Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of the Proposed Rule Change To Amend Rule 4512 (Customer Account Information) and Adopt FINRA Rule 2165 (Financial Exploitation of Specified Adults), as Modified by Partial Amendment No. 1, 10059-10070 [2017-02645]

Download as PDF Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices the Industry Member Data to the Central Repository by November 15, 2019. Such compliance dates are consistent with the compliance dates set forth in SEC Rule 613(a)(3)(v) and (vi), and Section 6.7(a)(v) and (vi) of the CAT NMS Plan. sradovich on DSK3GMQ082PROD with NOTICES 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,32 which require, among other things, that the Exchange’s 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, and Section 6(b)(8) of the Act,33 which requires that the Exchange’s rules not impose any burden on competition that is not necessary or appropriate. The Exchange believes that this proposal is consistent with the Act because it implements, interprets or clarifies the provisions of the Plan, and is designed to assist the Exchange and its Industry Members in meeting regulatory obligations pursuant to the Plan. In approving the Plan, the SEC noted that the Plan ‘‘is necessary and appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act.’’ 34 To the extent that this proposal implements, interprets or clarifies the Plan and applies specific requirements to Industry Members, the Exchange believes that this proposal furthers the objectives of the Plan, as identified by the SEC, and is therefore consistent with the Act. (B) Self-Regulatory Organization’s Statement on Burden on Competition The Exchange 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. The Exchange notes that the proposed rule change implements provisions of the CAT NMS Plan, and is designed to assist the Exchange in meeting its regulatory obligations pursuant to the Plan. The Exchange also notes that the Proposed Rules 4.5 through 4.16 implement provisions of the CAT NMS Plan will apply equally to all firms that trade NMS Securities and OTC Equity Securities. In addition, all national 32 15 U.S.C. 78f(b)(5). U.S.C. 78f(b)(8). 34 Approval Order at 84697. 33 15 VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 securities exchanges and FINRA are proposing similar rules to apply the requirements of the CAT NMS Plan to their members. Therefore, this is not a competitive rule filing, and, therefore, it does not impose a burden on competition. (C) Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. 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 Exchange 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, 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– BatsEDGA–2017–03 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–BatsEDGA–2017–03. 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 (https://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 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 10059 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 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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– BatsEDGA–2017–03 and should be submitted on or before March 2, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–02643 Filed 2–8–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79964; File No. SR–FINRA– 2016–039] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of the Proposed Rule Change To Amend Rule 4512 (Customer Account Information) and Adopt FINRA Rule 2165 (Financial Exploitation of Specified Adults), as Modified by Partial Amendment No. 1 February 3, 2017. I. Introduction On October 19, 2016, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘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 4512 (Customer Account Information) and adopt new FINRA Rule 2165 (Financial Exploitation of Specified Adults). The proposed rule change would: (1) 35 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\09FEN1.SGM 09FEN1 10060 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices 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) permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers, where there is a reasonable belief that these customers have been, are being, or will be subject to financial exploitation).3 The proposed rule change was published for comment in the Federal Register on November 7, 2016.4 The public comment period closed on November 28, 2016. The Commission received twenty-one (21) comment letters on the Proposal.5 On December 7, 3 See File No. SR–FINRA–2016–039. 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), Exchange Act Release No. 34–79215; File No. SR– FINRA–2016–039 (Nov. 1, 2016); 81 FR 78238 (Nov. 7, 2016) (‘‘Proposal’’). 5 See Tamra K. Solmon, Associate General Counsel, Investment Company Institute (‘‘ICI’’) (Nov. 28, 2016); Gary Sanders, Counsel and Vice President, Government Relations, National Association of Insurance and Financial Advisors (‘‘NAIFA’’) (Nov. 28, 2016); Catherine J. Weatherford, President & CEO, Insured Retirement Institute (‘‘IRI’’) (Nov. 28 2016); Eric Arnold and Clifford Kirsch, Sutherland, Asbill & Brennan LLP, on behalf of the Committee of Annuity Insurers (‘‘CAI’’) (Nov. 28, 2016); Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors (‘‘Wells Fargo’’) (Nov. 28, 2016); W. Alan Smith, Deputy General Counsel, Janney Montgomery Scott LLC, Philadelphia, PA (‘‘Janney’’) (Nov. 28, 2016); William A. Jacobson, Clinical Professor of Law, Cornell Law School and Director, Cornell Securities Law Clinic, and Alexander K. Brehan, 2017 J.D. Candidate, Cornell Law School (‘‘Cornell’’) (Nov. 28, 2016); Nicole G. Iannarone, Director, Investor Advocacy Clinic, Assistant Clinical Professor, and David Hsu, Student Intern, Georgia State University College of Law (‘‘GSU’’) (Nov. 28, 2016); Carrie L. Chelko, Esq., Chief Counsel, Lincoln Financial Network (‘‘Lincoln’’) (Nov. 28, 2016); David T. Bellaire, Esq., Executive Vice President and General Counsel, Financial Services Institute (‘‘FSI’’) (Nov. 28, 2016); Marnie C. Lambert, President, Public Investors Arbitration Bar Association, Norman, OK (‘‘PIABA’’) (Nov. 28, 2016); Lisa J. Bleier, Managing Director and Associate General Counsel, SIFMA, Washington, DC (Nov. 28, 2016); Atasia Richardson and Alyse Velger, Student Interns, and Elissa Germaine, Supervising Attorney, Pace Investor Rights Clinic, Elisabeth Haub School of Law, Pace University, White Plains, NY (‘‘PIRC’’) (Nov. 28, 2016); Mike Rothman, President, NASAA, and Minnesota Commissioner of Commerce (‘‘NASAA’’) (Nov. 28, 2016); Richard Foster, Financial Services Roundtable, Washington, DC (‘‘FSR’’) (Nov. 28, 2016); David P. Bergers, General Counsel, LPL Financial LLC (‘‘LPL’’) (Nov. 28, 2016); Jigar Gandhi, Counsel, American Counsel of Life Insurers (‘‘ACLI’’) (Nov. 28, 2016); Michael Nicholas, Chief Executive Officer, Bond Dealers of America (‘‘BDA’’) (Nov. 28, 2016); Jesse Hill, Principal, Government and Regulatory Relations, Edward Jones (‘‘Edward Jones’’) (Nov. 28, 2016); Manisha Kimmel, Chief Regulatory Officer, Wealth Management, Thomson Reuters (‘‘Thomson Reuters’’) (Dec. 5, 2016); and Rick Fleming, Investor Advocate, U.S. Securities and Exchange Commission, Office of the Investor Advocate (‘‘Investor Advocate’’) (Dec. 28, 2016). The sradovich on DSK3GMQ082PROD with NOTICES 4 See VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 2016, FINRA extended the time period in which the Commission must approve the Proposal, disapprove the Proposal, or institute proceedings to determine whether to approve or disapprove the Proposal to February 3, 2017.6 On January 19, 2017, FINRA filed a response to the comment letters,7 along with Partial Amendment No. 1 to the Proposal. This order provides notice of the filing of Partial Amendment No. 1 and approves the Proposal, as modified by Partial Amendment No. 1, on an accelerated basis. II. Description of the Proposal 8 A. Background With the aging of the U.S. population, financial exploitation of seniors and other vulnerable adults is a serious and growing problem.9 FINRA’s experience with the FINRA Securities Helpline for Seniors® (‘‘Seniors Helpline’’) has highlighted issues relating to financial exploitation of seniors and other vulnerable adults.10 A number of comment letters are available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA, at the Commission’s Web site at https:// www.sec.gov/comments/sr-finra-2016-039/ finra2016039.shtml, and at the Commission’s Public Reference Room. 6 See Letter from Jeanette Wingler, Associate General Counsel, FINRA, to Katherine England, Assistant Director, Division of Trading and Markets, Securities and Exchange Commission, dated December 7, 2016. 7 See Letter from Jeanette Wingler, Associate General Counsel, FINRA, to Brent J. Fields, Secretary, Securities and Exchange the Commission, dated January 19, 2017 (‘‘FINRA Response Letter’’). The FINRA Response Letter and the text of Partial Amendment No. 1 are available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA, at the Commission’s Web site at https://www.sec.gov/comments/sr-finra-2016039/finra2016039.shtml, and at the Commission’s Public Reference Room. 8 The subsequent description of the Proposal is substantially excerpted from FINRA’s description in the Proposal. See Proposal, 81 FR at 78238–78257. 9 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’’). 10 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’’); FINRA Securities Helpline for Seniors Marks First Year, with $1.3 Million Returned to Investors (April 20, 2016) (stating that, ‘‘To date, the helpline has PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 reports and studies also have explored various aspects of this important topic.11 Moreover, studies indicate that financial exploitation is the most common form of elder abuse.12 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.13 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.14 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. To address these issues, the Proposal 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) fielded more than 4,200 calls, recovering over $1.3 million in voluntary reimbursements from firms since its launch in April 2015’’). 11 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. 12 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’’). 13 See Seniors Helpline Report. 14 See Seniors Helpline Report. E:\FR\FM\09FEN1.SGM 09FEN1 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices 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 Proposal and that customers’ ordinary disbursements are not disrupted. According to FINRA, 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.15 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 Proposal would aid in the creation of a uniform national standard for the benefit of members and their customers. B. Terms of the Proposal sradovich on DSK3GMQ082PROD with NOTICES 1. Trusted Contact Person The Proposal 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.16 It would also require that the trusted contact person be age 18 or older.17 While the Proposal did not specify what contact information should be obtained for a trusted contact person, FINRA noted that a mailing address, telephone number and email address for the trusted contact person may be the most useful information for members. The Proposal would 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.18 FINRA stated that asking a customer to provide the name and contact information for a trusted contact 15 See, e.g., DEL. CODE ANN. tit. 31, § 3910 (2015); MO. REV. STAT. §§ 409.600-.630 (2015); WASH. REV. CODE §§ 74.34.215, 220 (2015); and IND. CODE ANN. § 23–19–4.1 (2016). 16 See proposed Rule 4512(a)(1)(F). 17 See proposed Rule 4512(a)(1)(F). 18 See proposed Supplementary Material .06(b) to Rule 4512. VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the Proposal’s requirements. The Proposal would not require a member 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 Proposal (‘‘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.19 With respect to any account subject to the requirements of Exchange Act Rule 17a–3(a)(17) to periodically update customer records, the Proposal would require a member to make reasonable efforts to obtain or, if previously obtained, to update where appropriate, the name and contact information for a trusted contact person in the manner and timeframes required under Exchange Act Rule 17a–3(a)(17).20 With regard to updating the contact information once provided for other accounts that are not subject to the requirements in Exchange Act Rule 17a– 3, FINRA stated that 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.21 The Proposal would also require, at the time of account opening, a member to 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 19 See Rule 4512(b). 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 selfregulatory organization of which it is a member. 21 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. 20 See PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 10061 permitted by proposed Rule 2165. With respect to any account that was opened pursuant to a prior FINRA rule, a member would be required to 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.22 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.23 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 22 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. 23 See proposed Rule 2165(b)(1)(B)(ii). E:\FR\FM\09FEN1.SGM 09FEN1 10062 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices Proposal would not require such notification. sradovich on DSK3GMQ082PROD with NOTICES 2. Temporary Hold on Disbursement of Funds or Securities The Proposal 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.24 The Proposal would create 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.’’ 25 The proposed safe harbor would not apply to a decision not to place a hold; rather, as stated in the proposed rule, members would be provided with a safe harbor from certain FINRA rules when exercising their discretion to place a temporary hold. 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.26 FINRA believes that ‘‘specified adults’’ may be particularly susceptible to financial exploitation.27 Proposed 24 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. 25 See proposed Supplementary Material .01 to Rule 2165. As discussed further below, Partial Amendment No. 1 clarifies the scope of Supplementary Material .01 to Rule 2165 by adding the words ‘‘associated persons’’ to the Proposal’s safe harbor, and by providing that the safe harbor is available when members exercise discretion in placing a temporary hold ‘‘consistent with the requirements of this Rule. 26 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. 27 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 VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 Rule 2165 would define ‘‘specified adult’’ as: (A) A natural person age 65 and older; 28 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.29 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.30 The Proposal would define the term ‘‘account’’ to mean any account of a member for which a specified adult has the authority to transact business.31 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.32 The Proposal 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.33 A temporary hold pursuant to proposed Rule 2165 may be placed on a particular suspicious disbursement(s) but not on other, non-suspicious disbursements.34 The Proposal would not apply to transactions in securities.35 The Proposal 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 Proposal 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.36 If a member places a temporary hold, the Proposal 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.37 In addition, the Proposal 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.38 While oral or written (including electronic) notification would be permitted under the Proposal, a member would be required to retain records evidencing the notification.39 33 See proposed Rule 2165(b)(1)(A). recognizes that a single disbursement could involve all of the assets in an account. 35 For example, the Proposal 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 Proposal could apply to the disbursement of the proceeds where the customer is a ‘‘specified adult’’ and there is reasonable belief of financial exploitation. 36 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. 37 See proposed Rule 2165(b)(1)(C). 38 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. 39 See proposed Rule 2165(d). 34 FINRA (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). 28 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’’). 29 See proposed Rule 2165(a)(1). 30 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). 31 See proposed Rule 2165(a)(2). 32 See proposed Rule 2165(a)(4). PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 E:\FR\FM\09FEN1.SGM 09FEN1 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES The Proposal would 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 Proposal would 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.40 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.41 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 Proposal would permit the member to extend the temporary hold for an additional 10 business days, unless sooner terminated or extended by an 40 Moreover, as discussed below, Partial Amendment No. 1 provides an exception from the proposed requirement in Rule 2165 to notify not later than two business days after placing a temporary hold all parties authorized to transact business on an account if a party is unavailable or if the member reasonably believes that the party has engaged, is engaged, or will engage in the financial exploitation of a Specified Adult. 41 See proposed Rule 2165(b)(2). VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 order of a state regulator or agency or court of competent jurisdiction.42 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 Proposal 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.43 The Proposal 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.44 The Proposal would require that the 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 the Rule.45 The Proposal 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.46 C. Partial Amendment No. 1 As discussed in FINRA’s response to comments, infra, Partial Amendment No. 1 makes the following changes to the Proposal: (1) It clarifies the scope of Supplementary Material .01 to Rule 42 See proposed Rule 2165(b)(3). As discussed below, Partial Amendment No. 1 clarifies that a member may place a temporary hold for up to 25 business days when the Rule’s requirements are met, unless the temporary hold is ‘‘otherwise’’ terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction. 43 See proposed Rule 2165(d). 44 See proposed Rule 2165(c)(1). 45 See proposed Rule 2165(c)(2). 46 See proposed Supplementary Material .02 to Rule 2165. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 10063 2165 by adding the words ‘‘associated persons’’ to the Proposal’s safe harbor, and by providing that the safe harbor is available when members exercise discretion in placing a temporary hold ‘‘consistent with the requirements of this Rule;’’ (2) it clarifies that a member may place a temporary hold for up to 25 business days when the Rule’s requirements are met, unless the temporary hold is ‘‘otherwise’’ terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction; (3) it provides an exception from the proposed requirement in Rule 2165 to notify not later than two business days after placing a temporary hold all parties authorized to transact business on an account if a party is unavailable or if the member reasonably believes that the party has engaged, is engaged, or will engage in the financial exploitation of a Specified Adult; and (4) it extends the Proposal’s implementation period from ‘‘no later than 180 days following Commission approval’’ to 12 months from Commission approval. III. Summary of Comments and FINRA’s Responses The Commission received twenty-one (21) comment letters on the Proposal,47 and a response letter from FINRA.48 Twenty (20) commenters supported FINRA’s efforts to protect seniors and other vulnerable adults but offered suggested modifications as to various aspects of the Proposal.49 The remaining commenter supported the proposed amendments to Rule 4512 regarding a trusted contact person, but opposed the proposed adoption of Rule 2165 that would permit temporary holds on disbursements where there is a reasonable belief of financial exploitation.50 Commenters’ concerns and suggested modifications to the Proposal, along with FINRA’s corresponding responses, are discussed by topic below. A. Comment Letters in Support of the Proposal As noted above, twenty (20) commenters generally supported FINRA’s Proposal.51 For instance, one commenter stated that adoption of FINRA’s Proposal would better enable its members ‘‘to protect seniors and 47 See supra note 5. supra note 7. 49 See ACLI, BDA, CAI, Edward Jones, GSU, FSI, FSR, ICI, Investor Advocate, IRI, Janney, Lincoln, LPL, NAIFA, NASAA, PIABA, PIRC, SIFMA, Thomson Reuters and Wells Fargo. 50 See Cornell. 51 See supra note 46. 48 See E:\FR\FM\09FEN1.SGM 09FEN1 10064 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices other vulnerable adults from financial exploitation,’’ and ‘‘to reach out to a trusted contact person whenever the member suspects financial exploitation of the account holder or when the member has concerns about the account holder’s ability to continue to handle his or her financial affairs.’’ 52 Another commenter stated that the Proposal was ‘‘well-conceived to help member firms protect seniors.’’ 53 A third commenter asserted that its members had been trying to obtain trusted contact person information, and that the Proposal would provide additional guidance to members, create uniform practices, and make customers more willing to provide the information.54 This commenter also supported the proposed temporary hold on disbursements, which, it argued, would facilitate quick protection for vulnerable adults, while promptly resolving concerns that might be unfounded.55 However, these twenty (20) commenters suggested modifications to the Proposal. These suggested modifications, along with FINRA’s responses to the commenters, are addressed below. sradovich on DSK3GMQ082PROD with NOTICES B. Suggested Modifications to the Proposal 1. Trusted Contact Person As noted above, the Proposal 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. One commenter contended that, if a customer refuses to provide the trusted contact person information, Rule 4512 should require a member to maintain records of its reasonable efforts to obtain the trusted contact person information and the customer’s refusal to provide the information.56 The commenter also believed that the rule text should set forth the minimum contact information that must be obtained (i.e., a name, telephone number, mailing address, email and relationship to customer) and that the information should be added to FINRA’s new account application template.57 In its Response Letter, FINRA acknowledged that Rule 4512 does not specify the manner in which members should evidence compliance with the rule, or what contact information should be obtained for a trusted contact person.58 However, according to FINRA, because Rule 3110 (Supervision) requires members to have supervisory procedures in place that are reasonably designed to achieve compliance with FINRA rules, members would have the flexibility to reasonably design their supervisory systems to achieve compliance with the Proposal’s requirements.59 To aid members in complying with the Proposal’s requirements, FINRA agreed to update its new account application template to reflect the proposed amendments to Rule 4512.60 a. Notification of Designation One commenter suggested modifying the proposed amendments to Rule 4512 to require members to notify an individual that he or she was named as a trusted contact person.61 Another commenter recommended that members voluntarily adopt a practice of notifying the trusted contact person of his or her designation.62 In response, FINRA states its belief that the ‘‘administrative burdens of requiring notification would outweigh the benefits.’’ 63 However, FINRA notes that 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).64 b. Notification of Temporary Hold As discussed above, proposed Rule 2165 would require a member to provide notification of a temporary hold and the reason for the hold to the trusted contact person, if available, not later than two business days after the date that the member first placed the hold. One commenter recommended voluntary, rather than mandatory, notification,65 while another asserted that a member should not be required to notify the trusted contact person if the member determines to lift the hold after speaking with all persons authorized to transact business on the account.66 In response, FINRA encourages members to attempt to resolve a matter with a customer before placing a temporary hold, ‘‘unless a member reasonably believes that doing so would cause further harm to a specified 58 See FINRA Response Letter. adult.’’ 67 According to FINRA, if a temporary hold is not placed, there is no requirement in the rule to notify the trusted contact person.68 However, once a member places a temporary hold on a disbursement, FINRA believes a member should be required to notify a trusted contact person.69 In addition, FINRA strongly encourages members to notify the specified adult of the temporary hold as soon as practicable but in no case longer than the two business days required by Rule 2165.70 Another commenter suggested that, rather than disclosing only that the temporary hold was placed, members should have discretion to disclose and discuss any information relevant to the financial exploitation investigation to the trusted contact person.71 In its Response Letter, FINRA states that ‘‘the proposed amendments to Rule 4512 explicitly permit members to contact the trusted contact person and disclose information about the customer’s account to address possible financial exploitation and as permitted by Rule 2165.’’ 72 According to FINRA, members are therefore permitted to disclose and discuss information relevant to a financial exploitation investigation to a trusted contact person.73 c. Update As previously discussed, with respect to an account that was opened pursuant to a prior FINRA rule (‘‘existing account’’), Rule 4512(b) requires members to update the trusted contact information for the account whenever they update the account information in the course of their routine and customary business, or as required by other applicable laws or rules. One commenter recommended a shorter recurring timeframe (e.g., annually) during which members must reach out to their non-institutional customers regarding the trusted contact person information.74 In response, FINRA declined to make the suggested change.75 FINRA states that applying the current standard in Rule 4512(b) to the trusted contact person information would ensure that members use reasonable efforts to obtain the information for existing accounts in the course of their routine business, while not imposing undue burdens on 67 See VerDate Sep<11>2014 69 Id. 61 See ICI. 53 See Janney. 54 See FSI. 55 Id. 56 See PIRC. 57 Id. 70 Id. GSU. 62 See Investor Advocate. 63 See FINRA Response Letter. 64 Id. 65 See SIFMA. 66 See FSR. 18:11 Feb 08, 2017 Jkt 241001 FINRA Response Letter. 68 Id. 60 Id. 52 See 59 Id. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 71 See 72 See IRI. FINRA Response Letter. 73 Id. 74 See 75 See E:\FR\FM\09FEN1.SGM PIRC. FINRA Response Letter. 09FEN1 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices members to contact accountholders more frequently.76 With respect to any account subject to the requirements of Exchange Act Rule 17a–3(a)(17) to periodically update customer records, proposed Supplementary Material .06(c) to Rule 4512 would require a member to 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 Rule 17a–3(a)(17).77 One commenter requested clarification on how the update requirement would apply to automated compliance processes or tech platforms that permit a client to voluntarily change information at their convenience.78 In response, FINRA states that the requirements of Rule 17a– 3(a)(17) apply to a wide range of account information and would not be unique to trusted contact person information.79 For any account subject to Rule 17a–3(a)(17), FINRA believes that any automated compliance process or tech platform would need to comply with the requirements of Rule 17a– 3(a)(17).80 Another commenter requested confirmation that the obligation to obtain trusted contact person information for existing accounts in the course of the member’s routine and customary business would be satisfied where the member updated the account within the 36-month period in accordance with the requirements of Rule 17a–3(a)(17)(i)(D).81 In response, FINRA states that, consistent with the requirements of Rule 4512(b) discussed above, the requirement to update the account information may be triggered earlier than the 36-month period if 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.82 2. Safe Harbor As set forth in the Proposal, Supplementary Material .01 to Rule 2165 states that members will be provided a safe harbor from FINRA Rules 2010, 2150 and 11870 when sradovich on DSK3GMQ082PROD with NOTICES 76 Id. 77 The Commission notes that, while FINRA Rule 4512 would impose on accounts subject to the requirements of Rule 17a–3(a)(17) a requirement to update trusted contact information, Rule 17a– 3(a)(17) by its terms imposes no independent requirement to do so, and Rule 4512 has no effect on a member’s obligations under Rule 17a–3(a)(17). 78 See SIFMA. 79 See FINRA Response Letter. 80 Id. 81 See FSR. 82 See FINRA Response Letter. VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 members exercise discretion to place temporary holds on disbursements of funds or securities from the accounts of specified adults under the circumstances denoted in the Rule. 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.83 In response, FINRA states its belief 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.84 Accordingly, FINRA declined to make the suggested change.85 One commenter requested that the safe harbor language be moved into the body of the rule text and the protection be extended to registered representatives of the member.86 In its Response Letter, FINRA states that, because Supplementary Material is part of the rule, it would not move the language as requested.87 Two commenters requested that the Supplementary Material be revised to explicitly state that the safe harbor applies to associated persons.88 In response, and as discussed in Partial Amendment No. 1, FINRA is proposing to incorporate associated persons into the rule text, which is consistent with FINRA’s original interpretation of the scope of the safe harbor.89 FINRA states that, as amended, proposed Supplementary Material .01 to Rule 2165 would explicitly provide that members and their associated persons have 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 the accounts of specified adults consistent with the requirements of Rule 2165.90 Another commenter suggested that the inclusion of Rules 2010 and 2150 in Supplementary Material .01 would create protections far beyond the scope of what is necessary to encourage members to act on financial exploitation.91 In response, FINRA states its belief that it is appropriate to include Rules 2010 and 2150 in Supplementary Material .01, as the rules 83 See 84 See GSU, PIABA, and PIRC. FINRA Response Letter. 85 Id. 86 See NAIFA. FINRA Response Letter. 88 See FSR and Wells Fargo. 89 See FINRA Response Letter. 90 Id. 91 See GSU. 87 See PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 10065 may be implicated by a member’s exercise of discretion to place a temporary hold on a disbursement.92 This same commenter also suggested that when a member exercises discretion and chooses not to place a hold, then the member should not be granted a safe harbor from duties that they would otherwise have under FINRA rules.93 In response, and as noted above, FINRA states that the proposed safe harbor does not apply to a decision not to place a hold; rather, proposed Rule 2165 explicitly states that it provides members with a safe harbor under FINRA rules when members exercise discretion in placing a temporary hold on disbursements of funds or securities.94 Another commenter requested revising Rule 2165 to clarify that a member’s failure to place a hold on a customer account shall not be deemed to be an abrogation of the member’s duties under FINRA rules.95 In its Response Letter, FINRA asserts that Supplementary Material .01 clearly states that proposed Rule 2165 contains a safe harbor, and that the Rule does not require placing a hold on a disbursement.96 Three commenters suggested that any associated person acting in good faith should not be subject to complaints reportable on Form U4 (Uniform Application for Securities Industry Registration or Transfer), and that the safe harbor should be extended to include FINRA Rule 4530 (Reporting Requirements).97 In its Response Letter, FINRA states that the proposed safe harbor from FINRA rules would not extend to complaints about an associated person that are reportable on Form U4.98 However, FINRA notes that an associated person may respond to any such complaints on Form U4, including with an explanation of actions taken pursuant to proposed Rule 2165.99 FINRA further states that the proposed safe harbor from FINRA rules would also not extend to reporting required pursuant to Rule 4530, 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.100 Lastly, a commenter stated that members may be subject to FINRA 92 See FINRA Response Letter. GSU. 94 See FINRA Response Letter. 95 See ICI. 96 See FINRA Response Letter. 97 See BDA, Janney, and SIFMA. 98 See FINRA Response Letter. 99 Id. 100 Id. 93 See E:\FR\FM\09FEN1.SGM 09FEN1 10066 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices sanctions (outside of Rules 2010, 2150 and 11870 violations) and private claims, and requested that FINRA extend the safe harbor to cover FINRA sanctions and private claims for members’ reasonable determinations regarding whether or not to place a temporary hold on a disbursement.101 Another commenter suggested that the safe harbor be extended to cover protection against liability for actions taken in connection with notifying the appropriate state authorities of financial exploitation.102 In response, FINRA states that proposed Rule 2165 is designed to provide regulatory relief to members by providing a safe harbor from FINRA rules for a determination to place a temporary hold.103 Nevertheless, some states may separately provide immunity to members under state law.104 3. Transactions Six commenters supported extending the scope of proposed Rule 2165 to apply to transactions.105 In its Response Letter, FINRA states that, although proposed Rule 2165 does not apply to transactions, FINRA may consider extending the safe harbor to transactions in securities in future rulemaking.106 4. Diminished Capacity Two commenters suggested extending the safe harbor beyond financial exploitation to address a customer’s diminished capacity.107 In its Response letter, FINRA recognizes the challenges members face in addressing diminished capacity and that this is an important issue for further consideration, and that it can make seniors especially vulnerable to financial exploitation.108 FINRA states that a member could contact a trusted contact person if it suspects that the customer may be suffering from Alzheimer’s disease, dementia or other forms of diminished capacity.109 FINRA further believes that a person with diminished capacity would generally qualify as a ‘‘specified adult’’ as defined by proposed Rule 2165(a)(1)(B).110 5. Specified Adults Proposed Rule 2165 would define ‘‘specified adult’’ as: (A) A natural 101 See CAI. NAIFA. 103 See FINRA Response Letter. 104 Id. 105 See FSI, IRI, Janney, Reuters, SIFMA and Wells Fargo. 106 See FINRA Response Letter. 107 See Lincoln and SIFMA. 108 See FINRA Response Letter. 109 Id. 110 Id. sradovich on DSK3GMQ082PROD with NOTICES 102 See VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 person age 65 and older; 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. With respect to persons younger than age 65, two commenters suggested revising the definition to cover other vulnerable persons (e.g., persons who would be deemed vulnerable under state statute).111 In response, FINRA states its belief that the suggested change would present operational challenges for members, as the customers covered by the definition would vary by jurisdiction.112 Furthermore, FINRA recognizes that customers who do not have a physical or mental impairment may also be vulnerable; however, proposed Rule 2165 is intended to cover those customers most susceptible to financial exploitation.113 As such, FINRA declined to make the suggested change at this time.114 Another commenter suggested revising proposed Supplementary Material .03 to Rule 2165 to provide that belief of impairment shall not create an assumption or implication that a member or its associated persons are qualified to make, or responsible for making, determinations about impairment.115 As stated in its Response Letter, FINRA declined to revise the rule text as suggested because 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.116 FINRA states that the ‘‘reasonable belief’’ standard required by proposed Rule 2165 for a member to place a temporary hold imposes no such requirement.117 6. Account As noted above, proposed Rule 2165 would define ‘‘account’’ to mean any account of a member for which a specified adult has the authority to transact business. One commenter suggested that the definition of ‘‘account’’ may be overly broad, and suggested clarifying that transactions in securities, such as variable insurance products, sold by a broker-dealer, but not custodied in a brokerage account, are not subject to proposed Rule 2165.118 In response, FINRA states that proposed Rule 2165 applies to disbursements of funds or securities out of a customer account, and does not apply to transactions in securities.119 7. Disbursements Two commenters expressed concern that a temporary hold pursuant to proposed Rule 2165 may not comply with the requirements of Section 22(e) of the Investment Company Act of 1940 (‘‘1940 Act’’).120 FINRA states in response that most mutual fund customer accounts are serviced and record-kept by intermediaries.121 According to FINRA, in the small proportion of circumstances where mutual fund customers purchase shares directly from the mutual fund, the customer’s account may be maintained by a mutual fund’s principal underwriter.122 Based on discussions with SEC staff, FINRA does not believe that a broker-dealer’s delay of a disbursement of mutual fund redemption proceeds to its customers in reliance on proposed Rule 2165 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.123 However, this conclusion is limited to situations where the mutual fund does not have a role in the disbursement of redemption proceeds from the customer’s account held by the broker-dealer, including any role in the decision to delay the disbursement of funds in reliance on proposed Rule 2165.124 Another commenter requested clarification on how ACATS transfers would be treated under proposed Rule 2165.125 For purposes of proposed Rule 2165, FINRA responds that it 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.126 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 118 See ACLI. FINRA Response Letter. 120 See CAI and Lincoln. 121 See FINRA Response Letter. 122 Id. 123 Id. 124 Id. 125 See SIFMA. 126 See FINRA Response Letter. 119 See 111 See 112 See NASAA and PIRC. FINRA Response Letter. 113 Id. 114 Id. 115 See 116 See NAIFA. FINRA Response Letter. 117 Id. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 E:\FR\FM\09FEN1.SGM 09FEN1 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices an account, for the same reasons.127 However, according to FINRA, 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.128 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.129 Another commenter requested clarification on where funds from a disbursement subject to a temporary hold should be maintained by a member.130 FINRA responds that, 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.131 sradovich on DSK3GMQ082PROD with NOTICES 8. Persons Permitted To Place Temporary Holds Proposed Rule 2165 would provide that a 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. One commenter suggested expanding the categories of persons authorized to place holds on behalf of a member to include persons who have been designated by the member to review cases involving specified adults as part of the member’s escalation process.132 In its Response Letter, FINRA states that, 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 difficult but necessary conversations with customers that could impact the member-customer relationship.133 FINRA believes that the current form of proposed Rule 2165 promotes administrative clarity, that it is reasonable to limit authority for placing holds on disbursements to a select group of individuals associated with the member, that persons serving in a supervisory, compliance or legal capacity are well positioned to make these determinations on behalf of the member, and that such a limitation is not a substantial burden to members that wish to rely on the rule’s safe harbor provision.134 Accordingly, FINRA declined to make the suggested revision.135 9. Period of Temporary Hold As set forth in the Proposal, the temporary hold authorized by proposed Rule 2165 would expire not later than 15 business days for any initial period and up to 10 business days in any subsequent period 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. Two commenters suggested that the time periods may not be adequate to give state regulators and agencies or courts time to take action on a matter.136 Another commenter suggested that regulatory approval be required prior to extending a temporary hold beyond the initial 15 business day period.137 FINRA responds that, in proposing the time periods, it has tried to strike a reasonable balance in giving members adequate time to investigate and contact the relevant parties, seeking input from a state regulator or 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.138 Another commenter stated that the rule text, as set forth in the Proposal, could be read to require the termination or extension of the temporary hold by the state regulator or agency of competent jurisdiction or a court of competent jurisdiction prior to the initial hold being extended for an additional 10 business day period.139 In response, FINRA states that it did not intend to impose any such limitation.140 As discussed in the Partial Amendment No. 1, FINRA states that it is proposing to revise Rule 2165(b)(2) and (3) to provide that a member may place a temporary hold for up to 25 business days when the Rule’s requirements are met, unless the temporary hold is ‘‘otherwise’’ terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.141 According to FINRA, this proposed change is intended to recognize that a state regulator or agency or a court may terminate or extend a hold on a disbursement at any time during the time period provided by proposed Rule 2165(b)(2) and (3).142 One commenter suggested that Rule 2165 should explicitly provide that a member must terminate a temporary hold as soon as the member’s internal review of the facts and circumstances that were the basis for the hold does not support a reasonable belief that financial exploitation is occurring or is attempted.143 In response, FINRA states that it declines to revise the rule text as suggested, but that it would expect a member to lift a temporary hold when it no longer has a reasonable belief of financial exploitation (e.g., when subsequent events indicate that the threat of financial exploitation no longer exists).144 10. Notifying All Parties Authorized To Transact Business Under proposed Rule 2165(b)(1)(B)(i), a member is required to notify all parties authorized to transact business on an account of the temporary hold and the reason for the temporary hold when the member places a temporary hold on a disbursement. Two commenters expressed concern that the rule text does not contemplate a party being unavailable, and that notifying all parties could lead to increased risk for the customer where a party is the suspected perpetrator of the financial exploitation.145 The commenters suggested providing an exception from the notification requirement where a party is unavailable or where the member reasonably suspects that a party has engaged, is engaged, or will engage in the financial exploitation of the Specified Adult.146 In response, FINRA states its belief that, although a member will need to exercise discretion in forming a reasonable belief that a party authorized to transact business on an account is engaged in the financial exploitation, FINRA also believes it is appropriate to provide an exception from contacting a party authorized to transact business on an account that is comparable to the exception provided for notifying a customer’s trusted contact person.147 As stated in Partial Amendment No. 1, FINRA is proposing 127 Id. 134 Id. 141 Id. 128 Id. 135 Id. 142 Id. 129 Id. 136 See 143 See IRI and PIRC. 137 See NASAA. 138 See FINRA Response Letter. 139 See SIFMA. 140 See FINRA Response Letter. 130 See ACLI. 131 See FINRA Response Letter. 132 See SIFMA. 133 See FINRA Response Letter. VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 10067 ICI. FINRA Response Letter. 145 See LPL and SIFMA. 146 Id. 147 See FINRA Response Letter. 144 See E:\FR\FM\09FEN1.SGM 09FEN1 10068 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices to amend Rule 2165(b)(1)(B)(i) to provide that a member is required to notify all parties authorized to transact business on an account, unless a party is unavailable or the member reasonably believes that the party has engaged, is engaged, or will engage in the financial exploitation of the Specified Adult.148 Another commenter suggested that requiring notification of all parties authorized to transact business on an account could inadvertently interfere with the ability to use the safe harbor in Rule 2165 if a member has trouble locating one or more authorized parties.149 In its Response Letter, FINRA states it does not believe that the notification requirement should impact a member’s decision to place a hold as it is a post-hold obligation.150 sradovich on DSK3GMQ082PROD with NOTICES 11. Notifying Immediate Family Member Due to the privacy and operational challenges noted by commenters in response to the proposal in Regulatory Notice 15–37, the Proposal did not require notifying an immediate family member when a temporary hold is placed. Three commenters supported removing the requirement to contact an immediate family member.151 One commenter agreed that requiring a member to contact an immediate family member may be overly restrictive and result in privacy issues, but suggested that the safe harbor be expanded to cover instances in which a member uses its discretion to contact a person reasonably believed to be connected with the account owner when the trusted contact person is unavailable.152 In its Response Letter, FINRA states that expanding proposed Rule 2165 to authorize members to contact any person reasonably believed to be connected with an account owner may create the same privacy and operational challenges raised by commenters to Regulatory Notice 15–37.153 However, FINRA states that proposed Rule 2165 would not preclude a member from contacting an immediate family member or any other person provided that the member has customer consent to do so.154 12. Notification Period Proposed Rule 2165 would require the member to provide notification of the temporary hold and the reason for the hold to all parties authorized to transact 148 Id. 149 See IRI. FINRA Response Letter. 151 See GSU, IRI and NASAA. 152 See Wells Fargo. 153 See FINRA Response Letter. 154 Id. 150 See VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 business on the account and the trusted contact person, if available, no later than two business days after placing the hold. Three commenters suggested extending the time period for notification beyond two business days.155 FINRA declined to extend the time period for notification beyond two business days, given its belief in the need for urgency in dealing with financial exploitation and to remain consistent with the NASAA model state act.156 13. Privacy Considerations Three commenters requested clarification on what information may be shared pursuant to the Proposal without violating Regulation S–P.157 In response, FINRA states that disclosures to a trusted contact person pursuant to proposed Rules 2165 and 4512(a)(1)(F) would be consistent with Regulation S–P, because such disclosures would be made with customers’ consent or authorization,158 to protect against fraud or unauthorized transactions, or to comply with federal, state, or local laws, rules and other applicable legal requirements, including the requirements of Rule 2165.159 14. 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. One commenter suggested requiring all members to establish and maintain written supervisory procedures reasonably designed to achieve compliance with the Rule.160 In its Response Letter, FINRA states that, because placing a temporary hold is discretionary, not mandatory, FINRA declines to make the suggested change.161 155 See CAI, IRI and SIFMA. FINRA Response Letter. 157 See BDA, CAI and FSR. 158 FINRA notes that, under the Proposal, members would be required to disclose to customers the purposes for obtaining the trusted contact information, including the possible disclosure of account information to a trusted contact in specified circumstances, and customers would authorize or consent to such disclosure by voluntarily providing the trusted contact information. See FINRA Response Letter. 159 See FINRA Response Letter. The Commission staff confirmed the accuracy of this interpretation during discussions with FINRA. 160 See PIRC. 161 See FINRA Response Letter. 156 See PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 Another commenter recommended requiring the written supervisory procedures to include provisions designed to ensure that the member lifts a temporary hold as soon as practicable after the member conducts an internal review and finds that the hold is not warranted.162 As noted above, FINRA expects that a member would lift a temporary hold when it no longer has a reasonable belief of financial exploitation.163 This same commenter also suggested that it is unclear whether the member can freeze all owners’ access to the account, and recommended that FINRA require a member’s written supervisory procedures to include provisions regarding the impact of a temporary hold on those joint account owners who are not believed to be the subject of financial exploitation.164 In response, FINRA states that 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).165 Accordingly, FINRA declined to make the suggested change.166 15. Training The Proposal would require members to develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of Rule 2165. One commenter supported applying the training requirement to associated persons, but suggested that FINRA should oversee training, including incorporating into its FINRA Rule 1250 (Continuing Education Requirements) training a module on the requirements of the Proposal and recognizing financial exploitation of vulnerable adults.167 In its Response Letter, FINRA states that the Proposal provides members with reasonable discretion in determining how best to structure their training policies or programs.168 FINRA states that, while it has developed material for the Continuing Education Regulatory Element Program that addresses the financial exploitation of senior investors, members are responsible for developing and documenting their training policies and programs.169 FINRA states that it will consider whether to develop additional 162 See ICI. FINRA Response Letter. 164 See ICI. 165 See FINRA Response Letter. 166 Id. 167 See GSU. 168 See FINRA Response Letter. 169 Id. 163 See E:\FR\FM\09FEN1.SGM 09FEN1 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices in resolving matters involving possible financial abuse.178 continuing education content specifically addressing financial exploitation of seniors and providing additional guidance to members, as appropriate.170 17. Implementation Period 16. Reporting sradovich on DSK3GMQ082PROD with NOTICES One commenter supported not requiring as part of proposed Rule 2165 that members report financial exploitation to local adult protective services and law enforcement, asserting that such a permissive approach would allow firms and advisors to undertake a reasonable inquiry and to decide whether or not to freeze an account without considering their own potential liability.171 In contrast, several other commenters recommended revising proposed Rule 2165 to require members to report financial exploitation to state and local authorities, such as adult protective services and law enforcement, or FINRA.172 One such commenter also supported requiring members to provide any account information requested by state and local authorities to conduct their investigations.173 Another suggested clarifying in Supplementary Material to Rule 2165 how members should coordinate with a state regulator or agency to confirm or validate suspicions regarding financial exploitation.174 In its Response Letter, FINRA states that, while proposed Rule 2165 does not require members to report a reasonable belief of financial exploitation to a state or local authority, some states mandate such reporting by financial institutions, including broker-dealers.175 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.176 FINRA states that it would expect members to comply with all applicable state requirements, including reporting requirements, and FINRA staff may request records related to state reporting as part of the examination process.177 Even where a state may not require such reporting, FINRA believes that members may find it beneficial to contact relevant state agencies, such as state securities regulators or state or local adult protective services, to assist If the Commission approves the Proposal, some commenters requested that members have from 12 to 18 months to implement the requirements.179 As a general matter, these commenters noted that additional time is needed to make all of the necessary adjustments to their internal systems, including updates needed to incorporate the trusted contact personrelated requirements. As discussed in the Partial Amendment No. 1, FINRA states it has determined to extend the implementation period before effectiveness from ‘‘no later than 180 days following Commission approval’’ to 12 months from Commission approval.180 FINRA intends this extended period of implementation to provide members more time to commit the necessary resources to implement the Proposal.181 FINRA believes this change is an appropriate balance of the commenters’ concerns and the strong desire to provide tools to members to address possible financial exploitation under the Proposal as soon as practicable.182 C. Opposition to Proposed Rule 2165 One commenter supported the proposed amendments to Rule 4512 regarding a trusted contact person, but opposed the proposed adoption of Rule 2165 that would permit temporary holds on disbursements where there is a reasonable belief of financial exploitation.183 This commenter asserted, among other things, that the ‘‘reasonable belief’’ standard for placing the temporary hold was ‘‘too low relative to the potential harm to a customer from not being able to withdraw funds or securities,’’ and that, absent a clearer standard, ‘‘Rule 2165 creates an incentive to place a hold on an account as the default response to concerns about a specified adult.’’ 184 In its Response Letter, FINRA states that it believes the Proposal 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 170 Id. 171 See 172 See FSI. Investor Advocate, NAIFA, NASAA and PIABA. 173 See Investor Advocate. 174 See FSR. 175 See FINRA Response Letter. 176 Id. 177 Id. VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 178 Id. 179 See BDA, Edward Jones, FSR, LPL, Reuters, SIFMA and Wells Fargo. 180 See FINRA Response Letter. 181 Id. 182 Id. 183 See Cornell. 184 Id. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 10069 trusted contact person.185 Furthermore, FINRA believes that the Proposal 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.186 IV. Solicitation of Comments on Partial Amendment No. 1 Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as amended by Partial Amendment No. 1, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://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 (https://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 10:00 a.m. and 3:00 p.m. Copies of the 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 185 See FINRA Response Letter. 186 Id. E:\FR\FM\09FEN1.SGM 09FEN1 10070 Federal Register / Vol. 82, No. 26 / Thursday, February 9, 2017 / Notices 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 March 2, 2017. sradovich on DSK3GMQ082PROD with NOTICES V. Discussion and Commission Findings The Commission has carefully considered the Proposal, the comments received, FINRA’s response to the comments, and Partial Amendment No. 1. Based on its review of the record, the Commission finds that the Proposal, as modified by Partial Amendment No. 1, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities association.187 In particular, the Commission finds that the Proposal, as modified by Partial Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange Act,188 which requires, among other things, that FINRA’s rules 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. As discussed above, the Proposal, as modified by Partial Amendment No. 1, would: (1) 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) permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers, where there is a reasonable belief that these customers have been, are being, or will be subject to financial exploitation. The Commission has considered the twenty-one (21) comment letters received on the Proposal,189 along with FINRA’s Response Letter, and Partial Amendment No. 1.190 The Commission acknowledges the supportive commenters’ positions, such that adoption of the Proposal would better enable FINRA members ‘‘to protect seniors and other vulnerable adults from financial exploitation,’’ 191 that the Proposal was ‘‘well-conceived to help member firms protect seniors,’’ 192 and that it would provide additional guidance to members, create uniform practices, and make customers more 187 In approving the Proposal, as modified by Partial Amendment No. 1, the Commission has also considered its impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 188 15 U.S.C. 78o–3(b)(6). 189 See supra note 5. 190 See supra note 7. 191 See ICI. 192 See Janney. VerDate Sep<11>2014 18:11 Feb 08, 2017 Jkt 241001 willing to provide trusted contact information.193 The Commission also acknowledges commenters’ concerns and recommended modifications to the Proposal. However, it also notes that FINRA’s response to comments addresses many of these concerns, and offers additional clarifications regarding FINRA’s expectations regarding the operation of the Proposal. For example, FINRA clarified that the notification requirement is a post-hold obligation, and that the proposed safe harbor does not apply to a decision not to place a hold. FINRA also addresses a concern of several commenters through its proposed partial amendment, which makes explicit in the rule text that associated persons are covered by the rule’s safe harbor, a position FINRA indicated is consistent with its original interpretation of the scope of the safe harbor. Throughout its response to comments, FINRA has emphasized its attempts to balance members’ operational practicalities with the serious investor protection concerns raised both by the specter of financial exploitation and the seriousness of placing a temporary hold on a disbursement. Moreover, FINRA has addressed commenters’ questions about the intersection of the Proposal with both Section 22(e) of the 1940 Act, and with Regulation S–P, based on its discussions with Commission staff. Taking into consideration the comments and FINRA’s responses, the Commission finds that the Proposal is consistent with the Exchange Act. Specifically, the Commission believes that the Proposal will protect investors and the public interest by, among other things, providing FINRA members with means by which they can respond to situations where there is a reasonable belief of financial exploitation of seniors and other vulnerable adults. The Commission additionally believes that the Proposal will promote investor protection by providing FINRA members with a safe harbor from the purported violation of certain FINRA rules, without which such members might otherwise be discouraged from placing a temporary hold on disbursements of funds or securities where there is a reasonable belief of financial exploitation. The Commission believes that FINRA’s responses, as discussed in more detail above, appropriately addressed commenters’ concerns and adequately explained FINRA’s reasons for modifying or declining to modify its Proposal. Accordingly, the Commission 193 See PO 00000 FSI. Frm 00088 Fmt 4703 Sfmt 4703 believes that the approach proposed by FINRA is appropriate and designed to protect investors and the public interest, consistent with Section 15A(b)(6) of the Exchange Act and the rules and regulations thereunder. VI. Conclusion It is therefore ordered pursuant to Section 19(b)(2) 194 of the Exchange Act that the proposed rule change (SR– FINRA–2016–039), as modified by Partial Amendment No. 1, be and hereby is approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.195 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–02645 Filed 2–8–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79957; File No. SR– BatsEDGX–2017–07] Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt a New Type of Logical Port Known as a Purge Port February 3, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 23, 2017, Bats EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6)(iii) thereunder,4 which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 194 Id. 195 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6)(iii). 1 15 E:\FR\FM\09FEN1.SGM 09FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 26 (Thursday, February 9, 2017)]
[Notices]
[Pages 10059-10070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02645]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79964; File No. SR-FINRA-2016-039]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of the Proposed Rule Change To Amend Rule 
4512 (Customer Account Information) and Adopt FINRA Rule 2165 
(Financial Exploitation of Specified Adults), as Modified by Partial 
Amendment No. 1

February 3, 2017.

I. Introduction

    On October 19, 2016, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``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 4512 
(Customer Account Information) and adopt new FINRA Rule 2165 (Financial 
Exploitation of Specified Adults). The proposed rule change would: (1)

[[Page 10060]]

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) permit members to place temporary holds on 
disbursements of funds or securities from the accounts of specified 
customers, where there is a reasonable belief that these customers have 
been, are being, or will be subject to financial exploitation).\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 7, 2016.\4\ The public comment period closed on 
November 28, 2016. The Commission received twenty-one (21) comment 
letters on the Proposal.\5\ On December 7, 2016, FINRA extended the 
time period in which the Commission must approve the Proposal, 
disapprove the Proposal, or institute proceedings to determine whether 
to approve or disapprove the Proposal to February 3, 2017.\6\ On 
January 19, 2017, FINRA filed a response to the comment letters,\7\ 
along with Partial Amendment No. 1 to the Proposal.
---------------------------------------------------------------------------

    \4\ See 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), Exchange Act Release 
No. 34-79215; File No. SR-FINRA-2016-039 (Nov. 1, 2016); 81 FR 78238 
(Nov. 7, 2016) (``Proposal'').
    \5\ See Tamra K. Solmon, Associate General Counsel, Investment 
Company Institute (``ICI'') (Nov. 28, 2016); Gary Sanders, Counsel 
and Vice President, Government Relations, National Association of 
Insurance and Financial Advisors (``NAIFA'') (Nov. 28, 2016); 
Catherine J. Weatherford, President & CEO, Insured Retirement 
Institute (``IRI'') (Nov. 28 2016); Eric Arnold and Clifford Kirsch, 
Sutherland, Asbill & Brennan LLP, on behalf of the Committee of 
Annuity Insurers (``CAI'') (Nov. 28, 2016); Robert J. McCarthy, 
Director of Regulatory Policy, Wells Fargo Advisors (``Wells 
Fargo'') (Nov. 28, 2016); W. Alan Smith, Deputy General Counsel, 
Janney Montgomery Scott LLC, Philadelphia, PA (``Janney'') (Nov. 28, 
2016); William A. Jacobson, Clinical Professor of Law, Cornell Law 
School and Director, Cornell Securities Law Clinic, and Alexander K. 
Brehan, 2017 J.D. Candidate, Cornell Law School (``Cornell'') (Nov. 
28, 2016); Nicole G. Iannarone, Director, Investor Advocacy Clinic, 
Assistant Clinical Professor, and David Hsu, Student Intern, Georgia 
State University College of Law (``GSU'') (Nov. 28, 2016); Carrie L. 
Chelko, Esq., Chief Counsel, Lincoln Financial Network (``Lincoln'') 
(Nov. 28, 2016); David T. Bellaire, Esq., Executive Vice President 
and General Counsel, Financial Services Institute (``FSI'') (Nov. 
28, 2016); Marnie C. Lambert, President, Public Investors 
Arbitration Bar Association, Norman, OK (``PIABA'') (Nov. 28, 2016); 
Lisa J. Bleier, Managing Director and Associate General Counsel, 
SIFMA, Washington, DC (Nov. 28, 2016); Atasia Richardson and Alyse 
Velger, Student Interns, and Elissa Germaine, Supervising Attorney, 
Pace Investor Rights Clinic, Elisabeth Haub School of Law, Pace 
University, White Plains, NY (``PIRC'') (Nov. 28, 2016); Mike 
Rothman, President, NASAA, and Minnesota Commissioner of Commerce 
(``NASAA'') (Nov. 28, 2016); Richard Foster, Financial Services 
Roundtable, Washington, DC (``FSR'') (Nov. 28, 2016); David P. 
Bergers, General Counsel, LPL Financial LLC (``LPL'') (Nov. 28, 
2016); Jigar Gandhi, Counsel, American Counsel of Life Insurers 
(``ACLI'') (Nov. 28, 2016); Michael Nicholas, Chief Executive 
Officer, Bond Dealers of America (``BDA'') (Nov. 28, 2016); Jesse 
Hill, Principal, Government and Regulatory Relations, Edward Jones 
(``Edward Jones'') (Nov. 28, 2016); Manisha Kimmel, Chief Regulatory 
Officer, Wealth Management, Thomson Reuters (``Thomson Reuters'') 
(Dec. 5, 2016); and Rick Fleming, Investor Advocate, U.S. Securities 
and Exchange Commission, Office of the Investor Advocate (``Investor 
Advocate'') (Dec. 28, 2016). The comment letters are available on 
FINRA's Web site at https://www.finra.org, at the principal office of 
FINRA, at the Commission's Web site at https://www.sec.gov/comments/sr-finra-2016-039/finra2016039.shtml, and at the Commission's Public 
Reference Room.
    \6\ See Letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Katherine England, Assistant Director, Division of Trading 
and Markets, Securities and Exchange Commission, dated December 7, 
2016.
    \7\ See Letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Brent J. Fields, Secretary, Securities and Exchange the 
Commission, dated January 19, 2017 (``FINRA Response Letter''). The 
FINRA Response Letter and the text of Partial Amendment No. 1 are 
available on FINRA's Web site at https://www.finra.org, at the 
principal office of FINRA, at the Commission's Web site at https://www.sec.gov/comments/sr-finra-2016-039/finra2016039.shtml, and at 
the Commission's Public Reference Room.
---------------------------------------------------------------------------

    This order provides notice of the filing of Partial Amendment No. 1 
and approves the Proposal, as modified by Partial Amendment No. 1, on 
an accelerated basis.

II. Description of the Proposal \8\
---------------------------------------------------------------------------

    \8\ The subsequent description of the Proposal is substantially 
excerpted from FINRA's description in the Proposal. See Proposal, 81 
FR at 78238-78257.
---------------------------------------------------------------------------

A. Background

    With the aging of the U.S. population, financial exploitation of 
seniors and other vulnerable adults is a serious and growing 
problem.\9\ 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.\10\ A 
number of reports and studies also have explored various aspects of 
this important topic.\11\ Moreover, studies indicate that financial 
exploitation is the most common form of elder abuse.\12\ 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.\13\ 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.\14\ 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.
---------------------------------------------------------------------------

    \9\ 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'').
    \10\ 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''); FINRA Securities 
Helpline for Seniors Marks First Year, with $1.3 Million Returned to 
Investors (April 20, 2016) (stating that, ``To date, the helpline 
has fielded more than 4,200 calls, recovering over $1.3 million in 
voluntary reimbursements from firms since its launch in April 
2015'').
    \11\ 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.
    \12\ 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'').
    \13\ See Seniors Helpline Report.
    \14\ See Seniors Helpline Report.
---------------------------------------------------------------------------

    To address these issues, the Proposal 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)

[[Page 10061]]

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 
Proposal and that customers' ordinary disbursements are not disrupted.
    According to FINRA, 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.\15\ 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 Proposal would aid in the creation of a 
uniform national standard for the benefit of members and their 
customers.
---------------------------------------------------------------------------

    \15\ 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).
---------------------------------------------------------------------------

B. Terms of the Proposal

1. Trusted Contact Person
    The Proposal 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.\16\ It would also require that the trusted contact 
person be age 18 or older.\17\ While the Proposal did not specify what 
contact information should be obtained for a trusted contact person, 
FINRA noted that a mailing address, telephone number and email address 
for the trusted contact person may be the most useful information for 
members.
---------------------------------------------------------------------------

    \16\ See proposed Rule 4512(a)(1)(F).
    \17\ See proposed Rule 4512(a)(1)(F).
---------------------------------------------------------------------------

    The Proposal would 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.\18\ FINRA stated 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 Proposal's requirements.
---------------------------------------------------------------------------

    \18\ See proposed Supplementary Material .06(b) to Rule 4512.
---------------------------------------------------------------------------

    The Proposal would not require a member 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 Proposal 
(``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.\19\ With respect to any account subject to the 
requirements of Exchange Act Rule 17a-3(a)(17) to periodically update 
customer records, the Proposal would require a member to make 
reasonable efforts to obtain or, if previously obtained, to update 
where appropriate, the name and contact information for a trusted 
contact person in the manner and timeframes required under Exchange Act 
Rule 17a-3(a)(17).\20\ With regard to updating the contact information 
once provided for other accounts that are not subject to the 
requirements in Exchange Act Rule 17a-3, FINRA stated that 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.\21\
---------------------------------------------------------------------------

    \19\ See Rule 4512(b).
    \20\ 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.
    \21\ 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.
---------------------------------------------------------------------------

    The Proposal would also require, at the time of account opening, a 
member to 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 would be required to 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.\22\
---------------------------------------------------------------------------

    \22\ 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.
---------------------------------------------------------------------------

    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.\23\
---------------------------------------------------------------------------

    \23\ See proposed Rule 2165(b)(1)(B)(ii).
---------------------------------------------------------------------------

    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

[[Page 10062]]

Proposal would not require such notification.
2. Temporary Hold on Disbursement of Funds or Securities
    The Proposal 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.\24\ The Proposal would create 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.'' \25\ The proposed 
safe harbor would not apply to a decision not to place a hold; rather, 
as stated in the proposed rule, members would be provided with a safe 
harbor from certain FINRA rules when exercising their discretion to 
place a temporary hold. 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.\26\
---------------------------------------------------------------------------

    \24\ 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.
    \25\ See proposed Supplementary Material .01 to Rule 2165. As 
discussed further below, Partial Amendment No. 1 clarifies the scope 
of Supplementary Material .01 to Rule 2165 by adding the words 
``associated persons'' to the Proposal's safe harbor, and by 
providing that the safe harbor is available when members exercise 
discretion in placing a temporary hold ``consistent with the 
requirements of this Rule.
    \26\ 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.
---------------------------------------------------------------------------

    FINRA believes that ``specified adults'' may be particularly 
susceptible to financial exploitation.\27\ Proposed Rule 2165 would 
define ``specified adult'' as: (A) A natural person age 65 and older; 
\28\ 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.\29\ 
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.\30\ The Proposal would define the term ``account'' to mean any 
account of a member for which a specified adult has the authority to 
transact business.\31\
---------------------------------------------------------------------------

    \27\ 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).
    \28\ 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'').
    \29\ See proposed Rule 2165(a)(1).
    \30\ 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).
    \31\ See proposed Rule 2165(a)(2).
---------------------------------------------------------------------------

    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.\32\
---------------------------------------------------------------------------

    \32\ See proposed Rule 2165(a)(4).
---------------------------------------------------------------------------

    The Proposal 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.\33\ A temporary hold pursuant to proposed Rule 2165 
may be placed on a particular suspicious disbursement(s) but not on 
other, non-suspicious disbursements.\34\ The Proposal would not apply 
to transactions in securities.\35\
---------------------------------------------------------------------------

    \33\ See proposed Rule 2165(b)(1)(A).
    \34\ FINRA recognizes that a single disbursement could involve 
all of the assets in an account.
    \35\ For example, the Proposal 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 Proposal could 
apply to the disbursement of the proceeds where the customer is a 
``specified adult'' and there is reasonable belief of financial 
exploitation.
---------------------------------------------------------------------------

    The Proposal 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 Proposal 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.\36\
---------------------------------------------------------------------------

    \36\ 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.
---------------------------------------------------------------------------

    If a member places a temporary hold, the Proposal 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.\37\ In addition, 
the Proposal 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.\38\ 
While oral or written (including electronic) notification would be 
permitted under the Proposal, a member would be required to retain 
records evidencing the notification.\39\
---------------------------------------------------------------------------

    \37\ See proposed Rule 2165(b)(1)(C).
    \38\ 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.
    \39\ See proposed Rule 2165(d).

---------------------------------------------------------------------------

[[Page 10063]]

    The Proposal would 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 Proposal would 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.\40\ A member may use the temporary hold provision under 
proposed Rule 2165 when a trusted contact person is not available.
---------------------------------------------------------------------------

    \40\ Moreover, as discussed below, Partial Amendment No. 1 
provides an exception from the proposed requirement in Rule 2165 to 
notify not later than two business days after placing a temporary 
hold all parties authorized to transact business on an account if a 
party is unavailable or if the member reasonably believes that the 
party has engaged, is engaged, or will engage in the financial 
exploitation of a Specified Adult.
---------------------------------------------------------------------------

    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.\41\ 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 Proposal 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.\42\
---------------------------------------------------------------------------

    \41\ See proposed Rule 2165(b)(2).
    \42\ See proposed Rule 2165(b)(3). As discussed below, Partial 
Amendment No. 1 clarifies that a member may place a temporary hold 
for up to 25 business days when the Rule's requirements are met, 
unless the temporary hold is ``otherwise'' terminated or extended by 
a state regulator or agency of competent jurisdiction or a court of 
competent jurisdiction.
---------------------------------------------------------------------------

    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 Proposal 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.\43\
---------------------------------------------------------------------------

    \43\ See proposed Rule 2165(d).
---------------------------------------------------------------------------

    The Proposal 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.\44\ The Proposal would require that the 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 the Rule.\45\ The Proposal 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.\46\
---------------------------------------------------------------------------

    \44\ See proposed Rule 2165(c)(1).
    \45\ See proposed Rule 2165(c)(2).
    \46\ See proposed Supplementary Material .02 to Rule 2165.
---------------------------------------------------------------------------

C. Partial Amendment No. 1

    As discussed in FINRA's response to comments, infra, Partial 
Amendment No. 1 makes the following changes to the Proposal: (1) It 
clarifies the scope of Supplementary Material .01 to Rule 2165 by 
adding the words ``associated persons'' to the Proposal's safe harbor, 
and by providing that the safe harbor is available when members 
exercise discretion in placing a temporary hold ``consistent with the 
requirements of this Rule;'' (2) it clarifies that a member may place a 
temporary hold for up to 25 business days when the Rule's requirements 
are met, unless the temporary hold is ``otherwise'' terminated or 
extended by a state regulator or agency of competent jurisdiction or a 
court of competent jurisdiction; (3) it provides an exception from the 
proposed requirement in Rule 2165 to notify not later than two business 
days after placing a temporary hold all parties authorized to transact 
business on an account if a party is unavailable or if the member 
reasonably believes that the party has engaged, is engaged, or will 
engage in the financial exploitation of a Specified Adult; and (4) it 
extends the Proposal's implementation period from ``no later than 180 
days following Commission approval'' to 12 months from Commission 
approval.

III. Summary of Comments and FINRA's Responses

    The Commission received twenty-one (21) comment letters on the 
Proposal,\47\ and a response letter from FINRA.\48\ Twenty (20) 
commenters supported FINRA's efforts to protect seniors and other 
vulnerable adults but offered suggested modifications as to various 
aspects of the Proposal.\49\ The remaining commenter supported the 
proposed amendments to Rule 4512 regarding a trusted contact person, 
but opposed the proposed adoption of Rule 2165 that would permit 
temporary holds on disbursements where there is a reasonable belief of 
financial exploitation.\50\ Commenters' concerns and suggested 
modifications to the Proposal, along with FINRA's corresponding 
responses, are discussed by topic below.
---------------------------------------------------------------------------

    \47\ See supra note 5.
    \48\ See supra note 7.
    \49\ See ACLI, BDA, CAI, Edward Jones, GSU, FSI, FSR, ICI, 
Investor Advocate, IRI, Janney, Lincoln, LPL, NAIFA, NASAA, PIABA, 
PIRC, SIFMA, Thomson Reuters and Wells Fargo.
    \50\ See Cornell.
---------------------------------------------------------------------------

A. Comment Letters in Support of the Proposal

    As noted above, twenty (20) commenters generally supported FINRA's 
Proposal.\51\ For instance, one commenter stated that adoption of 
FINRA's Proposal would better enable its members ``to protect seniors 
and

[[Page 10064]]

other vulnerable adults from financial exploitation,'' and ``to reach 
out to a trusted contact person whenever the member suspects financial 
exploitation of the account holder or when the member has concerns 
about the account holder's ability to continue to handle his or her 
financial affairs.'' \52\ Another commenter stated that the Proposal 
was ``well-conceived to help member firms protect seniors.'' \53\ A 
third commenter asserted that its members had been trying to obtain 
trusted contact person information, and that the Proposal would provide 
additional guidance to members, create uniform practices, and make 
customers more willing to provide the information.\54\ This commenter 
also supported the proposed temporary hold on disbursements, which, it 
argued, would facilitate quick protection for vulnerable adults, while 
promptly resolving concerns that might be unfounded.\55\
---------------------------------------------------------------------------

    \51\ See supra note 46.
    \52\ See ICI.
    \53\ See Janney.
    \54\ See FSI.
    \55\ Id.
---------------------------------------------------------------------------

    However, these twenty (20) commenters suggested modifications to 
the Proposal. These suggested modifications, along with FINRA's 
responses to the commenters, are addressed below.

B. Suggested Modifications to the Proposal

1. Trusted Contact Person
    As noted above, the Proposal 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. One commenter contended that, if a 
customer refuses to provide the trusted contact person information, 
Rule 4512 should require a member to maintain records of its reasonable 
efforts to obtain the trusted contact person information and the 
customer's refusal to provide the information.\56\ The commenter also 
believed that the rule text should set forth the minimum contact 
information that must be obtained (i.e., a name, telephone number, 
mailing address, email and relationship to customer) and that the 
information should be added to FINRA's new account application 
template.\57\
---------------------------------------------------------------------------

    \56\ See PIRC.
    \57\ Id.
---------------------------------------------------------------------------

    In its Response Letter, FINRA acknowledged that Rule 4512 does not 
specify the manner in which members should evidence compliance with the 
rule, or what contact information should be obtained for a trusted 
contact person.\58\ However, according to FINRA, because Rule 3110 
(Supervision) requires members to have supervisory procedures in place 
that are reasonably designed to achieve compliance with FINRA rules, 
members would have the flexibility to reasonably design their 
supervisory systems to achieve compliance with the Proposal's 
requirements.\59\ To aid members in complying with the Proposal's 
requirements, FINRA agreed to update its new account application 
template to reflect the proposed amendments to Rule 4512.\60\
---------------------------------------------------------------------------

    \58\ See FINRA Response Letter.
    \59\ Id.
    \60\ Id.
---------------------------------------------------------------------------

a. Notification of Designation
    One commenter suggested modifying the proposed amendments to Rule 
4512 to require members to notify an individual that he or she was 
named as a trusted contact person.\61\ Another commenter recommended 
that members voluntarily adopt a practice of notifying the trusted 
contact person of his or her designation.\62\
---------------------------------------------------------------------------

    \61\ See GSU.
    \62\ See Investor Advocate.
---------------------------------------------------------------------------

    In response, FINRA states its belief that the ``administrative 
burdens of requiring notification would outweigh the benefits.'' \63\ 
However, FINRA notes that 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).\64\
---------------------------------------------------------------------------

    \63\ See FINRA Response Letter.
    \64\ Id.
---------------------------------------------------------------------------

b. Notification of Temporary Hold
    As discussed above, proposed Rule 2165 would require a member to 
provide notification of a temporary hold and the reason for the hold to 
the trusted contact person, if available, not later than two business 
days after the date that the member first placed the hold. One 
commenter recommended voluntary, rather than mandatory, 
notification,\65\ while another asserted that a member should not be 
required to notify the trusted contact person if the member determines 
to lift the hold after speaking with all persons authorized to transact 
business on the account.\66\
---------------------------------------------------------------------------

    \65\ See SIFMA.
    \66\ See FSR.
---------------------------------------------------------------------------

    In response, FINRA encourages members to attempt to resolve a 
matter with a customer before placing a temporary hold, ``unless a 
member reasonably believes that doing so would cause further harm to a 
specified adult.'' \67\ According to FINRA, if a temporary hold is not 
placed, there is no requirement in the rule to notify the trusted 
contact person.\68\ However, once a member places a temporary hold on a 
disbursement, FINRA believes a member should be required to notify a 
trusted contact person.\69\ In addition, FINRA strongly encourages 
members to notify the specified adult of the temporary hold as soon as 
practicable but in no case longer than the two business days required 
by Rule 2165.\70\
---------------------------------------------------------------------------

    \67\ See FINRA Response Letter.
    \68\ Id.
    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

    Another commenter suggested that, rather than disclosing only that 
the temporary hold was placed, members should have discretion to 
disclose and discuss any information relevant to the financial 
exploitation investigation to the trusted contact person.\71\ In its 
Response Letter, FINRA states that ``the proposed amendments to Rule 
4512 explicitly permit members to contact the trusted contact person 
and disclose information about the customer's account to address 
possible financial exploitation and as permitted by Rule 2165.'' \72\ 
According to FINRA, members are therefore permitted to disclose and 
discuss information relevant to a financial exploitation investigation 
to a trusted contact person.\73\
---------------------------------------------------------------------------

    \71\ See IRI.
    \72\ See FINRA Response Letter.
    \73\ Id.
---------------------------------------------------------------------------

c. Update
    As previously discussed, with respect to an account that was opened 
pursuant to a prior FINRA rule (``existing account''), Rule 4512(b) 
requires members to update the trusted contact information for the 
account whenever they update the account information in the course of 
their routine and customary business, or as required by other 
applicable laws or rules. One commenter recommended a shorter recurring 
timeframe (e.g., annually) during which members must reach out to their 
non-institutional customers regarding the trusted contact person 
information.\74\ In response, FINRA declined to make the suggested 
change.\75\ FINRA states that applying the current standard in Rule 
4512(b) to the trusted contact person information would ensure that 
members use reasonable efforts to obtain the information for existing 
accounts in the course of their routine business, while not imposing 
undue burdens on

[[Page 10065]]

members to contact accountholders more frequently.\76\
---------------------------------------------------------------------------

    \74\ See PIRC.
    \75\ See FINRA Response Letter.
    \76\ Id.
---------------------------------------------------------------------------

    With respect to any account subject to the requirements of Exchange 
Act Rule 17a-3(a)(17) to periodically update customer records, proposed 
Supplementary Material .06(c) to Rule 4512 would require a member to 
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 Rule 17a-
3(a)(17).\77\ One commenter requested clarification on how the update 
requirement would apply to automated compliance processes or tech 
platforms that permit a client to voluntarily change information at 
their convenience.\78\ In response, FINRA states that the requirements 
of Rule 17a-3(a)(17) apply to a wide range of account information and 
would not be unique to trusted contact person information.\79\ For any 
account subject to Rule 17a-3(a)(17), FINRA believes that any automated 
compliance process or tech platform would need to comply with the 
requirements of Rule 17a-3(a)(17).\80\
---------------------------------------------------------------------------

    \77\ The Commission notes that, while FINRA Rule 4512 would 
impose on accounts subject to the requirements of Rule 17a-3(a)(17) 
a requirement to update trusted contact information, Rule 17a-
3(a)(17) by its terms imposes no independent requirement to do so, 
and Rule 4512 has no effect on a member's obligations under Rule 
17a-3(a)(17).
    \78\ See SIFMA.
    \79\ See FINRA Response Letter.
    \80\ Id.
---------------------------------------------------------------------------

    Another commenter requested confirmation that the obligation to 
obtain trusted contact person information for existing accounts in the 
course of the member's routine and customary business would be 
satisfied where the member updated the account within the 36-month 
period in accordance with the requirements of Rule 17a-
3(a)(17)(i)(D).\81\ In response, FINRA states that, consistent with the 
requirements of Rule 4512(b) discussed above, the requirement to update 
the account information may be triggered earlier than the 36-month 
period if 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.\82\
---------------------------------------------------------------------------

    \81\ See FSR.
    \82\ See FINRA Response Letter.
---------------------------------------------------------------------------

2. Safe Harbor
    As set forth in the Proposal, Supplementary Material .01 to Rule 
2165 states that members will be provided a safe harbor from FINRA 
Rules 2010, 2150 and 11870 when members exercise discretion to place 
temporary holds on disbursements of funds or securities from the 
accounts of specified adults under the circumstances denoted in the 
Rule. 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.\83\ In response, FINRA states its belief 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.\84\ 
Accordingly, FINRA declined to make the suggested change.\85\
---------------------------------------------------------------------------

    \83\ See GSU, PIABA, and PIRC.
    \84\ See FINRA Response Letter.
    \85\ Id.
---------------------------------------------------------------------------

    One commenter requested that the safe harbor language be moved into 
the body of the rule text and the protection be extended to registered 
representatives of the member.\86\ In its Response Letter, FINRA states 
that, because Supplementary Material is part of the rule, it would not 
move the language as requested.\87\
---------------------------------------------------------------------------

    \86\ See NAIFA.
    \87\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Two commenters requested that the Supplementary Material be revised 
to explicitly state that the safe harbor applies to associated 
persons.\88\ In response, and as discussed in Partial Amendment No. 1, 
FINRA is proposing to incorporate associated persons into the rule 
text, which is consistent with FINRA's original interpretation of the 
scope of the safe harbor.\89\ FINRA states that, as amended, proposed 
Supplementary Material .01 to Rule 2165 would explicitly provide that 
members and their associated persons have 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 the 
accounts of specified adults consistent with the requirements of Rule 
2165.\90\
---------------------------------------------------------------------------

    \88\ See FSR and Wells Fargo.
    \89\ See FINRA Response Letter.
    \90\ Id.
---------------------------------------------------------------------------

    Another commenter suggested that the inclusion of Rules 2010 and 
2150 in Supplementary Material .01 would create protections far beyond 
the scope of what is necessary to encourage members to act on financial 
exploitation.\91\ In response, FINRA states its belief that it is 
appropriate to include Rules 2010 and 2150 in Supplementary Material 
.01, as the rules may be implicated by a member's exercise of 
discretion to place a temporary hold on a disbursement.\92\ This same 
commenter also suggested that when a member exercises discretion and 
chooses not to place a hold, then the member should not be granted a 
safe harbor from duties that they would otherwise have under FINRA 
rules.\93\ In response, and as noted above, FINRA states that the 
proposed safe harbor does not apply to a decision not to place a hold; 
rather, proposed Rule 2165 explicitly states that it provides members 
with a safe harbor under FINRA rules when members exercise discretion 
in placing a temporary hold on disbursements of funds or 
securities.\94\
---------------------------------------------------------------------------

    \91\ See GSU.
    \92\ See FINRA Response Letter.
    \93\ See GSU.
    \94\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Another commenter requested revising Rule 2165 to clarify that a 
member's failure to place a hold on a customer account shall not be 
deemed to be an abrogation of the member's duties under FINRA 
rules.\95\ In its Response Letter, FINRA asserts that Supplementary 
Material .01 clearly states that proposed Rule 2165 contains a safe 
harbor, and that the Rule does not require placing a hold on a 
disbursement.\96\
---------------------------------------------------------------------------

    \95\ See ICI.
    \96\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Three commenters suggested that any associated person acting in 
good faith should not be subject to complaints reportable on Form U4 
(Uniform Application for Securities Industry Registration or Transfer), 
and that the safe harbor should be extended to include FINRA Rule 4530 
(Reporting Requirements).\97\ In its Response Letter, FINRA states that 
the proposed safe harbor from FINRA rules would not extend to 
complaints about an associated person that are reportable on Form 
U4.\98\ However, FINRA notes that an associated person may respond to 
any such complaints on Form U4, including with an explanation of 
actions taken pursuant to proposed Rule 2165.\99\ FINRA further states 
that the proposed safe harbor from FINRA rules would also not extend to 
reporting required pursuant to Rule 4530, 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.\100\
---------------------------------------------------------------------------

    \97\ See BDA, Janney, and SIFMA.
    \98\ See FINRA Response Letter.
    \99\ Id.
    \100\ Id.
---------------------------------------------------------------------------

    Lastly, a commenter stated that members may be subject to FINRA

[[Page 10066]]

sanctions (outside of Rules 2010, 2150 and 11870 violations) and 
private claims, and requested that FINRA extend the safe harbor to 
cover FINRA sanctions and private claims for members' reasonable 
determinations regarding whether or not to place a temporary hold on a 
disbursement.\101\ Another commenter suggested that the safe harbor be 
extended to cover protection against liability for actions taken in 
connection with notifying the appropriate state authorities of 
financial exploitation.\102\ In response, FINRA states that proposed 
Rule 2165 is designed to provide regulatory relief to members by 
providing a safe harbor from FINRA rules for a determination to place a 
temporary hold.\103\ Nevertheless, some states may separately provide 
immunity to members under state law.\104\
---------------------------------------------------------------------------

    \101\ See CAI.
    \102\ See NAIFA.
    \103\ See FINRA Response Letter.
    \104\ Id.
---------------------------------------------------------------------------

3. Transactions
    Six commenters supported extending the scope of proposed Rule 2165 
to apply to transactions.\105\ In its Response Letter, FINRA states 
that, although proposed Rule 2165 does not apply to transactions, FINRA 
may consider extending the safe harbor to transactions in securities in 
future rulemaking.\106\
---------------------------------------------------------------------------

    \105\ See FSI, IRI, Janney, Reuters, SIFMA and Wells Fargo.
    \106\ See FINRA Response Letter.
---------------------------------------------------------------------------

4. Diminished Capacity
    Two commenters suggested extending the safe harbor beyond financial 
exploitation to address a customer's diminished capacity.\107\ In its 
Response letter, FINRA recognizes the challenges members face in 
addressing diminished capacity and that this is an important issue for 
further consideration, and that it can make seniors especially 
vulnerable to financial exploitation.\108\ FINRA states that a member 
could contact a trusted contact person if it suspects that the customer 
may be suffering from Alzheimer's disease, dementia or other forms of 
diminished capacity.\109\ FINRA further believes that a person with 
diminished capacity would generally qualify as a ``specified adult'' as 
defined by proposed Rule 2165(a)(1)(B).\110\
---------------------------------------------------------------------------

    \107\ See Lincoln and SIFMA.
    \108\ See FINRA Response Letter.
    \109\ Id.
    \110\ Id.
---------------------------------------------------------------------------

5. Specified Adults
    Proposed Rule 2165 would define ``specified adult'' as: (A) A 
natural person age 65 and older; 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. With respect to persons younger than age 65, two commenters 
suggested revising the definition to cover other vulnerable persons 
(e.g., persons who would be deemed vulnerable under state 
statute).\111\ In response, FINRA states its belief that the suggested 
change would present operational challenges for members, as the 
customers covered by the definition would vary by jurisdiction.\112\ 
Furthermore, FINRA recognizes that customers who do not have a physical 
or mental impairment may also be vulnerable; however, proposed Rule 
2165 is intended to cover those customers most susceptible to financial 
exploitation.\113\ As such, FINRA declined to make the suggested change 
at this time.\114\
---------------------------------------------------------------------------

    \111\ See NASAA and PIRC.
    \112\ See FINRA Response Letter.
    \113\ Id.
    \114\ Id.
---------------------------------------------------------------------------

    Another commenter suggested revising proposed Supplementary 
Material .03 to Rule 2165 to provide that belief of impairment shall 
not create an assumption or implication that a member or its associated 
persons are qualified to make, or responsible for making, 
determinations about impairment.\115\ As stated in its Response Letter, 
FINRA declined to revise the rule text as suggested because 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.\116\ FINRA states that the ``reasonable belief'' standard 
required by proposed Rule 2165 for a member to place a temporary hold 
imposes no such requirement.\117\
---------------------------------------------------------------------------

    \115\ See NAIFA.
    \116\ See FINRA Response Letter.
    \117\ Id.
---------------------------------------------------------------------------

6. Account
    As noted above, proposed Rule 2165 would define ``account'' to mean 
any account of a member for which a specified adult has the authority 
to transact business. One commenter suggested that the definition of 
``account'' may be overly broad, and suggested clarifying that 
transactions in securities, such as variable insurance products, sold 
by a broker-dealer, but not custodied in a brokerage account, are not 
subject to proposed Rule 2165.\118\ In response, FINRA states that 
proposed Rule 2165 applies to disbursements of funds or securities out 
of a customer account, and does not apply to transactions in 
securities.\119\
---------------------------------------------------------------------------

    \118\ See ACLI.
    \119\ See FINRA Response Letter.
---------------------------------------------------------------------------

7. Disbursements
    Two commenters expressed concern that a temporary hold pursuant to 
proposed Rule 2165 may not comply with the requirements of Section 
22(e) of the Investment Company Act of 1940 (``1940 Act'').\120\ FINRA 
states in response that most mutual fund customer accounts are serviced 
and record-kept by intermediaries.\121\ According to FINRA, in the 
small proportion of circumstances where mutual fund customers purchase 
shares directly from the mutual fund, the customer's account may be 
maintained by a mutual fund's principal underwriter.\122\ Based on 
discussions with SEC staff, FINRA does not believe that a broker-
dealer's delay of a disbursement of mutual fund redemption proceeds to 
its customers in reliance on proposed Rule 2165 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.\123\ However, this conclusion is limited 
to situations where the mutual fund does not have a role in the 
disbursement of redemption proceeds from the customer's account held by 
the broker-dealer, including any role in the decision to delay the 
disbursement of funds in reliance on proposed Rule 2165.\124\
---------------------------------------------------------------------------

    \120\ See CAI and Lincoln.
    \121\ See FINRA Response Letter.
    \122\ Id.
    \123\ Id.
    \124\ Id.
---------------------------------------------------------------------------

    Another commenter requested clarification on how ACATS transfers 
would be treated under proposed Rule 2165.\125\ For purposes of 
proposed Rule 2165, FINRA responds that it 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.\126\ 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

[[Page 10067]]

an account, for the same reasons.\127\ However, according to FINRA, 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.\128\ 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.\129\
---------------------------------------------------------------------------

    \125\ See SIFMA.
    \126\ See FINRA Response Letter.
    \127\ Id.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    Another commenter requested clarification on where funds from a 
disbursement subject to a temporary hold should be maintained by a 
member.\130\ FINRA responds that, 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.\131\
---------------------------------------------------------------------------

    \130\ See ACLI.
    \131\ See FINRA Response Letter.
---------------------------------------------------------------------------

8. Persons Permitted To Place Temporary Holds
    Proposed Rule 2165 would provide that a 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. One commenter suggested expanding the categories of persons 
authorized to place holds on behalf of a member to include persons who 
have been designated by the member to review cases involving specified 
adults as part of the member's escalation process.\132\ In its Response 
Letter, FINRA states that, 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 difficult but necessary conversations with 
customers that could impact the member-customer relationship.\133\ 
FINRA believes that the current form of proposed Rule 2165 promotes 
administrative clarity, that it is reasonable to limit authority for 
placing holds on disbursements to a select group of individuals 
associated with the member, that persons serving in a supervisory, 
compliance or legal capacity are well positioned to make these 
determinations on behalf of the member, and that such a limitation is 
not a substantial burden to members that wish to rely on the rule's 
safe harbor provision.\134\ Accordingly, FINRA declined to make the 
suggested revision.\135\
---------------------------------------------------------------------------

    \132\ See SIFMA.
    \133\ See FINRA Response Letter.
    \134\ Id.
    \135\ Id.
---------------------------------------------------------------------------

9. Period of Temporary Hold
    As set forth in the Proposal, the temporary hold authorized by 
proposed Rule 2165 would expire not later than 15 business days for any 
initial period and up to 10 business days in any subsequent period 
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. Two commenters suggested that the time periods 
may not be adequate to give state regulators and agencies or courts 
time to take action on a matter.\136\ Another commenter suggested that 
regulatory approval be required prior to extending a temporary hold 
beyond the initial 15 business day period.\137\ FINRA responds that, in 
proposing the time periods, it has tried to strike a reasonable balance 
in giving members adequate time to investigate and contact the relevant 
parties, seeking input from a state regulator or 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.\138\
---------------------------------------------------------------------------

    \136\ See IRI and PIRC.
    \137\ See NASAA.
    \138\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Another commenter stated that the rule text, as set forth in the 
Proposal, could be read to require the termination or extension of the 
temporary hold by the state regulator or agency of competent 
jurisdiction or a court of competent jurisdiction prior to the initial 
hold being extended for an additional 10 business day period.\139\ In 
response, FINRA states that it did not intend to impose any such 
limitation.\140\ As discussed in the Partial Amendment No. 1, FINRA 
states that it is proposing to revise Rule 2165(b)(2) and (3) to 
provide that a member may place a temporary hold for up to 25 business 
days when the Rule's requirements are met, unless the temporary hold is 
``otherwise'' terminated or extended by a state regulator or agency of 
competent jurisdiction or a court of competent jurisdiction.\141\ 
According to FINRA, this proposed change is intended to recognize that 
a state regulator or agency or a court may terminate or extend a hold 
on a disbursement at any time during the time period provided by 
proposed Rule 2165(b)(2) and (3).\142\
---------------------------------------------------------------------------

    \139\ See SIFMA.
    \140\ See FINRA Response Letter.
    \141\ Id.
    \142\ Id.
---------------------------------------------------------------------------

    One commenter suggested that Rule 2165 should explicitly provide 
that a member must terminate a temporary hold as soon as the member's 
internal review of the facts and circumstances that were the basis for 
the hold does not support a reasonable belief that financial 
exploitation is occurring or is attempted.\143\ In response, FINRA 
states that it declines to revise the rule text as suggested, but that 
it would expect a member to lift a temporary hold when it no longer has 
a reasonable belief of financial exploitation (e.g., when subsequent 
events indicate that the threat of financial exploitation no longer 
exists).\144\
---------------------------------------------------------------------------

    \143\ See ICI.
    \144\ See FINRA Response Letter.
---------------------------------------------------------------------------

10. Notifying All Parties Authorized To Transact Business
    Under proposed Rule 2165(b)(1)(B)(i), a member is required to 
notify all parties authorized to transact business on an account of the 
temporary hold and the reason for the temporary hold when the member 
places a temporary hold on a disbursement. Two commenters expressed 
concern that the rule text does not contemplate a party being 
unavailable, and that notifying all parties could lead to increased 
risk for the customer where a party is the suspected perpetrator of the 
financial exploitation.\145\ The commenters suggested providing an 
exception from the notification requirement where a party is 
unavailable or where the member reasonably suspects that a party has 
engaged, is engaged, or will engage in the financial exploitation of 
the Specified Adult.\146\ In response, FINRA states its belief that, 
although a member will need to exercise discretion in forming a 
reasonable belief that a party authorized to transact business on an 
account is engaged in the financial exploitation, FINRA also believes 
it is appropriate to provide an exception from contacting a party 
authorized to transact business on an account that is comparable to the 
exception provided for notifying a customer's trusted contact 
person.\147\ As stated in Partial Amendment No. 1, FINRA is proposing

[[Page 10068]]

to amend Rule 2165(b)(1)(B)(i) to provide that a member is required to 
notify all parties authorized to transact business on an account, 
unless a party is unavailable or the member reasonably believes that 
the party has engaged, is engaged, or will engage in the financial 
exploitation of the Specified Adult.\148\
---------------------------------------------------------------------------

    \145\ See LPL and SIFMA.
    \146\ Id.
    \147\ See FINRA Response Letter.
    \148\ Id.
---------------------------------------------------------------------------

    Another commenter suggested that requiring notification of all 
parties authorized to transact business on an account could 
inadvertently interfere with the ability to use the safe harbor in Rule 
2165 if a member has trouble locating one or more authorized 
parties.\149\ In its Response Letter, FINRA states it does not believe 
that the notification requirement should impact a member's decision to 
place a hold as it is a post-hold obligation.\150\
---------------------------------------------------------------------------

    \149\ See IRI.
    \150\ See FINRA Response Letter.
---------------------------------------------------------------------------

11. Notifying Immediate Family Member
    Due to the privacy and operational challenges noted by commenters 
in response to the proposal in Regulatory Notice 15-37, the Proposal 
did not require notifying an immediate family member when a temporary 
hold is placed. Three commenters supported removing the requirement to 
contact an immediate family member.\151\ One commenter agreed that 
requiring a member to contact an immediate family member may be overly 
restrictive and result in privacy issues, but suggested that the safe 
harbor be expanded to cover instances in which a member uses its 
discretion to contact a person reasonably believed to be connected with 
the account owner when the trusted contact person is unavailable.\152\ 
In its Response Letter, FINRA states that expanding proposed Rule 2165 
to authorize members to contact any person reasonably believed to be 
connected with an account owner may create the same privacy and 
operational challenges raised by commenters to Regulatory Notice 15-
37.\153\ However, FINRA states that proposed Rule 2165 would not 
preclude a member from contacting an immediate family member or any 
other person provided that the member has customer consent to do 
so.\154\
---------------------------------------------------------------------------

    \151\ See GSU, IRI and NASAA.
    \152\ See Wells Fargo.
    \153\ See FINRA Response Letter.
    \154\ Id.
---------------------------------------------------------------------------

12. Notification Period
    Proposed Rule 2165 would require the member to provide notification 
of the temporary hold and the reason for the hold to all parties 
authorized to transact business on the account and the trusted contact 
person, if available, no later than two business days after placing the 
hold. Three commenters suggested extending the time period for 
notification beyond two business days.\155\ FINRA declined to extend 
the time period for notification beyond two business days, given its 
belief in the need for urgency in dealing with financial exploitation 
and to remain consistent with the NASAA model state act.\156\
---------------------------------------------------------------------------

    \155\ See CAI, IRI and SIFMA.
    \156\ See FINRA Response Letter.
---------------------------------------------------------------------------

13. Privacy Considerations
    Three commenters requested clarification on what information may be 
shared pursuant to the Proposal without violating Regulation S-P.\157\ 
In response, FINRA states that disclosures to a trusted contact person 
pursuant to proposed Rules 2165 and 4512(a)(1)(F) would be consistent 
with Regulation S-P, because such disclosures would be made with 
customers' consent or authorization,\158\ to protect against fraud or 
unauthorized transactions, or to comply with federal, state, or local 
laws, rules and other applicable legal requirements, including the 
requirements of Rule 2165.\159\
---------------------------------------------------------------------------

    \157\ See BDA, CAI and FSR.
    \158\ FINRA notes that, under the Proposal, members would be 
required to disclose to customers the purposes for obtaining the 
trusted contact information, including the possible disclosure of 
account information to a trusted contact in specified circumstances, 
and customers would authorize or consent to such disclosure by 
voluntarily providing the trusted contact information. See FINRA 
Response Letter.
    \159\ See FINRA Response Letter. The Commission staff confirmed 
the accuracy of this interpretation during discussions with FINRA.
---------------------------------------------------------------------------

14. 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. One commenter suggested 
requiring all members to establish and maintain written supervisory 
procedures reasonably designed to achieve compliance with the 
Rule.\160\ In its Response Letter, FINRA states that, because placing a 
temporary hold is discretionary, not mandatory, FINRA declines to make 
the suggested change.\161\
---------------------------------------------------------------------------

    \160\ See PIRC.
    \161\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Another commenter recommended requiring the written supervisory 
procedures to include provisions designed to ensure that the member 
lifts a temporary hold as soon as practicable after the member conducts 
an internal review and finds that the hold is not warranted.\162\ As 
noted above, FINRA expects that a member would lift a temporary hold 
when it no longer has a reasonable belief of financial 
exploitation.\163\ This same commenter also suggested that it is 
unclear whether the member can freeze all owners' access to the 
account, and recommended that FINRA require a member's written 
supervisory procedures to include provisions regarding the impact of a 
temporary hold on those joint account owners who are not believed to be 
the subject of financial exploitation.\164\ In response, FINRA states 
that 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).\165\ Accordingly, FINRA 
declined to make the suggested change.\166\
---------------------------------------------------------------------------

    \162\ See ICI.
    \163\ See FINRA Response Letter.
    \164\ See ICI.
    \165\ See FINRA Response Letter.
    \166\ Id.
---------------------------------------------------------------------------

15. Training
    The Proposal would require members to develop and document training 
policies or programs reasonably designed to ensure that associated 
persons comply with the requirements of Rule 2165. One commenter 
supported applying the training requirement to associated persons, but 
suggested that FINRA should oversee training, including incorporating 
into its FINRA Rule 1250 (Continuing Education Requirements) training a 
module on the requirements of the Proposal and recognizing financial 
exploitation of vulnerable adults.\167\ In its Response Letter, FINRA 
states that the Proposal provides members with reasonable discretion in 
determining how best to structure their training policies or 
programs.\168\ FINRA states that, while it has developed material for 
the Continuing Education Regulatory Element Program that addresses the 
financial exploitation of senior investors, members are responsible for 
developing and documenting their training policies and programs.\169\ 
FINRA states that it will consider whether to develop additional

[[Page 10069]]

continuing education content specifically addressing financial 
exploitation of seniors and providing additional guidance to members, 
as appropriate.\170\
---------------------------------------------------------------------------

    \167\ See GSU.
    \168\ See FINRA Response Letter.
    \169\ Id.
    \170\ Id.
---------------------------------------------------------------------------

16. Reporting
    One commenter supported not requiring as part of proposed Rule 2165 
that members report financial exploitation to local adult protective 
services and law enforcement, asserting that such a permissive approach 
would allow firms and advisors to undertake a reasonable inquiry and to 
decide whether or not to freeze an account without considering their 
own potential liability.\171\ In contrast, several other commenters 
recommended revising proposed Rule 2165 to require members to report 
financial exploitation to state and local authorities, such as adult 
protective services and law enforcement, or FINRA.\172\ One such 
commenter also supported requiring members to provide any account 
information requested by state and local authorities to conduct their 
investigations.\173\ Another suggested clarifying in Supplementary 
Material to Rule 2165 how members should coordinate with a state 
regulator or agency to confirm or validate suspicions regarding 
financial exploitation.\174\
---------------------------------------------------------------------------

    \171\ See FSI.
    \172\ See Investor Advocate, NAIFA, NASAA and PIABA.
    \173\ See Investor Advocate.
    \174\ See FSR.
---------------------------------------------------------------------------

    In its Response Letter, FINRA states that, while proposed Rule 2165 
does not require members to report a reasonable belief of financial 
exploitation to a state or local authority, some states mandate such 
reporting by financial institutions, including broker-dealers.\175\ 
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.\176\ FINRA states that it would expect 
members to comply with all applicable state requirements, including 
reporting requirements, and FINRA staff may request records related to 
state reporting as part of the examination process.\177\ Even where a 
state may not require such reporting, FINRA believes that members may 
find it beneficial to contact relevant state agencies, such as state 
securities regulators or state or local adult protective services, to 
assist in resolving matters involving possible financial abuse.\178\
---------------------------------------------------------------------------

    \175\ See FINRA Response Letter.
    \176\ Id.
    \177\ Id.
    \178\ Id.
---------------------------------------------------------------------------

17. Implementation Period
    If the Commission approves the Proposal, some commenters requested 
that members have from 12 to 18 months to implement the 
requirements.\179\ As a general matter, these commenters noted that 
additional time is needed to make all of the necessary adjustments to 
their internal systems, including updates needed to incorporate the 
trusted contact person-related requirements. As discussed in the 
Partial Amendment No. 1, FINRA states it has determined to extend the 
implementation period before effectiveness from ``no later than 180 
days following Commission approval'' to 12 months from Commission 
approval.\180\ FINRA intends this extended period of implementation to 
provide members more time to commit the necessary resources to 
implement the Proposal.\181\ FINRA believes this change is an 
appropriate balance of the commenters' concerns and the strong desire 
to provide tools to members to address possible financial exploitation 
under the Proposal as soon as practicable.\182\
---------------------------------------------------------------------------

    \179\ See BDA, Edward Jones, FSR, LPL, Reuters, SIFMA and Wells 
Fargo.
    \180\ See FINRA Response Letter.
    \181\ Id.
    \182\ Id.
---------------------------------------------------------------------------

C. Opposition to Proposed Rule 2165

    One commenter supported the proposed amendments to Rule 4512 
regarding a trusted contact person, but opposed the proposed adoption 
of Rule 2165 that would permit temporary holds on disbursements where 
there is a reasonable belief of financial exploitation.\183\ This 
commenter asserted, among other things, that the ``reasonable belief'' 
standard for placing the temporary hold was ``too low relative to the 
potential harm to a customer from not being able to withdraw funds or 
securities,'' and that, absent a clearer standard, ``Rule 2165 creates 
an incentive to place a hold on an account as the default response to 
concerns about a specified adult.'' \184\ In its Response Letter, FINRA 
states that it believes the Proposal 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.\185\ Furthermore, FINRA believes that the 
Proposal 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.\186\
---------------------------------------------------------------------------

    \183\ See Cornell.
    \184\ Id.
    \185\ See FINRA Response Letter.
    \186\ Id.
---------------------------------------------------------------------------

IV. Solicitation of Comments on Partial Amendment No. 1

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended by Partial Amendment No. 1, is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://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 (https://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 
10:00 a.m. and 3:00 p.m. Copies of the 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

[[Page 10070]]

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 March 2, 2017.

V. Discussion and Commission Findings

    The Commission has carefully considered the Proposal, the comments 
received, FINRA's response to the comments, and Partial Amendment No. 
1. Based on its review of the record, the Commission finds that the 
Proposal, as modified by Partial Amendment No. 1, is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities association.\187\ In 
particular, the Commission finds that the Proposal, as modified by 
Partial Amendment No. 1, is consistent with Section 15A(b)(6) of the 
Exchange Act,\188\ which requires, among other things, that FINRA's 
rules 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.
---------------------------------------------------------------------------

    \187\ In approving the Proposal, as modified by Partial 
Amendment No. 1, the Commission has also considered its impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \188\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    As discussed above, the Proposal, as modified by Partial Amendment 
No. 1, would: (1) 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) permit members to place temporary holds on 
disbursements of funds or securities from the accounts of specified 
customers, where there is a reasonable belief that these customers have 
been, are being, or will be subject to financial exploitation.
    The Commission has considered the twenty-one (21) comment letters 
received on the Proposal,\189\ along with FINRA's Response Letter, and 
Partial Amendment No. 1.\190\ The Commission acknowledges the 
supportive commenters' positions, such that adoption of the Proposal 
would better enable FINRA members ``to protect seniors and other 
vulnerable adults from financial exploitation,'' \191\ that the 
Proposal was ``well-conceived to help member firms protect seniors,'' 
\192\ and that it would provide additional guidance to members, create 
uniform practices, and make customers more willing to provide trusted 
contact information.\193\
---------------------------------------------------------------------------

    \189\ See supra note 5.
    \190\ See supra note 7.
    \191\ See ICI.
    \192\ See Janney.
    \193\ See FSI.
---------------------------------------------------------------------------

    The Commission also acknowledges commenters' concerns and 
recommended modifications to the Proposal. However, it also notes that 
FINRA's response to comments addresses many of these concerns, and 
offers additional clarifications regarding FINRA's expectations 
regarding the operation of the Proposal. For example, FINRA clarified 
that the notification requirement is a post-hold obligation, and that 
the proposed safe harbor does not apply to a decision not to place a 
hold. FINRA also addresses a concern of several commenters through its 
proposed partial amendment, which makes explicit in the rule text that 
associated persons are covered by the rule's safe harbor, a position 
FINRA indicated is consistent with its original interpretation of the 
scope of the safe harbor. Throughout its response to comments, FINRA 
has emphasized its attempts to balance members' operational 
practicalities with the serious investor protection concerns raised 
both by the specter of financial exploitation and the seriousness of 
placing a temporary hold on a disbursement. Moreover, FINRA has 
addressed commenters' questions about the intersection of the Proposal 
with both Section 22(e) of the 1940 Act, and with Regulation S-P, based 
on its discussions with Commission staff.
    Taking into consideration the comments and FINRA's responses, the 
Commission finds that the Proposal is consistent with the Exchange Act. 
Specifically, the Commission believes that the Proposal will protect 
investors and the public interest by, among other things, providing 
FINRA members with means by which they can respond to situations where 
there is a reasonable belief of financial exploitation of seniors and 
other vulnerable adults. The Commission additionally believes that the 
Proposal will promote investor protection by providing FINRA members 
with a safe harbor from the purported violation of certain FINRA rules, 
without which such members might otherwise be discouraged from placing 
a temporary hold on disbursements of funds or securities where there is 
a reasonable belief of financial exploitation.
    The Commission believes that FINRA's responses, as discussed in 
more detail above, appropriately addressed commenters' concerns and 
adequately explained FINRA's reasons for modifying or declining to 
modify its Proposal. Accordingly, the Commission believes that the 
approach proposed by FINRA is appropriate and designed to protect 
investors and the public interest, consistent with Section 15A(b)(6) of 
the Exchange Act and the rules and regulations thereunder.

VI. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) \194\ of the 
Exchange Act that the proposed rule change (SR-FINRA-2016-039), as 
modified by Partial Amendment No. 1, be and hereby is approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \194\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\195\
---------------------------------------------------------------------------

    \195\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02645 Filed 2-8-17; 8:45 am]
 BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.