of a commonly-known scam, can be quickly 
resolved after placing a temporary hold, other matters are more complex 
and may require additional time.\28\ For example, suspected financial 
exploitation of an elderly customer by a family member or caregiver may 
require additional time to resolve because of the need to interview 
multiple individuals, as well as to collect and review relevant 
documents according to FINRA. In these more complex cases, both the 
firm that has reported the suspected exploitation and the government or 
law enforcement entity investigating the conduct often need additional 
time to collect and share information to bring the investigation to 
resolution. In support of a maximum time period of 55 business days, 
FINRA cited to data indicating that the average duration of an

[[Page 53698]]

investigation for matters reported to the federal National Adult 
Maltreatment Reporting System (NAMRS) is 52.6 days.\29\
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    \26\ See Notice at 34087.
    \27\ The commenters referenced in this instance are commenters 
on FINRA Regulatory Notice 20-34 (Oct. 2020). See Notice at 34086. 
FINRA stated that it considered the collective feedback from the 
retrospective review stakeholders and comments to the Notice 20-34 
proposal in assessing Rule 2165 and the proposed amendments. See 
Notice at 34091.
    \28\ See Notice at 34088.
    \29\ See Notice at 34092.
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Proposed Rule Change
    As noted above, proposed Rule 2165 would: (1) Expand the current 
rule by permitting member firms to place a temporary hold on a 
securities transaction, subject to the same terms and restrictions 
currently applicable to a temporary hold on disbursements, where there 
is a reasonable belief of financial exploitation,\30\ (2) permit member 
firms to extend the maximum time period for any temporary hold 
initiated under the rule for an additional 30 business days if the firm 
has reported the matter to a state regulator or agency of competent 
jurisdiction, or a court of competent jurisdiction,\31\ and (3) require 
member firms to retain records of the reason and support for any 
extension of any temporary hold, including information regarding any 
communications with, or by, a state regulator or agency of competent 
jurisdiction or a court of competent jurisdiction.\32\
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    \30\ See proposed Rule 2165(b).
    \31\ Id.
    \32\ See proposed Rule 2165(d).
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Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the 
Account of a Specified Adult)

    Rule 2165 currently permits temporary holds to be placed on 
disbursements of funds or securities when the firm has a reasonable 
belief that the customer is being financially exploited. Although this 
serves to stop funds or securities from leaving a customer's account, 
the rule does not permit a firm to place a hold on a securities 
transaction where the same financial exploitation is suspected.\33\ 
Accordingly, FINRA is proposing to amend Rule 2165 to permit firms to 
place a temporary hold on securities transactions when the firm has a 
reasonable belief that the customer is being financially exploited.\34\ 
In accordance with the Rule's safe harbor approach for holds on 
disbursements,\35\ the proposed rule change would permit, but not 
require, firms to place a hold on transactions in these circumstances.
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    \33\ For example, FINRA stated that Rule 2165 currently would 
not apply to a customer's order to sell his shares of a stock. 
However, FINRA elaborated that if a customer requested that the 
proceeds of a sale of shares of a stock be disbursed out of his 
account at the member firm, then the rule could apply to the 
disbursement of the proceeds where the customer is a ``specified 
adult'' and there is reasonable belief of financial exploitation. 
See Notice at 34087 at n.33.
    \34\ See proposed Rule 2165(b).
    \35\ FINRA stated that Rule 2165 provides member firms and their 
associated persons with a safe harbor from FINRA Rules 2010 
(Standards of Commercial Honor and Principles of Trade), 2150 
(Improper Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts) and 11870 (Customer Account 
Transfer Contracts) when member firms exercise discretion in placing 
temporary holds on disbursements of funds or securities from the 
accounts of specified adults consistent with the requirements of 
Rule 2165. See Notice at 34086.
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Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period); Rule 
2165(d) (Record Retention)
    Rule 2165 currently allows a member firm to place a temporary 
disbursement hold on a specified adult customer's account for up to 15 
business days if the specified conditions required by the rule are 
satisfied, unless otherwise terminated or extended by a state regulator 
or agency of competent jurisdiction, or a court of competent 
jurisdiction.\36\ The member firm may extend that hold for an 
additional 10 business days, for a maximum of 25 business days total, 
if the member firm's internal review of the facts and circumstances 
supports its reasonable belief that the financial exploitation of the 
specified adult has occurred, is occurring, has been attempted or will 
be attempted, unless otherwise terminated or extended by a state 
regulator or agency of competent jurisdiction, or a court of competent 
jurisdiction.\37\ Under FINRA's proposal, these hold periods would also 
apply to transactions held under the same conditions described above.
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    \36\ See Rule 2165(b)(2).
    \37\ See Rule 2165(b)(3).
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    FINRA is proposing to amend Rule 2165 to permit firms to extend any 
temporary hold under the rule for an additional 30 business days if the 
member firm has reported the matter to a state regulator or agency of 
competent jurisdiction, or a court of competent jurisdiction.\38\ Thus, 
firms would be able to extend a transaction or disbursement hold up to 
a maximum of 55 business days only in instances where they have 
externally reported the suspicious conduct.
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    \38\ FINRA stated that the 30 business day hold period in 
proposed Rule 2165(b)(4) would be in addition to the 15 business day 
hold in Rule 2165(b)(2) and the 10 business day hold in Rule 
2165(b)(3). See Notice at 34087 n.31.
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    In addition, Rule 2165(d) currently requires member firms to retain 
records related to compliance with the rule, which must be readily 
available to FINRA upon request. To evidence compliance with Rule 2165 
in placing or extending a temporary hold, FINRA is proposing to amend 
Rule 2165(d) to require that a member firm retain records of the reason 
and support for any extension of a temporary hold, including 
information regarding any communications with, or by, a state regulator 
or agency of competent jurisdiction or a court of competent 
jurisdiction.\39\
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    \39\ See proposed Rule 2165(d)(6).
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III. Proceedings To Determine Whether To Approve or Disapprove File 
Number SR-FINRA-2021-016 and Grounds for Disapproval Under 
Consideration

    The Commission is instituting proceedings to further consider the 
proposed rule change and the issues raised by commenters. Specifically, 
the Commission is providing notice of the following grounds for 
possible disapproval under consideration:
     Whether FINRA has demonstrated how its proposed rule 
change is consistent with Section 15A(b)(6) of the Exchange Act, which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest.\40\
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    \40\ 15 U.S.C. 78o-3(b)(6).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \41\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\42\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations issued thereunder.\43\
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    \41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \42\ See id.
    \43\ See id.
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    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Exchange Act to allow for additional consideration of the issues 
raised by the proposed rule change as it determines whether the 
proposed rule change should be approved or disapproved.\44\ Institution 
of proceedings does not indicate that the Commission has reached any

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conclusions with respect to the proposed rule change.
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    \44\ 15 U.S.C. 78s(b)(2)(B).
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change is consistent with the Exchange Act and the rules 
thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\45\
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    \45\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by October 13, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 19, 2021. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2021-016 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR- FINRA-2021-016. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2021-016 and 
should be submitted on or before October 13, 2021. If comments are 
received, any rebuttal comments should be submitted on or before 
October 19, 2021.
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    \46\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20970 Filed 9-27-21; 8:45 am]
BILLING CODE 8011-01-P