Document ID: SEC-2016-1949-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-11-07T05:00Z

[Federal Register Volume 81, Number 215 (Monday, November 7, 2016)]
[Notices]
[Pages 78238-78257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26797]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79215; File No. SR-FINRA-2016-039]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
Rule 4512 (Customer Account Information) and Adopt FINRA Rule 2165 
(Financial Exploitation of Specified Adults)

November 1, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 19, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC,'' 
or the ``Commission'') the proposed rule change as described in Items 
I, II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to: (1) Amend FINRA Rule 4512 (Customer Account 
Information) to require members to make reasonable efforts to obtain 
the name of and contact information for a trusted contact person for a 
customer's account; and (2) adopt new FINRA Rule 2165 (Financial 
Exploitation of Specified Adults) to permit members to place temporary 
holds on disbursements of funds or securities from the accounts of 
specified customers where there is a reasonable belief of financial 
exploitation of these customers.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B,

[[Page 78239]]

and C below, of the most significant aspects of such statements.
    A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change
1. Purpose
    With the aging of the U.S. population, financial exploitation of 
seniors and other vulnerable adults is a serious and growing 
problem.\3\ FINRA's experience with the FINRA Securities Helpline for 
Seniors[supreg] (``Seniors Helpline'') has highlighted issues relating 
to financial exploitation of seniors and other vulnerable adults.\4\ A 
number of reports and studies also have explored various aspects of 
this important topic.\5\ Moreover, studies indicate that financial 
exploitation is the most common form of elder abuse.\6\ Financial 
exploitation can be difficult for any investor, but it can be 
particularly devastating for seniors and other vulnerable adults, many 
of whom are living on fixed incomes without the ability to offset 
significant losses over time or through other means.\7\ Financial 
exploitation can occur suddenly, and once funds leave an account they 
can be difficult, if not impossible, to recover, especially when they 
ultimately are transferred outside of the U.S.\8\ Members need more 
effective tools that will allow them to quickly and effectively address 
suspected financial exploitation of seniors and other vulnerable 
adults. Currently, however, FINRA rules do not explicitly permit 
members to contact a non-account holder or to place a temporary hold on 
disbursements of funds or securities where there is a reasonable belief 
of financial exploitation of a senior or other vulnerable adult.
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    \3\ See The MetLife Study of Elder Financial Abuse: Crimes of 
Occasion, Desperation, and Predation Against America's Elders (June 
2011) (discussing the increasing prevalence of elder financial 
abuse) (hereinafter ``MetLife Study''). See also FINRA Investor 
Education Foundation, Financial Fraud and Fraud Susceptibility in 
the United States: Research Report from a 2012 National Survey 
(2013) (which found that U.S. adults age 65 and older are more 
likely to be targeted for financial fraud, including investment 
scams, and more likely to lose money once targeted) (hereinafter 
``FINRA Foundation Study'').
    \4\ See FINRA Launches Toll-Free FINRA Securities Helpline for 
Seniors (April 20, 2015). See also Report on the FINRA Securities 
Helpline for Seniors (December 2015) (stating that from its launch 
on April 20, 2015 until December 2015, the Seniors Helpline received 
more than 2,500 calls with an average call duration of nearly 25 
minutes) (hereinafter ``Seniors Helpline Report'').
    \5\ See, e.g., National Senior Investor Initiative: A 
Coordinated Series of Examinations, SEC's Office of Compliance 
Inspections and Examinations and FINRA (April 15, 2015) (hereinafter 
``Senior Investor Initiative''); MetLife Study; and Seniors Helpline 
Report.
    \6\ See Interagency Guidance on Privacy Laws and Reporting 
Financial Abuse of Older Adults, Board of Governors of the Federal 
Reserve System, Commodity Futures Trading Commission, Consumer 
Financial Protection Bureau, Federal Deposit Insurance Corp., 
Federal Trade Commission, National Credit Union Administration, 
Office of the Comptroller of the Currency and SEC (September 24, 
2013) (hereinafter ``Interagency Guidance'') (citing Acierno, R., 
M.A. Hernandez, A.B. Amstadter, H.S. Resnick, K. Steve, W. Muzzy, 
and D.G. Kilpatrick, ``Prevalence and Correlates of Emotional, 
Physical, Sexual and Financial Abuse and Potential Neglect in the 
United States: The National Elder Mistreatment Study,'' American 
Journal of Public Health 100(2): 292-97; Lifespan of Greater 
Rochester, Inc., et al., Under the Radar: New York State Elder Abuse 
Prevention Study, (Rochester, NY: Lifespan of Greater Rochester, 
Inc., May 2011)) (hereinafter ``New York State Elder Abuse 
Prevention Study'').
    \7\ See Seniors Helpline Report.
    \8\ See Seniors Helpline Report.
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    To address these issues, the proposed rule change would provide 
members with a way to quickly respond to situations in which they have 
a reasonable basis to believe that financial exploitation of vulnerable 
adults has occurred or will be attempted. FINRA believes that a member 
can better protect its customers from financial exploitation if the 
member can: (1) Place a temporary hold on a disbursement of funds or 
securities from a customer's account; and (2) notify a customer's 
trusted contact person when there is concern that, among other things, 
the customer may be the victim of financial exploitation. These 
measures will assist members in thwarting financial exploitation of 
seniors and other vulnerable adults before potentially ruinous losses 
occur. As discussed below, FINRA is proposing a number of safeguards to 
help ensure that there is not a misapplication of the proposed rule and 
that customers' ordinary disbursements are not disrupted.
    A small number of states have enacted statutes that permit 
financial institutions, including broker-dealers, to place temporary 
holds on ``disbursements'' or ``transactions'' if financial 
exploitation of covered persons is suspected.\9\ In addition, the North 
American Securities Administrators Association (``NASAA'') created a 
model state act to protect vulnerable adults from financial 
exploitation (``NASAA model''). Due to the small number of state 
statutes currently in effect and the lack of a federal standard in this 
area, FINRA believes that the proposed rule change would aid in the 
creation of a uniform national standard for the benefit of members and 
their customers.
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    \9\ See, e.g., DEL. CODE ANN. tit. 31, Sec.  3910 (2015); MO. 
REV. STAT. Sec. Sec.  409.600-.630 (2015); WASH. REV. CODE 
Sec. Sec.  74.34.215, 220 (2015); and IND. CODE ANN. Sec.  23-19-4.1 
(2016).
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Trusted Contact Person
    The proposed rule change would amend Rule 4512 to require members 
to make reasonable efforts to obtain the name of and contact 
information for a trusted contact person upon the opening of a non-
institutional customer's account.\10\ The proposed rule change would 
require that the trusted contact person be age 18 or older.\11\ While 
the proposed rule change does not specify what contact information 
should be obtained for a trusted contact person, a mailing address, 
telephone number and email address for the trusted contact person may 
be the most useful information for members.
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    \10\ See proposed Rule 4512(a)(1)(F).
    \11\ See proposed Rule 4512(a)(1)(F).
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    The proposal does not prohibit members from opening and maintaining 
an account if a customer fails to identify a trusted contact person as 
long as the member made reasonable efforts to obtain a name and contact 
information.\12\ FINRA believes that asking a customer to provide the 
name and contact information for a trusted contact person ordinarily 
would constitute reasonable efforts to obtain the information and would 
satisfy the proposed rule change's requirements.
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    \12\ See proposed Supplementary Material .06(b) to Rule 4512.
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    Consistent with the current requirements of Rule 4512, a member 
would not need to attempt to obtain the name of and contact information 
for a trusted contact person for accounts in existence prior to the 
effective date of the proposed rule change (``existing accounts'') 
until such time as the member updates the information for the account 
either in the course of the member's routine and customary business or 
as otherwise required by applicable laws or rules.\13\ With respect to 
any account subject to the requirements of Exchange Act Rule 17a-
3(a)(17) to periodically update customer records, a member shall make 
reasonable efforts to obtain or, if previously obtained, to update 
where appropriate the name of and contact information for a trusted 
contact person consistent with the requirements in Exchange Act Rule 
17a-3(a)(17).\14\ With

[[Page 78240]]

regard to updating the contact information once provided for other 
accounts that are not subject to the requirements in Exchange Act Rule 
17a-3, a member should consider asking the customer to review and 
update the name of and contact information for a trusted contact person 
on a periodic basis or when there is a reason to believe that there has 
been a change in the customer's situation.\15\
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    \13\ See Rule 4512(b).
    \14\ See proposed Supplementary Material .06(c) to Rule 4512. 
The reference to the requirements of Rule 17a-3(a)(17) includes the 
requirements of Rule 17a-3(a)(17)(i)(A) in conjunction with Rule 
17a-3(a)(17)(i)(D). In this regard, Rule 17a-3(a)(17)(i)(D) provides 
that the account record requirements in Rule 17a-3(a)(17)(i)(A) only 
apply to accounts for which the member, broker or dealer is, or has 
within the past 36 months been, required to make a suitability 
determination under the federal securities laws or under the 
requirements of a self-regulatory organization of which it is a 
member.
    \15\ A customer's request to change his or her trusted contact 
person may be a possible red flag of financial exploitation. For 
example, a senior customer instructing his registered representative 
to change his trusted contact person from an immediate family member 
to a previously unknown third party may be a red flag of financial 
exploitation.
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    The proposed rule change would also require that, at the time of 
account opening, a member shall disclose in writing (which may be 
electronic) to the customer that the member or an associated person is 
authorized to contact the trusted contact person and disclose 
information about the customer's account to address possible financial 
exploitation, to confirm the specifics of the customer's current 
contact information, health status, or the identity of any legal 
guardian, executor, trustee or holder of a power of attorney, or as 
otherwise permitted by proposed Rule 2165. With respect to any account 
that was opened pursuant to a prior FINRA rule, a member shall provide 
this disclosure in writing, which may be electronic, when updating the 
information for the account pursuant to Rule 4512(b) either in the 
course of the member's routine and customary business or as otherwise 
required by applicable laws or rules.\16\
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    \16\ See proposed Supplementary Material .06(a) to Rule 4512. A 
member would be required to provide the disclosure at account 
opening or when updating information for existing accounts pursuant 
to Rule 4512(b), even if a customer fails to identify a trusted 
contact person. Among other things, such disclosure may assist a 
customer in making an informed decision about whether to provide the 
trusted contact person information.
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    FINRA believes that members and customers will benefit from the 
trusted contact information in many different settings. For example, 
consistent with the disclosure, if a member has been unable to contact 
a customer after multiple attempts, a member could contact a trusted 
contact person to inquire about the customer's current contact 
information. Or if a customer is known to be ill or infirm and the 
member has been unable to contact the customer after multiple attempts, 
the member could contact a trusted contact person to inquire about the 
customer's health status. A member also could reach out to a trusted 
contact person if it suspects that the customer may be suffering from 
Alzheimer's disease, dementia or other forms of diminished capacity. A 
member could contact a trusted contact person to address possible 
financial exploitation of the customer before placing a temporary hold 
on a disbursement. In addition, as discussed below, pursuant to 
proposed Rule 2165, when information about a trusted contact person is 
available, a member must notify the trusted contact person orally or in 
writing, which may be electronic, if the member has placed a temporary 
hold on a disbursement of funds or securities from a customer's 
account, unless the member reasonably believes that the trusted contact 
person is engaged in the financial exploitation.\17\
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    \17\ See proposed Rule 2165(b)(1)(B)(ii). With respect to 
disclosing information to the trusted contact person, Regulation S-P 
excepts from the Regulation's notice and opt-out requirements 
disclosures made: (A) To comply with federal, state, or local laws, 
rules and other applicable legal requirements; or (B) made with 
client consent, provided such consent has not been revoked. See 17 
C.F.R Sec. Sec.  248.15(a)(1) and (a)(7)(i). FINRA believes that 
disclosures to a trusted contact person pursuant to proposed Rule 
2165 or 4512(a)(1)(F) would be consistent with Regulation S-P.
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    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. A member may use its 
discretion in relying on any information provided by the trusted 
contact person. A member may elect to notify an individual that he or 
she was named as a trusted contact person; however, the proposed rule 
change would not require such notification.
Temporary Hold on Disbursement of Funds or Securities
    The proposed rule change would permit a member that reasonably 
believes that financial exploitation may be occurring to place a 
temporary hold on the disbursement of funds or securities from the 
account of a ``specified adult'' customer.\18\ The proposed rule change 
creates no obligation to withhold a disbursement of funds or securities 
where financial exploitation may be occurring. In this regard, 
Supplementary Material to proposed Rule 2165 would explicitly state 
that the Rule provides members 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 members exercise discretion in placing temporary holds 
on disbursements of funds or securities from the accounts of specified 
adults under the circumstances denoted in the Rule.\19\ The proposed 
Supplementary Material would further state that the Rule does not 
require members to place temporary holds on disbursements of funds or 
securities from the account of a specified adult.\20\
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    \18\ See proposed Rule 2165(b)(1). Members also must consider 
any obligations under FINRA Rule 3310 (Anti-Money Laundering 
Compliance Program) and the reporting of suspicious transactions 
required under 31 U.S.C. 5318(g) and the implementing regulations 
thereunder.
    \19\ See proposed Supplementary Material .01 to Rule 2165.
    \20\ See proposed Supplementary Material .01 to Rule 2165. FINRA 
understands that some members, pursuant to state law or their own 
policies, may already place temporary holds on disbursements from 
customers' accounts where financial exploitation is suspected.
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    FINRA believes that ``specified adults'' may be particularly 
susceptible to financial exploitation.\21\ Proposed Rule 2165 would 
define ``specified adult'' as: (A) A natural person age 65 and older; 
\22\ or (B) a natural person age 18 and older who the member reasonably 
believes has a mental or physical impairment that renders the 
individual unable to protect his or her own interests.\23\ 
Supplementary Material to proposed Rule 2165 would provide that a 
member's reasonable belief that a natural person age 18 and older has a 
mental or physical impairment that renders the individual unable to 
protect his or her own interests may be based on the facts and 
circumstances observed in the member's business relationship with the 
person.\24\

[[Page 78241]]

The proposed rule change would define the term ``account'' to mean any 
account of a member for which a specified adult has the authority to 
transact business.\25\
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    \21\ See Senior Investor Initiative (noting the increase in 
persons aged 65 and older living in the United States and the 
concentration of wealth in those persons during a time of downward 
yield pressure on conservative income-producing investments). See 
also FINRA Foundation Study (noting that respondents age 65 and over 
were more likely to be solicited to invest in a potentially 
fraudulent opportunity (93%), more likely to engage with the offer 
(49%) and more likely to have lost money (16%) than younger 
respondents); MetLife Study (noting the many forms of vulnerability 
that ``make elders more susceptible to [financial] abuse,'' 
including, among others, poor physical or mental health, lack of 
mobility, and isolation); Protecting Elderly Investors from 
Financial Exploitation: Questions to Consider (February 5, 2015) 
(noting that one of the greatest risk factors for diminished 
capacity is age).
    \22\ See, e.g., Aging Statistics, U.S. Department of Health and 
Human Services Administration on Aging (referring to the ``older 
population'' as persons ``65 years or older''); Senior Investor 
Initiative (noting the examinations underlying the report ``focused 
on investors aged 65 years old or older'').
    \23\ See proposed Rule 2165(a)(1).
    \24\ See proposed Supplementary Material .03 to Rule 2165. A 
member also may rely on other sources of information in making a 
determination under proposed Rule 2165(a)(1) (e.g., a court or 
government agency order finding a customer to be legally 
incompetent).
    \25\ See proposed Rule 2165(a)(2).
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    Because financial abuse may take many forms, FINRA has proposed a 
broad definition of ``financial exploitation.'' Specifically, financial 
exploitation would mean: (A) The wrongful or unauthorized taking, 
withholding, appropriation, or use of a specified adult's funds or 
securities; or (B) any act or omission by a person, including through 
the use of a power of attorney, guardianship, or any other authority, 
regarding a specified adult, to: (i) Obtain control, through deception, 
intimidation or undue influence, over the specified adult's money, 
assets or property; or (ii) convert the specified adult's money, assets 
or property.\26\
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    \26\ See proposed Rule 2165(a)(4).
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    The proposed rule change would permit a member to place a temporary 
hold on a disbursement of funds or securities from the account of a 
specified adult if the member reasonably believes that financial 
exploitation of the specified adult has occurred, is occurring, has 
been attempted or will be attempted.\27\ A temporary hold pursuant to 
proposed Rule 2165 may be placed on a particular suspicious 
disbursement(s) but not on other, non-suspicious disbursements.\28\ The 
proposed rule change would not apply to transactions in securities.\29\
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    \27\ See proposed Rule 2165(b)(1)(A).
    \28\ FINRA recognizes that a single disbursement could involve 
all of the assets in an account.
    \29\ For example, the proposed rule change would not apply to a 
customer's order to sell his shares of a stock. However, if a 
customer requested that the proceeds of a sale of shares of a stock 
be disbursed out of his account at the member, then the proposed 
rule change could apply to the disbursement of the proceeds where 
the customer is a ``specified adult'' and there is reasonable belief 
of financial exploitation.
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    The proposed rule change would require that a member's written 
supervisory procedures identify the title of each person authorized to 
place, terminate or extend a temporary hold on behalf of the member 
pursuant to Rule 2165. The proposed rule change would require that any 
such person be an associated person of the member who serves in a 
supervisory, compliance or legal capacity for the member.\30\
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    \30\ See proposed Rule 2165(c)(2). This provision is intended to 
ensure that a member's decision to place a temporary hold is 
elevated to an associated person with appropriate authority.
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    If a member places a temporary hold, the proposed rule change would 
require the member to immediately initiate an internal review of the 
facts and circumstances that caused the member to reasonably believe 
that financial exploitation of the specified adult has occurred, is 
occurring, has been attempted or will be attempted.\31\ In addition, 
the proposed rule change would require the member to provide 
notification of the hold and the reason for the hold to all parties 
authorized to transact business on the account, including, but not 
limited to, the customer, and, if available, the trusted contact 
person, no later than two business days after the date that the member 
first placed the hold.\32\ While oral or written (including electronic) 
notification would be permitted under the proposed rule change, a 
member would be required to retain records evidencing the 
notification.\33\
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    \31\ See proposed Rule 2165(b)(1)(C).
    \32\ See proposed Rule 2165(b)(1)(B). FINRA understands that a 
member may not necessarily be able to speak with or otherwise get a 
response from such persons within the two-business-day period. FINRA 
would consider, for example, a member's mailing a letter, sending an 
email, or placing a telephone call and leaving a message with 
appropriate person(s) within the two-business-day period to 
constitute notification for purposes of proposed Rule 2165. 
Moreover, as further discussed herein, FINRA would consider the 
inability to contact a trusted contact person to mean that the 
trusted contact person was not available for purposes of the Rule.
    \33\ See proposed Rule 2165(d).
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    The proposed rule change does not preclude a member from 
terminating a temporary hold after communicating with either the 
customer or trusted contact person. FINRA believes that a customer's 
objection to a temporary hold or information obtained during an 
exchange with the customer or trusted contact person may be used in 
determining whether a hold should be placed or lifted. FINRA believes 
that while not dispositive members should weigh a customer's objection 
against other information in determining whether a hold should be 
placed or lifted.
    While the proposed rule change does not require notifying the 
customer's registered representative of suspected financial 
exploitation, a customer's registered representative may be the first 
person to detect potential financial exploitation. If the detection 
occurs in another way, a member may choose to notify and discuss the 
suspected financial exploitation with the customer's registered 
representative.
    For purposes of proposed Rule 2165, FINRA would consider the lack 
of an identified trusted contact person, the inability to contact the 
trusted contact person or a person's refusal to act as a trusted 
contact person to mean that the trusted contact person was not 
available. A member may use the temporary-hold provision under proposed 
Rule 2165 when a trusted contact person is not available.
    The temporary hold authorized by proposed Rule 2165 would expire 
not later than 15 business days after the date that the member first 
placed the temporary hold on the disbursement of funds or securities, 
unless sooner terminated or extended by an order of a state regulator 
or agency or court of competent jurisdiction.\34\ In addition, provided 
that the member'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, the proposed rule change would permit the member to 
extend the temporary hold for an additional 10 business days, unless 
sooner terminated or extended by an order of a state regulator or 
agency or court of competent jurisdiction.\35\
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    \34\ See proposed Rule 2165(b)(2).
    \35\ See proposed Rule 2165(b)(3).
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    Proposed Rule 2165 would require members to retain records related 
to compliance with the Rule, which shall be readily available to FINRA, 
upon request. Retained records required by the proposed rule change are 
records of: (1) Requests for disbursement that may constitute financial 
exploitation of a specified adult and the resulting temporary hold; (2) 
the finding of a reasonable belief that financial exploitation has 
occurred, is occurring, has been attempted or will be attempted 
underlying the decision to place a temporary hold on a disbursement; 
(3) the name and title of the associated person that authorized the 
temporary hold on a disbursement; (4) notification(s) to the relevant 
parties pursuant to the Rule; and (5) the internal review of the facts 
and circumstances supporting the member's reasonable belief that the 
financial exploitation of the specified adult has occurred, is 
occurring, has been attempted or will be attempted.\36\
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    \36\ See proposed Rule 2165(d).
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    The proposed rule change would require a member that anticipates 
using a temporary hold in appropriate circumstances to establish and 
maintain written supervisory procedures reasonably designed to achieve 
compliance with the Rule, including procedures on the identification, 
escalation and reporting of matters related to financial exploitation 
of specified adults.\37\ The proposed rule change would require that 
the member's written supervisory procedures identify the title of each 
person authorized to place, terminate or extend a temporary

[[Page 78242]]

hold on behalf of the member pursuant to the Rule.\38\ The proposed 
rule change would also require a member that anticipates placing a 
temporary hold pursuant to the Rule to develop and document training 
policies or programs reasonably designed to ensure that associated 
persons comply with the requirements of the Rule.\39\
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    \37\ See proposed Rule 2165(c)(1).
    \38\ See proposed Rule 2165(c)(2).
    \39\ See proposed Supplementary Material .02 to Rule 2165.
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    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 180 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\40\ 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. The proposed rule change will promote investor 
protection by relieving members from FINRA rules that might otherwise 
discourage them from exercising discretion to protect customers through 
placing a temporary hold on disbursements of funds or securities. Such 
a hold, combined with contacting a trusted contact person, also may 
assist these customers in stopping unwanted disbursements and better 
protecting themselves from financial exploitation.
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    \40\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. All members would be subject to 
the proposed amendments to Rule 4512, so they would be affected in the 
same manner, and FINRA has narrowly tailored the requirements to 
minimize the impacts on members. Moreover, proposed Rule 2165 is a 
safe-harbor provision that permits, but does not require, members to 
place temporary holds on disbursements in appropriate circumstances.
    The population of seniors and other vulnerable adults in the United 
States is large. According to the U.S. Department of Health and Human 
Services, the number of older Americans (persons 65 years of age or 
older) is estimated to be 44.7 million, slightly over 14% of the U.S. 
population.\41\ Of these Americans, approximately 57%, just under 25.5 
million individuals, are invested in the stock market.\42\ Further, in 
a recent survey, 75% of older households--that is, those where the 
survey respondent was 65 years of age or older--reported having 
securities investments in retirement or taxable accounts. This compares 
to only 61% for households where the survey respondent was younger than 
65.\43\ These figures represent conservative estimates of the 
individuals who may be better protected by this proposed rule change as 
it excludes any estimate of other vulnerable adults along with the 
anticipated continued growth of the older population.
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    \41\ See Aging Statistics, U.S. Department of Health and Human 
Services Administration.
    \42\ See Gallup 2013 Economy and Personal Finance survey at 
http://www.gallup.com/poll/162353/stock-ownership-stays-record-low.aspx.
    \43\ See FINRA Investor Education Foundation's 2015 National 
Financial Capability Study (State-by-State Survey) at http://www.usfinancialcapability.org/.
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    As noted above, the proposed rule change would provide members with 
a way to quickly respond to situations in which they have a reasonable 
basis to believe that financial exploitation of vulnerable adults has 
occurred or will be attempted. The proposed rule change not only better 
safeguards customers, to the extent that members today do not provide 
additional protections for specified adults, but also better protects 
those members that are already doing so. FINRA believes that the 
proposed rule change would protect investors by relieving members from 
FINRA rules that might otherwise discourage members from exercising 
discretion to protect customers through placing a temporary hold on 
disbursements of funds or securities. Such a hold, combined with 
notifying a trusted contact person, also may assist these customers in 
stopping unwanted disbursements and better protecting themselves from 
financial exploitation.
    FINRA does not believe that the proposed rule change will impose 
undue operational costs on members. The proposed amendments to Rule 
4512 would require members to attempt to collect the name and contact 
information for a trusted contact person at the time of account opening 
or, with respect to existing accounts, in the course of the member's 
routine and customary business. Members also would incur additional 
responsibilities to provide disclosure about the member's right to 
share certain personal information with the customer's trusted contact 
person.
    While FINRA recognizes that there will be some operational costs to 
members in complying with the proposed trusted contact person 
requirement, FINRA has lessened the cost of compliance by not requiring 
members to notify the trusted contact person of his or her designation 
as such. Furthermore, the proposed rule change would permit a member to 
deliver the disclosure and notification required by Rule 4512 or 2165 
in paper or electronic form thereby giving the member alternative 
methods of complying with the requirements.
    In addition, there may be impacts with respect to legal risks and 
attendant costs to members that choose to rely on the proposed rule 
change in placing temporary holds on disbursements, although the 
direction of the impact is ambiguous. The proposed rule change may 
provide some legal protection to members if they are sued for 
withholding disbursements where there is a reasonable belief of 
financial exploitation as they can point to the rule as a rationale for 
their actions. At the same time, while proposed Rule 2165 creates no 
obligation to withhold disbursements where financial exploitation may 
be occurring or to refrain from opening or maintaining an account where 
no trusted contact person is identified, the proposed rule change might 
serve as a rationale for a private action against members that do not 
withhold disbursements when there is a reasonable belief of financial 
exploitation. To reduce the latter risk, proposed Rule 2165 explicitly 
states that it provides members with a safe harbor from FINRA Rules 
2010, 2150 and 11870 when members exercise discretion in placing 
temporary holds on disbursements of funds or securities, but does not 
require members to place such holds.
    To the extent that members today have reasons to suspect financial 
exploitation of their customers, they may make judgments with regard to 
withholding disbursements of funds or securities. As such, these 
members may already face litigation risk with regard to their actions, 
whether or not they choose to disburse funds or securities, and without 
the benefit of a rule that supports their actions.
    In developing the proposed rule change, FINRA considered several 
alternatives to help to ensure that it is narrowly tailored to achieve 
its purposes described previously without

[[Page 78243]]

imposing unnecessary costs and burdens on members or resulting in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
addresses many of the concerns noted by commenters in response to the 
proposal published for public comment in Regulatory Notice 15-37 
(``Notice 15-37 Proposal'').
    First, the Notice 15-37 Proposal would have prohibited a person who 
is authorized to transact business on an account from being designated 
a customer's trusted contact person under Rule 4512(a)(1)(F). 
Commenters raised concerns that this restriction may prohibit trustees 
or individuals with powers of attorney from being designated as trusted 
contact persons. In response to these comments, FINRA agrees that 
prohibiting persons authorized to transact business on an account from 
being designated a trusted contact person could present an overly 
restrictive burden on some customers. Accordingly, FINRA has proposed 
removing the prohibition on trusted contact persons being authorized to 
transact business on an account so as to permit joint accountholders, 
trustees, individuals with powers of attorney and other natural persons 
authorized to transact business on an account to be designated as 
trusted contact persons.
    Second, under the Notice 15-37 Proposal, the temporary hold on 
disbursements of funds or securities would have expired not later than 
15 business days after the date that the hold was initially placed, 
unless sooner terminated or extended by an order of a court of 
competent jurisdiction. Provided that the member's internal review of 
the facts and circumstances supported the reasonable belief of 
financial exploitation, the Notice 15-37 Proposal would have permitted 
the temporary hold to be extended for an additional 15 business days, 
unless sooner terminated by an order of a court of competent 
jurisdiction. FINRA has proposed revising the time periods to up to 15 
business days in the initial period and up to 10 business days (down 
from 15 business days) in any subsequent period. The shortened overall 
period responds to commenters' concerns about disbursement delays and 
better aligns proposed Rule 2165 with the NASAA model. The proposed 
subsequent period of up to 10 business days provides members with an 
additional period to address the issue if concerns about financial 
exploitation exist after the initial period, during which time the 
member must contact account holders and perform an appropriate 
investigation. FINRA believes that the proposed time periods are 
appropriately tailored to provide members with an adequate time period 
to address concerns about financial exploitation, while also responding 
to commenters' concerns about disbursement delays.
    Third, the Notice 15-37 Proposal incorporated the concept of the 
temporary hold being terminated or extended by an order of a court of 
competent jurisdiction. In response to comments, FINRA agrees that the 
Notice 15-37 Proposal may be considered overly narrow in not permitting 
temporary holds to be terminated or extended by a state regulator or 
agency of competent jurisdiction in addition to a court of competent 
jurisdiction. In light of the important role of state regulators and 
agencies in dealing with financial exploitation, FINRA has revised 
proposed Rule 2165 to incorporate the concept of a temporary hold being 
terminated or extended by a state regulator or agency in addition to a 
court of competent jurisdiction.
    Fourth, the Notice 15-37 Proposal would have required a qualified 
person to place a temporary hold pursuant to proposed Rule 2165. 
Commenters suggested that the member should place a temporary hold, not 
the qualified person. In response to comments, FINRA has revised 
proposed Rule 2165 to provide that the member would place a hold under 
the rule. As revised, proposed Rule 2165 also would require that a 
member's written supervisory procedures identify the title of each 
person authorized to place, terminate or extend a temporary hold on 
behalf of the member pursuant to Rule 2165, and that any such person be 
an associated person of the member who serves in a supervisory, 
compliance or legal capacity for the member. In addition, proposed Rule 
2165 would require that a member's records include the name and title 
of the associated person that authorized the temporary hold on a 
disbursement. FINRA believes that the revised proposed rule change is 
appropriately tailored to apply the obligations at the member-level, 
while preserving a role for associated persons serving in a 
supervisory, compliance or legal capacity in placing, terminating or 
extending the hold on behalf of the member.
    Fifth, the Notice 15-37 Proposal would have required that the 
supervisory, compliance or legal capacity be ``reasonably related to 
the account'' in question. Commenters raised concerns over how they 
should determine whether the capacity was reasonably related to the 
account, citing in particular some members' practice of using a 
centralized group to respond to senior or fraud issues. After 
considering these comments, FINRA is now proposing to eliminate the 
requirement that the supervisory, compliance or legal capacity be 
``reasonably related to the account.''
    Sixth, under the Notice 15-37 Proposal, if the trusted contact 
person was not available or the member reasonably believed that the 
trusted contact person was involved in the financial exploitation of 
the specified adult, the member would have been required to contact an 
immediate family member, unless the member reasonably believed that the 
immediate family member was involved in the financial exploitation of 
the specified adult. Some commenters raised operational and privacy 
concerns regarding disclosing information to an immediate family member 
who the customer did not designate as a trusted contact person. In 
response to comments, FINRA has proposed removing the requirement to 
contact an immediate family member under proposed Rule 2165.
    For these reasons, FINRA believes that the proposed rule change 
would strengthen FINRA's regulatory structure and provide additional 
protection to investors without imposing any burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 15-37 (October 2015). FINRA received 40 comment letters in 
response to the Notice 15-37 Proposal. A copy of Notice 15-37 is 
attached as Exhibit 2a to this filing.\44\ Copies of the comment 
letters received in response to Notice 15-37 are attached as Exhibit 2c 
to this filing.\45\ The comments and FINRA's responses are set forth in 
detail below.
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    \44\ Exhibits to File No. SR-FINRA-2016-039 are available on 
FINRA's Web site at http://www.finra.org, at the principal office of 
FINRA, and at the Commission's Public Reference Room.
    \45\ See Exhibit 2b to this filing for a list of abbreviations 
assigned to commenters.
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General Support and Opposition to the Notice 15-37 Proposal
    Twenty-seven commenters supported FINRA's efforts to protect 
seniors and other vulnerable adults but did not support all aspects of 
the proposal.\46\

[[Page 78244]]

Chambers supported the proposal as promoting investor protection and 
preventing fraud in customer accounts. Twelve commenters raised 
significant concerns about the proposal.\47\
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    \46\ See Cowan, IJEC, NAELA, CFA Institute, GSU, Commonwealth, 
NAPSA, ICI, PIABA, CAI, Cetera, Lincoln, Miami Investor Rights 
Clinic, PIRC, AARP, Wells Fargo, NASAA, FSI, SIFMA, Coughlin, 
Yaakov, IRI, First U.S. Community Credit Union, NAIFA, Alzheimer's 
Assoc., BDA and GWFS.
    \47\ See FSR, FIBA, Thomson, Girdler, Christian Financial 
Services, Rich, Stoehr, Ros, Hayden, Anderson, Liberman and Pisenti.
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    FINRA has considered the concerns raised by commenters and, as 
discussed in detail below, has addressed many of the concerns noted by 
commenters in response to the Notice 15-37 Proposal. Seniors are 
constantly subjected to a spectrum of exploitation scams, including 
scams centered on financial exploitation.\48\ FINRA believes that the 
proposed rule change is needed to provide members with a defined way to 
respond to situations where there is a reasonable belief of financial 
exploitation of seniors and other vulnerable adults, including the 
ability to share customer information with a trusted contact person. 
Furthermore, the proposed rule change would promote investor protection 
by providing members with a safe harbor from FINRA rules that might 
otherwise discourage them from exercising discretion to protect 
customers through placing a temporary hold on disbursements of funds or 
securities.
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    \48\ See, e.g., New York State Elder Abuse Prevention Study 
(stating that financial exploitation was the most common form of 
mistreatment self-reported by study respondents); and National Adult 
Protective Services Association: Policy & Advocacy--Elder Financial 
Exploitation (discussing the widespread nature of financial 
exploitation of seniors and vulnerable adults) available at http://www.napsa-now.org/policy-advocacy/exploitation/.
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    As noted above, studies indicate that financial exploitation is the 
most common form of elder abuse and is a growing concern.\49\ A 
member's relationship with its customers and its knowledge of 
customers' accounts and financial situations may enable the member to 
detect unusual account activity or other indicators of possible 
financial exploitation. However, due to uncertainty about the ability 
to place holds on disbursements under FINRA rules or privacy-related 
concerns about sharing customer information, members may be unsure how 
to proceed when there is a reasonable belief of financial exploitation.
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    \49\ See supra notes 3 and 6.
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Safe Harbor
    Proposed Rule 2165 would provide members with a safe harbor from 
FINRA Rules 2010, 2150 and 11870 when members exercise discretion in 
placing temporary holds on disbursements of funds or securities from 
accounts of specified adults under the circumstances denoted in the 
Rule.
    FSI supported providing a safe harbor when members choose to place 
temporary holds on disbursements of funds or securities from the 
account of a specified adult. CFA Institute supported providing a safe 
harbor, but stated that FINRA should encourage, not just permit, 
members to make use of the safe harbor. Rather than providing a safe 
harbor when members choose to place temporary holds, three commenters 
supported requiring members to place temporary holds where there is a 
reasonable belief of financial exploitation.\50\ PIABA further 
supported penalizing members for willfully ignoring evidence of 
financial exploitation.
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    \50\ See GSU, PIABA and Miami Rights Clinic.
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    The proposed rule change retains the approach in the Notice 15-37 
Proposal. FINRA believes that a member can better protect its customers 
from financial exploitation if the member can use its discretion in 
placing a temporary hold on a disbursement of funds or securities from 
a customer's account.
    Other commenters supported expanding the scope of the safe harbor. 
CAI supported expanding the scope of the safe harbor to explicitly 
extend to situations in which: (1) A name and contact information for a 
trusted contact person has not been obtained for an existing account; 
and (2) the member was not able to obtain a name and contact 
information for a trusted contact person for an account. If, despite 
reasonable efforts, the member is unable to obtain or the customer 
declines to provide the name and contact information for a trusted 
contact person, FINRA would consider the trusted contact person to be 
``unavailable'' for purposes of proposed Rule 2165. The unavailability 
of a trusted contact person would not preclude a member from availing 
itself of the safe harbor in proposed Rule 2165. Furthermore, for 
existing accounts, a member may avail itself of the safe harbor even if 
the member had not yet sought to obtain trusted contact person 
information in the course of its routine and customary business.
    FIBA supported expanding the scope of the safe harbor to explicitly 
cover a decision by a member that a temporary hold is not appropriate, 
as well as the due diligence process leading to the decision. 
Similarly, SIFMA suggested that the scope of the safe harbor be 
extended to cover the final decision of a member that financial 
exploitation of a specified adult has occurred. FINRA does not 
interpret the proposed safe harbor from FINRA rules to cover final 
decisions by members that financial exploitation does or does not 
exist. Rather, proposed Rule 2165 provides members with a safe harbor 
from FINRA rules when members exercise discretion in placing temporary 
holds on disbursements of funds or securities from the account of a 
specified adult. FINRA believes that the proposal is appropriately 
tailored to provide members with a defined way of addressing possible 
financial exploitation.
    SIFMA suggested that the safe harbor approach should recognize that 
members have the ability to develop and implement alternative 
protection structures under existing law (e.g., a customer's right to 
voluntarily enter into an alternative protection structure through 
agreement with the member). The safe harbor approach in proposed Rule 
2165 does not preclude members from developing or implementing 
alternative protection structures consistent with existing law and 
FINRA rules.
    Two commenters requested that FINRA clarify to which rules the safe 
harbor would apply.\51\ In response to these comments, FINRA modified 
proposed Rule 2165, which now explicitly states that it provides 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).
---------------------------------------------------------------------------

    \51\ See CAI and SIFMA.
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    Three commenters supported extending the safe harbor protection of 
proposed Rule 2165 to associated persons of the member.\52\ Proposed 
Rule 2165 would provide a safe harbor from FINRA rules for members and 
their associated persons when placing temporary holds on disbursements 
in accordance with the Rule.
---------------------------------------------------------------------------

    \52\ See Cetera, NAIFA and BDA.
---------------------------------------------------------------------------

    BDA suggested that any associated person that acted in good faith 
not be subject to complaints reportable on Form U4 (Uniform Application 
for Securities Industry Registration or Transfer). The proposed safe 
harbor from FINRA rules would not extend to complaints about an 
associated person that are reportable on Form U4. An associated person 
may respond to any such complaints on Form U4, including with an 
explanation of actions taken pursuant to proposed Rule 2165. The 
proposed safe harbor from FINRA rules also would not extend to 
reporting required pursuant to FINRA Rule 4530

[[Page 78245]]

(Reporting Requirements), although FINRA would consider whether a 
member or associated person had acted consistent with the proposed rule 
when FINRA assesses reported information about a hold on a 
disbursement.
    NAIFA suggested that the reference to the safe harbor from FINRA 
rules be moved out of Supplementary Material and into the body of 
proposed Rule 2165. Because Supplementary Material is part of the rule, 
FINRA declines to move the reference as requested.
Alternative Approaches
    FINRA requested comment in the Notice 15-37 Proposal regarding 
approaches other than the proposed rulemaking that FINRA should 
consider. Two commenters suggested that FINRA adopt a principles-based 
approach that would allow a member to develop policies and procedures 
to fit its business model.\53\ FINRA declines to make the suggested 
change. The safe harbor approach in proposed Rule 2165 is optional for 
members. Moreover, FINRA believes that the safeguards outlined in the 
safe harbor approach are important so that the ability to place 
temporary holds is not abused.
---------------------------------------------------------------------------

    \53\ See FSR and Lincoln.
---------------------------------------------------------------------------

    Liberman suggested that FINRA consider alternatives to the proposed 
rule change, such as working more closely with authorities that are 
knowledgeable about financial exploitation of seniors. FINRA has long 
had a strong interest in issues related to financial exploitation of 
seniors and other vulnerable adults. FINRA has extensive knowledge 
about financial exploitation of seniors, including working with 
members, federal and state agencies, and senior groups, and in 
administering the Seniors Helpline. Based on that information, FINRA 
believes that the ability to place temporary holds on disbursements is 
an important tool to guard against financial exploitation of seniors 
and other vulnerable adults.\54\
---------------------------------------------------------------------------

    \54\ See also supra note 9 (regarding state laws) and NASAA 
model.
---------------------------------------------------------------------------

    Pisenti suggested establishing a government hotline for members to 
provide information about customers and allowing the hotline's staffers 
to address the situation, including providing a reasonable time to 
delay disbursements under the guidance of the staffers. Certain states 
require reporting of suspected financial exploitation to adult 
protective services or another agency, and FINRA expects members to 
comply with these state reporting requirements. However, with the right 
tools, members may be able to more effectively serve as the first line 
of defense against financial exploitation of seniors and other 
vulnerable adults. As discussed above, financial exploitation can occur 
suddenly and cause irreversible damage to customers' assets if action 
is not taken before funds or securities are disbursed. The proposed 
rule change would thus provide members with a critical tool to further 
protect customers from financial exploitation by explicitly allowing 
members to place temporary holds on disbursements of funds or 
securities consistent with the rule's requirements.
    Anderson suggested requiring that members monitor accounts of 
senior customers for possible fraud rather than permitting members to 
place temporary holds on disbursements. FINRA recognizes that allowing 
members to place temporary holds on disbursements of funds or 
securities may be viewed as a significant action. Accordingly, the 
proposed rule change would impose numerous safeguards to help ensure 
that temporary holds are used only in appropriate circumstances and for 
the protection of customers. FINRA believes that members understand the 
problem of financial exploitation and will act to address potential 
financial exploitation of customers. A temporary hold would halt a 
potentially fraudulent disbursement or other problematic situation 
quickly, before significant harm to the customer occurs.
Reasonable Belief of Financial Exploitation
    The proposed rule change would permit members to place a temporary 
hold on disbursements of funds or securities where there is a 
reasonable belief of financial exploitation of a specified adult. 
Cetera requested guidance as to what would constitute a reasonable 
belief of financial exploitation. Ros commented that the reasonable 
belief standard is vague.
    Other commenters suggested alternatives to the reasonable belief 
standard. Cowen commented that the reasonable belief standard may be 
too high and suggested instead ``substantial suspicion'' of potential 
fraud or abuse as the standard. To cover red flags of financial 
exploitation, FSR suggested an alternative standard of a ``reasonable 
basis to suspect the customer may be the subject of financial 
exploitation.'' AARP suggested that FINRA consider requiring members 
and their associated persons to act with ``reasonable care.''
    FINRA believes that the proposed standard is appropriate in that it 
permits members to use their judgment, based on their assessment of the 
facts, to place temporary holds without requiring actual knowledge of 
financial exploitation. The reasonable belief standard is present in 
other FINRA rules (e.g., FINRA Rules 2040 (Payments to Unregistered 
Persons) and 2111 (Suitability)). The standard also is consistent with 
similar state statutes and the NASAA model.
    While not required by the proposed rule change, members may find it 
beneficial to develop their own red flags to guide the formation of a 
reasonable belief of financial exploitation. Among the commonly 
identified red flags of potential financial exploitation are: (1) 
Attempts to transfer money to engage in commonly known fraudulent 
schemes (e.g., foreign lottery schemes); (2) uncharacteristic attempts 
to wire securities or funds, particularly with a customer who is unable 
to explain the attempts; (3) when a caretaker, relative, or friend of 
the customer requests disbursements on behalf of the customer without 
proper documentation; (4) abrupt increases in disbursements, 
particularly with a customer who is accompanied by another person who 
appears to be directing the disbursements; (5) attempted forgery of the 
customer's signature on account documentation or a power of attorney; 
and (6) a customer's unusual degree of fear, anxiety, submissiveness or 
deference related to another person. While not dispositive, red flags 
may be used by members to detect and prevent financial exploitation.
    Three commenters suggested expanding the proposed rule change 
beyond financial exploitation of specified adults to permit temporary 
holds on disbursements of funds and securities when a customer is 
showing signs of diminished capacity.\55\ FINRA appreciates that 
diminished capacity can make seniors especially vulnerable to financial 
exploitation and believes that the proposed rule would cover most 
situations involving questionable disbursements by customers suffering 
from such a condition. In many instances where a customer is suffering 
from diminished capacity and requests that a member make a potentially 
problematic disbursement, the member is likely to have a reasonable 
belief, at least initially, that financial exploitation may be 
occurring. For those situations where that may not be the case, FINRA 
recognizes that this is an important issue for future consideration.
---------------------------------------------------------------------------

    \55\ See NAELA, Lincoln and Alzheimer's Assoc.
---------------------------------------------------------------------------

Definition of ``Specified Adults''
    The proposed rule change would define ``specified adults'' to 
include: (A) A natural person age 65 and older; or (B)

[[Page 78246]]

a natural person age 18 and older who the member reasonably believes 
has a mental or physical impairment that renders the individual unable 
to protect his or her own interests. FINRA requested comment in the 
Notice 15-37 Proposal regarding whether the ages used in the definition 
of ``specified adult'' in proposed Rule 2165 should be modified or 
eliminated.
    Two commenters suggested extending the proposed rule change to 
apply to all customers and not be otherwise limited.\56\ Cetera 
suggested raising the age in the proposed definition above 65, which it 
believes is under the age of retirement for many customers. Other 
commenters suggested lowering the age in the proposed definition from 
65 to 60.\57\ FINRA has proposed defining specified adults to include 
natural persons age 65 and older. Federal agencies, FINRA and NASAA 
have focused on persons age 65 and older for various senior 
initiatives.\58\ Moreover, FINRA believes that the concentration of 
wealth among older investors makes this group more vulnerable to 
financial exploitation.\59\ With regard to suggestions to extend 
coverage to all customers, the proposed rule, as discussed above, also 
would apply to natural persons age 18 and older who the member 
reasonably believes has a mental or physical impairment that renders 
the individual unable to protect his or her own interest. FINRA 
believes that these two categories of ``specified adults'' 
appropriately protect those adults who are most vulnerable to financial 
exploitation and that they are therefore neither over nor under 
inclusive in scope.
---------------------------------------------------------------------------

    \56\ See Cowan and Thomson.
    \57\ See IRI, Wells Fargo, NASAA and SIFMA.
    \58\ See supra note 22. See also NASAA model.
    \59\ See supra note 21.
---------------------------------------------------------------------------

    Ros commented that the application of the proposed rule change to 
persons age 65 and older is an unreasonable intrusion into the 
financial affairs of competent adults. Proposed Rule 2165 would permit 
placing a temporary hold only where there is a reasonable belief of 
financial exploitation and only with regard to a specific 
disbursement(s). Given these limitations, FINRA does not believe that 
the proposed rule change is an unreasonable intrusion into the 
financial affairs of customers.
    NAPSA suggested revising the definition to cover natural persons 
age 60 and older or a natural person deemed vulnerable under a state's 
adult protective services statute. FINRA believes that this approach 
would present operational challenges for members as the customers 
covered by the definition would vary by jurisdiction. As such, FINRA 
declines to make the suggested change.
    Girdler suggested that the definition of specified adult be 
modified to consider customer vulnerability due to circumstances beyond 
cognitive ability. In contrast, CAI suggested that, because of 
administrative challenges in implementing the definition, vulnerable 
adults should be removed from the definition. FINRA has proposed 
defining ``specified adults'' to include an adult who the member 
reasonably believes has a mental or physical impairment that renders 
the individual unable to protect his or her own interests. FINRA 
declines to omit such individuals from the definition of specified 
adult; however, FINRA also declines at this time to expand the 
definition to include additional potentially vulnerable adults. FINRA 
recognizes that customers who do not have a physical or mental 
impairment may also be vulnerable; however, the proposed rule change is 
intended to cover those customers most susceptible to financial 
exploitation.
    Some commenters requested that FINRA provide guidance as to what 
would constitute a mental or physical impairment covered by the 
proposed definition.\60\ Members have reasonable latitude in 
determining whether there is a mental or physical impairment that 
renders an adult unable to protect his or her own interests for 
purposes of the Rule. A member may base such a determination on the 
facts and circumstances observed in the member's business relationship 
with the person or on other sources of information, such as a court or 
government agency order.
---------------------------------------------------------------------------

    \60\ See SIFMA, Cetera and GWFS.
---------------------------------------------------------------------------

    SIFMA requested clarification as to whether the definition would 
cover temporary impairments, as well as permanent or chronic 
impairments. FINRA would consider the proposed rule change to apply to 
temporary, as well as permanent or chronic impairments that render an 
adult unable to protect his or her own interests.
    NAIFA suggested revising proposed Supplementary Material .03 to 
Rule 2165 to provide that a member's belief of a customer's impairment 
shall not create an assumption or implication that the member or its 
associated persons are qualified to make determinations about a 
customer's impairment. While FINRA declines to revise the proposed 
Supplementary Material as suggested, FINRA does not intend proposed 
Rule 2165 to create an assumption or implication that a member or its 
associated persons are qualified to make impairment determinations 
beyond the limited purposes of the proposed rule. A member's 
relationship with its customers and its knowledge of customers' 
accounts and financial situations puts the member in a unique position 
to thwart possible financial exploitation. The proposal will aid 
members in doing so.
    CAI suggested that FINRA work with state regulators to ensure 
consistency between the proposed rule change and state requirements for 
members. As discussed below, while the proposed rule change and NASAA 
model are not identical, FINRA and NASAA have worked together to 
achieve consistency where possible and appropriate.
Definition of ``Qualified Person''
    In the Notice 15-37 Proposal, a ``qualified person'' was defined to 
include an associated person of a member who serves in a supervisory, 
compliance or legal capacity that is reasonably related to an account. 
FINRA requested comment in the Notice 15-37 Proposal regarding whether 
the scope of the persons included in the definition of ``qualified 
person'' in proposed Rule 2165 be modified.
    Some commenters suggested expanding the proposed definition to 
include all employees,\61\ all associated persons \62\ or all 
registered persons of a member.\63\ GWFS suggested that the definition 
cover associated persons designated as qualified by the member. PIABA 
further suggested that, at a minimum, registered representatives should 
be required to report any suspicious behavior or conduct to a 
supervisor. FSR suggested that persons serving in a legal or compliance 
capacity not be included in the definition of ``qualified person,'' as 
such persons would seldom witness events that would provide a 
reasonable belief of financial exploitation.
---------------------------------------------------------------------------

    \61\ See NASAA.
    \62\ See Wells Fargo.
    \63\ See GSU and PIABA.
---------------------------------------------------------------------------

    Under the proposed rule change, a member's written supervisory 
procedures shall identify the title of each person authorized to place, 
terminate or extend a temporary hold on behalf of the member pursuant 
to proposed Rule 2165. Furthermore, any such person shall be an 
associated person of a member who serves in a supervisory, compliance 
or legal capacity. While the benefits of preventing financial 
exploitation are significant to both the member and customer, placing a 
temporary hold on a disbursement is a serious action on the part of a 
member and may lead to

[[Page 78247]]

difficult but necessary conversations with customers that could impact 
the member-customer relationship. Given the seriousness of placing a 
temporary hold on a disbursement, FINRA believes that it is reasonable 
to limit authority for placing holds on disbursements to a select group 
of individuals associated with the member and believes that persons 
serving in a supervisory, compliance or legal capacity are well 
positioned to make these determinations on behalf of the member.
    The scope of proposed Rule 2165(c)(2) does not cover registered 
representatives who are not otherwise serving in supervisory, 
compliance or legal capacities. FINRA recognizes that registered 
representatives may often be the first persons to notice behavior or 
conduct indicating financial exploitation. To encourage appropriate 
escalation of these matters, proposed Rule 2165(c)(1) would require 
that a member relying on proposed Rule 2165 establish and maintain 
written supervisory procedures related to the escalation of matters 
involving the financial exploitation of specified adults. As such, 
FINRA believes that it is reasonable to expect a registered 
representative to report any suspicious behavior or conduct to a 
supervisor or a person serving in a compliance or legal capacity.
    Some commenters suggested clarifying or eliminating the requirement 
in the Notice 15-37 Proposal that the associated person serve in a 
supervisory, compliance or legal capacity that is ``reasonably related 
to an account.'' \64\ In light of commenters' concerns regarding how to 
determine whether a person is serving in a supervisory, compliance or 
legal capacity that is ``reasonably related to an account,'' FINRA has 
proposed eliminating the ``reasonably related to an account'' 
requirement.
---------------------------------------------------------------------------

    \64\ See FSR, BDA and SIFMA.
---------------------------------------------------------------------------

    To apply the obligations at the member-level, not the individual 
level, SIFMA suggested replacing ``qualified person'' with ``member'' 
in the provisions in proposed Rule 2165 related to the decision to 
place a temporary hold. FINRA has revised proposed Rule 2165 to provide 
that the member may place the hold on a disbursement, provided that the 
member's written supervisory procedures identify the title of each 
person authorized to place, terminate or extend a hold on behalf of the 
member and that each such person be serving in a supervisory, 
compliance or legal capacity for the member. In addition, proposed Rule 
2165 would require that a member's records include the name and title 
of the associated person who authorized the temporary hold on a 
disbursement.
Definition of ``Account''
    The proposed rule change would define ``account'' to mean any 
account of a member for which a specified adult has the authority to 
transact business. FINRA requested comment in the Notice 15-37 Proposal 
regarding whether the definition of account should be expanded to 
include accounts for which a specified adult is a named beneficiary.
    Some commenters supported expanding the definition of account to 
accounts for which a specified adult is a named beneficiary.\65\ 
Commonwealth did not support expanding the definition to include 
accounts for which a specified adult is a named beneficiary. FINRA 
recognizes that members may not have current contact information for 
each named beneficiary. In addition, members may lack other critical 
information about beneficiaries that would preclude them from forming a 
reasonable belief that the beneficiaries are the subject of financial 
exploitation. Due to the operational challenges for members in applying 
the proposed rule to beneficiaries, FINRA has not proposed including 
accounts for which a specified adult is a named beneficiary.
---------------------------------------------------------------------------

    \65\ See IJEC, AARP and SIFMA.
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    BDA suggested excluding accounts where there is a designated 
guardian, custodian or power of attorney because such accounts should 
receive protection under FINRA rules beyond the scope of the safe 
harbor. If these accounts are included in the scope of the proposal, 
BDA suggested that members should be provided with a heightened level 
of protection when they suspect financial exploitation by a designated 
guardian, custodian or power of attorney ``since the account holder 
themselves would have had to know that this person has transaction 
capacity for the account, resulting in an enhanced burden to the firm 
when suspicion arose.'' It is not clear what heightened protections the 
commenter suggests for members with respect to accounts where there is 
a designated guardian, custodian or power of attorney. As discussed 
above, the proposed rule does not require members to place temporary 
holds on disbursements of funds or securities, and FINRA does not 
intend to provide through the proposed rule change additional 
protections on accounts where there is guardian, custodian or power of 
attorney.
Disbursements
    The proposed rule change would permit members to place temporary 
holds on disbursements of funds or securities. The proposed rule change 
would not apply to transactions in securities. Some commenters 
supported extending the proposed rule change to apply to transactions 
in securities.\66\ While the proposed rule change does not apply to 
transactions, FINRA may consider extending the safe harbor to 
transactions in securities in future rulemaking.
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    \66\ See IRI, FSR, Lincoln, SIFMA and FSI.
---------------------------------------------------------------------------

    PIABA requested that the proposed rule change define 
``disbursement.'' PIABA also requested that FINRA clarify that the 
temporary hold may be placed on particular disbursement(s). FINRA would 
consider a disbursement to include a movement of cash or securities out 
of an account. In addition, a temporary hold pursuant to proposed Rule 
2165 may be placed on a particular suspicious disbursement(s) but not 
on other, non-suspicious disbursements (e.g., member may choose to 
place a hold on a questionable disbursement but not on a 
contemporaneous regular mortgage or tax payment where there is no 
reasonable belief of exploitation regarding such payment).
    Two commenters requested that FINRA explicitly permit temporary 
holds on Automated Customer Account Transfer Service (``ACATS'') 
transfers under the proposed rule change.\67\ For purposes of proposed 
Rule 2165, FINRA would consider disbursements to include ACATS 
transfers but, as with any temporary hold, a member would need to have 
a reasonable belief of financial exploitation in order to place a 
temporary hold on the processing of an ACATS transfer request pursuant 
to the Rule. FINRA also reminds members of the application of FINRA 
Rule 2140 (Interfering With the Transfer of Customer Accounts in the 
Context of Employment Disputes) to the extent that there is not a 
reasonable belief of financial exploitation.
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    \67\ See FSR and SIFMA.
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    FINRA recognizes that, depending on the facts and circumstances, 
placing a temporary hold on the processing of an ACATS transfer request 
could also lead the member to place a temporary hold on all assets in 
an account, for the same reasons. However, if a temporary hold is 
placed on the processing of an ACATS transfer request, the member must 
permit disbursements from the account where there is not a reasonable 
belief of financial exploitation regarding such disbursements (e.g., a 
customer's regular

[[Page 78248]]

bill payments). FINRA emphasizes that where a questionable disbursement 
involves less than all assets in an account, a member may not place a 
blanket hold on the entire account. Each disbursement must be analyzed 
separately.
    While supporting the proposed rule change, Yaakov requested 
clarification about how the proposed rule change would apply to certain 
types of disbursements from a customer's account. Specifically, Yaakov 
requested that the proposed rule change provide that disbursements 
would include payments from a customer's account to a customer's bank. 
Yaakov also requested that FINRA clarify whether a temporary hold may 
be placed on disbursements related to a customer's checkbook, credit 
card or debit card associated with a brokerage account at a member. 
FINRA would consider disbursements to include, among other things, 
questionable payments to a bank or other financial institution, credit/
debit card payments or issued checks associated with a brokerage 
account at a member. However, members need to consider the recipient of 
the disbursement when determining whether there is a reasonable belief 
of financial exploitation. For example, a monthly disbursement to a 
customer's mortgage lender likely represents a lower risk of financial 
exploitation than a one-time, sizable disbursement to a non-U.S. 
person. In addition, the temporary hold is on the disbursement-level 
not the account-level, so that a member must permit a disbursement 
where there is not a reasonable belief of financial exploitation (e.g., 
a regular mortgage payment to a bank), but may place a temporary hold 
on another disbursement where there is a reasonable belief of financial 
exploitation.
    CAI questioned whether the ability to place temporary holds on 
disbursements would conform to the requirements of Section 22(e) of the 
Investment Company Act of 1940 (``1940 Act'') for redemptions of a 
redeemable security. CAI noted that the proposed rule change could be 
seen as reconcilable with the 1940 Act requirements to the extent that 
a disbursement request directed to a broker-dealer does not constitute 
a disbursement request to the issuer of a variable annuity. Section 
22(e) of the 1940 Act generally prohibits registered funds from 
suspending the right of redemption, or postponing the date of payment 
or satisfaction upon redemption of any redeemable security for more 
than seven days after tender of such security to the fund or its agent, 
except for certain periods specified in that section. The safe harbor 
under proposed Rule 2165 applies to disbursements of proceeds and 
securities and does not apply to transactions, including redemptions of 
securities.
    Most mutual fund customer accounts are serviced and record kept by 
intermediaries, such as broker-dealers. FINRA does not believe that a 
member's ability to place a hold on a disbursement of proceeds from its 
customer's account under the proposed rule change creates a conflict 
with Section 22(e) of the 1940 Act as the mutual fund does not have a 
role in the disbursement from the customer's account held by an 
intermediary.
    In certain limited circumstances, the customer's account may be 
maintained by a mutual fund's principal underwriter. In light of the 
role of the principal underwriter with respect to these accounts, the 
ability to place a temporary hold on a disbursement of proceeds under 
the proposed rule change may be viewed as conflicting with Section 
22(e) of the 1940 Act.
Period of Temporary Hold
    Under the Notice 15-37 Proposal, the temporary hold on 
disbursements of funds or securities would have expired not later than 
15 business days after the date that the hold was initially placed, 
unless sooner terminated or extended by an order of a court of 
competent jurisdiction. In addition, provided that the member's 
internal review of the facts and circumstances supported the reasonable 
belief of financial exploitation, the Notice 15-37 Proposal would have 
permitted the temporary hold to be extended for an additional 15 
business days, unless sooner terminated by an order of a court of 
competent jurisdiction. FINRA requested comment in the Notice 15-37 
Proposal on whether the permissible time periods for placing and 
extending a temporary hold pursuant to proposed Rule 2165 should be 
modified.
    Some commenters supported permitting longer time periods. IRI 
supported changing the time periods to 45 business days for the initial 
period and an additional 45 business days for any subsequent period. 
IRI also supported automatic extensions of the temporary hold upon 
notification to FINRA until such time that a court of competent 
jurisdiction or FINRA takes action.
    First U.S. Community Credit Union commented that 15 business days 
may not be sufficient time for a member to obtain a court order or 
receive input from adult protective services. FIBA commented that the 
proposed time periods may not be sufficient, particularly for non-U.S. 
customers and suggested that FINRA create different time periods or 
establish different processes for non-U.S. customers. CAI suggested 
changing the time periods to 25 business days for the initial period to 
recognize the need to have adequate time at the outset and an 
additional 10 business days for any subsequent period.
    FSR supported permitting members to place a temporary hold for any 
period of time within the reasonable discretion of the member or until 
a third party (e.g., a court of competent jurisdiction or adult 
protective services) notified the member that the hold has expired or 
subsequent events indicate that the threat of financial exploitation no 
longer exists.
    Other commenters supported shorter time periods. AARP suggested 
that the temporary hold expire no later than 10 business days after the 
hold is placed. NASAA commented that the proposed time periods were too 
long. NASAA supported requiring both FINRA and state regulatory review 
of any extension of a temporary hold by a member.
    FINRA has proposed revising the time periods to up to 15 business 
days in the initial period and up to 10 business days (down from 15 
business days) in any subsequent period. These time periods are 
consistent with the NASAA model and the shortened extension period 
responds to commenters' concerns about disbursement delays. The 
proposed extension period of up to 10 business days provides members 
with a longer period to address the issue if concerns about financial 
exploitation exist after the initial period, during which time the 
member must contact persons authorized to transact business on the 
account and trusted contact persons, as available, and perform an 
appropriate investigation.
    CFA Institute supported giving a member the ability to extend the 
temporary hold for an additional period if the member's internal review 
supported the additional time period. FINRA has tried to strike a 
reasonable balance in giving members adequate time to investigate and 
contact the relevant parties, as well as seek input from a state 
regulator or agency (e.g., state securities regulator or state adult 
protective services agency) or a court order if needed, but also not 
permitting an open-ended or overly long hold period in recognition of 
the seriousness of placing a temporary hold on a disbursement.
    SIFMA supported the proposed time periods but suggested including 
language permitting the expiration or

[[Page 78249]]

extension of the hold as otherwise permitted by state or federal law, 
through agreement with the specified adult or their authorized 
representative, or in accordance with prior written instructions or 
lawful orders, or sooner terminated or extended by an order of a court 
of competent jurisdiction. SIFMA also suggested that an investigating 
state government regulator or agency should be able to terminate or 
extend a hold on a disbursement. FINRA has revised proposed Rule 2165 
to incorporate the concept of a temporary hold being terminated or 
extended by a state regulator or agency in addition to a court of 
competent jurisdiction.
    FINRA has not revised proposed Rule 2165 to expressly permit 
lifting the hold ``through agreement with the specified adult or their 
authorized representative, or in accordance with prior written client 
instructions or lawful orders.'' While the proposed rule change would 
not prohibit members from lifting a hold, for example, upon a 
determination that there is no financial exploitation, FINRA believes 
that the commenter's suggested language is overly broad (e.g., allowing 
an authorized representative to lift the hold may enable an abuser to 
lift the hold and gain access to the customer's funds).
    Lincoln requested that FINRA provide guidance on what members 
should do after the expiration of the temporary hold. Alzheimer's 
Assoc. requested clarification on the process for lifting or extending 
a temporary hold. FINRA believes that the proposed time period of up to 
25 business days total is sufficient time for a member to resolve an 
issue. Moreover, the proposed rule change allows the time to be further 
extended by a court or a state regulator or agency. If a member is 
unable to resolve an issue due to circumstances beyond its control, 
there may be circumstances in which a member may hold a disbursement 
after the period provided under the safe harbor. A member should assess 
the facts and circumstances to determine whether a disbursement is 
appropriate after the expiration of the period provided in the safe 
harbor.
    BDA questioned whether the proposed rule change would only permit 
terminating the temporary hold with an order of a court of competent 
jurisdiction. The proposed rule change would not prohibit a member from 
lifting a hold without a court order, provided that the member would 
have to comply with an order of a court of competent jurisdiction or of 
a state regulator or agency terminating or extending a temporary hold.
    ICI supported limiting the number of temporary holds that a member 
may place on an account during a calendar year or other specified 
period. FINRA declines to limit the number of holds that a member may 
place. However, taking into account a member's size and business, FINRA 
would closely examine a member that places an outsized number of holds 
on customer accounts to determine whether there was any wrongdoing on 
the part of the member.
Potential Harm
    Some commenters expressed concern that permitting members to place 
temporary holds may result in customer harm. NAPSA supported allowing 
members to place temporary holds where there is a reasonable belief of 
financial exploitation but suggested that members be required to take 
measures to ensure that any holds will not cause undue harm to 
customers (e.g., if a customer's payments are not made in a timely 
manner).
    Some commenters questioned whether the proposed rule change would 
permit lifting a temporary hold if the customer disagrees with the 
hold.\68\ Rich expressed concern that a temporary hold may result in a 
customer defaulting on legal or contractual obligations and supported a 
mechanism other than a court order for lifting the hold (e.g., the 
trusted contact person's approval to lift the hold). Liberman expressed 
concern that the proposed rule change could be abused by members in 
refusing to disburse funds or securities. ICI supported FINRA providing 
customers with recourse for lifting the temporary hold other than 
obtaining a court order and indicated that such recourse may limit a 
member's civil liability.
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    \68\ See Stoehr and Hayden.
---------------------------------------------------------------------------

    FINRA recognizes that placing a temporary hold on a disbursement is 
a serious step for a member and the affected customer. While FINRA 
recognizes that customers may be affected by temporary holds, the costs 
of financial exploitation can be significant and devastating to 
customers, particularly older customers who rely on their savings and 
investments to pay their living expenses and who may not have the 
ability to offset a significant loss over time. FINRA believes that the 
harm to customers of financial exploitation justifies permitting 
members to place temporary holds.
    To minimize the potential harm to customers that may arise from 
unnecessarily holding customer funds, FINRA believes that members 
should consider the recipient of the disbursement in determining 
whether there is a reasonable belief of financial exploitation. As 
noted above, FINRA believes that members should weigh a customer's 
objection against other information in determining whether a hold 
should be placed or lifted. While not dispositive, a customer's 
objection and explanation may indicate to the member that the hold 
should be lifted.
    FIBA commented that the proposed rule change does not explicitly 
contemplate the customer disagreeing with the temporary hold and that 
relying on a trusted contact person to maintain a hold may conflict 
with the interests of the customer. Although FINRA believes that a 
member may use its discretion in relying on any information provided by 
the trusted contact person, a member also must consider a customer's 
objection and explanation, as well as other pertinent facts and 
circumstances, in determining whether a hold should be maintained or 
lifted.
Legal Risks
    FINRA requested comment in the Notice 15-37 Proposal regarding 
members' current practices when they suspect financial exploitation has 
occurred, is occurring, has been attempted or will be attempted, 
including whether the proposed rules would change members' current 
practices. Commenters did not provide any information regarding their 
current practices when financial exploitation of a customer is 
suspected.
    FINRA also requested comment in the Notice 15-37 Proposal on 
members' views on any potential legal risks associated with placing or 
not placing temporary holds on disbursements of funds or securities at 
present and under the proposal. Some commenters suggested that the 
proposed rule change creates legal risks for members in placing or not 
placing a temporary hold.
    Christian Financial Services objected to the proposed rule change 
as making ``a broker responsible for the behavior of an incapacitated 
senior'' and that such a rule ``invites lawsuits and abuse.'' GWFS 
commented that placing a temporary hold under the proposed rule change 
allows for discretion, which causes members to be more susceptible to 
litigation for acting or failing to act. GWFS also commented that the 
proposed rule change does not provide ``comprehensive immunity'' from 
liability in a civil action.
    Lincoln requested that FINRA expressly state that no private right 
of action is created by a member's decision to place or not place a 
temporary hold. Cetera commented that the safe harbor

[[Page 78250]]

under proposed Rule 2165 may not protect members from liability under 
state laws. NAIFA requested that the proposed rule change provide 
protection from liability for reporting financial exploitation to state 
regulators.
    On the other hand, PIABA commented that FINRA should clarify that a 
private right of action would exist when a member willfully ignores 
evidence of abuse. Yaakov requested that FINRA state that members would 
not be ``insure[d]'' for liabilities that may be created by placing a 
temporary hold in good faith.
    FINRA believes that members today make judgments with regard to 
making or withholding disbursements and already face litigation risks 
with respect to these decisions. The proposed rule change is designed 
to provide regulatory relief to members by providing a safe harbor from 
FINRA rules for a determination to place a hold. Some states may 
separately provide immunity to members under state law.
    To mitigate any civil claims that a member had a duty to place a 
temporary hold, ICI suggested that FINRA clarify in proposed Rule 2165 
that: (1) No member is required by FINRA to place a temporary hold; and 
(2) a member's failure to place a temporary hold shall not be deemed an 
abrogation of the member's duties under FINRA rules. FINRA believes 
that Supplementary Material .01 stating that proposed Rule 2165 is a 
safe harbor and that the Rule does not require placing holds clearly 
indicates that there is not a requirement to place a hold on a 
disbursement.
Notifying Parties Authorized To Transact Business on the Account
    Under the Notice 15-37 Proposal, proposed Rule 2165 would have 
required a member to provide notification of the hold and the reason 
for the hold to all parties authorized to transact business on the 
account no later than two business days after placing the hold.
    PIRC supported requiring notification to all parties authorized to 
transact business on an account. SIFMA commented that the term 
``authorized to transact business on an account'' is vague and can be 
expansive and burdensome. IRI commented that the requirement to notify 
all parties authorized to transact business on an account could result 
in a member being unable to place a temporary hold on a disbursement 
and suggested instead requiring that a member notify ``any'' party 
rather than ``all'' parties authorized to transact business on an 
account.
    FINRA believes that each person authorized to transact business on 
an account should be notified that the member has placed a temporary 
hold on a disbursement from the account.\69\ In the case of jointly 
held accounts, each person authorized to transact business on the 
account should be notified of the temporary hold on a particular 
disbursement.
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    \69\ See FINRA Rule 2090 (Know Your Customer) (requiring that 
members use reasonable diligence, in regard to the opening and 
maintenance of every account, to know (and retain) the essential 
facts concerning every customer and concerning the authority of each 
person acting on behalf of such customer).
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    There are a number of reasons why it is important to notify all 
persons authorized to transact business on the account. By reaching out 
to all persons authorized to transact business on an account, there is 
a greater likelihood of someone intervening to assist in thwarting the 
financial exploitation at an early stage. Moreover, persons authorized 
to transact business on an account would have a reasonable expectation 
that they would be contacted when a member places a temporary hold on a 
disbursement based on a reasonable belief that financial exploitation 
may be occurring. The notification requirement, moreover, should not 
impact a member's decision to place a hold as it is a post-hold 
obligation.
Trusted Contact Person
    The proposed rule change would amend Rule 4512 to require members 
to make reasonable efforts to obtain the name of and contact 
information for a trusted contact person upon the opening of a non-
institutional customer's account. In addition, under the Notice 15-37 
Proposal, proposed Rule 2165 would have required the member to provide 
notification of the hold and the reason for the hold to the trusted 
contact person, if available, no later than two business days after 
placing the hold.
    Some commenters supported requiring members to make reasonable 
efforts to obtain the name and contact information for a trusted 
contact person, as well as notification to the trusted contact person 
when a temporary hold is placed pursuant to proposed Rule 2165.\70\ 
First U.S. Community Credit Union commented that the trusted contact 
person may be useful to members.
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    \70\ See NAPSA, ICI, PIRC and FSI.
---------------------------------------------------------------------------

    Ros and SIFMA suggested that members should have the option of 
seeking trusted contact person information rather than requiring it 
under Rule 4512. FINRA is mindful of the efforts that some members may 
need to undertake in order to comply with a requirement that they make 
reasonable efforts to obtain trusted contact person information. 
However, the benefits to both members and investors of having trusted 
contact person information when serious problems arise will be far 
greater. And the likelihood of members encountering situations when 
such information is necessary will continue to increase with the aging 
of our population. Moreover, trusted persons can assist members in any 
number of ways beyond the more serious situations of, for example, 
financial exploitation or diminished capacity. Members may find them 
helpful in administering accounts (e.g., where a customer has been 
unresponsive to multiple contact attempts).
    CAI suggested that the requirement that members make reasonable 
efforts to obtain the name and contact information for a trusted 
contact person apply only when the customer is age 55 or older. Because 
members may place temporary holds in situations where financial 
exploitation is occurring to a customer younger than age 55 who is 
suffering from an incapacity, it is important that members seek to 
obtain trusted contact person information for all customers, not simply 
those age 55 or older.
    Some comments related to the ability to have more than one trusted 
contact person. IJEC suggested revising the proposal to require more 
than one trusted contact person and that such persons be independent of 
each other. Cowan suggested the alternative approach of having a 
``protectors' committee'' consisting of several individuals for each 
account of a senior investor. SIFMA requested clarification on whether 
an organization or practice could be a trusted contact person and 
whether a customer could designate multiple contact persons. While 
FINRA declines to require more than one trusted contact person, the 
proposed rule change would not prohibit members from requesting or 
customers from naming more than one trusted contact person. Given the 
role of the trusted contact person and that the member is authorized to 
disclose information about the account to such person, FINRA does not 
believe that an organization or practice, such as a law firm or an 
accounting firm, could serve as the trusted contact person in the 
capacity intended by the proposed rule change. However, a customer 
could designate an attorney or an accountant as a trusted contact 
person.
    SIFMA commented that the proposed rule change should contemplate

[[Page 78251]]

situations where a customer orally notifies a member of the name and 
contact information for a trusted contact person. Rule 4512 requires 
that the member maintain the trusted contact person's name and contact 
information, as well as the written notification to the customer that 
the member may contact the trusted contact person. The proposed rule 
change would allow members to rely on oral conversations with customers 
that members then document, provided that the written notification 
requirement of proposed Supplementary Material .06 to Rule 4512 is 
satisfied.
    With respect to notifying the trusted contact person that a 
temporary hold has been placed, SIFMA suggested that FINRA adopt a 
voluntary reporting process that is separate from the process for 
placing a temporary hold under proposed Rule 2165. SIFMA's concerns are 
twofold: (1) Potential difficulty in reaching a trusted contact person; 
and (2) a desire not to embarrass a customer by notifying a trusted 
contact person if the matter can be resolved through a discussion with 
the customer. Not all commenters agreed that the notification to the 
trusted contact person should be voluntary and some believed the 
requirement should be more stringent. For instance, Rich suggested a 
``more substantial'' requirement than ``attempting'' to contact the 
trusted contact person.
    Proposed Rule 2165 requires that the member notify the trusted 
contact person orally or in writing, which may be electronic, within 
two business days of placing a temporary hold. While FINRA appreciates 
the desire to ensure that a member actually discusses a hold with a 
trusted contact person, doing so may not be possible in every 
situation. As discussed above, FINRA would consider a member's mailing 
a letter, sending an email, or placing a telephone call and leaving a 
message with appropriate person(s) within the two-business-day period 
to constitute notification for purposes of proposed Rule 2165. 
Moreover, FINRA would consider the inability to contact a trusted 
contact person (e.g., an email is returned as undeliverable, a 
telephone number is out of service or a trusted contact person does not 
respond to a member's notification attempts) to mean that the trusted 
contact person was not available for purposes of the Rule. With regard 
to SIFMA's concern over potentially embarrassing a customer by being 
required to notify a trusted contact person, FINRA notes that a member 
may attempt to resolve a matter with a customer before placing a 
temporary hold on a disbursement without having to notify a trusted 
contact person.\71\ However, once a member places a hold on a 
disbursement, FINRA believes a member should notify a trusted contact 
person.
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    \71\ As discussed above, FINRA's proposed amendments to Rule 
4512 would permit a member to contact a trusted contact person to 
address, among other things, potential financial exploitation. In 
the context of SIFMA's concern, FINRA emphasizes that Rule 4512, as 
amended, would permit, but not require, a member to contact a 
trusted contact person about financial exploitation prior to placing 
a temporary hold on a disbursement. Thus, a member could resolve a 
matter with a customer prior to placing a hold on a disbursement 
without having to contact a trusted contact person.
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    Rich further commented that a member should be required to notify 
both the customer and the trusted contact person when the member has a 
reasonable belief of financial exploitation. When placing a hold on a 
disbursement, proposed Rule 2165 would require a member to notify all 
persons authorized to transact business on an account, including the 
customer, as well as the trusted contact person, if available. Even 
where a member has not placed a temporary hold on an account, however, 
FINRA would expect a member to reach out to a customer as one step in 
addressing potential financial exploitation of the customer.
    FSR requested that FINRA clarify that a member is not liable if it 
contacts a trusted contact person designated by a customer pursuant to 
Rule 4512 or proposed Rule 2165, so long as the customer has not 
directed the member to remove or replace the trusted contact person. 
FINRA would consider a member contacting the trusted contact person 
identified by a customer to be consistent with the proposed rule 
change, provided that the customer had not previously directed the 
member to remove or replace the trusted contact person.
    Some commenters requested that FINRA clarify what would constitute 
reasonable efforts to obtain a name and contact information for a 
trusted contact person.\72\ For purposes of the proposed rule change, 
FINRA would consider reasonable efforts to include actions such as 
incorporating a request for trusted contact person name and contact 
information on an account opening form or sending a letter, an 
electronic communication or other similar form of communication to 
existing customers requesting the name and contact information for a 
trusted contact person.
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    \72\ See CAI, FSR, BDA, GWFS and SIFMA.
---------------------------------------------------------------------------

    SIFMA requested that FINRA provide guidance on the appropriate 
place on new account forms for customers to designate a trusted contact 
person. Members may use their discretion in determining the appropriate 
place on new account forms for customers to designate a trusted contact 
person. Commonwealth supported the trusted contact person-related 
provisions and suggested that FINRA provide template language that 
members can use in account applications or other customer forms. If the 
SEC approves the proposed rule change, FINRA will make template 
language available for optional use by members in complying with the 
trusted contact person-related provisions of Rule 4512.\73\
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    \73\ In 2008, FINRA developed a New Account Application 
Template, available on FINRA's Web site that firms may use as a 
model form. See http://www.finra.org/industry/new-account-application-template. This New Account Application Template permits 
a customer to name a back-up contact who the member may contact. If 
the SEC approves the proposed rule change, FINRA will update the New 
Account Application Template to reflect the amendments to Rule 4512.
---------------------------------------------------------------------------

    SIFMA also requested that FINRA provide clarification as to whether 
the reasonable efforts requirement would apply to accounts opened after 
the proposed rule change becomes effective. The reasonable efforts 
requirement in Rule 4512 would apply to all accounts. FINRA would 
consider reasonable efforts for existing accounts to include asking the 
customer for the information when the member updates the information 
for the account either in the course of the member's routine and 
customary business or as otherwise required by applicable laws or 
rules.
    FSR requested clarification on the role of the trusted contact 
person and the extent to which a member may rely on the information 
provided by the trusted contact person. BDA expressed concern that 
members could become responsible for evaluating the mental capabilities 
of trusted contact persons and that such capabilities could change over 
time. FINRA intends the trusted contact person to be a resource for a 
member in administering a customer's account and believes that a member 
may use its discretion in relying on any information provided by the 
trusted contact person. The proposed rule change does not make a member 
responsible for evaluating mental capabilities of trusted contact 
persons.
Requirement To Notify Trusted Contact Person of Designation
    In the Notice 15-37 Proposal, FINRA stated that a member may elect 
to notify an individual that he or she was named as a trusted contact 
person; however, the proposal would not require notification. Some 
commenters supported requiring members to notify

[[Page 78252]]

an individual that he or she was named as a trusted contact person.\74\ 
Alzheimer's Assoc. supported also requiring a member to notify an 
individual designated as a trusted contact person if the customer later 
designates another individual to be his or her trusted contact person. 
FSR suggested that the trusted contact person should be required to 
acknowledge his or her role at the time of designation by the customer.
---------------------------------------------------------------------------

    \74\ See IJEC, GSU and Alzheimer's Assoc.
---------------------------------------------------------------------------

    The proposed rule change does not require that a member notify a 
trusted contact person of his or her designation. FINRA believes that 
the administrative burdens of requiring notification would outweigh the 
benefits. However, a member may elect to notify a trusted contact 
person of his or her designation (e.g., if the member determines that 
notifying the trusted contact person may be helpful in administering a 
customer account).
Limitations on Who Can Be a Trusted Contact Person
    Under the Notice 15-37 Proposal, the proposed amendments to Rule 
4512 would have required that the trusted contact person be age 18 or 
older and not be authorized to transact business on behalf of the 
account. Commonwealth supported the age limitation but suggested that 
FINRA revise the proposed rule to explicitly permit members to rely on 
the representations of the customer regarding the trusted contact 
person's age so that members do not have to independently verify the 
age. While FINRA declines to revise the proposed rule as suggested, 
FINRA would not expect a member to verify the age of a designated 
trusted contact person.
    SIFMA requested clarification of the meaning of the term ``not 
authorized to transact business on the account.'' Some commenters did 
not support the limitation on persons not authorized to transact 
business on behalf of the account.\75\ NAELA commented that the 
limitation would presumably prohibit persons with powers of attorney 
from serving as trusted contact persons. FSR and Lincoln supported 
permitting individuals with powers of attorney to be trusted contact 
persons. Lincoln further supported permitting trustees to be trusted 
contact persons.
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    \75\ See Cowan and NAELA.
---------------------------------------------------------------------------

    In light of the concerns raised by commenters, FINRA has proposed 
removing the prohibition on those authorized to transact on the account 
so as to permit joint accountholders, trustees, individuals with powers 
of attorney and other natural persons authorized to transact business 
on an account to be designated as trusted contact persons.
    Authorization To Contact the Trusted Contact Person
    Under the Notice 15-37 Proposal, the proposed amendments to Rule 
4512 would have required that, at the time of account opening, a member 
shall disclose in writing (which may be electronic) to the customer 
that the member or an associated person is authorized to contact the 
trusted contact person. In the Notice 15-37 Proposal, FINRA requested 
comment on whether Rule 4512 should require customer consent to contact 
the trusted contact person or if customer notice is sufficient.
    Some commenters questioned whether customer notice would be 
sufficient under the Regulation S-P exception for disclosing 
information to a third party with unrevoked customer consent.\76\ 
Lincoln suggested requiring customer consent to contact the trusted 
contact person. Commonwealth stated that customer notice should be 
sufficient and that requiring customer consent could jeopardize a 
member's ability to protect investors. FINRA believes that disclosures 
to a trusted contact person pursuant to proposed Rules 2165 or 
4512(a)(1)(F) would be consistent with Regulation S-P.
---------------------------------------------------------------------------

    \76\ See CAI, Lincoln and SIFMA.
---------------------------------------------------------------------------

    SIFMA requested guidance on how the disclosure requirements in 
proposed Supplementary Material .06 to Rule 4512 could be met (e.g., in 
an account agreement, privacy policy or other form). The proposed rule 
change does not mandate any particular form of written disclosure. A 
member has flexibility in choosing which document should include the 
required disclosure (e.g., in an account application or another 
customer form) or whether to provide the disclosure in a separate 
document.
Information That May Be Disclosed to a Trusted Contact Person
    Under the Notice 15-37 Proposal, pursuant to proposed Supplementary 
Material .06 to Rule 4512, a member may disclose to the trusted contact 
person information about the customer's account to confirm the 
specifics of the customer's current contact information, health status, 
and the identity of any legal guardian, executor, trustee or holder of 
a power of attorney, and as otherwise permitted by proposed Rule 2165. 
In the Notice 15-37 Proposal, FINRA requested comment on whether the 
types of information that may be disclosed to the trusted contact 
person under Rule 4512 should be modified.
    Some commenters supported addressing in Rule 4512 the information 
that may be shared by a member with a trusted contact person.\77\ SIFMA 
further supported removing any restrictions on the information that may 
be discussed with a trusted contact person. IRI commented that members 
should have discretion to disclose to and discuss with the trusted 
contact person any information relevant to an investment under proposed 
Rule 2165. CAI supported a more general ``catch all'' category for 
information that may be disclosed to and discussed with a trusted 
contact person.
---------------------------------------------------------------------------

    \77\ See FSR, Lincoln, BDA and SIFMA.
---------------------------------------------------------------------------

    ICI suggested revising the proposed Supplementary Material to Rule 
4512 to provide that a member is prohibited from contacting a trusted 
contact person except as permitted by Rule 2165 to protect the 
customer's privacy. GWFS commented that a member does not request or 
receive health information from customers and, if the member should 
have health information, it would be responsible for additional 
regulatory requirements.
    FINRA has proposed retaining the approach in the Notice 15-37 
Proposal regarding the types of information that may be disclosed to 
the trusted contact person under Rule 4512, with the addition of 
information to address possible financial exploitation. FINRA has 
sought to identify reasonable categories of information that may be 
discussed with a trusted contact person, including information that 
will assist a member in administering the customer's account. Given 
privacy considerations, FINRA does not propose to give the member 
absolute latitude to discuss any information with trusted contact 
persons. With respect to health status, while members generally do not 
receive health information from customers, FINRA believes it is 
reasonable to permit members to reach out to the trusted contact person 
when they are concerned about a customer's health (e.g., when a 
customer who is known to be frail or ill has not responded to multiple 
telephone calls over a period of time). FINRA also believes that 
members should be allowed to contact the trusted contact person to 
address possible financial exploitation of the customer (e.g., when the 
member is concerned that the customer is being financially exploited 
but the member has not yet decided to place a temporary hold on a 
particular disbursement).
    Some commenters suggested including in the list of information that

[[Page 78253]]

may be disclosed to the trusted contact person the reason for any 
temporary hold, as well as details about the disbursement request.\78\ 
Proposed Supplementary Material to Rule 4512 contemplates a member 
contacting the trusted contact person as otherwise permitted by Rule 
2165. FINRA would consider discussing the temporary hold, including the 
rationale for the hold, with the trusted contact person to be covered 
by Supplementary Material to Rule 4512.
---------------------------------------------------------------------------

    \78\ See Commonwealth and Alzheimer's Assoc.
---------------------------------------------------------------------------

    Two commenters stated that FINRA should explicitly permit members 
to share information concerning an account with the financial 
institution that is the receiving party in an ACATS transfer.\79\ SIFMA 
also stated that such information sharing should be permitted even if a 
temporary hold is not placed on a disbursement pursuant to proposed 
Rule 2165. As noted above, FINRA would consider disbursements to 
include processing of an ACATS transfer but a member would need to have 
a reasonable belief of financial exploitation in order to place a 
temporary hold on an ACATS transfer request pursuant to proposed Rule 
2165. Furthermore, FINRA believes that the reasonableness of a member 
discussing a questionable ACATS transfer with the financial institution 
that is to receive the transferring assets would depend on the facts 
and circumstances. Members considering whether to discuss an ACATS 
transfer with another financial institution may wish to consider the 
availability of the Regulation S-P exception for allowing sharing of 
information in order to protect against or prevent actual or potential 
fraud, unauthorized transactions, claims, or other liability.\80\ FINRA 
would consider providing guidance, as appropriate, if specific 
questions regarding the application of the proposed rule change to 
ACATS transfers arise.
---------------------------------------------------------------------------

    \79\ See FSR and SIFMA.
    \80\ See 17 CFR 248.15(a)(2)(ii).
---------------------------------------------------------------------------

Application of Rule 4512 Requirements to Existing Accounts
    Consistent with the current requirements of Rule 4512, a member 
would not need to attempt to obtain the name of and contact information 
for a trusted contact person for existing accounts until such time as 
the member updates the information for the account either in the course 
of the member's routine and customary business or as otherwise required 
by applicable laws or rules.
    Some commenters stated that members should be required to request 
the name and contact information for a trusted contact person for 
existing accounts not later than 12 months after the adoption of the 
proposed rule change.\81\ NASAA supported requiring members to obtain 
the name and contact information for a trusted contact person from 
customers and to update the information on a regular basis in the 
manner in which members collect and maintain suitability information. 
CFA Institute supported requiring members to update trusted contact 
person-related information during periodic reviews and when a 
customer's situation changes. Commonwealth stated that members should 
be able to rely on existing procedures for updating accounts pursuant 
to Rule 17a-3 under the Exchange Act. Commonwealth further stated that 
it should be sufficient to indicate that no trusted contact person-
related information has been provided to the member and that the 
customer should contact the member if he or she would like to provide 
the name of and contact information for a trusted contact person.
---------------------------------------------------------------------------

    \81\ See Cowan and Alzheimer's Assoc.
---------------------------------------------------------------------------

    With respect to an account that was opened pursuant to a prior 
FINRA rule, FINRA Rule 4512(b) requires members to update the 
information for such an account in compliance with FINRA Rule 4512 
whenever they update the account information in the course of their 
routine and customary business, or as required by other applicable laws 
or rules. With respect to any account that was opened pursuant to a 
prior FINRA rule, a member shall provide the required disclosure in 
writing, which may be electronic, when updating the information for the 
account pursuant to Rule 4512(b) either in the course of the member's 
routine and customary business or as otherwise required by applicable 
laws or rules. Such an approach promotes greater uniformity and 
consistency of account record information, while also minimizing 
burdens to members with respect to updating information for existing 
accounts. Applying the same standard to trusted contact person 
information would ensure that members use reasonable efforts to obtain 
such information for existing accounts in the course of their routine 
business, while not imposing undue burdens on firms to immediately 
contact all existing accountholders.
Immediate Family Member
    Under the Notice 15-37 Proposal, if the trusted contact person is 
not available or the member reasonably believes that the trusted 
contact person has engaged, is engaged or will engage in the financial 
exploitation of the specified adult, the member would have been 
required to contact an immediate family member, unless the member 
reasonably believes that the immediate family member has engaged, is 
engaged or will engage in the financial exploitation of the specified 
adult.
    Some commenters raised privacy concerns regarding disclosing 
information to an immediate family member. GSU commented that an 
immediate family member who has not been designated as a customer's 
trusted contact person should be contacted only for the purpose of 
gathering information about the identity of a guardian, executor, 
trustee or holder of a power of attorney so as to ensure that the 
customer's personal and private information is not disclosed to persons 
that the customer does not wish to receive the information. ICI 
suggested that contacting an immediate family member or other person 
about an account without the customer's explicit approval would not be 
permitted by Regulation S-P. NASAA stated that contacting immediate 
family members implicates privacy concerns and may exacerbate the 
problems that the proposed rule change seeks to address. IRI supported 
giving a member discretion not to contact an immediate family member 
where the member may have reason to believe that the customer would not 
want the family member contacted. Some commenters suggested including 
``immediate family members'' in the proposed Supplementary Material .06 
to Rule 4512 to make it clear that such persons may be contacted under 
proposed Rule 2165.\82\
---------------------------------------------------------------------------

    \82\ See CAI and Wells Fargo.
---------------------------------------------------------------------------

    Some commenters expressed operational concerns with contacting an 
immediate family member. Alzheimer's Assoc. commented that it is 
unclear how a member would identify an immediate family member to 
contact in the event that the trusted contact person was unavailable. 
FSR suggested an alternative approach that where time is of the 
essence, a member may in its discretion contact an immediate family 
member in instances where the trusted contact person is not immediately 
available.
    Some commenters supported looking beyond immediate family members 
to provide members with discretion regarding whom to contact about a 
customer's account.\83\ FSI suggested permitting members to also 
contact an individual who shares a trusted

[[Page 78254]]

relationship with a customer (e.g., an attorney or an accountant).
---------------------------------------------------------------------------

    \83\ See Lincoln and Wells Fargo.
---------------------------------------------------------------------------

    Under the Notice 15-37 Proposal, the term ``immediate family 
member'' was defined to include a spouse, child, grandchild, parent, 
brother or sister, mother-in-law or father-in-law, brother-in-law or 
sister-in-law, and son-in-law or daughter-in-law, each of whom must be 
age 18 or older. SIFMA suggested revising the definition to include a 
customer's niece or nephew.
    Due to the privacy and operational challenges noted by commenters, 
FINRA has proposed removing the requirements in the Notice 15-37 
Proposal with respect to notifying an immediate family member when a 
temporary hold is placed. While a customer may name an immediate family 
member as his or her trusted contact person, the proposed rule change 
would not require that a member notify an immediate family member who 
is not authorized to transact business on the customer's account or who 
has not been named a trusted contact person. However, the proposed rule 
change would not preclude a member from contacting an immediate family 
member or any other person if the member has customer consent to do so. 
Moreover, contacting such persons may be useful to members in 
administering customer accounts.
Notification Period
    Under the Notice 15-37 Proposal, proposed Rule 2165 would have 
required the member to provide notification of the hold and the reason 
for the hold to all parties authorized to transact business on the 
account and, if available, the trusted contact person, no later than 
two business days after placing the hold. In the Notice 15-37 Proposal, 
FINRA requested comment on whether the two-business-day period for 
notifying the appropriate parties under proposed Rule 2165 is 
appropriate. If not, FINRA requested comment on what circumstances may 
warrant a shorter or longer period.
    Commenters suggested extending the period from two business days to 
four business days,\84\ five business days \85\ and seven business 
days.\86\ Commonwealth commented that the two-business-day period may 
be insufficient. Commonwealth suggested that if a member is unable to 
reach the trusted contact person or an immediate family member within 
two business days, then the member should have up to ten business days 
for notification. Alzheimer's Assoc. suggested reducing the period from 
two business days to 24 hours.
---------------------------------------------------------------------------

    \84\ See CAI.
    \85\ See FSR and FSI.
    \86\ See IRI.
---------------------------------------------------------------------------

    Other commenters suggested not requiring notification within a 
specific time period. Wells Fargo suggested requiring notification 
``promptly'' or ``as is reasonable under the circumstances.'' Because 
the two-business-day period may be insufficient, SIFMA suggested 
requiring ``reasonable efforts'' to notify the appropriate parties 
without imposing a specific time period.
    Given the need for urgency in dealing with financial exploitation, 
FINRA has proposed retaining the requirement to notify all parties 
authorized to transact business on an account not later than two 
business days after the hold is placed. To ease members' administrative 
and operational burdens, FINRA has proposed eliminating the requirement 
to contact an immediate family member under proposed Rule 2165.
    Commenters suggested clarifying when the time period would begin 
and end.\87\ Many FINRA rules require calculating business days. For 
purposes of calculating the two-business-day period within which a 
member must provide notification of the temporary hold to parties 
authorized to transact business on the account, and consistent with the 
approach taken in FINRA Rule 9138(b) (Computation of Time), the day 
when the member places the temporary hold should not be included, so 
the two-business-day period would begin to run on the next business day 
and would thus run until the end of the second business day thereafter. 
For example, assuming no intermediate federal holiday, if a member 
placed a temporary hold on a Monday, the two-business-day period would 
run until the end of Wednesday. If a member placed a hold on a Friday, 
then the two-business-day period would run until the end of the 
following Tuesday, again assuming no intermediate federal holiday. 
FINRA intends this same approach to be used for the calculation of the 
period for the temporary hold under proposed Rule 2165.
---------------------------------------------------------------------------

    \87\ See CAI and FSR.
---------------------------------------------------------------------------

Internal Review
    Under the Notice 15-37 Proposal, if a member places a temporary 
hold, proposed Rule 2165 would require the member to immediately 
initiate an internal review of the facts and circumstances that caused 
the qualified person to reasonably believe that financial exploitation 
of the specified adult has occurred, is occurring, has been attempted 
or will be attempted.
    PIRC supported requiring members to immediately initiate an 
internal review. SIFMA commented that the requirement to immediately 
initiate an internal review is unnecessarily duplicative because the 
proposed rule change already tacitly requires members to initiate an 
internal review prior to placing the temporary hold. CAI suggested 
requiring members to initiate an internal review as soon as reasonably 
practicable. FINRA intends the requirement to immediately initiate an 
internal review to signify that a member should not delay in reviewing 
the appropriateness of the temporary hold and determining appropriate 
next steps. Moreover, because a member's internal review is part of 
determining appropriate next steps once a hold has been placed, FINRA 
does not believe that the requirement is unnecessarily duplicative of 
any other requirements in the proposed rule change.
    FSR requested that FINRA clarify the scope of the internal review 
requirement, including what factors should be considered and the nature 
of the inquiry. FINRA believes that the appropriate internal review 
will depend on the facts and circumstances of the situation. Members 
have discretion in conducting a reasonable internal review under 
proposed Rule 2165.
Policies and Procedures
    Proposed Rule 2165 would require a member that anticipates using a 
temporary hold in appropriate circumstances to establish and maintain 
written supervisory procedures reasonably designed to achieve 
compliance with the Rule, including, but not limited to, procedures on 
the identification, escalation and reporting of matters related to 
financial exploitation of specified adults. In the Notice 15-37 
Proposal, FINRA requested comment on whether to mandate specific 
procedures for escalating matters related to financial exploitation.
    Lincoln commented that FINRA should not prescribe or mandate any 
specific procedures for escalating matters. On the other hand, Miami 
Investor Rights Clinic supported requiring all members to establish 
written supervisory procedures for all registered persons related to 
the identification and escalation of matters involving financial 
exploitation.
    FINRA has proposed retaining the approach in the Notice 15-37 
Proposal requiring policies and procedures reasonably designed to 
achieve compliance with proposed Rule 2165. FINRA is committed to 
protecting seniors and other vulnerable adults and

[[Page 78255]]

believes that the proposed rule change would assist members in 
addressing financial exploitation of such individuals. FINRA recognizes 
however that placing holds on disbursements, even on a temporary basis, 
could have negative implications for the customer's financial situation 
and the member-customer relationship. In light of the complexities 
surrounding financial exploitation and to help protect against 
potential misapplication of the proposed rule, FINRA believes that 
members must have written supervisory procedures reasonably designed to 
achieve compliance with proposed Rule 2165. Such procedures would help 
to ensure that members give careful consideration to their 
responsibilities in identifying and escalating matters related to 
financial exploitation of specified adults and that there is a 
consistent approach across the member's organization.
Training
    Under the Notice 15-37 Proposal, the proposal would also require 
members to develop and document training policies or programs 
reasonably designed to ensure that registered persons comply with the 
requirements of the Rule. Some commenters supported requiring broad 
training of the members' staffs regarding the risks of financial 
exploitation.\88\ Miami Investor Rights Clinic supported requiring 
members to establish training policies and programs for all registered 
persons.
---------------------------------------------------------------------------

    \88\ See NAELA and AARP.
---------------------------------------------------------------------------

    GSU suggested that FINRA oversee training policies or programs 
related to proposed Rule 2165, including the creation of continuing 
education requirements for registered persons and web-based training 
for all qualified persons. Commonwealth supported FINRA providing 
guidance on appropriate training of registered persons related to 
proposed Rule 2165, including FINRA-created training modules.
    FINRA has proposed retaining the approach in the Notice 15-37 
Proposal to require members to develop and document training policies 
or programs. FINRA has modified the requirement to mandate training for 
associated persons--not just registered persons. Because the proposed 
rule change permits an associated person of the member who serves in a 
supervisory, compliance or legal capacity for the member to place, 
terminate or extend a temporary hold on behalf of the member, FINRA 
believes that it is appropriate to require members to develop and 
document training policies or programs reasonably designed to ensure 
that associated persons--not just registered persons--comply with the 
proposed rule.
    FINRA believes that the requirement will further strengthen 
compliance by members and associated persons that anticipate placing 
holds on disbursements of funds or securities consistent with the 
requirements of the Rule. The proposed rule change provides members 
with reasonable discretion in determining how best to structure such 
training policies or programs. FINRA has developed material for the 
Continuing Education Regulatory Element Program that addresses the 
financial exploitation of senior investors. FINRA will consider whether 
to develop additional continuing education content specifically 
addressing financial exploitation of seniors and providing additional 
guidance to members, as appropriate.
Reporting
    Some commenters supported revising the proposal to require members 
to report financial exploitation to local adult protective services and 
law enforcement.\89\ Some commenters also supported revising the 
proposal to require members to report financial exploitation to 
FINRA.\90\ SIFMA also supported providing members with explicit 
permission to share records with local adult protective services and 
law enforcement.
---------------------------------------------------------------------------

    \89\ See NAELA, PIABA, Miami Investor Rights Clinic, NAIFA, 
PIRC, Alzheimer's Assoc., AARP, NASAA and SIFMA.
    \90\ See PIRC and NASAA.
---------------------------------------------------------------------------

    CAI commented that FINRA needs to provide a more definitive 
mechanism under which members may refer a matter to the proper agency 
or governmental body for handling. NAPSA supported requiring members to 
report financial exploitation to adult protective services under the 
Regulation S-P exceptions for allowing sharing of information in order 
to prevent actual or potential fraud and to comply with authorized 
civil investigations. FSR suggested that the proposed rule change 
should permit members to petition a government agency for a 
determination concerning a proposed disbursement, which would allow the 
applicable jurisdiction's adult protective services to intervene. FSI 
suggested that requiring the reporting of potential financial 
exploitation or exposing members to potential civil liability will lead 
to members reporting even the slightest suspicions to regulators, 
thereby over-taxing regulatory resources.
    The proposed rule change does not require that members report a 
reasonable belief of financial exploitation to a state or local 
authority. Some states mandate such reporting by financial 
institutions, including broker-dealers. Given the varying and evolving 
reporting requirements under state law, FINRA believes that states are 
well positioned to determine whether a broker-dealer or any other 
entity has satisfied its reporting requirements under state law. FINRA 
would expect members to comply with all applicable state requirements, 
including reporting requirements.\91\
---------------------------------------------------------------------------

    \91\ See Interagency Guidance clarifying that reporting 
suspected financial abuse to appropriate local, state, or federal 
agencies does not, in general, violate the privacy provisions of the 
Gramm-Leach-Bliley Act or its implementing regulations, including 
Regulation S-P.
---------------------------------------------------------------------------

    Alzheimer's Assoc. supported requiring members to document any 
referral to an external agency, as well as the final outcome of any 
holds placed. Because the proposed rule change would not require 
referring matters to an external agency, proposed Rule 2165 does not 
require members to document any such referrals. However, FINRA would 
expect members to comply with all applicable state recordkeeping 
requirements.
Costs
    In the Notice 15-37 Proposal, FINRA requested comment on the costs 
that may result from the proposed rules. Commonwealth stated that it 
will need to make changes to existing account profile systems that will 
require development time, at an estimated cost of approximately 
$40,000. Wells Fargo stated that it will need to incorporate the 
trusted contact person into the account opening process and make other 
necessary system updates, at an estimated cost of approximately $1.25 
million.
    Other commenters indicated that the proposed rule change will 
result in costs to members but did not attempt to quantify such costs. 
GWFS commented that in order to capture, retain and periodically update 
trusted contact person information, systems changes will be required 
resulting in additional costs to the member. FSR suggested that the 
proposed recordkeeping requirement will result in significant costs for 
members.
    FSR suggested that FINRA's economic impact assessment present 
findings that show evidence that a customer designating a trusted 
contact person is, or is likely to be, an effective mitigant

[[Page 78256]]

against the financial exploitation the proposed rule change is designed 
to address.
    PIRC suggested that FINRA seek more information on the logistics 
and costs of expanding the proposed rule change to apply to all 
investors or to otherwise expand the definition of ``specified 
adults.''
    As discussed in greater detail in Item 4 of this filing, FINRA does 
not believe that the proposed rule change will impose undue operational 
costs on members. While FINRA recognizes that there will be some 
operational costs to members in complying with the proposed trusted 
contact person requirement, FINRA has lessened the cost of compliance 
by not requiring members to notify the trusted contact person of his or 
her designation as such. Furthermore, the proposed rule change would 
permit a member to deliver the disclosure and notification required by 
Rule 4512 or Rule 2165 to trusted contact persons in paper or 
electronic form thereby giving the member alternative methods of 
complying with the requirements.
    FIBA suggested that the reasonable costs associated with due 
diligence and investigatory processes, including responding to 
inquiries from the trusted contact person, immediate family members and 
other parties, should be borne by the customer and chargeable against 
the relevant account(s). FINRA would closely examine the reasonableness 
of a member charging a customer for costs associated with placing a 
temporary hold on the customer's account.
Additional Privacy Considerations
    FIBA commented that the disclosure of confidential information 
pursuant to the proposed rule change may run afoul of U.S. and foreign 
privacy laws. The proposed rule change addresses Regulation S-P 
requirements. Members will need to separately consider any applicable 
non-U.S. privacy requirements in determining whether to place temporary 
holds consistent with the requirements of proposed Rule 2165.
    CAI questioned whether the Regulation S-P exception for disclosure 
of information pursuant to a law or rule would be available if proposed 
Rule 2165 permits, but does not require, a temporary hold. FINRA 
believes that a member disclosing information pursuant to proposed Rule 
2165 would be consistent with the Regulation S-P exception for 
disclosures to comply with federal, state, or local laws, rules and 
other applicable legal requirements.
Additional Suggestions for Clarification or Guidance
    CAI requested guidance on the status of funds during the time of 
the temporary hold and, in particular, on the obligations of different 
parties related to the temporary hold on disbursements of funds related 
to a variable annuity contract withdrawal or surrender, or how to 
address such funds when the member is not authorized to hold customer 
funds. Proposed Rule 2165 applies to disbursements of funds or 
securities out of a customer account and does not apply to redemptions 
of securities or other transactions. As such, FINRA does not anticipate 
a member that is not authorized to hold funds being required to hold 
funds under the proposed rule change. Rather, while the temporary hold 
on a disbursement is in effect, the funds or securities would remain in 
a customer's account and would not be released.
    GWFS requested clarification as to the application of the proposed 
rule to members primarily involved with the retirement plan business, 
such as where a retirement plan sponsor's relationship is with a 
financial intermediary unaffiliated with the member but the member 
provides recordkeeping services. GWFS questioned which broker-dealer is 
``responsible for rule compliance.''
    More than one financial institution may be providing services in 
some arrangements and business models (e.g., retirement plans or 
introducing and clearing firm arrangements). In such arrangements, the 
financial institution that has a reasonable belief that financial 
exploitation is occurring may not hold the assets that are subject to 
the disbursement request. For example, with respect to introducing and 
clearing firm arrangements, an introducing firm may make the 
determination that placing a temporary hold pursuant to the proposed 
rule change is appropriate. The clearing firm may then place the 
temporary hold at the direction of and in reasonable reliance on the 
information provided by the introducing firm. FINRA recognizes that 
members making a determination or recommendation to place a hold on a 
disbursement may not be in the position to place the actual hold on the 
funds or securities.
Coordination With Other Regulators
    As noted above, NASAA has separately proposed model legislation 
relating to financial exploitation of seniors and other vulnerable 
adults. NASAA stated that it hopes that the final outcomes of the FINRA 
proposal and the NASAA model are complementary. Some commenters 
recommended consistency between the FINRA proposal and NASAA model as 
being in the best interests of both investors and financial 
institutions.\92\ Other commenters stated that FINRA should coordinate 
with NASAA and state regulators to develop a cohesive framework.\93\
---------------------------------------------------------------------------

    \92\ See ICI, Lincoln, AARP and FSI.
    \93\ See FSR, IRI, BDA and SIFMA.
---------------------------------------------------------------------------

    While the proposed rule change and NASAA model are not identical, 
FINRA and NASAA have worked together to achieve consistency where 
possible and appropriate. Both the proposed rule change and NASAA model 
would apply to accounts of natural persons age 65 and older and would 
permit temporary holds of up to 25 business days, including the initial 
and subsequent periods. Proposed Rule 2165 also would incorporate the 
concept of a temporary hold being terminated or extended by a state 
regulator or agency or court of competent jurisdiction.
Implementation Period
    Some commenters requested that if the proposed rule change is 
approved, FINRA allow at least 12 months for members to implement the 
requirements so as to provide adequate time to make updates to members' 
systems and written supervisory procedures.\94\ If the proposed rule 
change is approved, FINRA will consider the need for members to make 
necessary changes to their systems, forms, and supervisory procedures 
in establishing an implementation date for the proposed rule change.
---------------------------------------------------------------------------

    \94\ See Commonwealth, CAI and Wells Fargo.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing,

[[Page 78257]]

including whether the proposed rule change is consistent with the Act. 
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-2016-039 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-2016-039. 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 Web site (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 Web site 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 
a.m. and 3 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2016-039 and should be 
submitted on or before November 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\95\
---------------------------------------------------------------------------

    \95\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26797 Filed 11-4-16; 8:45 am]
 BILLING CODE 8011-01-P