Document ID: SEC-2022-0142-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-01-31T05:00Z

[Federal Register Volume 87, Number 20 (Monday, January 31, 2022)]
[Notices]
[Pages 4974-4980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01843]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94061; File No. SR-FINRA-2021-016]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend Rule 
2165 (Financial Exploitation of Specified Adults)

January 25, 2022.

I. Introduction

    On June 9, 2021, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 2165 
(Financial Exploitation of Specified Adults) to: (1) Permit member 
firms to place a temporary hold on a securities transaction, subject to 
the same terms and restrictions applicable to a temporary hold on 
disbursements of funds or securities (``disbursements''), where there 
is a reasonable belief of financial exploitation of a ``specified 
adult'' as defined in the rule; \3\ (2) permit member firms to extend a 
temporary hold, whether on a disbursement or a transaction, for an 
additional 30 business days, if the member firm has reported the matter 
to a state regulator or agency of competent jurisdiction, or a court of 
competent jurisdiction (hereinafter collectively referred to as a 
``State Authority''); and, (3) require member firms to retain records 
of the reason and support for any extension of any temporary hold, 
including information regarding any communications with, or by, a State 
Authority.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 9 and accompanying text.
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    The proposed rule change was published for comment in the Federal 
Register on June 28, 2021.\4\ On July 20, 2021, FINRA consented to 
extend until September 24, 2021, the time period in which the 
Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\5\ On August 23, 2021,

[[Page 4975]]

FINRA responded to the comment letters received in response to the 
Notice.\6\ On September 22, 2021, the Commission filed an Order 
Instituting Proceedings (``OIP'') to determine whether to approve or 
disapprove the proposed rule change.\7\ On November 2, 2021, FINRA 
responded to the comment letters received in response to the OIP.\8\ On 
December 6, 2021, FINRA consented to extend until February 23, 2022 the 
time period in which the Commission must approve or disapprove the 
proposed rule change.\9\ This order approves the proposed rule change.
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    \4\ See Exchange Act Release No. 92225 (June 22, 2021), 86 FR 
34084 (June 28, 2021) (File No. SR-FINRA-2021-016) (``Notice'').
    \5\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Trading and Markets, Commission, dated July 
20, 2021, available at https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf.
    \6\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated August 
23, 2021 (``FINRA Response Letter 1''), available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf.
    \7\ See Exchange Act Release No. 93103 (September 22, 2021) 86 
FR 53696 (September 28, 2021) (File No. SR-FINRA-2021-016) 
(``OIP'').
    \8\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated November 
2, 2021 (``FINRA Response Letter 2''), available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9363745-261806.pdf.
    \9\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Trading and Markets, Commission, dated 
December 6, 2021, available at https://www.finra.org/sites/default/files/2021-12/sr-finra-2021-016-extension2.pdf.
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II. Description of the Proposed Rule Change

A. Background

    FINRA's proposed rule change would amend Rule 2165, which currently 
permits a member firm to place a temporary hold on a disbursement from 
the account of a ``specified adult'' customer for up to 25 business 
days if the criteria of the rule are satisfied. A ``specified adult'' 
is someone either age 65 and older, or age 18 and older if the member 
firm reasonably believes that a mental or physical impairment has 
rendered the person incapable of protecting their own interests.\10\ 
According to FINRA, temporary holds on disbursements have played a 
significant role in providing member firms with a way to respond 
promptly to suspicions of customer financial exploitation before a 
customer experiences potentially significant losses.\11\
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    \10\ See Rule 2165(a)(1). Supplementary Material .03 to Rule 
2165 provides that a member firm's reasonable belief that a natural 
person age 18 and older has a mental or physical impairment that 
renders the individual unable to protect their own interests may be 
based on the facts and circumstances observed in the member firm's 
business relationship with the person. See Notice at 34086 n.17.
    \11\ See Notice at 34086. For example, according to FINRA member 
firms have placed temporary holds to prevent senior investors from 
losing: (1) $200,000 (representing approximately two-thirds of the 
investor's account) related to a Central Intelligence Agency lawsuit 
scam; (2) $10,000 in a lottery scam; (3) $60,000 in a romance scam; 
and (4) $50,000 to financial exploitation by a brother-in-law. Id.
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    A member firm's ability to place a temporary hold on disbursements 
is subject to a number of conditions that are designed to help prevent 
misapplication of the rule.\12\ The safeguards include requiring that 
member firms provide notification of both the hold, and the reason for 
the hold, to all parties authorized to transact business on the 
customer's account, including the customer and any trusted contact 
person of the customer, no later than two business days after the day 
on which the firm first placed the hold.\13\ In addition, after placing 
the hold the member firm must immediately initiate an internal review 
of the facts and circumstances that caused the firm to reasonably 
believe that the financial exploitation of the specified adult has 
occurred, is occurring, has been attempted, or will be attempted.\14\ 
Furthermore, the general supervisory and recordkeeping requirements of 
certain FINRA Rules \15\ require a member firm relying on Rule 2165 to 
establish and maintain written supervisory procedures that are 
reasonably designed to achieve compliance with the rule, including, but 
not limited to, procedures related to the identification, escalation, 
and reporting of matters related to the financial exploitation of 
specified adults.\16\ With respect to associated persons who may be 
handling the customer's account, Rule 2165 also requires that any 
request for a hold be escalated to a supervisor, compliance department 
or legal department rather than allowing the associated person to 
independently place a hold.\17\ In addition, a member firm relying on 
the rule is required to develop and document training policies or 
programs reasonably designed to ensure that such associated persons 
comply with the requirements of the rule,\18\ as well as retain records 
related to compliance with the rule, which must be made readily 
available to FINRA upon request.\19\ With respect to the specific 
disbursements on which a hold may be placed, temporary holds pursuant 
to Rule 2165 may only be placed where the member has a reasonable 
belief of customer financial exploitation--for example, a customer 
payment related to a commonly known scam, such as a lottery scam.\20\ 
Each of these safeguards incorporated into Rule 2165 would apply 
equally to the proposed rule change permitting temporary holds on 
securities transactions.\21\
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    \12\ See Notice at 34086.
    \13\ See Rule 2165(b)(1)(B).
    \14\ See Rule 2165(b)(1)(C).
    \15\ See Rules 3110, 3120, 3130, 3150, and the Rule 4510 Series.
    \16\ See Rule 2165(c)(1).
    \17\ See Rule 2165(c)(2).
    \18\ See Supplementary Material .02 to Rule 2165.
    \19\ See Rule 2165(d).
    \20\ See Notice at 34086.
    \21\ See Notice at 34088.
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    In August 2019, FINRA commenced a retrospective review to assess 
the effectiveness and efficiency of its rules and administrative 
processes designed to protect senior investors from financial 
exploitation, including Rule 2165.\22\ FINRA stated that information 
gathered during the review supported the need for firms to have 
additional time to resolve matters arising from suspected financial 
exploitation, as well as extending the rule to allow firms to place 
securities transaction holds.\23\
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    \22\ According to FINRA, the retrospective review process had 
two phases: (1) The assessment phase and (2) the action phase. FINRA 
stated that during the assessment phase, it first sought comment via 
Regulatory Notice 19-27 (August 2019) on several questions with 
respect to addressing financial exploitation and other circumstances 
of financial vulnerability for senior investors. The assessment 
phase of this review included discussions during member exams in 
2019 that focused on Rule 2165, as well as a survey of FINRA members 
on these issues. In addition, FINRA obtained input from several 
advisory committees comprising member firms of different sizes and 
business models, investor protection advocates, member firms, and 
trade associations. FINRA stated that it also obtained the 
perspective of its operating departments that help administer Rule 
2165, and considered examination observations and findings involving 
senior issues. Finally, FINRA stated that it also developed an 
anonymous survey that was distributed to all member firms in the 
first quarter of 2020. See Notice at 34085.
    \23\ See Notice at 34087.
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    The proposed rule change would expand upon Rule 2165 in both scope 
and temporal reach by: (1) Expanding the scope of Rule 2165(b)(1) by 
permitting member firms to place a temporary hold on a securities 
transaction, in addition to the already-permitted hold on 
disbursements, where the conditions of the rule, including the member's 
reasonable belief of customer financial exploitation, are met; \24\ (2) 
permitting member firms to extend the maximum time period for any 
temporary hold initiated pursuant to Rule 2165(b)(1) for an additional 
30 business days, beyond the current maximum of 25 business days, if 
the firm has reported the matter to a State

[[Page 4976]]

Authority; \25\ and (3) requiring member firms to retain records of the 
reason and support for any extension of a temporary hold, including 
information regarding any communications with, or by, a State 
Authority.\26\ According to FINRA, the proposed rule change is designed 
to protect investors and the public interest by strengthening the tools 
available to FINRA's member firms to combat the financial exploitation 
of vulnerable investors, which presents the potential for significant 
and longstanding harm to those investors.\27\
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    \24\ See proposed Rule 2165(b).
    \25\ See proposed Rule 2165(b)(4).
    \26\ See proposed Rule 2165(d).
    \27\ See Notice at 34087.
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B. Proposed Rule Change

1. Proposed Temporary Hold on Securities Transactions in the Account of 
a Specified Adult (Proposed Rule 2165(b))
    Rule 2165 currently permits member firms to place temporary holds 
on disbursements of funds or securities when the firm has a reasonable 
belief that the customer is being financially exploited.\28\ Although 
this serves to stop funds or securities from leaving a customer's 
account, FINRA indicated that a hold on disbursements may be 
insufficient to protect certain investors from financial exploitation 
with respect to their securities transactions.\29\ Specifically, FINRA 
believes that even if a temporary hold is placed on the resulting 
disbursement out of a customer's account, the execution of the 
transaction may still subject the customer to significant, negative 
financial consequences.\30\
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    \28\ See Rule 2165(b).
    \29\ For example, FINRA stated that Rule 2165 currently would 
not apply to a customer's order to sell his shares of a stock. 
However, FINRA elaborated that if a customer requested that the 
proceeds of a sale of shares of a stock be disbursed out of his or 
her account at the member firm, then the rule could apply to the 
disbursement of the proceeds where the customer is a ``specified 
adult'' and there is reasonable belief of financial exploitation. 
See Notice at 34087 at n.33.
    \30\ See Notice at 34087. For example, according to FINRA such 
customers may be subject to adverse tax consequences, early 
withdrawal penalties (such as surrender charges), or the inability 
to regain access to a sold investment that was subsequently closed 
to new investors. Id.
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    Accordingly, FINRA is proposing to amend Rule 2165 to permit firms 
to place a temporary hold on securities transactions when the firm has 
a reasonable belief that the customer is being financially 
exploited.\31\ In accordance with the rule's current safe harbors for 
holds on disbursements,\32\ the proposed rule change would permit, but 
not require, firms to place a hold on transactions in these 
circumstances. FINRA believes that the safeguards in Rule 2165 \33\ 
would help prevent misapplication of the rule with respect to temporary 
holds on disbursements, and would apply equally to temporary holds on 
transactions.\34\
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    \31\ See proposed Rule 2165(b).
    \32\ FINRA stated that Rule 2165 provides member firms and their 
associated persons with a safe harbor from FINRA Rules 2010 
(Standards of Commercial Honor and Principles of Trade), 2150 
(Improper Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts) and 11870 (Customer Account 
Transfer Contracts) when member firms exercise discretion in placing 
temporary holds on disbursements of funds or securities from the 
accounts of specified adults consistent with the requirements of 
Rule 2165. See Notice at 34086.
    \33\ See supra notes 11-20 and accompanying language.
    \34\ See Notice at 34086.
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2. Proposed 30-Day Extension of the Temporary Hold Period (Proposed 
Rule 2165(b)(4))
    Rule 2165 currently allows a member firm to place a temporary 
disbursement hold on a specified adult customer's account for up to 15 
business days if the specified conditions required by the rule are 
satisfied, unless otherwise terminated or extended by a State 
Authority.\35\ The member firm may extend that hold for an additional 
10 business days, for a maximum of 25 business days total, if the 
member firm's internal review of the facts and circumstances supports 
its reasonable belief that the financial exploitation of the specified 
adult has occurred, is occurring, has been attempted or will be 
attempted, unless otherwise terminated or extended by a State 
Authority.\36\
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    \35\ See Rule 2165(b)(2).
    \36\ See Rule 2165(b)(3).
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    FINRA stated that although some matters can be quickly resolved 
after placing a temporary hold (e.g., by explaining to the customer 
that the activity and requested disbursement fit a commonly-known 
scam), other matters are more complex and may require additional 
time.\37\ For example, a more complex matter like suspected financial 
exploitation of an elderly customer by a family member or caregiver may 
entail investigations by state regulators or agencies, or legal actions 
in a court, and thus may require additional time for firms to resolve 
since both the firm and the other parties investigating the matter need 
time to gather and share information.\38\ In particular, FINRA stated 
that the average duration of an investigation for matters reported to 
the federal National Adult Maltreatment Reporting System (NAMRS) is 
52.6 days.\39\
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    \37\ See Notice at 34088, 34092.
    \38\ See id.
    \39\ Id.
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    Accordingly, FINRA is proposing to amend Rule 2165 to permit firms 
to extend any temporary hold (of a securities transaction or 
disbursement) under the rule for an additional 30 business days 
provided that: (1) The member firm's internal review of the facts and 
circumstances supports the firm's reasonable belief that financial 
exploitation of the specified adult has occurred, is occurring, has 
been attempted, or will be attempted, and (2) the member firm has 
reported or provided notification of its reasonable belief to a State 
Authority.\40\ Thus, firms would be able to extend a transaction or 
disbursement hold up to a maximum of 55 business days only in instances 
where they have externally reported the suspicious conduct.
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    \40\ See proposed Rule 2165(b)(4). FINRA stated that the 30-
business-day-hold period in proposed Rule 2165(b)(4) would be in 
addition to the 15-business-day-hold period in Rule 2165(b)(2) and 
the 10-business-day-hold period in Rule 2165(b)(3). See Notice at 
34087 n.31.
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3. Proposed Addition To Record Retention (Proposed Rule 2165(d))
    Rule 2165(d) currently requires member firms to retain records 
related to compliance with the rule, which must be readily available to 
FINRA upon request. To evidence compliance with Rule 2165 in placing or 
extending a temporary hold (of a securities transaction or 
disbursement), FINRA is proposing to amend Rule 2165(d) to require that 
a member firm retain records of the reason and support for any 
extension of a temporary hold, including information regarding any 
communications with, or by, a State Authority.\41\
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    \41\ See proposed Rule 2165(d)(6).
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III. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's responses to the comments, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\42\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Exchange Act,\43\ which requires, among other 
things, that FINRA rules be designed to prevent

[[Page 4977]]

fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
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    \42\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \43\ 15 U.S.C. 78o-3(b)(6).
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A. Temporary Holds on Securities Transactions in the Account of a 
Specified Adult (Proposed Rule 2165(b))

    The proposed rule change would amend Rule 2165 to permit firms to 
place a temporary hold on securities transactions when the firm has a 
reasonable belief that the customer is being financially exploited.
    All commenters generally supported this aspect of the proposal.\44\ 
For example, commenters asserted that extending Rule 2165 to cover 
securities transactions would provide additional tools that firms could 
use to protect senior investors from financial exploitation and its 
detrimental consequences.\45\ One of these commenters further stated 
that the proposed rule change would ``provide more clarity on the 
manner in which member firms can attempt to combat financial 
exploitation with respect to direct held securities products, such as 
variable annuities, that are not usually held in a brokerage account 
that has a disbursement [feature].'' \46\ Another commenter stated that 
expanding the rule to include temporary holds on transactions would 
allow member firms to protect their customers to a greater degree, 
noting that customers may be financially exploited with regard to 
transactions just as they are with disbursements, and additionally 
member firms are in the best position to identify common 
characteristics of scams and exploitation and to recognize red flags in 
individual customers' accounts.\47\ This commenter further stated that 
``[c]onsistent with this state law trend, FINRA's proposal to now 
include temporary holds on securities transactions within 2165 will 
help protect against financial exploitation relating to purchases or 
sales, and thus protect senior investors from significant harm.'' \48\
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    \44\ See letter to Vanessa Countryman, Secretary, Commission, 
from William A. Jacobson, Esq., Clinical Professor of Law and 
Director of Cornell Securities Law Clinic, Cornell University Law 
School, dated October 13, 2021 (``Cornell Clinic Letter''); letter 
to Vanessa Countryman, Secretary, Commission, from William Benson, 
National Policy Adviser, and Kendra Kuehn, National Policy Analyst, 
National Adult Protective Services Association (``NAPSA''), dated 
July 29, 2021 (``NAPSA Letter''); letter to Vanessa Countryman, 
Secretary, Commission, from Lisa Bleier and Marin Gibson, Securities 
Industry and Financial Markets Association (``SIFMA''), dated July 
28, 2021 (``SIFMA Letter''); letter to Vanessa Countryman, 
Secretary, Commission, from Christine Lazaro, Director of the 
Securities Arbitration Clinic and, Professor of Clinical Legal 
Education, St. John's University (the ``St. John's Clinic''), dated 
July 19, 2021 (``St. John's Clinic Letter''); letter to Vanessa 
Countryman, Secretary, Commission, from Eversheds Sutherland (US) 
LLP on behalf of the Committee of Annuity Insurers (``CAI''), dated 
July 19, 2021 (``CAI Letter''); letter to Vanessa Countryman, 
Secretary, Commission, from Ron Long, Head of Aging Client Services, 
Wells Fargo (``Wells Fargo''), dated July 15, 2021 (``Wells Fargo 
Letter'').
    \45\ See CAI Letter at 2; NAPSA Letter at 1.
    \46\ CAI Letter at 2.
    \47\ See Cornell Clinic Letter at 2-3.
    \48\ Id. at 1.
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    One commenter suggested that notwithstanding its general support 
for the proposed rule change as drafted, ``more may be done to further 
protect senior investors'' and requested that ``FINRA further consider 
making the Rule proscriptive rather than permissive.'' \49\ In 
particular, this commenter stated that ``small and mid-sized firms have 
declined to utilize the safe harbor offered by Rule 2165 because of 
concerns associated with litigation risks,'' \50\ and that investors 
``would benefit from a uniform national standard of mandated reporting 
where financial exploitation is suspected, even if placing a hold is 
not mandated.'' \51\
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    \49\ St. John's Clinic Letter at 2.
    \50\ Id.
    \51\ Id.
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    In response, FINRA stated that permitting a member firm to use 
discretion in placing a temporary hold would allow for the judicious 
use of temporary holds to protect customers from financial 
exploitation.\52\ FINRA stated that some states mandate reporting of 
suspected financial exploitation by financial institutions, including 
broker-dealers, within a specified period of time, and FINRA expects 
member firms to comply with all applicable state requirements, 
including reporting requirements.\53\ FINRA further stated that where 
state reporting is not required, mandatory reporting of every temporary 
hold pursuant to Rule 2165 could lead to an inefficient or ineffective 
use of time and resources for state regulators and agencies, 
particularly where firms were able to quickly resolve matters by 
engaging a customer's trusted contact person or using other tools.\54\ 
For these reasons, FINRA declined amending the proposed rule change.
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    \52\ See FINRA Response Letter 1 at 4.
    \53\ Id.
    \54\ Id.
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    Permitting firms to impose a temporary hold on transactions where 
appropriate, in addition to the authority firms already have to impose 
temporary holds on disbursements, would provide an additional measure 
of protection to customers from the harmful impact of exploitative 
transactions, such as adverse tax consequences, early withdrawal 
penalties, or investing in securities that do not align with their 
investor profiles. A temporary hold on disbursements may not be 
sufficient to prevent or redress customer harm from financial 
exploitation in certain instances, such as financial exploitation 
involving the purchase and sale of securities. Therefore, authorizing 
firms to place temporary holds on securities transactions represents an 
important mechanism to help firms prevent harmful financial 
consequences that could result from a customer being subject to an 
exploitative securities transaction. Moreover, FINRA's approach, which 
balances the importance of reporting against the risk of an inefficient 
or ineffective use of time and resources for state regulators and 
agencies, is reasonable. In addition, the Commission expects firms to 
comply with applicable state laws mandating that firms report suspected 
financial exploitation. For these reasons, the Commission finds the 
proposed rule change is consistent with the protection of investors and 
in the public interest.

B. Proposed 30-Day Extension of the Temporary Hold Period (Proposed 
Rule 2165(b)(4))

    The proposed rule change would permit firms to extend the temporary 
hold on disbursements or transactions authorized by this rule for an 
additional 30 business days where the member firm has reported or 
provided notification of the member's reasonable belief of financial 
exploitation of a specified adult to a State Authority.
    Several commenters suggested that more time is needed for the 
investigation of senior financial exploitation cases.\55\ One commenter 
stated that compared to the average 52.6 day duration of an 
investigation for all cases reported to NAMRS, ``financial exploitation 
investigations are often more complicated and time consuming'' and thus 
the commenter recommended that the 30-business-day extension be treated 
only as a starting point, which could be revisited as more data become 
available.\56\ Another commenter stated that data show ``there will 
still be a sizeable percentage of cases of potential financial 
exploitation that are not resolved in a timely manner, even with the 
30-business day extension . . . so firms will still be in the 
unenviable position of determining whether to engage in the 
disbursement, or execute the securities transaction, prior to their

[[Page 4978]]

ability to conclude the investigation and ensure that the customer has 
not been exploited.'' \57\ In addition, a commenter stated that because 
``[s]tate laws do not conform to the additional 30-business days 
granted under'' the proposed rule change ``firms will be forced to 
continue to wade through a patchwork of requirements.'' \58\ Therefore, 
this commenter recommended that FINRA work with state agencies and the 
courts to foster consistency with respect to the permitted timeframe, 
as well as review the timeline again in the future to assess its 
efficacy.\59\
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    \55\ See CAI Letter; NAPSA Letter; SIFMA Letter.
    \56\ See NAPSA Letter at 1.
    \57\ CAI Letter at 2-3.
    \58\ Id. at 2.
    \59\ Id. at 3.
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    In response, FINRA stated that the proposed rule change strikes a 
reasonable balance between giving member firms adequate time to 
investigate and contact the relevant parties, as well as to seek input 
from a State Authority if needed, while prohibiting an open-ended hold 
period.\60\ FINRA emphasized that Rule 2165 already permits a temporary 
hold to be terminated or extended by a State Authority.\61\ 
Furthermore, FINRA stated that it has met, and will continue to meet, 
with adult protective services (``APS'') staff in multiple states and 
NAPSA to increase the coordination of senior investor protection 
efforts and highlight Rule 2165's provision that APS has the ability to 
direct a member firm to terminate or extend a temporary hold authorized 
by the Rule.\62\ In addition, FINRA asserted that if the proposed hold 
period does not provide member firms with adequate time for 
investigation, FINRA may consider extending the temporary hold period 
in future rulemaking.\63\
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    \60\ See FINRA Response Letter 1 at 3.
    \61\ Id.
    \62\ Id.
    \63\ See FINRA Response Letter 1 at 3-4.
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    Another commenter opposed the proposed extension of the temporary 
hold period because the basis for whether to exercise the 10-business-
day extension currently permitted by the rule \64\ and the proposed 30-
business-day extension \65\ would use different standards.\66\ The 
commenter recommended that FINRA amend the proposed rule change to 
require that the basis for exercising both extensions require that an 
internal investigation support a reasonable belief in financial 
exploitation (the current standard for the 10-business-day 
extension).\67\ The commenter also suggested that FINRA consolidate the 
two extensions into a single 40-business-day extension.\68\
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    \64\ See Rule 2165(b)(3).
    \65\ See Proposed Rule 2165(b)(4).
    \66\ See Cornell Clinic Letter at 3.
    \67\ Id.
    \68\ Id.
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    In response, FINRA stated that, as with the 10-business-day 
extension currently provided under Rule 2165(b)(3), the 30-business-day 
extension would require that the member firm's internal review of the 
facts and circumstances support a reasonable belief of the existence 
of, or potential for, financial exploitation necessitating the 
temporary hold.\69\ However, the additional 30-business-day extension 
also would require the firm to report or notify a State Authority.\70\ 
The additional 30 business days would provide firms with additional 
time to resolve complex matters, often involving investigations by 
state regulators or agencies or legal actions in a court.\71\ FINRA 
stated that it does not support consolidating the two extensions of the 
temporary hold into a single 40-business day extension because doing so 
would not differentiate between matters of varying complexity.\72\ 
FINRA stated that the proposed rule change strikes a reasonable balance 
in giving member firms adequate time to investigate and contact the 
relevant parties, as well as seek input from a state regulator or 
agency or a court if needed.\73\
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    \69\ See FINRA Response Letter 2 at 2-3.
    \70\ See id. at 2.
    \71\ See id. at 3.
    \72\ See id.
    \73\ Id.
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    The commenter also opposed the proposed 30-business-day extension 
because ``a non-overridable limit on customers' ability to transact and 
disburse, even though temporary, unduly limits the customers autonomy, 
which does not strike the right balance of interests under the Exchange 
Act.'' \74\ Accordingly, the commenter recommended that FINRA provide a 
mechanism for customers to override the temporary hold in limited 
circumstances, since customers may be aware of the risks and choose to 
proceed nonetheless.\75\
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    \74\ Cornell Clinic Letter at 3.
    \75\ See id.
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    In response, FINRA stated that customers are given opportunities to 
help resolve any circumstance giving rise to a temporary hold. For 
instance, FINRA stated that unless a member firm reasonably believes 
that doing so would cause further harm to a specified adult, FINRA 
encourages the firm to attempt to resolve the matter with a customer 
before placing a temporary hold.\76\ In addition, FINRA stated that 
Rule 2165(b)(1)(B)(i) requires that, not later than two days after 
placing a temporary hold, the firm notify all persons authorized to 
transact business on the account, including the customer.\77\ FINRA 
stated, however, that allowing a customer to ``override a temporary 
hold when the member firm has a reasonable belief that the customer is 
being financially exploited would give a powerful tool to the person 
exploiting the customer and deprive the member firm of a tool to 
address the exploitation.'' \78\ For example, the exploiter could 
direct the customer to override the hold so that the exploiter could 
access the customer's funds.\79\ For these reasons, FINRA declined 
amending the proposed rule change.
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    \76\ See FINRA Response Letter 2 at 3.
    \77\ Id.
    \78\ Id.
    \79\ Id.
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    Providing firms with the ability to extend the temporary hold 
period from a maximum of 25 business days to 55 business days 
reasonably aligns with FINRA's stated purpose of providing firms with 
additional time to resolve financial exploitation matters where 
circumstances warrant. FINRA has found that the average duration of an 
investigation for matters reported to NAMRS is 52.6 days, and the 
proposed rule change would extend the potential maximum duration of the 
hold to 55 business days--a sum that is more in line with the average 
amount of time needed to conduct an investigation. As FINRA noted, 
firms as well as the government or law enforcement entities that 
investigate suspected financial exploitation often need additional time 
to collect and share information in order to bring the investigation to 
resolution.\80\ But if a State Authority determines that additional 
time is needed the proposed rule change permits it to further extend 
the temporary hold. Moreover, it is reasonable to condition a firm's 
ability to extend the temporary hold for an additional 30 business days 
on the firm reporting the matter to a State Authority, given that the 
extension is a serious step for both the firm and affected customer. 
These additional requirements, combined with the existing safeguards 
incorporated into Rule 2165, should provide firms with an effective 
mechanism to obtain additional time that may be necessary to resolve 
suspected financial exploitation of specified adults.
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    \80\ See supra notes 21 and 37-39 and accompanying text.
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    Furthermore, allowing a customer to override a temporary hold when 
the firm has a reasonable belief that the customer is being financially 
exploited

[[Page 4979]]

could potentially serve to aid the person who is exploiting the 
customer, while also potentially diminishing the effectiveness of the 
firm's means to address the exploitation. At the same time, a maximum 
hold time of no more than 55 business days, combined with other 
safeguards, would provide a reasonable upper limit on holds that serves 
to protect customers from being subject to unduly lengthy or even 
indefinite holds on transactions or disbursements. For these reasons, 
the Commission finds that the proposed 30-day extension of the 
temporary hold period is consistent with the protection of investors 
and in the public interests.

C. Record Retention (Rule 2165(d))

    The proposed rule change would also extend Rule 2165's record 
retention obligation to temporary hold extensions by requiring firms to 
retain records of the reason and support for any extension of a 
temporary hold, including information regarding any communications 
with, or by, a State Authority--so that firms have a means to 
demonstrate compliance with the rule upon request by FINRA.
    One commenter stated that retaining records that justify a 
reasonable belief of financial exploitation would help ``justify the 
imposition of a protective temporary hold, justify limiting a 
customer's autonomy, justify the member firm's decision-making process, 
and ensure member firms do not feel free to impose unnecessary holds.'' 
\81\ For these reasons, the commenter stated that the proposed record 
retention requirement would benefit member firms, customers and the 
public.\82\
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    \81\ Cornell Clinic Letter at 4.
    \82\ See id.
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    FINRA's determination to require firms to maintain records 
evidencing those communications so that they can demonstrate compliance 
with the rule upon FINRA's request, as set forth in the proposed rule 
change, is reasonable. For these reasons, the Commission finds FINRA's 
proposed rule change is consistent with the protection of investors and 
in the public interest.

D. Additional Issues Raised by Commenters

1. Cognitive Decline or Diminished Capacity
    One commenter recommended that FINRA consider extending the Rule 
2165 safe harbor to apply where there is a reasonable belief that the 
investor has an impairment that renders the individual unable to 
protect his or her own interests, irrespective of whether there is 
evidence the customer may be the victim of financial exploitation by a 
third party.\83\
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    \83\ See Wells Letter at 2.
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    In response, FINRA stated that it did not extend Rule 2165 to 
situations where a member firm has a reasonable belief that the 
customer has cognitive decline or diminished capacity, but there is no 
evidence of financial exploitation because such an extension would give 
member firms too much discretion or would unfairly impede customer 
autonomy.\84\ FINRA also stated that member firms are not well-
positioned to determine if a customer is suffering from cognitive 
decline or diminished capacity.\85\ However, FINRA reminded firms of 
the guidance it provided in this area in Regulatory Notice 20-34 to 
assist member firms and investors address issues related to cognitive 
decline and diminished capacity.\86\
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    \84\ See FINRA Response Letter 1 at 5.
    \85\ Id.
    \86\ See FINRA Response Letter 1 at 5.
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    The Commission finds that expanding the proposed rule change to 
capture investors with cognitive decline or diminished capacity where 
there is no evidence of financial exploitation is beyond the scope of 
this proposed rule change.
2. Investment Companies
    One commenter recommended that the temporary hold rules apply to 
investment companies, such as mutual funds, noting that because these 
companies are often the custodian of the actual assets, ``there is 
nothing to be done to hold the actual assets if the client goes to them 
directly and circumvents the broker-dealer.'' \87\
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    \87\ NAPSA Letter at 1.
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    In response, FINRA stated that the Commission, not FINRA, has 
jurisdiction over investment companies and their transfer agents and, 
in fact, has already addressed the commenter's concern.\88\ 
Furthermore, FINRA stated that based on discussions with SEC staff 
regarding Section 22(e) of the Investment Company Act of 1940, FINRA 
does not believe that a broker-dealer's delay of a redemption of mutual 
fund shares pursuant to its customer's mutual fund redemption request, 
or of a disbursement of mutual fund redemption proceeds to its 
customer, in reliance on Rule 2165 as amended by the Proposal and based 
on a reasonable belief of financial exploitation of the customer would 
be imputed to the mutual fund, including where the broker-dealer is the 
fund's principal underwriter.\89\
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    \88\ See FINRA Response Letter 1 at 2. FINRA stated that 
Division of Investment Management staff issued a no-action letter in 
2018 to the Investment Company Institute permitting mutual fund 
transfer agents to protect specified adult shareholders from 
financial exploitation to the same extent that broker-dealers may do 
so currently under FINRA Rule 2165. Specifically, the no-action 
letter stated that the staff would not recommend enforcement action 
if, consistent with the conditions in the letter, a transfer agent, 
acting on behalf of a mutual fund, temporarily delayed for more than 
seven days the disbursement of redemption proceeds from the mutual 
fund account of a specified adult held directly with the transfer 
agent based on a reasonable belief that financial exploitation of 
the specified adult has occurred, is occurring, has been attempted, 
or will be attempted. See also Investment Company Institute, SEC No-
Action Letter (June 1, 2018).
    \89\ See letter from Jeanette Wingler, Associate General 
Counsel, FINRA, to Vanessa Countryman, Secretary, Commission, dated 
January 24, 2022, available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-20112614-265430.pdf. See also Notice 
of Filing of Partial Amendment No. 1 and Order Granting Accelerated 
Approval of File No. SR-FINRA-2016-039, Securities Exchange Act 
Release No. 79964 (February 3, 2017), 82 FR 10059, 10066 (February 
9, 2017).
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    In general, FINRA rules apply to all members and persons associated 
with a member. The term ``member'' means any registered broker-dealer 
whose regular course of business consists in actually transacting 
securities business that is admitted to membership in FINRA.\90\ 
Therefore, the commenter's recommendation is beyond the scope of this 
proposed rule change.
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    \90\ See FINRA Rule 0160(d)(10) and Article III, Section 1(a) of 
the FINRA Bylaws.
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    In sum, for the above reasons, the Commission finds that the 
proposed rule change would strengthen the tools available to FINRA's 
member firms to combat the financial exploitation of vulnerable 
investors. In addition, the Commission finds that conditioning the 
ability to extend the temporary hold by requiring firms to report the 
matter to a specified external authority, as well as requiring firms to 
maintain records evidencing those communications, would aid in 
preventing misapplication of the rule, and complement the existing 
safeguards already present in Rule 2165. Accordingly, the Commission 
finds that the proposed rule change would facilitate a greater measure 
of protection for investors by providing firms with additional means to 
prevent customer harm by imposing temporary holds on securities 
transactions where appropriate, and also by providing firms with 
additional time to resolve financial exploitation matters through 
extending the duration of a temporary hold when necessary. For these 
reasons, the Commission finds FINRA's proposed rule change is designed 
to protect investors and the public interest.

[[Page 4980]]

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \91\ that the proposed rule change (SR-FINRA-2021-016) be, 
and hereby is, approved.
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    \91\ 15 U.S.C. 78s(b)(2).

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01843 Filed 1-28-22; 8:45 am]
BILLING CODE 8011-01-P