Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults), 34084-34096 [2021-13653]

Download as PDF 34084 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 26 of the Act to determine whether the proposed rule change should be approved or disapproved. khammond on DSKJM1Z7X2PROD with NOTICES 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: Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2021–36, and should be submitted on or before July 19, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–13660 Filed 6–25–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 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– NYSE–2021–36 on the subject line. Sunshine Act Meeting; Cancellation 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–NYSE–2021–36. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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. CHANGES IN THE MEETING: 26 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: 86 FR 32993, June 23, 2021. PREVIOUSLY ANNOUNCED TIME AND DATE OF THE MEETING: Thursday, June 24, 2021 at 2:00 p.m. The Closed Meeting scheduled for Thursday, June 24, 2021 at 2:00 p.m., has been cancelled. CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Dated: June 24, 2021. Vanessa A. Countryman, Secretary. [FR Doc. 2021–13813 Filed 6–24–21; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92225; File No. SR–FINRA– 2021–016] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults) June 22, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 9, 2021, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) 27 17 CFR 200.30–3(a)(12), (59). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend Rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) Extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm has reported the matter to a state regulator or agency or a court of competent jurisdiction; and (2) place a temporary hold on a securities transactions where there is a reasonable belief of financial exploitation. The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Protection of Senior Investors The protection of senior investors is a top priority for FINRA. FINRA has prioritized protecting senior investors and addressed financial exploitation of senior investors in numerous ways, including: • Identifying senior investor issues as an examination priority; 3 • Launching the dedicated FINRA Securities Helpline for Seniors®— available at 844–57–HELPS—to provide 3 See 2019 Risk Monitoring and Examination Priorities Letter (January 2019) available at https:// www.finra.org/industry/2019-annual-riskmonitoring-and-examination-priorities-letter. E:\FR\FM\28JNN1.SGM 28JNN1 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES senior investors and their family members with a supportive place to get assistance from specially trained FINRA staff related to concerns they have with their brokerage accounts and investments; 4 • Creating national standards that give member firms tools—including permitting firms to place temporary holds on disbursements when they have a reasonable belief of financial exploitation and requiring firms to request information from customers about a trusted contact—to address suspected financial exploitation of senior investors and other vulnerable adults (i.e., FINRA Rules 2165 and 4512 (Customer Account Information)); 5 • Collaborating with the North American Securities Administrators Association (NASAA) and the SEC to address senior investor protection, including issuing a Senior Safe Act Fact Sheet designed to raise awareness among member firms, investment advisers and transfer agents about the Act and its immunity provisions; 6 • Issuing alerts and articles educating investors about important issues and highlighting risks facing senior investors; 7 • Conducting and funding research on senior investors and financial fraud, and engaging with national, state and grassroots partners to develop and distribute fraud prevention resources, educate consumers, and provide training for law enforcement professionals, victim advocates, and other people on the front lines of fighting financial fraud; • Issuing Regulatory Notices emphasizing member firms’ obligations to senior investors and providing guidance on how to fulfill those obligations; 8 and 4 See https://www.finra.org/investors/highlights/ finra-securities-helpline-seniors. 5 See Regulatory Notice 17–11 (March 2017). 6 See https://www.finra.org/sites/default/files/ senior_safe_act_factsheet.pdf. 7 See, e.g., articles such as Protecting Seniors from Financial Exploitation; Investor Alerts such as Power of Attorney and Your Investments—10 Tips, Plan for Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death; Seniors Beware: What You Should Know About Life Settlements; and FINRA’s Retirement web page for investors. 8 See, e.g., Regulatory Notice 07–43 (Sept. 2007) (reminding member firms of their obligations relating to senior investors and highlighting industry practices to serve these customers); Regulatory Notice 09–42 (July 2009) (reminding member firms of their obligations with variable life settlement activities); Regulatory Notice 11–52 (Nov. 2011) (reminding member firms of their obligations regarding the supervision of associated persons using senior designations); Regulatory Notice 16–12 (Apr. 2016) (providing guidance on member firm responsibilities for sales of pension income stream products); and Regulatory Notice VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 • Bringing disciplinary actions for misconduct against senior investors.9 Retrospective Review In August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation. The retrospective review process has two phases: The assessment phase and the action phase.10 During the assessment phase, FINRA first sought comment in Regulatory Notice 19–27 (August 2019) on several questions with respect to addressing financial exploitation and other circumstances of financial vulnerability for senior investors. FINRA received 22 comment letters to Regulatory Notice 19–27.11 17–11 (Mar. 2017) (discussing new senior rules and potential financial exploitation of seniors). 9 See, e.g., John W. Cutshall, Order Accepting Offer of Settlement, Case ID 2014041590801 (April 11, 2019); Steven Anthony Olejniczak, Letter of Acceptance, Waiver and Consent, Case ID 2016050107901 (May 8, 2017). 10 The stakeholders who provided input during the assessment phase of the retrospective review are collectively referred to herein as the ‘‘Retrospective Review Stakeholders.’’ 11 See Letter from Megan Valent, Legal Intern, and Teresa J. Verges, Director, University of Miami School of Law, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 1, 2019; Letter from Jennifer L. Szaro, Lara May & Associates, LLC, and Robert L. Hamman, President, First Asset Financial Inc., to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 4, 2019; Letter from William A. Jacobson, Esq., Clinical Professor of Law and Director, Securities Law Clinic Cornell Law School, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 7, 2019; Letter from Kathleen Quinn, Board President, National Adult Protective Services Association, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 7, 2019; Letter from Joe Snyder, Chair, Philadelphia Financial Exploitation Task Force dated Oct. 7, 2019; Letter from Seth A. Miller, General Counsel, Executive Vice President, and Chief Risk Officer, Cambridge Investment Research, Inc., to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Eric Arnold, Clifford Kirsch and Holly Smith of Eversheds Sutherland on behalf of the Committee of Annuity Insurers, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Christopher W. Bok, Director, Financial Information Forum, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Marc Fitapelli, Esq., Fitapelli Kurta, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Robin M. Traxler, Senior Vice President, Policy & Deputy General Counsel, Financial Services Institute, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Maureen K. Paparo, Legal Intern, Lincoln Square Legal Services, Inc., to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Courtney Rogers Reid, Lead Counsel, Broker-Dealer and Investment Adviser Practice Group, MML Investors Services, LLC, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Christopher Gerold, President, NASAA, to Jennifer Piorko PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 34085 In addition, FINRA obtained input from several advisory committees comprising member firms of different sizes and business models, investor protection advocates, member firms, and trade associations. FINRA also obtained the perspective of its operating departments that touch the rules and their administration. Moreover, FINRA considered examination observations and findings involving senior issues. In this regard, FINRA previously had identified as an examination priority reviewing member firms’ controls regarding Rule 2165, to the extent firms anticipated using the rule’s safe harbor, and Rule 4512’s trusted-contact provision.12 As part of these reviews, FINRA looked at whether member firms had clearly defined policies and procedures and sought information about firms’ early experiences with these provisions.13 Finally, FINRA developed an anonymous survey that was distributed to all member firms in the first quarter of 2020. The purpose of the survey was to collect information in order to validate the feedback received and to provide an additional opportunity for all member firms to provide their views.14 Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Nancy Brown, President and Co-Chair, and Dian VanderWell, Opportunity Alliance Nevada, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Christine Lazaro, President, and Samuel B. Edwards, Executive Vice President, Public Investors Advocate Bar Association, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Lisa J. Bleier, Managing Director, SIFMA, dated Oct. 8, 2019; Letter from Christine Lazaro, Professor of Clinical Legal Education and Director, St. John’s University School of Law Securities Arbitration Clinic, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Alice L. Stewart, Director, and Rachael T. Shaw, Adjunct Professor, University of Pittsburgh School of Law—Securities Arbitration Clinic, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Ron Long, Head of Elder Client Initiatives Center of Excellence, Wells Fargo & Company, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Erin K. Lineham, Associate General Counsel—Compliance, Raymond James & Associates, Inc., to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 29, 2019; Letter from Marin E. Gibson, Managing Director and Associate General Counsel, SIFMA, dated Nov. 15, 2019; Letter from Anonymous dated Feb. 26, 2020. 12 See 2019 Annual Risk Monitoring and Examination Priorities Letter (Jan. 22, 2019). 13 See id. 14 Survey respondents were permitted to skip survey questions. Information in this proposed rule change regarding the percentage of survey respondents for a particular question reflects the percentage of respondents for that question, not the percentage of respondents for the survey as a whole. Approximately 190 responses were received for E:\FR\FM\28JNN1.SGM Continued 28JNN1 34086 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices The review indicated that FINRA’s steps to protect seniors have provided helpful and effective tools in the fight against financial exploitation, but it also suggested some additional tools, guidance and rule changes. In October 2020, FINRA published Regulatory Notice 20–34 (October 2020): (1) Summarizing the retrospective rule review process, including the predominant themes that emerged from Retrospective Review Stakeholder feedback; (2) seeking comment on proposed amendments to Rule 2165 to further address suspected financial exploitation of senior investors and other specified adults; and (3) providing guidance to aid member firms and senior investors and other specified adults.15 khammond on DSKJM1Z7X2PROD with NOTICES Rule 2165 Rule 2165 is the first uniform national standard for placing temporary holds on disbursements to address suspected financial exploitation.16 Rule 2165 permits a member firm to place a temporary hold on a disbursement of funds or securities from the account of a ‘‘specified adult’’ 17 customer when the firm reasonably believes that financial exploitation of that adult has occurred, is occurring, has been attempted or will be attempted. Prior to the adoption of Rule 2165, some member firms expressed concern that placing a temporary hold on suspicious disbursements was not explicitly permitted by FINRA rules. To address these concerns, Rule 2165 provides member firms and their associated persons with a safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of each top-level (non-nested) question. Therefore, unless indicated otherwise, the reader can assume that the percentages are based on approximately 190 responses. 15 The proposed amendments to Rule 2165 set forth in Regulatory Notice 20–34 are referred to herein as the ‘‘Notice 20–34 Proposal.’’ 16 See Securities Exchange Act Release No. 79964 (Feb. 3, 2017), 82 FR 10059 (Feb. 9, 2017) (Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of File No. SR– FINRA–2016–039). 17 The definition of ‘‘specified adult’’ in Rule 2165 covers those investors who are particularly susceptible to financial exploitation. A ‘‘specified adult’’ is (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. See Rule 2165(a)(1). Supplementary Material .03 to Rule 2165 provides that a member firm’s reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member firm’s business relationship with the person. VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts) when member firms exercise discretion in placing temporary holds on disbursements of funds or securities from the accounts of specified adults consistent with the requirements of Rule 2165. FINRA encourages member firms to take advantage of the Rule 2165 safe harbor where there is a reasonable belief of customer financial exploitation. Rule Safeguards Rule 2165 also includes important safeguards that are designed to ensure that there is not a misapplication of the rule, including the requirements that: (1) A member firm provide notification of the hold and the reason for the hold to all parties authorized to transact business on the account, including the customer and the customer’s trusted contact person no later than two business days after the date that the member firm first placed the hold; 18 (2) A member firm that places a hold pursuant to the rule immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that the financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted; 19 (3) In addition to the general supervisory and recordkeeping requirements of FINRA Rules 3110, 3120, 3130, 3150, and Rule 4510 Series, a member relying on the rule establish and maintain written supervisory procedures reasonably designed to achieve compliance with the rule, including, but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of specified adults; 20 (4) Any request for a hold be escalated to a supervisor, compliance department or legal department rather than allowing an associated person handling an account to independently place a hold; 21 (5) A member firm relying on the rule develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of the rule; 22 and (6) A member firm relying on the rule retain records related to compliance 18 See Rule 2165(b)(1)(B). Rule 2165(b)(1)(C). 20 See Rule 2165(c)(1). 21 See Rule 2165(c)(2). 22 See Supplementary Material .02 to Rule 2165. 19 See PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 with the rule, which shall be readily available to FINRA, upon request.23 Importantly, a temporary hold pursuant to Rule 2165 may be placed on a particular suspicious disbursement(s) (e.g., a payment related to a commonly known scam, such as a lottery scam) but not on non-suspicious disbursements (e.g., a regular mortgage payment or assisted living facility payment). Responding to Suspected Financial Exploitation Temporary holds on disbursements have played a critical role in providing member firms a way to quickly respond to suspicions of financial exploitation before potentially ruinous losses occur for the customer. For example, FINRA’s report for the five-year anniversary of the FINRA Securities Helpline for Seniors® highlights several matters that illustrate the positive impact of placing temporary holds on disbursements to address financial exploitation.24 The matters include temporary holds placed by member firms to prevent senior investors from losing: • $200,000 (representing approximately two-thirds of the investor’s account) related to a Central Intelligence Agency (CIA) lawsuit scam; • $10,000 in a lottery scam; • $60,000 in a romance scam; and • $50,000 to financial exploitation by a brother-in-law. Proposed Amendments to Rule 2165 The retrospective review indicated that Rule 2165 has been an effective tool in the fight against financial exploitation,25 but supported amendments to permit member firms to: (1) Extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm has reported the matter to a state regulator or agency or a court of 23 See Rule 2165(d). Protecting Senior Investors 2015–2020: An Update on the FINRA Securities Helpline for Seniors, Other FINRA Initiatives and Member Firm Practices (Apr. 2020) (Senior Helpline Anniversary Report). 25 During exams in 2019 focusing on Rule 2165, FINRA observed that large firms were more likely than small firms to place temporary holds pursuant to Rule 2165. Some member firms that declined to use the safe harbor cited litigation risks associated with placing temporary holds or in evaluating whether a customer is being financially exploited. This is consistent with FINRA’s survey responses with large firms indicating that they had placed a temporary hold pursuant to the rule in a significantly larger percentage than mid-size or small firms. Thirty-one survey respondents had placed a temporary hold pursuant to Rule 2165. Eighty-four percent of large firm respondents had placed a hold pursuant to Rule 2165, while only 6% of all other sized firm respondents had placed a hold pursuant to Rule 2165. 24 See E:\FR\FM\28JNN1.SGM 28JNN1 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices competent jurisdiction; and (2) place a temporary hold on a securities transaction where there is a reasonable belief of financial exploitation. khammond on DSKJM1Z7X2PROD with NOTICES Hold Period Rule 2165 currently allows a member firm to place a temporary hold on a specified adult customer’s account for up to 25-business days if the criteria in the rule are satisfied. More specifically, the temporary hold authorized by Rule 2165 would expire not later than 15business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by a state regulator or agency or court of competent jurisdiction.26 In addition, provided that the member firm’s internal review of the facts and circumstances supports its reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted, the rule permits the member to extend the temporary hold for an additional 10business days, unless otherwise terminated or extended by a state regulator or agency or court of competent jurisdiction.27 Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal generally supported extending the current 25-business day hold period to provide member firms with a longer period to resolve matters.28 These Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal indicated that the current period may not be sufficient when a matter is under consideration by a state regulator, state agency or court. Notably, this view was shared by NAPSA and the Philadelphia Financial Exploitation Task Force in comments to Regulatory Notice 19–27 and the Notice 20–34 Proposal, with both commenters stating that adult protective services (APS) agencies, state regulators and law enforcement typically need more time to conduct thorough investigations. In contrast, in comments to Regulatory Notice 19–27 and the Notice 20–34 Proposal, NASAA supported retaining the current 25-business day period, which aligns with the hold period provided in the NASAA Model Act to Protect Vulnerable Adults from 26 See Rule 2165(b)(2). Rule 2165(b)(3). 28 See, e.g., comments to the Notice 20–34 Proposal from CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia Financial Exploitation Task Force, SIFMA and Wells Fargo. 27 See VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 Financial Exploitation (NASAA Model Act).29 During exams in 2019 focusing on Rule 2165, member firms expressed to FINRA the need for additional time to conduct investigations and resolve matters.30 Member firms were asked in the survey distributed to member firms about possible impediments to resolving a matter within the current 25-business day hold period provided by Rule 2165. Approximately 53% of survey respondents stated that they had been unable to resolve a matter within the 25business day period. The most common reason was that the matter was under consideration by a state agency (such as APS) or a court. Other common reasons included: (1) The customer did not respond to inquiries from the firm; or (2) the customer did not believe that he or she was being financially exploited. For matters that took longer to resolve than the 25-business day period, approximately 35% of survey respondents indicated that it took on average 26–50 days to resolve the matter and approximately 59% of survey respondents indicated that it took on average 51–100 days to resolve the matter. FINRA recognizes that placing or extending a temporary hold on a disbursement is a serious step for a member and the affected customer. While FINRA recognizes that customers may be affected by temporary holds, the costs of financial exploitation can be devastating to customers, particularly older customers who rely on their savings and investments to pay their living expenses and who may not have the ability to offset a significant loss over time. Furthermore, the rule’s safeguards are designed to ensure that there is not a misapplication of the rule. To provide member firms with additional time to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations, FINRA is proposing amending Rule 2165 to permit extending a temporary hold on a disbursement of funds or securities or a transaction in securities for an 29 The NASAA Model Act is available at https:// www.nasaa.org/industry-resources/senior-issues/ model-act-to-protect-vulnerable-adults-fromfinancial-exploitation/. 30 In 2019, FINRA identified as an examination priority: (1) Reviewing member firms’ controls regarding their obligations under trusted contact person-related amendments to FINRA Rule 4512 and Rule 2165, to the extent that firms anticipate placing temporary holds on disbursements pursuant to the Rule 2165 safe harbor, including whether firms have clearly defined policies and procedures or practices; and (2) learning about firms’ early experiences with these provisions. See 2019 Annual Risk Monitoring and Examination Priorities Letter (Jan. 22, 2019). PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 34087 additional 30-business days if the member firm has reported the matter to a state regulator or agency or a court of competent jurisdiction.31 In addition, Rule 2165(d) requires members to retain records related to compliance with the rule, which shall be readily available to FINRA, upon request. To evidence compliance with Rule 2165 in placing or extending a temporary hold, FINRA is proposing to require that a member firm retain records of the reason and support for any extension of a temporary hold, including information regarding any communications with or by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.32 Transactions in Securities While placing a hold pursuant to Rule 2165 stops funds or securities from leaving a customer’s account, the rule currently does not apply to transactions in securities.33 Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal generally supported extending Rule 2165 to permit a member firm to place a temporary hold on a transaction in securities when the firm has a reasonable belief that the customer is being financially exploited.34 Even if a temporary hold is placed on a disbursement out of the customer’s account, these Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal noted that executing a related transaction may result in significant financial consequences for the customer (e.g., adverse tax consequences, surrender charges, the inability to regain access to a sold investment that has been closed to new investors or trading by a perpetrator in inappropriate high risk or illiquid securities). Currently, there are 34 states with laws that allow investment advisers or broker-dealers to place some form of hold. Several Retrospective Review 31 The 30-business day hold period in proposed Rule 2165(b)(4) would be in addition to the 15business day hold in Rule 2165(b)(2) and the 10business day hold in Rule 2165(b)(3). 32 See proposed Rule 2165(d)(6). 33 For example, Rule 2165 currently 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 firm, then the rule could apply to the disbursement of the proceeds where the customer is a ‘‘specified adult’’ and there is reasonable belief of financial exploitation. 34 See, e.g., comments to the Notice 20–34 Proposal from CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, LPL, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia Financial Exploitation Task Force, SIFMA and Wells Fargo. E:\FR\FM\28JNN1.SGM 28JNN1 34088 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Stakeholders noted that while the NASAA Model Act does not extend to transactions, 20 of those 34 states (with approximately half of the U.S. population) have enacted laws permitting investment advisers and broker-dealers to place temporary holds on disbursements and transactions.35 While some state laws permit placing holds on transactions, FINRA is proposing to amend Rule 2165 to create the first uniform national standard for placing holds on securities transactions related to suspected financial exploitation. Under the safe harbor approach, a member firm would be permitted, but not required, to place a temporary hold on a transaction when there is a reasonable belief that the customer is being financially exploited. FINRA recognizes that placing a temporary hold on a transaction is a serious step for a member firm and the affected customer. But FINRA also recognizes that placing a temporary hold on the underlying transaction may prevent significant negative financial consequences for the customer. These negative financial consequences can result even if a temporary hold is placed on any related disbursement of funds out of the customer’s account. Moreover, as discussed above, the rule includes important safeguards designed to avoid misapplication of the rule. Need for the Proposed Amendments khammond on DSKJM1Z7X2PROD with NOTICES Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal consistently indicated the prevalence of and problems associated with financial exploitation of senior investors,36 including the potential for significant and longstanding harm to customers.37 Moreover, Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal generally 35 As of June 2021, the following states permit holds on disbursement and transactions: Arkansas, Arizona, California, Florida, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, North Dakota, Oklahoma, South Carolina, Texas, Utah, Virginia, Washington and West Virginia. 36 See, e.g., comments to the Notice 20–34 Proposal from PIABA. See also Consumer Financial Protection Bureau, Office of Financial Protection for Older Americans, Suspicious Activity Reports on Elder Financial Exploitation: Issues and Trends (Feb. 2019) (highlighting that SAR filings on elder financial exploitation quadrupled from 2013 to 2017). See also U.S. Securities and Exchange Commission, Office of the Investor Advocate, Elder Financial Exploitation (June 2018) (providing an overview of studies on the prevalence of senior financial exploitation). 37 See, e.g., discussion in the Senior Helpline Anniversary Report regarding a member firm placing a temporary hold to prevent a senior investor from losing $200,000 (representing approximately two-thirds of the investor’s account) related to a CIA lawsuit scam. VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 agree that member firms need tools to address suspected financial exploitation.38 As discussed in greater detail in section C infra, some Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal expressed concern that a temporary hold could be harmful to customers or that Rule 2165 could be misused by member firms. Regarding the potential of customer harm, it is important to consider that Rule 2165 is available only if the member firm has a reasonable belief that the customer is being financially exploited. Moreover, the temporary hold may be placed only on the suspicious disbursement (or transaction if the proposed amendment to extend the rule to transactions is approved). Even if the member firm has placed a temporary hold on a suspicious disbursement or transaction pursuant to Rule 2165, a temporary hold may not be placed on non-suspicious disbursements or transactions (e.g., a regular mortgage payment). In evaluating concerns about potential misuse of Rule 2165, neither FINRA nor commenters were able to identify any reported customer complaints on Forms U4 or U5 or pursuant to Rule 4530 related to placing a temporary hold pursuant to Rule 2165. Moreover, respondents to FINRA’s survey to member firms indicated that they had not reported a complaint on Form U4 or Form U5 or pursuant to Rule 4530 related to placing any temporary holds. In addition, neither FINRA nor the states have brought any disciplinary action due to misuse of Rule 2165 or any state temporary hold law.39 The demonstrated and potential benefits of Rule 2165 weigh in favor of the proposed rule change. Notably, Rule 2165 has been used by member firms to address suspected financial exploitation and these temporary holds have prevented significant financial harm to customers.40 Moreover, Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal stressed that, even if a temporary hold is placed on a disbursement of funds or securities, a 38 See, e.g., in comments to the Notice 20–34 Proposal the Miami Investor Rights Clinic stated that it ‘‘fully supports’’ the proposed amendments as they will provide greater protection to seniors and vulnerable adults that may be victims of financial exploitation. IRI also stated that the proposed amendments will better enable firms to prevent the financial exploitation of vulnerable Americans. 39 This lack of disciplinary action by FINRA and the states is also noted in the NASAA’s comment letter to the Notice 20–34 Proposal. 40 See, e.g., Protecting Senior Investors 2015– 2020: An Update on the FINRA Securities Helpline for Seniors, Other FINRA Initiatives and Member Firm Practices (Apr. 2020). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 customer can experience significant negative financial consequences if a suspicious transaction is permitted.41 Some Retrospective Review Stakeholders and commenters to the Notice 20–34 Proposal believe that the proposed extension of the hold period is too long and could be harmful to customers.42 Commenters to the Notice 20–34 Proposal stated that some matters can be quickly resolved after placing a temporary hold, but complex matters that involve investigations by state regulators or agencies or legal actions in a court (e.g., financial exploitation of an elderly customer by a family member or caregiver) may need additional time to resolve.43 In considering the appropriate time period, it is notable that NAPSA and the Philadelphia Financial Exploitation Task Force—representing APS programs which play a critical role in investigating suspicions of financial exploitation—also expressed in their comments to the Notice 20–34 Proposal the need for additional time to conduct investigations. NAPSA’s comment letter to the Notice 20–34 Proposal also shared data in support of the need for a longer hold period in Rule 2165 that the average investigation duration of reported matters to the federal National Adult Maltreatment Reporting System (NAMRS) is 52.6 days. In considering the proposed extension of Rule 2165 to securities transactions, it is notable that approximately 50% of the U.S. population lives in a state that permits broker-dealers and investment advisers to place holds on suspicious securities transactions pursuant to state law. These state laws represent a patchwork where some customers may be afforded greater protection from financial exploitation than other customers. In contrast, Rule 2165 provides a uniform national standard for placing temporary holds when there is a reasonable belief of financial exploitation. Moreover, Rule 2165 incorporates numerous safeguards that apply to each temporary hold and that are designed to ensure that there is not a misapplication of the rule. If the Commission approves the proposed rule change, FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice. The implementation date will be no later than 180 days following publication of the Regulatory 41 See, e.g., comments to the Notice 20–34 Proposal from Edward Jones and the Miami Investor Rights Clinic. 42 See, e.g., comments to the Notice 20–34 Proposal from NASAA and the Pittsburgh Clinic. 43 See, e.g., comments to the Notice 20–34 Proposal from Edward Jones. E:\FR\FM\28JNN1.SGM 28JNN1 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Notice announcing Commission approval. 2. Statutory Basis The proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,44 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The proposed rule change will promote investor protection by allowing for additional time for firms to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations of suspected financial exploitation. Customers would benefit from this extension in instances where the additional time allows for a positive identification of financial exploitation and retention of the disbursement amount within the account. The proposed rule change also will allow firms to place temporary holds on transactions, which should prevent harm to exploited customers such as being subject to adverse tax consequences, early withdraw penalties or investments that do not align with their investor profiles. Moreover, the rule incorporates numerous safeguards that apply to each temporary hold and that are designed to ensure that there is not a misapplication of the rule. khammond on DSKJM1Z7X2PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. All member firms would be subject to the proposed rule change. Economic Impact Assessment FINRA has undertaken an economic impact assessment, as set forth below, to further analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits, and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in assessing how best to meet its regulatory objective. Regulatory Need FINRA is active in its efforts to protect senior investors from financial exploitation. In the context of these efforts, and with evidence of a growing 44 15 U.S.C. 78o–3(b)(6). VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 trend of such exploitation,45 FINRA conducted a review of relevant existing rules and administrative processes that help protect senior investors from financial exploitation. Through this review, FINRA has received feedback on the effectiveness and efficiency of Rule 2165. Economic Baseline The economic baseline for the proposed rule amendments is the current Rule 2165 and its use by member firms, as well as existing firm policies and state laws related to protecting senior investors. As discussed above, in August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect senior investors from financial exploitation. To conduct the assessment phase of the retrospective rule review, FINRA first sought comment in Regulatory Notice 19–27. FINRA obtained input from several advisory committees comprising member firms of different sizes and business models, investor protection advocates, and member firms, and from trade associations. In addition, FINRA obtained the perspective of its operating departments that touch the rules and their administration. FINRA also distributed a survey to all member firms in the first quarter of 2020, to which a subset of firms, ranging from small to large firms, responded. The purpose of the survey was to collect information and to provide member firms an additional opportunity to provide their views. The economic baseline, regarding the current application of the rule by firms and the effectiveness and efficiency of the rule, is established using the information obtained during the assessment phase. As noted above, with respect to the use of Rule 2165 in placing a temporary hold on disbursements, of the member firms that indicated having placed a temporary hold,46 approximately 53% of survey respondents stated that the firm had been unable to resolve the matter within the 25-business day period provided by the rule. For firms responding that any matter took longer to resolve than the 25-business day period, approximately 35% indicated that it took on average 26–50 days to resolve the matter and approximately 45 See supra note 36. firms responded in the survey that they had placed a temporary hold. Out of the 31 firms that indicated that they had placed a temporary hold, 17 firms indicated that it took more than the 25-business day period to resolve the matter, as currently provided in Rule 2165. 46 Thirty-one PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 34089 59% indicated that it took on average 51–100 days to resolve the matter. With respect to the issue of placing a temporary hold on transactions, currently 20 states (with approximately half of the U.S. population) have enacted laws permitting investment advisers and broker-dealers to place temporary holds on disbursements and transactions. Economic Impacts FINRA has analyzed the potential costs and benefits of the proposed amendments, and the different parties that are expected to be affected. FINRA has identified senior investors and member firms that serve senior investors as the main parties to be impacted by the proposed amendments. The proposed amendments to Rule 2165 would permit extending a temporary hold for an additional 30business days if the member firm has reported the matter to a state agency or a court of competent jurisdiction. FINRA believes that allowing an extension to the temporary hold period would provide firms additional time to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations of suspected financial exploitation. Moreover, extensions may allow for greater collaboration and interaction between the member firm placing the hold and other authorities or regulators, on a local, state or national level. Customers would benefit from this extension in instances where the additional time allows for a positive identification of financial exploitation and retention of the disbursement amount within the account. Alternatively, if the additional time leads to a determination that no financial exploitation occurred, customers may incur costs from the extended delay in access to the funds. The proposed amendments would also extend Rule 2165 to permit a member firm to place a temporary hold on a transaction in securities when the firm has a reasonable belief that the customer is being financially exploited. Twenty states, together containing approximately half of the U.S. population, already permit firms to place temporary holds on transactions. The proposed amendments would impact firms in all states by providing a safe harbor under FINRA rules for firms to place holds on transactions. The extent of the impact would vary across firms depending on their decision to take advantage of the proposed extension of Rule 2165 to E:\FR\FM\28JNN1.SGM 28JNN1 34090 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices transactions.47 The proposed amendments would also impact the customers of those firms. In instances when a firm’s hold on a transaction prevented financial exploitation, the customer whose transaction was held would benefit from not incurring the negative financial consequences of the transaction. In instances when a transaction hold was executed and no financial exploitation was found, the economic impact of the hold stems primarily from the magnitude of the security’s price movement (positive or negative) between the time the hold was placed and the time it was lifted. Alternatives Considered khammond on DSKJM1Z7X2PROD with NOTICES FINRA considered various alternatives to the proposed rule amendments. First, FINRA considered different possible extensions of the temporary hold period, ranging from no extension to an extension of up to 75business days. On the one hand, a longer temporary hold period would allow member firms more time to investigate and contact the relevant parties, as well as obtain input from a state regulator, agency, or court if needed. Alternatively, an extended temporary hold period could result in increased costs to both investors and firms.48 These include increased costs to investors from lost investment opportunities or liquidity problems and increased costs to firms from legal challenges to investigations, all of which are anticipated to be related to the length of the hold on disbursements. Considering these factors, as well as information from the various outreach efforts and stakeholder engagements, FINRA believes that the proposal strikes a balance across the spectrum of possible options. Second, FINRA considered not extending Rule 2165 to transactions, but rather keeping the temporary hold option only for disbursements. FINRA weighed the costs and benefits of doing so, as discussed above, also considering that some states already permit such a hold on transactions. Ultimately, FINRA has found the proposed amendment to expand Rule 2165 to transactions to strike an appropriate balance between regulatory burden, investor protection and investor choice. 47 When asked in the survey about FINRA extending Rule 2165 to transactions, respondents were evenly split with 50% anticipating that the member firm would place holds on transactions pursuant to amended Rule 2165 and 50% anticipating that the firm would not place holds. 48 See discussion in ‘‘Economic Impacts’’ section above in section B, ‘‘Hold Period’’ section below in section C, and Regulatory Notice 20–34. VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 Third, FINRA considered requiring firms to place temporary holds, for either disbursements or transactions, rather than permitting it. FINRA believes that providing firms with the discretion of placing a hold, versus a requirement, results in incentives to use the hold option in a way that ultimately benefits both the firm and its’ customers.49 Finally, FINRA considered extending Rule 2165 to situations where a firm has a reasonable belief that one of its customers is exhibiting signs of diminished capacity or cognitive decline, affecting the customers’ ability to protect their own financial interests, without any evidence of financial exploitation. FINRA believes that the associated costs with establishing such a standard outweigh the potential benefits. Such an extension would give discretion to member firms that could directly or indirectly impede informed investor choice, with potential costs that might exceed the potential benefits from investor protection. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The proposed rule change was published for comment in Regulatory Notice 20–34. FINRA received 19 comment letters in response to the Notice 20–34 Proposal. A copy of the Notice 20–34 Proposal is attached [sic] as Exhibit 2a. Copies of the comment letters received in response to the Notice 20–34 Proposal are attached [sic] as Exhibit 2c.50 The comments and FINRA’s responses are set forth in detail below. Support for the Notice 20–34 Proposal Fourteen commenters expressed support for the Notice 20–34 Proposal.51 Several commenters stated that the proposed amendments will better protect vulnerable investors from financial exploitation. For example, Miami Investor Rights Clinic stated that it ‘‘fully supports’’ the proposed amendments as they will provide greater protection to seniors and vulnerable adults that may be victims of 49 See Bruce I. Carlin, Tarik Umar, and Hanyi Yi, Deputization, National Bureau of Economic Research Working Paper No. 27225 (May 2020) (discussing the benefits of providing financial institutions tools to address suspected financial exploitation versus requiring specific actions). 50 See Exhibit 2b for a list of abbreviations assigned to commenters. 51 See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia Financial Exploitation Task Force, SIFMA and Wells Fargo. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 financial exploitation. IRI also stated that the proposed amendments will better enable firms to prevent the financial exploitation of vulnerable Americans. LPL supported the proposed amendments but requested that the hold period be further extended to allow for holds of up to 100-business days. Regarding the hold period in Rule 2165, FINRA has tried to strike a reasonable balance in giving member firms adequate time to investigate and contact the relevant parties, as well as seek input from a state regulator or agency or a court if needed, but also not permitting an open-ended hold period in recognition of the seriousness of placing a temporary hold. Rule 2165 would continue to permit the temporary hold to be terminated or extended by a state regulator, state agency or court of competent jurisdiction. In addition, if the proposed hold period does not provide member firms adequate time to investigate and contact the relevant parties, as well as seek input from a state regulator or agency or a court if needed, FINRA may consider extending the temporary hold period in future rulemaking. Opposition to or Concerns With the Notice 20–34 Proposal PIABA supports enhanced protections for investors but expressed concern that member firms could misuse the proposed amendments. PIABA recommended that FINRA require in Rule 2165 that the member firm: (1) Update its written supervisory manuals to include training and review transactions suspected of elder abuse; (2) include in its retained records documentation of the firm’s reasonable efforts to quickly investigate the matter; and (3) file a report with the appropriate APS agency and state regulator as soon as reasonably practical but no later than seven business days from the initial hold period. Regarding PIABA’s suggested requirements, Rule 2165 currently includes several safeguards designed to prevent misapplication of the rule, including requiring that member firms that intend to place a hold pursuant to Rule 2165 must: (1) Retain records related to the firm’s internal investigation; 52 and (2) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of the rule.53 FINRA also expects member firms to comply with 52 See 53 See E:\FR\FM\28JNN1.SGM Rule 2165(d). Supplementary Material .02 to Rule 2165. 28JNN1 34091 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices all applicable state requirements, including reporting requirements. NASAA’s letter acknowledges that neither FINRA nor the states have brought disciplinary action due to misuse of Rule 2165 or any state temporary hold laws by a member firm. However, as discussed in greater detail below, NASAA does not support extending the temporary hold period and expressed concern about the potential impact of a longer hold period on customers. FINRA’s responses to NASAA’s detailed concerns are included below in section C under ‘‘Hold Period’’ and ‘‘Transactions in Securities.’’ Pittsburgh Clinic does not support current Rule 2165 or the proposed amendments because it believes that member firms could misuse temporary holds for their financial benefit. FINRA has extensively addressed the concerns of potential misuse above in section A under the ‘‘Need for the Proposed Amendments.’’ Pittsburgh Clinic also said that the survey of member firms should not be relied on to assess Rule 2165 or the proposed amendments because: (1) The survey respondents are member firms that stand to benefit from an increase to the extension of the hold period, as well as the rule’s safe harbor provisions; (2) the survey respondents were not flrm Sile # required to provide any information to support their claims; and (3) the survey respondents represent an inadequate and unrepresentative sample size (the survey was provided to 3,516 member firms, of which only 238 member firms responded). FINRA engaged in extensive internal and external stakeholder outreach during the assessment phase of the retrospective review to assess the effectiveness and efficiency of FINRA’s rules and administrative processes that help protect senior investors from financial exploitation. This outreach included: (1) Seeking comment in Regulatory Notice 19–27 on several questions with respect to addressing financial exploitation and other circumstances of financial vulnerability for senior investors; (2) obtaining input from several advisory committees comprising member firms of different sizes and business models, investor protection advocates, member firms, and trade associations; (3) obtaining the perspective of FINRA’s operating departments that administer the rules and their administration; (4) considering FINRA examination observations and findings involving senior issues; and (5) developing an anonymous survey that was distributed to all member firms in the first quarter of 2020. In addition, as part of the action phase of the RR, lndustl') Sm·,c~ Respondents Count Count Tot.ll 54 See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia Financial Exploitation Task Force, SIFMA and Wells Fargo. Jkt 253001 person or using other tools, but the firm has experienced situations where the current 25-day period provided under Rule 2165 is insufficient. Edward Jones notes having experienced this situation when working with state agencies, such as APS, to investigate a case of suspected financial exploitation. Edward Jones stated that some APS agencies are not adequately resourced to quickly review these matters and yet are hesitant to request an extension of a hold until they determine whether exploitation exists. While NAPSA and Philadelphia Financial Exploitation Task Force previously supported a 60-business day extension in their comments to Regulatory Notice 19–27, they PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 supported the proposed extension of the temporary hold period in the Notice 20– 34 Proposal. NAPSA and Philadelphia Financial Exploitation Task Force noted that the latest data submitted to the NAMRS indicates that the average investigation duration of all reported cases is 52.6 days. Recognizing that financial exploitation investigations are often more complicated and time consuming, NAPSA and Philadelphia Financial Exploitation Task Force expressed appreciation for the additional days as a starting point, with the ability to revisit as more data becomes available. While acknowledging that an adequate period for review of the facts and circumstances must be allowed, E:\FR\FM\28JNN1.SGM 28JNN1 EN28JN21.000</GPH> khammond on DSKJM1Z7X2PROD with NOTICES The majority of commenters supported the proposed amendment to extend a temporary hold for an additional 30 business days if the member firm has reported the matter to a state regulator or agency or a court of competent jurisdiction.54 For example, Edward Jones stated that the firm is often able to quickly resolve matters where it suspects financial exploitation of a senior or vulnerable investor by engaging the customer’s trusted contact 17:39 Jun 25, 2021 010 Tofal 3,519 Hold Period VerDate Sep<11>2014 retrospective review, FINRA sought comment on the proposed amendments to Rule 2165 in Regulatory Notice 20– 34. FINRA considered the collective feedback from the Retrospective Review Stakeholders and comments to the Notice 20–34 Proposal in assessing Rule 2165 and the proposed amendments. The purpose of the survey distributed to all member firms was to collect information in order to validate the feedback received and to provide an additional opportunity for all member firms to provide their views. There were 238 firms that responded to the survey, and the breakdown of these firm survey respondents according to firm size, as measured by the number of registered representatives, and the comparison to the general population of member firms, is provided in Table 1 below. With respect to the Pittsburgh Clinic comment letter, FINRA notes that: (1) The membership survey is one tool frequently used by FINRA in its outreach efforts to solicit information from its members; (2) the response rate mentioned is a lower bound when considering relevant member firms; and (3) the breakdown of survey respondents by firm size is mostly representative with respect to the full member firm population, as summarized in Table 1. khammond on DSKJM1Z7X2PROD with NOTICES 34092 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Pittsburgh Clinic stated that the proposed longer hold period increases the possibility that a member firm could misuse a hold to harm an investor. Pittsburgh Clinic stated that the proposed hold period is too long because customers may need the funds to pay for living expenses. Pittsburgh Clinic also expressed concern that Rule 2165 does not include a reporting requirement unless a member firm wants to avail itself of the additional 30business day extension. NASAA believes that the current 25business day hold period, with the authority for state regulators or agencies or the courts to terminate or extend, is the better approach as it provides time to conduct the investigation and avoids unintended hardships from lengthy delays. Moreover, NASAA supports involving state regulators or agencies or the courts within the initial 15-business day hold period specified in Rule 2165(b)(2). Information gathered during the assessment phase of the retrospective review, including discussions during exams in 2019 focusing on Rule 2165 and a survey to FINRA membership, supports the need for additional time to conduct investigations and resolve matters. NAPSA—representing APS programs which play a critical role in investigating suspicions of financial exploitation—also expressed the need for additional time to conduct investigations. NAPSA’s data that the average investigation duration of reported matters to the NAMRS is 52.6 days also highlights the need for a longer period to conduct investigations and resolve matters. Retrospective Review Stakeholders and comments to the Notice 20–34 Proposal indicated that some matters can be quickly resolved after placing a temporary hold (e.g., by explaining to the customer that the activity and requested disbursement fits a commonly known scam). However, complex matters that involve investigations by state regulators or agencies or legal actions in a court (e.g., financial exploitation of an elderly customer by a family member or caregiver) may need additional time to resolve. These complex matters often involve information gathering and sharing by the firm and the state agency or regulatory investigating the matter. To provide member firms with additional time to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations, FINRA is proposing amending Rule 2165 to permit extending a temporary hold for an additional 30 business days if the VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 member firm has reported the matter to a state agency or a court of competent jurisdiction. Extending the hold period as proposed is intended to address the complex matters that need additional time to resolve. In addition, some states mandate reporting of suspected financial exploitation by financial institutions, including broker-dealers, within a specified period of time. FINRA expects member firms to comply with all applicable state requirements, including reporting requirements. In addition, FINRA agrees with the commenters who stressed the need for a temporary hold not to interfere with non-suspicious disbursements that are needed for the customer’s expenses. A temporary hold pursuant to Rule 2165 may be placed only on the suspicious disbursement (or transaction if the proposed amendment to extend the rule to transactions is adopted). A temporary hold may not be placed on nonsuspicious disbursements or transactions (e.g., a regular mortgage payment). Commonwealth supported the proposed extension of the temporary hold period and stated that there should be some additional remedy when a matter is not resolved at the end of the hold period. As previously addressed in the rule filing to adopt Rule 2165, if a member firm is unable to resolve an issue due to circumstances beyond its control, there may be circumstances in which a member firm may extend a temporary hold after the period provided under the safe harbor.55 NAPSA and the Philadelphia Financial Exploitation Task Force requested clarification on whether ‘‘a state regulator or agency of competent jurisdiction’’ would include state or local law enforcement. For purposes of Rule 2165, FINRA would interpret state or local law enforcement to be ‘‘a state regulator or agency of competent jurisdiction’’ and, accordingly, state or local law enforcement may terminate or extend a temporary hold pursuant to Rule 2165. SIFMA noted that, depending on the jurisdiction, APS may be a state or local agency and suggested revising proposed Rule 2165(b)(4) to refer to a ‘‘state regulator, or an agency of competent jurisdiction’’ to more clearly cover local APS. The inclusion of ‘‘a state regulator or agency of competent jurisdiction’’ in proposed Rule 2165(b)(4) is consistent with the language in current Rule 2165(b)(2) and (3). For purposes of Rule 2165, FINRA would interpret state or local APS to be ‘‘a state regulator or agency of competent jurisdiction’’ and, 55 See PO 00000 File No. SR–FINRA–2016–039. Frm 00126 Fmt 4703 Sfmt 4703 accordingly, state or local APS may terminate or extend a temporary hold pursuant to Rule 2165. Transactions in Securities The majority of commenters supported the proposed amendment to permit member firms to place a temporary hold on a securities transactions where there is a reasonable belief of financial exploitation.56 For example, NAPSA and the Philadelphia Financial Exploitation Task Force applauded the creation of a uniform national standard for placing holds on transactions related to suspected financial exploitation. Miami Investor Rights Clinic stated that substantial damage can result from securities transactions due to financial exploitation and that appropriate policies, procedures, and training can minimize any misapplication Rule 2165. Edward Jones stated that the financial harm resulting from exploitative transactions can take many forms, including selling long-held investments with low cost basis resulting in a significant tax liability, the sale of fixed income investments with yields more attractive than current rates, and the sale of variable annuities, which could lead to surrender charges. Edward Jones stated that the perpetrator of the exploitation could also utilize the proceeds of these sales to invest in highrisk securities further jeopardizing the financial security of the senior or vulnerable investor. Edward Jones stated that when balanced against the potential financial devastation to the senior or vulnerable investor, the proposal is a natural extension of the current rule that will further minimize the risk of financial harm and provide greater protection for senior and vulnerable investors. In its comment to Regulatory Notice 19–27, PIABA cautioned FINRA against substantive changes to Rule 2165 that might conflict with state laws. However, PIABA noted that the recently adopted state laws allow for holds on securities transactions and disbursements. Pittsburgh Clinic expressed concern that the proposed extension gives too much authority to member firms with limited oversight and that the customer may bear the risk of loss if firm makes the wrong call in placing a hold. NASAA stated that if FINRA extends Rule 2165 to permit placing holds on securities transactions, the supervision and documentation requirements under 56 See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, LPL, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia Financial Exploitation Task Force, SIFMA and Wells Fargo. E:\FR\FM\28JNN1.SGM 28JNN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Rule 2165(c)–(d), and the training specified in Supplementary Material .02 to Rule 2165, should be enhanced to require a documented rationale stating why the customer’s financial professional and the member firm believe that a transaction hold will protect the customer whereas a disbursement hold would not. NASAA stated that documentation should be reviewed as a part of FINRA examinations. NASAA believes that disbursement holds should be the default and that a transaction hold should be utilized only where a disbursement hold cannot adequately protect a customer. Furthermore, NASAA supports member firms establishing policies and procedures to address any harm that may result to the customer from a transaction hold. FINRA recognizes that placing a temporary hold on a transaction is a serious step for a member and the affected customer. Requiring that a member firm make a disbursement hold the default and use transaction holds only where a disbursement hold cannot adequately protect the customer would add complexity and uncertainty into the decision to place a temporary hold as the member firm would be required to weigh the consequences to the customer of placing the hold at different stages. Moreover, placing a temporary hold on the underlying transaction may prevent significant negative financial consequences for the customer. These negative financial consequences can result even if a temporary hold is placed on any related disbursement of funds out of the customer’s account. Importantly, the ability to place a hold on a transaction pursuant to Rule 2165 would apply only if the firm had a reasonable belief that the customer was being financially exploited. As noted above, FINRA would pursue disciplinary action against a firm that uses Rule 2165 for inappropriate purposes. As discussed in Regulatory Notice 20–34 and NASAA’s comment letter to Regulatory Notice 20–34, neither FINRA nor the states have brought an action against a member firm for misuse of a temporary hold to address suspected financial exploitation. Some member firms already place holds on securities transactions pursuant to state law. As noted in section A of this filing, currently, 20 states (with approximately half of the U.S. population) have enacted laws permitting investment advisers and broker-dealers to place temporary holds on disbursements and transactions. Amending Rule 2165 as proposed would create the first uniform national VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 34093 standard for placing holds on transactions related to suspected financial exploitation. Moreover, extending Rule 2165 to transactions would allow for consistent, national safeguards to avoid misapplication of temporary holds. NASAA also noted that the NASAA Model Act is limited to disbursements, in part, because a delay in a securities transaction could be deemed inconsistent with best execution requirements. Regarding whether the best execution obligation applies to a member firm’s decision to place a temporary hold on a securities transaction where there is a reasonable belief of customer financial exploitation, ‘‘[b]roker-dealers are reminded that nothing under the federal securities laws or FINRA rules obligates them to accept an order where they believe that the associated compliance or legal risks are unacceptable.’’ 57 capacity in the absence of suspected financial exploitation. In addition, in comments to Regulatory Notice 19–27, the Cornell Clinic, NASAA, PIABA and Pittsburgh Clinic expressed concerns that such an extension would give member firms too much discretion or would unfairly impede customer autonomy. FINRA has not proposed to extend Rule 2165 to situations where a member firm has a reasonable belief that the customer has cognitive decline or diminished capacity but there is no evidence of financial exploitation due to the concerns expressed that such an extension would give member firms too much discretion or would unfairly impede customer autonomy. Rather than rulemaking, FINRA summarized the information obtained about member firms’ procedures and practices in this area in Regulatory Notice 20–34 to assist other member firms and investors. Mandatory Holds Miami Investor Rights Clinic noted that Rule 2165 is a safe harbor and that FINRA should consider amendments to Rule 2165 requiring that member firms place temporary holds. FINRA believes that a member firm using its discretion to place a temporary hold allows for the judicious use of temporary holds to protect customers from financial exploitation. Trusted Contact Person Where a customer has not named a trusted contact person, Wells Fargo suggested that FINRA give member firms the flexibility to contact a person ‘‘reasonably associated’’ with the customer’s account. Under Rule 2165 as originally proposed in Regulatory Notice 15–37 (October 2015) (Notice 15–37 Proposal), if the trusted contact person was unavailable, a member firm placing a hold would have been required to contact an immediate family member, unless the member reasonably believed that the immediate family member was financially exploiting the customer. Commenters to the Notice 15–37 Proposal expressed concerns that the proposed requirement would impinge upon customer privacy and would be operationally challenging for member firms in identifying the customer’s immediate family members. Due to these concerns, FINRA removed the requirements in the Notice 15–37 Proposal with respect to notifying an immediate family member when a temporary hold is placed. In the rule filing to adopt Rule 2165, FINRA noted that Rule 2165 would not preclude a member firm from contacting an immediate family member or any other person if the member has customer consent to do so and that contacting such persons may be useful to member firms in administering customer accounts.59 NAPSA and the Philadelphia Financial Exploitation Task Force recommended that FINRA pursue efforts to promote use of trusted contact Cognitive Decline or Diminished Capacity Some commenters supported extending Rule 2165 to situations where a firm has a reasonable belief that the customer has an impairment, such as diminished capacity, that renders the individual unable to protect his or her own interests, even though there is no evidence of financial exploitation.58 Some Retrospective Review Stakeholders also supported extending Rule 2165 to these situations. However, other Retrospective Review Stakeholders expressed concerns that member firms are not well-positioned to determine if a customer is suffering from cognitive decline or diminished 57 See SEC Staff Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities (Nov. 12, 2020), available at https:// www.sec.gov/tm/risks-omnibus-accountstransacting-low-priced-securities (SEC Staff Bulletin). The SEC Staff Bulletin provides that, where the broker-dealer determines that the risks cannot be appropriately managed, and particularly in the context of low-priced securities transactions, a broker-dealer should consider, among other things, restricting or rejecting transactions effected on behalf of the customers of a foreign financial institution. 58 See Miami Investor Rights Clinic, NAPSA, Philadelphia Financial Exploitation Task Force and Wells Fargo. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 59 See E:\FR\FM\28JNN1.SGM File No. SR–FINRA–2016–039. 28JNN1 34094 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices persons by customers. FINRA has taken steps to encourage customers to name trusted contact persons. For example, the SEC’s Office of Investor Education and Advocacy and FINRA collaborated on an Investor Bulletin that helps customers understand the purpose of designating a trusted contact person for brokerage accounts, and encourages customers to designate a trusted contact person.60 In addition, in April 2018, FINRA published a similar article providing information on the trusted contact person-related amendments to Rule 4512 and Rule 2165 for investors and member firms.61 FINRA and the FINRA Investor Education Foundation have highlighted these articles on FINRA-managed social media channels, including Facebook and Twitter, and staff regularly discuss the benefits of designating a trusted contact when speaking with individual investors. khammond on DSKJM1Z7X2PROD with NOTICES Reporting Requirements Several commenters expressed concern that Rule 2165’s safe harbor does not extend to complaints reportable on Forms U4 (Uniform Application for Securities Industry Registration or Transfer) or U5 (Uniform Termination Notice for Securities Industry Registration), or pursuant to Rule 4530 about an associated person whose actions were within the safe harbor and stated that some member firms and associated persons may choose not to place a hold pursuant to Rule 2165 because of concerns about a possible customer complaint.62 These commenters requested guidance on when a Rule 2165-related complaint would be reportable and supported developing a specific problem code for reporting any Rule 2165-related complaint to FINRA pursuant to FINRA Rule 4530. FSI suggested that FINRA consider additional protections for financial professionals so they can confidently act when there is possible exploitation that could have long-term negative consequences on a client’s financial future and overall well-being. As discussed in Regulatory Notice 20– 34, to date, based on FINRA’s review of reported complaints, member firms have not reported a complaint on Forms U4 or U5 or pursuant to Rule 4530 related 60 The Investor Bulletin was published in March 2020 and is available on the SEC’s website at https://www.investor.gov/introduction-investing/ general-resources/news-alerts/alerts-bulletins/ investor-bulletins-trusted-contact and on FINRA’s website at https://www.finra.org/investors/insights/ consider-adding-trusted-contact-to-your-account. 61 FINRA made a downloadable print version of the article available at https://www.finra.org/sites/ default/files/Protecting-Seniors-From-FinancialExploitation_0.pdf. 62 See Cambridge, FSI and SIFMA. VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 to placing a temporary hold pursuant to Rule 2165. Moreover, survey respondents indicated that they had not reported a complaint on Form U4 or Form U5 or pursuant to Rule 4530 related to placing any temporary holds. FINRA does not currently plan to propose guidance regarding when a Rule 2165-related complaint would be reportable or develop a specific problem code for reporting any Rule 2165-related complaint to FINRA pursuant to FINRA Rule 4530. In considering whether a complaint is reportable, member firms should use the existing publicly available guidance. FINRA may reconsider this issue or develop a specified problem code for reporting any Rule 2165-related complaint to FINRA pursuant to FINRA Rule 4530 if complaints are reported in the future and they appear to have a detrimental impact on the protection of seniors and other vulnerable adults. Customer Actions Cambridge supported extending the safe harbor provided by Rule 2165 to protecting member firms and registered representatives from customer actions as a result of steps taken by a member firm pursuant to Rule 2165. FINRA previously addressed this issue when adopting Rule 2165, noting that member firms today make judgments with regard to making or withholding disbursements and already face litigation risks with respect to these decisions.63 Rule 2165 is designed to provide regulatory relief to member firms by providing a safe harbor from FINRA rules for a determination to place a hold. Some states may separately provide immunity to member firms under state law. Scope of Rule 2165 Because some state temporary hold laws cover customers younger than 65 years of age, LPL suggested that FINRA amend the definition of ‘‘specified adult’’ in Rule 2165(a)(1) to include persons 60 years of age and older. In adopting Rule 2165, FINRA solicited feedback regarding whether the ages used in the definition of ‘‘specified adult’’ in proposed Rule 2165 should be modified or eliminated. As discussed in the rule filing proposing Rule 2165, some commenters suggested including an age lower than 65 and some commenters suggested including an age over 65 in the definition.64 The inclusion of persons 65 and older in the definition reflects, in part, that federal agencies, FINRA and NASAA have focused on persons age 65 and older for 63 See 64 See PO 00000 File No. SR–FINRA–2016–039. File No. SR–FINRA–2016–039. Frm 00128 Fmt 4703 Sfmt 4703 various senior initiatives. In addition, the definition of ‘‘specified adult’’ in Rule 2165(a)(1) also includes persons age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. Manabat stated that FINRA rules protecting senior investors should apply to non-U.S. investors. For clarity, FINRA rules apply to U.S. and non-U.S. customers of member firms. NAPSA and the Philadelphia Financial Exploitation Task Force recommended that investment companies, such as mutual funds, be permitted to place temporary holds. In 2018, staff in the SEC’s Division of Investment Management issued a noaction letter to the Investment Company Institute stating that the staff would not recommend enforcement action if, consistent with the conditions in the letter, a transfer agent, acting on behalf of a mutual fund, temporarily delayed for more than seven days the disbursement of redemption proceeds from the mutual fund account of a specified adult held directly with the transfer agent based on a reasonable belief that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.65 The no-action letter permits mutual fund transfer agents to protect specified adult shareholders from financial exploitation to the same extent that broker-dealers may do so currently under FINRA Rule 2165. If a member firm places a temporary hold, Rule 2165 requires 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. FSI recommended that FINRA provide additional guidance to member firms on conducting these internal reviews. FSI stated that state regulators and agencies have the appropriate expertise to conduct these types of investigations and member firms work cooperatively to provide state regulators and agencies with requested information. FSI stated that member firms have access to internal records that evidence the customer’s regular trading and account disbursement activity, but firms do not want to, for example, front-run and jeopardize a criminal investigation by trying to contact and interview witnesses. 65 See Investment Company Institute, SEC NoAction Letter (June 1, 2018). E:\FR\FM\28JNN1.SGM 28JNN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices As stated in the rule filing proposing the adoption of Rule 2165, FINRA believes that the appropriate internal review will depend on the facts and circumstances of the situation.66 Member firms have discretion in conducting a reasonable internal review under proposed Rule 2165. In addition, Rule 2165 gives member firms flexibility regarding notifying some parties when the member firm reasonably suspects that the party is involved in the financial exploitation. Specifically, Rule 2165(b)(1)(B)(i)–(ii) provides that a member firm is not required to provide notification of a temporary hold to a party authorized to transact business on the account or the trusted contact person if the member firm reasonably suspects that the authorized party or trusted contact person, respectively, may be engaged in the financial exploitation of the specified adult. If Rule 2165 is extended to allow for temporary holds on transactions in securities, FSI suggested that FINRA expand the application of the safe harbor provided by Rule 2165 to cover both FINRA Rule 3260 (Discretionary Accounts) and FINRA Rule 5310.01 (Execution of Marketable Customer Orders). Rule 3260’s scope and purpose are distinguishable from permitting a member firm to place a temporary hold on a transaction when there is a reasonable belief that the customer is being financially exploited. Rules 3260 addresses the creation and maintenance of discretionary accounts and requires firms to have procedures to identify and prevent excessive trading or ‘‘churning’’ in such accounts. Rule 3260 is intended to protect customers from the misuse of discretionary power by firms and associated persons. In considering whether Rule 2165’s safe harbor needs to be extended to address rules relating to order execution, ‘‘[b]roker-dealers are reminded that nothing under the federal securities laws or FINRA rules obligates them to accept an order where they believe that the associated compliance or legal risks are unacceptable.’’ 67 the FINRA Foundation aimed at promoting awareness about, and support for, the prevention of financial fraud and exploitation, while simultaneously empowering financial consumers to protect themselves and their loved ones, using tactics including: Æ Training law enforcement and victim advocates to detect, investigate, and assist consumers with concerns of financial fraud and exploitation in collaboration with federal and state securities regulators, APS groups, NAPSA, the National Center for Victims of Crime, the National White Collar Crime Center, and staff from FINRA’s National Cause and Financial Crimes Detection Programs; Æ Engaging in consumer outreach— often in coordination with the SEC, CFPB, state securities regulators, and nonprofits such as AARP and Better Business Bureaus—to empower financial consumers to spot, avoid, and report financial fraud; Æ Conducting, supporting, and disseminating research focused on financial exploitation and fraud as well as aging and financial decision-making, which is shared with internal and external stakeholders; 68 Æ Collaborating with Committees and Task Forces focused on issues of financial fraud and exploitation, including working with the Department of Justice’s Elder Justice Initiative, serving on NAPSA’s Financial Exploitation Advisory Board, serving on NASAA’s Senior Issues and Diminished Capacity Committee Advisory Council, participating on various multidisciplinary teams (MDTs) aimed at protecting and assisting vulnerable adults, and holding joint trainings with the CFPB’s Office of Older Americans, and meeting periodically with state securities regulators and states’ attorneys general to discuss senior investor protection issues; 69 • Issuing alerts and articles that educate investors about important issues and highlighting risks facing senior investors; 70 • Launching the dedicated FINRA Securities Helpline for Seniors®— Outreach and Collaboration CAI requested that FINRA coordinate with state authorities and SEC on measures to address financial exploitation. FINRA has and will continue to prioritize senior investors and address financial exploitation of senior investors, including through: • Carrying out a multi-faceted investor protection campaign through 68 See FINRA Investor Education Foundation Investor Protection Campaign Research, available at www.finrafoundation.org/fraudresearch. 69 See Protecting Senior Investors 2015–2020: An Update on the FINRA Securities Helpline for Seniors, Other FINRA Initiatives and Member Firm Practices (Apr. 2020). 70 See, e.g., articles such as Protecting Seniors from Financial Exploitation and Don’t Give in to Power of Attorney Pressure; Investor Alerts such as Power of Attorney and Your Investments–10 Tips, Plan for Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death, and Seniors Beware: What You Should Know About Life Settlements; and FINRA’s Retirement web page for investors. 66 See 67 See File No. SR–FINRA–2016–039. SEC Staff Bulletin. VerDate Sep<11>2014 17:39 Jun 25, 2021 Jkt 253001 PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 34095 available at (844) 57–HELPS—to provide senior investors and their family members with a supportive place to get assistance from specially trained FINRA staff related to concerns they have with their brokerage accounts and investments; • Collaborating with NASAA and the SEC to address senior investor protection, including issuing a Senior Safe Act Fact Sheet designed to raise awareness among member firms, investment advisers and transfer agents about the Act and its immunity provisions; 71 • Producing and presenting on inperson and virtual panels addressing senior investor protection with the SEC, state securities regulators, NASAA, APS offices, NAPSA, FBI and other agencies; and • Meeting with adult protective services staff in multiple states, in part through NAPSA, to increase coordination of senior investor protection efforts and highlight FINRA Rule 2165’s provision that APS can direct a member firm to terminate or extend a temporary hold authorized by the Rule. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, 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– FINRA–2021–016 on the subject line. 71 See https://www.finra.org/sites/default/files/ senior_safe_act_factsheet.pdf. E:\FR\FM\28JNN1.SGM 28JNN1 34096 Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2021–016. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (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 website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2021–016 and should be submitted on or before July 19, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.72 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–13653 Filed 6–25–21; 8:45 am] khammond on DSKJM1Z7X2PROD with NOTICES BILLING CODE 8011–01–P [Release No. 34–92226; File No. SR–ISE– 2021–14] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 2, Section 4 (Obligations of Market Makers), Options 4, Section 3 (Criteria for Underlying Securities), Options 4, Section 8 (Long-Term Options Contracts), and Options 4A, Section 12 (Terms of Index Options Contracts) 1. Purpose The Exchange proposes to amend Options 2, Section 4, Obligations of Market Makers; Options 4, Section 3, Criteria for Underlying Securities; Options 4, Section 8, Long-Term Options Contracts; and Options 4A, Section 12, Terms of Index Options Contracts. Each change will be described below. SECURITIES AND EXCHANGE COMMISSION June 22, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 9, 2021, Nasdaq ISE, LLC (‘‘ISE’’ or ‘‘Exchange’’) 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 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Options 2, Section 4, Obligations of Market Makers; Options 4, Section 3, Criteria for Underlying Securities; Options 4, Section 8, Long-Term Options Contracts; and Options 4A, Section 12, Terms of Index Options Contracts. The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/ise/rules, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 72 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:39 Jun 25, 2021 2 17 Jkt 253001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00130 Fmt 4703 Sfmt 4703 Options 2, Section 4(a) The Exchange proposes to remove the following rule text from Options 2, Section 4(a), which has been in place since ISE’s inception: 3 . . . Ordinarily, Market Makers are expected to: (1) Refrain from purchasing a call option or a put option at a price more than $0.25 below parity, although a larger amount may be appropriate considering the particular market conditions. In the case of calls, parity is measured by the bid in the underlying security, and in the case of puts, parity is measured by the offer in the underlying security. (2) The $0.25 amount above may be increased, or the provisions of this Rule may be waived, by the Exchange on a series-byseries basis. This proposed rule text also previously existed on Cboe Exchange, Inc. within prior Rule 8.7 4 and was removed from Cboe’s Rulebook in 2019.5 The 3 See Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (In the Matter of the Application of The International Securities Exchange LLC for Registration as a National Securities Exchange; Findings and Opinion of the Commission). 4 Prior Interpretation and Policy .02 to Rule 8.7 provided, ‘‘Market-Makers are expected ordinarily to refrain from purchasing a call option or a put option at a price more than $0.25 below parity, although a larger amount may be appropriate considering the particular market conditions. In the case of calls, parity is measured by the bid in the underlying security, and in the case of puts, parity is measured by the offer in the underlying security. The $0.25 amount above may be increased, or the provisions of this Interpretation may be waived, by the Exchange on a series-by-series basis.’’ 5 Cboe’s rule change merely noted, with respect to the removal of Cboe’s parity rule, that the filing makes non-substantive changes to the rule governing a Market-Maker’s general obligations (current Rule 8.7, in part), most of which remove redundant provisions that are already covered under the umbrella of a Market-Maker’s obligation to engage in dealing to maintain fair and orderly markets. No specific argument is provided with respect to removing this provision. See Securities Exchange Act 87024 (September 19, 2019), 84 FR 50545 (September 25, 2019) (SR–CBOE–2019–059) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Certain Rules Relating To Market-Makers Upon Migration to the Trading System Used by Cboe Affiliated Exchanges). E:\FR\FM\28JNN1.SGM 28JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 121 (Monday, June 28, 2021)]
[Notices]
[Pages 34084-34096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92225; File No. SR-FINRA-2021-016]


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

June 22, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on June 9, 2021, the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 2165 (Financial Exploitation of 
Specified Adults) to permit member firms to: (1) Extend a temporary 
hold on a disbursement of funds or securities or a transaction in 
securities for an additional 30-business days if the member firm has 
reported the matter to a state regulator or agency or a court of 
competent jurisdiction; and (2) place a temporary hold on a securities 
transactions where there is a reasonable belief of financial 
exploitation.
    The text of the proposed rule change is available on FINRA's 
website at https://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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

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

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

1. Purpose
Protection of Senior Investors
    The protection of senior investors is a top priority for FINRA. 
FINRA has prioritized protecting senior investors and addressed 
financial exploitation of senior investors in numerous ways, including:
     Identifying senior investor issues as an examination 
priority; \3\
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    \3\ See 2019 Risk Monitoring and Examination Priorities Letter 
(January 2019) available at https://www.finra.org/industry/2019-annual-risk-monitoring-and-examination-priorities-letter.
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     Launching the dedicated FINRA Securities Helpline for 
Seniors[supreg]--available at 844-57-HELPS--to provide

[[Page 34085]]

senior investors and their family members with a supportive place to 
get assistance from specially trained FINRA staff related to concerns 
they have with their brokerage accounts and investments; \4\
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    \4\ See https://www.finra.org/investors/highlights/finra-securities-helpline-seniors.
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     Creating national standards that give member firms tools--
including permitting firms to place temporary holds on disbursements 
when they have a reasonable belief of financial exploitation and 
requiring firms to request information from customers about a trusted 
contact--to address suspected financial exploitation of senior 
investors and other vulnerable adults (i.e., FINRA Rules 2165 and 4512 
(Customer Account Information)); \5\
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    \5\ See Regulatory Notice 17-11 (March 2017).
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     Collaborating with the North American Securities 
Administrators Association (NASAA) and the SEC to address senior 
investor protection, including issuing a Senior Safe Act Fact Sheet 
designed to raise awareness among member firms, investment advisers and 
transfer agents about the Act and its immunity provisions; \6\
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    \6\ See https://www.finra.org/sites/default/files/senior_safe_act_factsheet.pdf.
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     Issuing alerts and articles educating investors about 
important issues and highlighting risks facing senior investors; \7\
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    \7\ See, e.g., articles such as Protecting Seniors from 
Financial Exploitation; Investor Alerts such as Power of Attorney 
and Your Investments--10 Tips, Plan for Transition: What You Should 
Know About the Transfer of Brokerage Account Assets on Death; 
Seniors Beware: What You Should Know About Life Settlements; and 
FINRA's Retirement web page for investors.
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     Conducting and funding research on senior investors and 
financial fraud, and engaging with national, state and grassroots 
partners to develop and distribute fraud prevention resources, educate 
consumers, and provide training for law enforcement professionals, 
victim advocates, and other people on the front lines of fighting 
financial fraud;
     Issuing Regulatory Notices emphasizing member firms' 
obligations to senior investors and providing guidance on how to 
fulfill those obligations; \8\ and
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    \8\ See, e.g., Regulatory Notice 07-43 (Sept. 2007) (reminding 
member firms of their obligations relating to senior investors and 
highlighting industry practices to serve these customers); 
Regulatory Notice 09-42 (July 2009) (reminding member firms of their 
obligations with variable life settlement activities); Regulatory 
Notice 11-52 (Nov. 2011) (reminding member firms of their 
obligations regarding the supervision of associated persons using 
senior designations); Regulatory Notice 16-12 (Apr. 2016) (providing 
guidance on member firm responsibilities for sales of pension income 
stream products); and Regulatory Notice 17-11 (Mar. 2017) 
(discussing new senior rules and potential financial exploitation of 
seniors).
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     Bringing disciplinary actions for misconduct against 
senior investors.\9\
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    \9\ See, e.g., John W. Cutshall, Order Accepting Offer of 
Settlement, Case ID 2014041590801 (April 11, 2019); Steven Anthony 
Olejniczak, Letter of Acceptance, Waiver and Consent, Case ID 
2016050107901 (May 8, 2017).
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Retrospective Review
    In August 2019, FINRA launched a retrospective review to assess the 
effectiveness and efficiency of its rules and administrative processes 
that help protect senior investors from financial exploitation. The 
retrospective review process has two phases: The assessment phase and 
the action phase.\10\ During the assessment phase, FINRA first sought 
comment in Regulatory Notice 19-27 (August 2019) on several questions 
with respect to addressing financial exploitation and other 
circumstances of financial vulnerability for senior investors. FINRA 
received 22 comment letters to Regulatory Notice 19-27.\11\
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    \10\ The stakeholders who provided input during the assessment 
phase of the retrospective review are collectively referred to 
herein as the ``Retrospective Review Stakeholders.''
    \11\ See Letter from Megan Valent, Legal Intern, and Teresa J. 
Verges, Director, University of Miami School of Law, to Jennifer 
Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated 
Oct. 1, 2019; Letter from Jennifer L. Szaro, Lara May & Associates, 
LLC, and Robert L. Hamman, President, First Asset Financial Inc., to 
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 
dated Oct. 4, 2019; Letter from William A. Jacobson, Esq., Clinical 
Professor of Law and Director, Securities Law Clinic Cornell Law 
School, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 7, 2019; Letter from Kathleen Quinn, 
Board President, National Adult Protective Services Association, to 
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 
dated Oct. 7, 2019; Letter from Joe Snyder, Chair, Philadelphia 
Financial Exploitation Task Force dated Oct. 7, 2019; Letter from 
Seth A. Miller, General Counsel, Executive Vice President, and Chief 
Risk Officer, Cambridge Investment Research, Inc., to Jennifer 
Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated 
Oct. 8, 2019; Letter from Eric Arnold, Clifford Kirsch and Holly 
Smith of Eversheds Sutherland on behalf of the Committee of Annuity 
Insurers, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 8, 2019; Letter from Christopher W. 
Bok, Director, Financial Information Forum, to Jennifer Piorko 
Mitchell, Office of the Corporate Secretary, FINRA, dated Oct. 8, 
2019; Letter from Marc Fitapelli, Esq., Fitapelli Kurta, to Jennifer 
Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated 
Oct. 8, 2019; Letter from Robin M. Traxler, Senior Vice President, 
Policy & Deputy General Counsel, Financial Services Institute, to 
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 
dated Oct. 8, 2019; Letter from Maureen K. Paparo, Legal Intern, 
Lincoln Square Legal Services, Inc., to Jennifer Piorko Mitchell, 
Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter 
from Courtney Rogers Reid, Lead Counsel, Broker-Dealer and 
Investment Adviser Practice Group, MML Investors Services, LLC, to 
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 
dated Oct. 8, 2019; Letter from Christopher Gerold, President, 
NASAA, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 8, 2019; Letter from Nancy Brown, 
President and Co-Chair, and Dian VanderWell, Opportunity Alliance 
Nevada, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 8, 2019; Letter from Christine Lazaro, 
President, and Samuel B. Edwards, Executive Vice President, Public 
Investors Advocate Bar Association, to Jennifer Piorko Mitchell, 
Office of the Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter 
from Lisa J. Bleier, Managing Director, SIFMA, dated Oct. 8, 2019; 
Letter from Christine Lazaro, Professor of Clinical Legal Education 
and Director, St. John's University School of Law Securities 
Arbitration Clinic, to Jennifer Piorko Mitchell, Office of the 
Corporate Secretary, FINRA, dated Oct. 8, 2019; Letter from Alice L. 
Stewart, Director, and Rachael T. Shaw, Adjunct Professor, 
University of Pittsburgh School of Law--Securities Arbitration 
Clinic, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 8, 2019; Letter from Ron Long, Head of 
Elder Client Initiatives Center of Excellence, Wells Fargo & 
Company, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 8, 2019; Letter from Erin K. Lineham, 
Associate General Counsel--Compliance, Raymond James & Associates, 
Inc., to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated Oct. 29, 2019; Letter from Marin E. Gibson, 
Managing Director and Associate General Counsel, SIFMA, dated Nov. 
15, 2019; Letter from Anonymous dated Feb. 26, 2020.
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    In addition, FINRA obtained input from several advisory committees 
comprising member firms of different sizes and business models, 
investor protection advocates, member firms, and trade associations. 
FINRA also obtained the perspective of its operating departments that 
touch the rules and their administration. Moreover, FINRA considered 
examination observations and findings involving senior issues. In this 
regard, FINRA previously had identified as an examination priority 
reviewing member firms' controls regarding Rule 2165, to the extent 
firms anticipated using the rule's safe harbor, and Rule 4512's 
trusted-contact provision.\12\ As part of these reviews, FINRA looked 
at whether member firms had clearly defined policies and procedures and 
sought information about firms' early experiences with these 
provisions.\13\
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    \12\ See 2019 Annual Risk Monitoring and Examination Priorities 
Letter (Jan. 22, 2019).
    \13\ See id.
---------------------------------------------------------------------------

    Finally, FINRA developed an anonymous survey that was distributed 
to all member firms in the first quarter of 2020. The purpose of the 
survey was to collect information in order to validate the feedback 
received and to provide an additional opportunity for all member firms 
to provide their views.\14\
---------------------------------------------------------------------------

    \14\ Survey respondents were permitted to skip survey questions. 
Information in this proposed rule change regarding the percentage of 
survey respondents for a particular question reflects the percentage 
of respondents for that question, not the percentage of respondents 
for the survey as a whole. Approximately 190 responses were received 
for each top-level (non-nested) question. Therefore, unless 
indicated otherwise, the reader can assume that the percentages are 
based on approximately 190 responses.

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[[Page 34086]]

    The review indicated that FINRA's steps to protect seniors have 
provided helpful and effective tools in the fight against financial 
exploitation, but it also suggested some additional tools, guidance and 
rule changes. In October 2020, FINRA published Regulatory Notice 20-34 
(October 2020): (1) Summarizing the retrospective rule review process, 
including the predominant themes that emerged from Retrospective Review 
Stakeholder feedback; (2) seeking comment on proposed amendments to 
Rule 2165 to further address suspected financial exploitation of senior 
investors and other specified adults; and (3) providing guidance to aid 
member firms and senior investors and other specified adults.\15\
---------------------------------------------------------------------------

    \15\ The proposed amendments to Rule 2165 set forth in 
Regulatory Notice 20-34 are referred to herein as the ``Notice 20-34 
Proposal.''
---------------------------------------------------------------------------

Rule 2165
    Rule 2165 is the first uniform national standard for placing 
temporary holds on disbursements to address suspected financial 
exploitation.\16\ Rule 2165 permits a member firm to place a temporary 
hold on a disbursement of funds or securities from the account of a 
``specified adult'' \17\ customer when the firm reasonably believes 
that financial exploitation of that adult has occurred, is occurring, 
has been attempted or will be attempted. Prior to the adoption of Rule 
2165, some member firms expressed concern that placing a temporary hold 
on suspicious disbursements was not explicitly permitted by FINRA 
rules.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 79964 (Feb. 3, 
2017), 82 FR 10059 (Feb. 9, 2017) (Notice of Filing of Partial 
Amendment No. 1 and Order Granting Accelerated Approval of File No. 
SR-FINRA-2016-039).
    \17\ The definition of ``specified adult'' in Rule 2165 covers 
those investors who are particularly susceptible to financial 
exploitation. A ``specified adult'' is (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. See Rule 
2165(a)(1). Supplementary Material .03 to Rule 2165 provides that a 
member firm's reasonable belief that a natural person age 18 and 
older has a mental or physical impairment that renders the 
individual unable to protect his or her own interests may be based 
on the facts and circumstances observed in the member firm's 
business relationship with the person.
---------------------------------------------------------------------------

    To address these concerns, Rule 2165 provides member firms and 
their associated persons with a safe harbor from FINRA Rules 2010 
(Standards of Commercial Honor and Principles of Trade), 2150 (Improper 
Use of Customers' Securities or Funds; Prohibition Against Guarantees 
and Sharing in Accounts) and 11870 (Customer Account Transfer 
Contracts) when member firms exercise discretion in placing temporary 
holds on disbursements of funds or securities from the accounts of 
specified adults consistent with the requirements of Rule 2165. FINRA 
encourages member firms to take advantage of the Rule 2165 safe harbor 
where there is a reasonable belief of customer financial exploitation.
Rule Safeguards
    Rule 2165 also includes important safeguards that are designed to 
ensure that there is not a misapplication of the rule, including the 
requirements that:
    (1) A member firm provide notification of the hold and the reason 
for the hold to all parties authorized to transact business on the 
account, including the customer and the customer's trusted contact 
person no later than two business days after the date that the member 
firm first placed the hold; \18\
---------------------------------------------------------------------------

    \18\ See Rule 2165(b)(1)(B).
---------------------------------------------------------------------------

    (2) A member firm that places a hold pursuant to the rule 
immediately initiate an internal review of the facts and circumstances 
that caused the member to reasonably believe that the financial 
exploitation of the specified adult has occurred, is occurring, has 
been attempted, or will be attempted; \19\
---------------------------------------------------------------------------

    \19\ See Rule 2165(b)(1)(C).
---------------------------------------------------------------------------

    (3) In addition to the general supervisory and recordkeeping 
requirements of FINRA Rules 3110, 3120, 3130, 3150, and Rule 4510 
Series, a member relying on the rule establish and maintain written 
supervisory procedures reasonably designed to achieve compliance with 
the rule, including, but not limited to, procedures related to the 
identification, escalation and reporting of matters related to the 
financial exploitation of specified adults; \20\
---------------------------------------------------------------------------

    \20\ See Rule 2165(c)(1).
---------------------------------------------------------------------------

    (4) Any request for a hold be escalated to a supervisor, compliance 
department or legal department rather than allowing an associated 
person handling an account to independently place a hold; \21\
---------------------------------------------------------------------------

    \21\ See Rule 2165(c)(2).
---------------------------------------------------------------------------

    (5) A member firm relying on the rule develop and document training 
policies or programs reasonably designed to ensure that associated 
persons comply with the requirements of the rule; \22\ and
---------------------------------------------------------------------------

    \22\ See Supplementary Material .02 to Rule 2165.
---------------------------------------------------------------------------

    (6) A member firm relying on the rule retain records related to 
compliance with the rule, which shall be readily available to FINRA, 
upon request.\23\
---------------------------------------------------------------------------

    \23\ See Rule 2165(d).
---------------------------------------------------------------------------

    Importantly, a temporary hold pursuant to Rule 2165 may be placed 
on a particular suspicious disbursement(s) (e.g., a payment related to 
a commonly known scam, such as a lottery scam) but not on non-
suspicious disbursements (e.g., a regular mortgage payment or assisted 
living facility payment).
Responding to Suspected Financial Exploitation
    Temporary holds on disbursements have played a critical role in 
providing member firms a way to quickly respond to suspicions of 
financial exploitation before potentially ruinous losses occur for the 
customer. For example, FINRA's report for the five-year anniversary of 
the FINRA Securities Helpline for Seniors[supreg] highlights several 
matters that illustrate the positive impact of placing temporary holds 
on disbursements to address financial exploitation.\24\ The matters 
include temporary holds placed by member firms to prevent senior 
investors from losing:
---------------------------------------------------------------------------

    \24\ See Protecting Senior Investors 2015-2020: An Update on the 
FINRA Securities Helpline for Seniors, Other FINRA Initiatives and 
Member Firm Practices (Apr. 2020) (Senior Helpline Anniversary 
Report).
---------------------------------------------------------------------------

     $200,000 (representing approximately two-thirds of the 
investor's account) related to a Central Intelligence Agency (CIA) 
lawsuit scam;
     $10,000 in a lottery scam;
     $60,000 in a romance scam; and
     $50,000 to financial exploitation by a brother-in-law.
Proposed Amendments to Rule 2165
    The retrospective review indicated that Rule 2165 has been an 
effective tool in the fight against financial exploitation,\25\ but 
supported amendments to permit member firms to: (1) Extend a temporary 
hold on a disbursement of funds or securities or a transaction in 
securities for an additional 30-business days if the member firm has 
reported the matter to a state regulator or agency or a court of

[[Page 34087]]

competent jurisdiction; and (2) place a temporary hold on a securities 
transaction where there is a reasonable belief of financial 
exploitation.
---------------------------------------------------------------------------

    \25\ During exams in 2019 focusing on Rule 2165, FINRA observed 
that large firms were more likely than small firms to place 
temporary holds pursuant to Rule 2165. Some member firms that 
declined to use the safe harbor cited litigation risks associated 
with placing temporary holds or in evaluating whether a customer is 
being financially exploited. This is consistent with FINRA's survey 
responses with large firms indicating that they had placed a 
temporary hold pursuant to the rule in a significantly larger 
percentage than mid-size or small firms. Thirty-one survey 
respondents had placed a temporary hold pursuant to Rule 2165. 
Eighty-four percent of large firm respondents had placed a hold 
pursuant to Rule 2165, while only 6% of all other sized firm 
respondents had placed a hold pursuant to Rule 2165.
---------------------------------------------------------------------------

Hold Period
    Rule 2165 currently allows a member firm to place a temporary hold 
on a specified adult customer's account for up to 25-business days if 
the criteria in the rule are satisfied. More specifically, the 
temporary hold authorized by 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 otherwise 
terminated or extended by a state regulator or agency or court of 
competent jurisdiction.\26\ In addition, provided that the member 
firm's internal review of the facts and circumstances supports its 
reasonable belief that the financial exploitation of the specified 
adult has occurred, is occurring, has been attempted or will be 
attempted, the rule permits the member to extend the temporary hold for 
an additional 10-business days, unless otherwise terminated or extended 
by a state regulator or agency or court of competent jurisdiction.\27\
---------------------------------------------------------------------------

    \26\ See Rule 2165(b)(2).
    \27\ See Rule 2165(b)(3).
---------------------------------------------------------------------------

    Retrospective Review Stakeholders and commenters to the Notice 20-
34 Proposal generally supported extending the current 25-business day 
hold period to provide member firms with a longer period to resolve 
matters.\28\ These Retrospective Review Stakeholders and commenters to 
the Notice 20-34 Proposal indicated that the current period may not be 
sufficient when a matter is under consideration by a state regulator, 
state agency or court. Notably, this view was shared by NAPSA and the 
Philadelphia Financial Exploitation Task Force in comments to 
Regulatory Notice 19-27 and the Notice 20-34 Proposal, with both 
commenters stating that adult protective services (APS) agencies, state 
regulators and law enforcement typically need more time to conduct 
thorough investigations. In contrast, in comments to Regulatory Notice 
19-27 and the Notice 20-34 Proposal, NASAA supported retaining the 
current 25-business day period, which aligns with the hold period 
provided in the NASAA Model Act to Protect Vulnerable Adults from 
Financial Exploitation (NASAA Model Act).\29\
---------------------------------------------------------------------------

    \28\ See, e.g., comments to the Notice 20-34 Proposal from CAI, 
Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, Miami 
Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia 
Financial Exploitation Task Force, SIFMA and Wells Fargo.
    \29\ The NASAA Model Act is available at https://www.nasaa.org/industry-resources/senior-issues/model-act-to-protect-vulnerable-adults-from-financial-exploitation/.
---------------------------------------------------------------------------

    During exams in 2019 focusing on Rule 2165, member firms expressed 
to FINRA the need for additional time to conduct investigations and 
resolve matters.\30\ Member firms were asked in the survey distributed 
to member firms about possible impediments to resolving a matter within 
the current 25-business day hold period provided by Rule 2165. 
Approximately 53% of survey respondents stated that they had been 
unable to resolve a matter within the 25-business day period. The most 
common reason was that the matter was under consideration by a state 
agency (such as APS) or a court. Other common reasons included: (1) The 
customer did not respond to inquiries from the firm; or (2) the 
customer did not believe that he or she was being financially 
exploited. For matters that took longer to resolve than the 25-business 
day period, approximately 35% of survey respondents indicated that it 
took on average 26-50 days to resolve the matter and approximately 59% 
of survey respondents indicated that it took on average 51-100 days to 
resolve the matter.
---------------------------------------------------------------------------

    \30\ In 2019, FINRA identified as an examination priority: (1) 
Reviewing member firms' controls regarding their obligations under 
trusted contact person-related amendments to FINRA Rule 4512 and 
Rule 2165, to the extent that firms anticipate placing temporary 
holds on disbursements pursuant to the Rule 2165 safe harbor, 
including whether firms have clearly defined policies and procedures 
or practices; and (2) learning about firms' early experiences with 
these provisions. See 2019 Annual Risk Monitoring and Examination 
Priorities Letter (Jan. 22, 2019).
---------------------------------------------------------------------------

    FINRA recognizes that placing or extending a temporary hold on a 
disbursement is a serious step for a member and the affected customer. 
While FINRA recognizes that customers may be affected by temporary 
holds, the costs of financial exploitation can be devastating to 
customers, particularly older customers who rely on their savings and 
investments to pay their living expenses and who may not have the 
ability to offset a significant loss over time. Furthermore, the rule's 
safeguards are designed to ensure that there is not a misapplication of 
the rule.
    To provide member firms with additional time to resolve matters and 
for APS agencies, state regulators and law enforcement to conduct 
thorough investigations, FINRA is proposing amending Rule 2165 to 
permit extending a temporary hold on a disbursement of funds or 
securities or a transaction in securities for an additional 30-business 
days if the member firm has reported the matter to a state regulator or 
agency or a court of competent jurisdiction.\31\
---------------------------------------------------------------------------

    \31\ The 30-business day hold period in proposed Rule 2165(b)(4) 
would be in addition to the 15-business day hold in Rule 2165(b)(2) 
and the 10-business day hold in Rule 2165(b)(3).
---------------------------------------------------------------------------

    In addition, Rule 2165(d) requires members to retain records 
related to compliance with the rule, which shall be readily available 
to FINRA, upon request. To evidence compliance with Rule 2165 in 
placing or extending a temporary hold, FINRA is proposing to require 
that a member firm retain records of the reason and support for any 
extension of a temporary hold, including information regarding any 
communications with or by a state regulator or agency of competent 
jurisdiction or a court of competent jurisdiction.\32\
---------------------------------------------------------------------------

    \32\ See proposed Rule 2165(d)(6).
---------------------------------------------------------------------------

Transactions in Securities
    While placing a hold pursuant to Rule 2165 stops funds or 
securities from leaving a customer's account, the rule currently does 
not apply to transactions in securities.\33\ Retrospective Review 
Stakeholders and commenters to the Notice 20-34 Proposal generally 
supported extending Rule 2165 to permit a member firm to place a 
temporary hold on a transaction in securities when the firm has a 
reasonable belief that the customer is being financially exploited.\34\ 
Even if a temporary hold is placed on a disbursement out of the 
customer's account, these Retrospective Review Stakeholders and 
commenters to the Notice 20-34 Proposal noted that executing a related 
transaction may result in significant financial consequences for the 
customer (e.g., adverse tax consequences, surrender charges, the 
inability to regain access to a sold investment that has been closed to 
new investors or trading by a perpetrator in inappropriate high risk or 
illiquid securities).
---------------------------------------------------------------------------

    \33\ For example, Rule 2165 currently 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 firm, then the rule 
could apply to the disbursement of the proceeds where the customer 
is a ``specified adult'' and there is reasonable belief of financial 
exploitation.
    \34\ See, e.g., comments to the Notice 20-34 Proposal from CAI, 
Cambridge, Commonwealth, Edward Jones, Fidelity, FSI, IRI, LPL, 
Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, Philadelphia 
Financial Exploitation Task Force, SIFMA and Wells Fargo.
---------------------------------------------------------------------------

    Currently, there are 34 states with laws that allow investment 
advisers or broker-dealers to place some form of hold. Several 
Retrospective Review

[[Page 34088]]

Stakeholders noted that while the NASAA Model Act does not extend to 
transactions, 20 of those 34 states (with approximately half of the 
U.S. population) have enacted laws permitting investment advisers and 
broker-dealers to place temporary holds on disbursements and 
transactions.\35\
---------------------------------------------------------------------------

    \35\ As of June 2021, the following states permit holds on 
disbursement and transactions: Arkansas, Arizona, California, 
Florida, Iowa, Kentucky, Minnesota, Mississippi, Missouri, Nebraska, 
New Jersey, New Mexico, North Dakota, Oklahoma, South Carolina, 
Texas, Utah, Virginia, Washington and West Virginia.
---------------------------------------------------------------------------

    While some state laws permit placing holds on transactions, FINRA 
is proposing to amend Rule 2165 to create the first uniform national 
standard for placing holds on securities transactions related to 
suspected financial exploitation. Under the safe harbor approach, a 
member firm would be permitted, but not required, to place a temporary 
hold on a transaction when there is a reasonable belief that the 
customer is being financially exploited.
    FINRA recognizes that placing a temporary hold on a transaction is 
a serious step for a member firm and the affected customer. But FINRA 
also recognizes that placing a temporary hold on the underlying 
transaction may prevent significant negative financial consequences for 
the customer. These negative financial consequences can result even if 
a temporary hold is placed on any related disbursement of funds out of 
the customer's account. Moreover, as discussed above, the rule includes 
important safeguards designed to avoid misapplication of the rule.
Need for the Proposed Amendments
    Retrospective Review Stakeholders and commenters to the Notice 20-
34 Proposal consistently indicated the prevalence of and problems 
associated with financial exploitation of senior investors,\36\ 
including the potential for significant and longstanding harm to 
customers.\37\ Moreover, Retrospective Review Stakeholders and 
commenters to the Notice 20-34 Proposal generally agree that member 
firms need tools to address suspected financial exploitation.\38\
---------------------------------------------------------------------------

    \36\ See, e.g., comments to the Notice 20-34 Proposal from 
PIABA. See also Consumer Financial Protection Bureau, Office of 
Financial Protection for Older Americans, Suspicious Activity 
Reports on Elder Financial Exploitation: Issues and Trends (Feb. 
2019) (highlighting that SAR filings on elder financial exploitation 
quadrupled from 2013 to 2017). See also U.S. Securities and Exchange 
Commission, Office of the Investor Advocate, Elder Financial 
Exploitation (June 2018) (providing an overview of studies on the 
prevalence of senior financial exploitation).
    \37\ See, e.g., discussion in the Senior Helpline Anniversary 
Report regarding a member firm placing a temporary hold to prevent a 
senior investor from losing $200,000 (representing approximately 
two-thirds of the investor's account) related to a CIA lawsuit scam.
    \38\ See, e.g., in comments to the Notice 20-34 Proposal the 
Miami Investor Rights Clinic stated that it ``fully supports'' the 
proposed amendments as they will provide greater protection to 
seniors and vulnerable adults that may be victims of financial 
exploitation. IRI also stated that the proposed amendments will 
better enable firms to prevent the financial exploitation of 
vulnerable Americans.
---------------------------------------------------------------------------

    As discussed in greater detail in section C infra, some 
Retrospective Review Stakeholders and commenters to the Notice 20-34 
Proposal expressed concern that a temporary hold could be harmful to 
customers or that Rule 2165 could be misused by member firms. Regarding 
the potential of customer harm, it is important to consider that Rule 
2165 is available only if the member firm has a reasonable belief that 
the customer is being financially exploited. Moreover, the temporary 
hold may be placed only on the suspicious disbursement (or transaction 
if the proposed amendment to extend the rule to transactions is 
approved). Even if the member firm has placed a temporary hold on a 
suspicious disbursement or transaction pursuant to Rule 2165, a 
temporary hold may not be placed on non-suspicious disbursements or 
transactions (e.g., a regular mortgage payment).
    In evaluating concerns about potential misuse of Rule 2165, neither 
FINRA nor commenters were able to identify any reported customer 
complaints on Forms U4 or U5 or pursuant to Rule 4530 related to 
placing a temporary hold pursuant to Rule 2165. Moreover, respondents 
to FINRA's survey to member firms indicated that they had not reported 
a complaint on Form U4 or Form U5 or pursuant to Rule 4530 related to 
placing any temporary holds. In addition, neither FINRA nor the states 
have brought any disciplinary action due to misuse of Rule 2165 or any 
state temporary hold law.\39\
---------------------------------------------------------------------------

    \39\ This lack of disciplinary action by FINRA and the states is 
also noted in the NASAA's comment letter to the Notice 20-34 
Proposal.
---------------------------------------------------------------------------

    The demonstrated and potential benefits of Rule 2165 weigh in favor 
of the proposed rule change. Notably, Rule 2165 has been used by member 
firms to address suspected financial exploitation and these temporary 
holds have prevented significant financial harm to customers.\40\ 
Moreover, Retrospective Review Stakeholders and commenters to the 
Notice 20-34 Proposal stressed that, even if a temporary hold is placed 
on a disbursement of funds or securities, a customer can experience 
significant negative financial consequences if a suspicious transaction 
is permitted.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., Protecting Senior Investors 2015-2020: An Update 
on the FINRA Securities Helpline for Seniors, Other FINRA 
Initiatives and Member Firm Practices (Apr. 2020).
    \41\ See, e.g., comments to the Notice 20-34 Proposal from 
Edward Jones and the Miami Investor Rights Clinic.
---------------------------------------------------------------------------

    Some Retrospective Review Stakeholders and commenters to the Notice 
20-34 Proposal believe that the proposed extension of the hold period 
is too long and could be harmful to customers.\42\ Commenters to the 
Notice 20-34 Proposal stated that some matters can be quickly resolved 
after placing a temporary hold, but complex matters that involve 
investigations by state regulators or agencies or legal actions in a 
court (e.g., financial exploitation of an elderly customer by a family 
member or caregiver) may need additional time to resolve.\43\ In 
considering the appropriate time period, it is notable that NAPSA and 
the Philadelphia Financial Exploitation Task Force--representing APS 
programs which play a critical role in investigating suspicions of 
financial exploitation--also expressed in their comments to the Notice 
20-34 Proposal the need for additional time to conduct investigations. 
NAPSA's comment letter to the Notice 20-34 Proposal also shared data in 
support of the need for a longer hold period in Rule 2165 that the 
average investigation duration of reported matters to the federal 
National Adult Maltreatment Reporting System (NAMRS) is 52.6 days.
---------------------------------------------------------------------------

    \42\ See, e.g., comments to the Notice 20-34 Proposal from NASAA 
and the Pittsburgh Clinic.
    \43\ See, e.g., comments to the Notice 20-34 Proposal from 
Edward Jones.
---------------------------------------------------------------------------

    In considering the proposed extension of Rule 2165 to securities 
transactions, it is notable that approximately 50% of the U.S. 
population lives in a state that permits broker-dealers and investment 
advisers to place holds on suspicious securities transactions pursuant 
to state law.
    These state laws represent a patchwork where some customers may be 
afforded greater protection from financial exploitation than other 
customers. In contrast, Rule 2165 provides a uniform national standard 
for placing temporary holds when there is a reasonable belief of 
financial exploitation. Moreover, Rule 2165 incorporates numerous 
safeguards that apply to each temporary hold and that are designed to 
ensure that there is not a misapplication of the rule.
    If the Commission approves the proposed rule change, FINRA will 
announce the implementation date of the proposed rule change in a 
Regulatory Notice. The implementation date will be no later than 180 
days following publication of the Regulatory

[[Page 34089]]

Notice announcing Commission approval.
2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Act,\44\ which requires, among other things, 
that FINRA rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The proposed rule change will promote investor 
protection by allowing for additional time for firms to resolve matters 
and for APS agencies, state regulators and law enforcement to conduct 
thorough investigations of suspected financial exploitation. Customers 
would benefit from this extension in instances where the additional 
time allows for a positive identification of financial exploitation and 
retention of the disbursement amount within the account. The proposed 
rule change also will allow firms to place temporary holds on 
transactions, which should prevent harm to exploited customers such as 
being subject to adverse tax consequences, early withdraw penalties or 
investments that do not align with their investor profiles. Moreover, 
the rule incorporates numerous safeguards that apply to each temporary 
hold and that are designed to ensure that there is not a misapplication 
of the rule.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. All member firms would be 
subject to the proposed rule change.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the regulatory need for the proposed rule 
change, its potential economic impacts, including anticipated costs, 
benefits, and distributional and competitive effects, relative to the 
current baseline, and the alternatives FINRA considered in assessing 
how best to meet its regulatory objective.
Regulatory Need
    FINRA is active in its efforts to protect senior investors from 
financial exploitation. In the context of these efforts, and with 
evidence of a growing trend of such exploitation,\45\ FINRA conducted a 
review of relevant existing rules and administrative processes that 
help protect senior investors from financial exploitation. Through this 
review, FINRA has received feedback on the effectiveness and efficiency 
of Rule 2165.
---------------------------------------------------------------------------

    \45\ See supra note 36.
---------------------------------------------------------------------------

Economic Baseline
    The economic baseline for the proposed rule amendments is the 
current Rule 2165 and its use by member firms, as well as existing firm 
policies and state laws related to protecting senior investors. As 
discussed above, in August 2019, FINRA launched a retrospective review 
to assess the effectiveness and efficiency of its rules and 
administrative processes that help protect senior investors from 
financial exploitation. To conduct the assessment phase of the 
retrospective rule review, FINRA first sought comment in Regulatory 
Notice 19-27. FINRA obtained input from several advisory committees 
comprising member firms of different sizes and business models, 
investor protection advocates, and member firms, and from trade 
associations. In addition, FINRA obtained the perspective of its 
operating departments that touch the rules and their administration.
    FINRA also distributed a survey to all member firms in the first 
quarter of 2020, to which a subset of firms, ranging from small to 
large firms, responded. The purpose of the survey was to collect 
information and to provide member firms an additional opportunity to 
provide their views. The economic baseline, regarding the current 
application of the rule by firms and the effectiveness and efficiency 
of the rule, is established using the information obtained during the 
assessment phase.
    As noted above, with respect to the use of Rule 2165 in placing a 
temporary hold on disbursements, of the member firms that indicated 
having placed a temporary hold,\46\ approximately 53% of survey 
respondents stated that the firm had been unable to resolve the matter 
within the 25-business day period provided by the rule. For firms 
responding that any matter took longer to resolve than the 25-business 
day period, approximately 35% indicated that it took on average 26-50 
days to resolve the matter and approximately 59% indicated that it took 
on average 51-100 days to resolve the matter.
---------------------------------------------------------------------------

    \46\ Thirty-one firms responded in the survey that they had 
placed a temporary hold. Out of the 31 firms that indicated that 
they had placed a temporary hold, 17 firms indicated that it took 
more than the 25-business day period to resolve the matter, as 
currently provided in Rule 2165.
---------------------------------------------------------------------------

    With respect to the issue of placing a temporary hold on 
transactions, currently 20 states (with approximately half of the U.S. 
population) have enacted laws permitting investment advisers and 
broker-dealers to place temporary holds on disbursements and 
transactions.
Economic Impacts
    FINRA has analyzed the potential costs and benefits of the proposed 
amendments, and the different parties that are expected to be affected. 
FINRA has identified senior investors and member firms that serve 
senior investors as the main parties to be impacted by the proposed 
amendments.
    The proposed amendments to Rule 2165 would permit extending a 
temporary hold for an additional 30-business days if the member firm 
has reported the matter to a state agency or a court of competent 
jurisdiction. FINRA believes that allowing an extension to the 
temporary hold period would provide firms additional time to resolve 
matters and for APS agencies, state regulators and law enforcement to 
conduct thorough investigations of suspected financial exploitation. 
Moreover, extensions may allow for greater collaboration and 
interaction between the member firm placing the hold and other 
authorities or regulators, on a local, state or national level. 
Customers would benefit from this extension in instances where the 
additional time allows for a positive identification of financial 
exploitation and retention of the disbursement amount within the 
account. Alternatively, if the additional time leads to a determination 
that no financial exploitation occurred, customers may incur costs from 
the extended delay in access to the funds.
    The proposed amendments would also extend Rule 2165 to permit a 
member firm to place a temporary hold on a transaction in securities 
when the firm has a reasonable belief that the customer is being 
financially exploited. Twenty states, together containing approximately 
half of the U.S. population, already permit firms to place temporary 
holds on transactions. The proposed amendments would impact firms in 
all states by providing a safe harbor under FINRA rules for firms to 
place holds on transactions. The extent of the impact would vary across 
firms depending on their decision to take advantage of the proposed 
extension of Rule 2165 to

[[Page 34090]]

transactions.\47\ The proposed amendments would also impact the 
customers of those firms. In instances when a firm's hold on a 
transaction prevented financial exploitation, the customer whose 
transaction was held would benefit from not incurring the negative 
financial consequences of the transaction. In instances when a 
transaction hold was executed and no financial exploitation was found, 
the economic impact of the hold stems primarily from the magnitude of 
the security's price movement (positive or negative) between the time 
the hold was placed and the time it was lifted.
---------------------------------------------------------------------------

    \47\ When asked in the survey about FINRA extending Rule 2165 to 
transactions, respondents were evenly split with 50% anticipating 
that the member firm would place holds on transactions pursuant to 
amended Rule 2165 and 50% anticipating that the firm would not place 
holds.
---------------------------------------------------------------------------

Alternatives Considered
    FINRA considered various alternatives to the proposed rule 
amendments. First, FINRA considered different possible extensions of 
the temporary hold period, ranging from no extension to an extension of 
up to 75-business days. On the one hand, a longer temporary hold period 
would allow member firms more time to investigate and contact the 
relevant parties, as well as obtain input from a state regulator, 
agency, or court if needed. Alternatively, an extended temporary hold 
period could result in increased costs to both investors and firms.\48\ 
These include increased costs to investors from lost investment 
opportunities or liquidity problems and increased costs to firms from 
legal challenges to investigations, all of which are anticipated to be 
related to the length of the hold on disbursements. Considering these 
factors, as well as information from the various outreach efforts and 
stakeholder engagements, FINRA believes that the proposal strikes a 
balance across the spectrum of possible options.
---------------------------------------------------------------------------

    \48\ See discussion in ``Economic Impacts'' section above in 
section B, ``Hold Period'' section below in section C, and 
Regulatory Notice 20-34.
---------------------------------------------------------------------------

    Second, FINRA considered not extending Rule 2165 to transactions, 
but rather keeping the temporary hold option only for disbursements. 
FINRA weighed the costs and benefits of doing so, as discussed above, 
also considering that some states already permit such a hold on 
transactions. Ultimately, FINRA has found the proposed amendment to 
expand Rule 2165 to transactions to strike an appropriate balance 
between regulatory burden, investor protection and investor choice.
    Third, FINRA considered requiring firms to place temporary holds, 
for either disbursements or transactions, rather than permitting it. 
FINRA believes that providing firms with the discretion of placing a 
hold, versus a requirement, results in incentives to use the hold 
option in a way that ultimately benefits both the firm and its' 
customers.\49\
---------------------------------------------------------------------------

    \49\ See Bruce I. Carlin, Tarik Umar, and Hanyi Yi, 
Deputization, National Bureau of Economic Research Working Paper No. 
27225 (May 2020) (discussing the benefits of providing financial 
institutions tools to address suspected financial exploitation 
versus requiring specific actions).
---------------------------------------------------------------------------

    Finally, FINRA considered extending Rule 2165 to situations where a 
firm has a reasonable belief that one of its customers is exhibiting 
signs of diminished capacity or cognitive decline, affecting the 
customers' ability to protect their own financial interests, without 
any evidence of financial exploitation. FINRA believes that the 
associated costs with establishing such a standard outweigh the 
potential benefits. Such an extension would give discretion to member 
firms that could directly or indirectly impede informed investor 
choice, with potential costs that might exceed the potential benefits 
from investor protection.

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

    The proposed rule change was published for comment in Regulatory 
Notice 20-34. FINRA received 19 comment letters in response to the 
Notice 20-34 Proposal. A copy of the Notice 20-34 Proposal is attached 
[sic] as Exhibit 2a. Copies of the comment letters received in response 
to the Notice 20-34 Proposal are attached [sic] as Exhibit 2c.\50\
---------------------------------------------------------------------------

    \50\ See Exhibit 2b for a list of abbreviations assigned to 
commenters.
---------------------------------------------------------------------------

    The comments and FINRA's responses are set forth in detail below.
Support for the Notice 20-34 Proposal
    Fourteen commenters expressed support for the Notice 20-34 
Proposal.\51\ Several commenters stated that the proposed amendments 
will better protect vulnerable investors from financial exploitation. 
For example, Miami Investor Rights Clinic stated that it ``fully 
supports'' the proposed amendments as they will provide greater 
protection to seniors and vulnerable adults that may be victims of 
financial exploitation. IRI also stated that the proposed amendments 
will better enable firms to prevent the financial exploitation of 
vulnerable Americans.
---------------------------------------------------------------------------

    \51\ See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, 
FSI, IRI, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, 
Philadelphia Financial Exploitation Task Force, SIFMA and Wells 
Fargo.
---------------------------------------------------------------------------

    LPL supported the proposed amendments but requested that the hold 
period be further extended to allow for holds of up to 100-business 
days. Regarding the hold period in Rule 2165, FINRA has tried to strike 
a reasonable balance in giving member firms adequate time to 
investigate and contact the relevant parties, as well as seek input 
from a state regulator or agency or a court if needed, but also not 
permitting an open-ended hold period in recognition of the seriousness 
of placing a temporary hold. Rule 2165 would continue to permit the 
temporary hold to be terminated or extended by a state regulator, state 
agency or court of competent jurisdiction. In addition, if the proposed 
hold period does not provide member firms adequate time to investigate 
and contact the relevant parties, as well as seek input from a state 
regulator or agency or a court if needed, FINRA may consider extending 
the temporary hold period in future rulemaking.
Opposition to or Concerns With the Notice 20-34 Proposal
    PIABA supports enhanced protections for investors but expressed 
concern that member firms could misuse the proposed amendments. PIABA 
recommended that FINRA require in Rule 2165 that the member firm: (1) 
Update its written supervisory manuals to include training and review 
transactions suspected of elder abuse; (2) include in its retained 
records documentation of the firm's reasonable efforts to quickly 
investigate the matter; and (3) file a report with the appropriate APS 
agency and state regulator as soon as reasonably practical but no later 
than seven business days from the initial hold period.
    Regarding PIABA's suggested requirements, Rule 2165 currently 
includes several safeguards designed to prevent misapplication of the 
rule, including requiring that member firms that intend to place a hold 
pursuant to Rule 2165 must: (1) Retain records related to the firm's 
internal investigation; \52\ and (2) develop and document training 
policies or programs reasonably designed to ensure that associated 
persons comply with the requirements of the rule.\53\ FINRA also 
expects member firms to comply with

[[Page 34091]]

all applicable state requirements, including reporting requirements.
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    \52\ See Rule 2165(d).
    \53\ See Supplementary Material .02 to Rule 2165.
---------------------------------------------------------------------------

    NASAA's letter acknowledges that neither FINRA nor the states have 
brought disciplinary action due to misuse of Rule 2165 or any state 
temporary hold laws by a member firm. However, as discussed in greater 
detail below, NASAA does not support extending the temporary hold 
period and expressed concern about the potential impact of a longer 
hold period on customers. FINRA's responses to NASAA's detailed 
concerns are included below in section C under ``Hold Period'' and 
``Transactions in Securities.''
    Pittsburgh Clinic does not support current Rule 2165 or the 
proposed amendments because it believes that member firms could misuse 
temporary holds for their financial benefit. FINRA has extensively 
addressed the concerns of potential misuse above in section A under the 
``Need for the Proposed Amendments.''
    Pittsburgh Clinic also said that the survey of member firms should 
not be relied on to assess Rule 2165 or the proposed amendments 
because: (1) The survey respondents are member firms that stand to 
benefit from an increase to the extension of the hold period, as well 
as the rule's safe harbor provisions; (2) the survey respondents were 
not required to provide any information to support their claims; and 
(3) the survey respondents represent an inadequate and unrepresentative 
sample size (the survey was provided to 3,516 member firms, of which 
only 238 member firms responded).
    FINRA engaged in extensive internal and external stakeholder 
outreach during the assessment phase of the retrospective review to 
assess the effectiveness and efficiency of FINRA's rules and 
administrative processes that help protect senior investors from 
financial exploitation. This outreach included: (1) Seeking comment in 
Regulatory Notice 19-27 on several questions with respect to addressing 
financial exploitation and other circumstances of financial 
vulnerability for senior investors; (2) obtaining input from several 
advisory committees comprising member firms of different sizes and 
business models, investor protection advocates, member firms, and trade 
associations; (3) obtaining the perspective of FINRA's operating 
departments that administer the rules and their administration; (4) 
considering FINRA examination observations and findings involving 
senior issues; and (5) developing an anonymous survey that was 
distributed to all member firms in the first quarter of 2020. In 
addition, as part of the action phase of the retrospective review, 
FINRA sought comment on the proposed amendments to Rule 2165 in 
Regulatory Notice 20-34. FINRA considered the collective feedback from 
the Retrospective Review Stakeholders and comments to the Notice 20-34 
Proposal in assessing Rule 2165 and the proposed amendments.
    The purpose of the survey distributed to all member firms was to 
collect information in order to validate the feedback received and to 
provide an additional opportunity for all member firms to provide their 
views. There were 238 firms that responded to the survey, and the 
breakdown of these firm survey respondents according to firm size, as 
measured by the number of registered representatives, and the 
comparison to the general population of member firms, is provided in 
Table 1 below. With respect to the Pittsburgh Clinic comment letter, 
FINRA notes that: (1) The membership survey is one tool frequently used 
by FINRA in its outreach efforts to solicit information from its 
members; (2) the response rate mentioned is a lower bound when 
considering relevant member firms; and (3) the breakdown of survey 
respondents by firm size is mostly representative with respect to the 
full member firm population, as summarized in Table 1.
[GRAPHIC] [TIFF OMITTED] TN28JN21.000

Hold Period
    The majority of commenters supported the proposed amendment to 
extend a temporary hold for an additional 30 business days if the 
member firm has reported the matter to a state regulator or agency or a 
court of competent jurisdiction.\54\ For example, Edward Jones stated 
that the firm is often able to quickly resolve matters where it 
suspects financial exploitation of a senior or vulnerable investor by 
engaging the customer's trusted contact person or using other tools, 
but the firm has experienced situations where the current 25-day period 
provided under Rule 2165 is insufficient. Edward Jones notes having 
experienced this situation when working with state agencies, such as 
APS, to investigate a case of suspected financial exploitation. Edward 
Jones stated that some APS agencies are not adequately resourced to 
quickly review these matters and yet are hesitant to request an 
extension of a hold until they determine whether exploitation exists.
---------------------------------------------------------------------------

    \54\ See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, 
FSI, IRI, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, 
Philadelphia Financial Exploitation Task Force, SIFMA and Wells 
Fargo.
---------------------------------------------------------------------------

    While NAPSA and Philadelphia Financial Exploitation Task Force 
previously supported a 60-business day extension in their comments to 
Regulatory Notice 19-27, they supported the proposed extension of the 
temporary hold period in the Notice 20-34 Proposal. NAPSA and 
Philadelphia Financial Exploitation Task Force noted that the latest 
data submitted to the NAMRS indicates that the average investigation 
duration of all reported cases is 52.6 days. Recognizing that financial 
exploitation investigations are often more complicated and time 
consuming, NAPSA and Philadelphia Financial Exploitation Task Force 
expressed appreciation for the additional days as a starting point, 
with the ability to revisit as more data becomes available.
    While acknowledging that an adequate period for review of the facts 
and circumstances must be allowed,

[[Page 34092]]

Pittsburgh Clinic stated that the proposed longer hold period increases 
the possibility that a member firm could misuse a hold to harm an 
investor. Pittsburgh Clinic stated that the proposed hold period is too 
long because customers may need the funds to pay for living expenses. 
Pittsburgh Clinic also expressed concern that Rule 2165 does not 
include a reporting requirement unless a member firm wants to avail 
itself of the additional 30-business day extension.
    NASAA believes that the current 25-business day hold period, with 
the authority for state regulators or agencies or the courts to 
terminate or extend, is the better approach as it provides time to 
conduct the investigation and avoids unintended hardships from lengthy 
delays. Moreover, NASAA supports involving state regulators or agencies 
or the courts within the initial 15-business day hold period specified 
in Rule 2165(b)(2).
    Information gathered during the assessment phase of the 
retrospective review, including discussions during exams in 2019 
focusing on Rule 2165 and a survey to FINRA membership, supports the 
need for additional time to conduct investigations and resolve matters. 
NAPSA--representing APS programs which play a critical role in 
investigating suspicions of financial exploitation--also expressed the 
need for additional time to conduct investigations. NAPSA's data that 
the average investigation duration of reported matters to the NAMRS is 
52.6 days also highlights the need for a longer period to conduct 
investigations and resolve matters.
    Retrospective Review Stakeholders and comments to the Notice 20-34 
Proposal indicated that some matters can be quickly resolved after 
placing a temporary hold (e.g., by explaining to the customer that the 
activity and requested disbursement fits a commonly known scam). 
However, complex matters that involve investigations by state 
regulators or agencies or legal actions in a court (e.g., financial 
exploitation of an elderly customer by a family member or caregiver) 
may need additional time to resolve. These complex matters often 
involve information gathering and sharing by the firm and the state 
agency or regulatory investigating the matter.
    To provide member firms with additional time to resolve matters and 
for APS agencies, state regulators and law enforcement to conduct 
thorough investigations, FINRA is proposing amending Rule 2165 to 
permit extending a temporary hold for an additional 30 business days if 
the member firm has reported the matter to a state agency or a court of 
competent jurisdiction. Extending the hold period as proposed is 
intended to address the complex matters that need additional time to 
resolve. In addition, some states mandate reporting of suspected 
financial exploitation by financial institutions, including broker-
dealers, within a specified period of time. FINRA expects member firms 
to comply with all applicable state requirements, including reporting 
requirements.
    In addition, FINRA agrees with the commenters who stressed the need 
for a temporary hold not to interfere with non-suspicious disbursements 
that are needed for the customer's expenses. A temporary hold pursuant 
to Rule 2165 may be placed only on the suspicious disbursement (or 
transaction if the proposed amendment to extend the rule to 
transactions is adopted). A temporary hold may not be placed on non-
suspicious disbursements or transactions (e.g., a regular mortgage 
payment).
    Commonwealth supported the proposed extension of the temporary hold 
period and stated that there should be some additional remedy when a 
matter is not resolved at the end of the hold period. As previously 
addressed in the rule filing to adopt Rule 2165, if a member firm is 
unable to resolve an issue due to circumstances beyond its control, 
there may be circumstances in which a member firm may extend a 
temporary hold after the period provided under the safe harbor.\55\
---------------------------------------------------------------------------

    \55\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

    NAPSA and the Philadelphia Financial Exploitation Task Force 
requested clarification on whether ``a state regulator or agency of 
competent jurisdiction'' would include state or local law enforcement. 
For purposes of Rule 2165, FINRA would interpret state or local law 
enforcement to be ``a state regulator or agency of competent 
jurisdiction'' and, accordingly, state or local law enforcement may 
terminate or extend a temporary hold pursuant to Rule 2165.
    SIFMA noted that, depending on the jurisdiction, APS may be a state 
or local agency and suggested revising proposed Rule 2165(b)(4) to 
refer to a ``state regulator, or an agency of competent jurisdiction'' 
to more clearly cover local APS. The inclusion of ``a state regulator 
or agency of competent jurisdiction'' in proposed Rule 2165(b)(4) is 
consistent with the language in current Rule 2165(b)(2) and (3). For 
purposes of Rule 2165, FINRA would interpret state or local APS to be 
``a state regulator or agency of competent jurisdiction'' and, 
accordingly, state or local APS may terminate or extend a temporary 
hold pursuant to Rule 2165.
Transactions in Securities
    The majority of commenters supported the proposed amendment to 
permit member firms to place a temporary hold on a securities 
transactions where there is a reasonable belief of financial 
exploitation.\56\ For example, NAPSA and the Philadelphia Financial 
Exploitation Task Force applauded the creation of a uniform national 
standard for placing holds on transactions related to suspected 
financial exploitation. Miami Investor Rights Clinic stated that 
substantial damage can result from securities transactions due to 
financial exploitation and that appropriate policies, procedures, and 
training can minimize any misapplication Rule 2165. Edward Jones stated 
that the financial harm resulting from exploitative transactions can 
take many forms, including selling long-held investments with low cost 
basis resulting in a significant tax liability, the sale of fixed 
income investments with yields more attractive than current rates, and 
the sale of variable annuities, which could lead to surrender charges. 
Edward Jones stated that the perpetrator of the exploitation could also 
utilize the proceeds of these sales to invest in high-risk securities 
further jeopardizing the financial security of the senior or vulnerable 
investor. Edward Jones stated that when balanced against the potential 
financial devastation to the senior or vulnerable investor, the 
proposal is a natural extension of the current rule that will further 
minimize the risk of financial harm and provide greater protection for 
senior and vulnerable investors.
---------------------------------------------------------------------------

    \56\ See CAI, Cambridge, Commonwealth, Edward Jones, Fidelity, 
FSI, IRI, LPL, Miami Investor Rights Clinic, MMLIS, NAPSA, Norcross, 
Philadelphia Financial Exploitation Task Force, SIFMA and Wells 
Fargo.
---------------------------------------------------------------------------

    In its comment to Regulatory Notice 19-27, PIABA cautioned FINRA 
against substantive changes to Rule 2165 that might conflict with state 
laws. However, PIABA noted that the recently adopted state laws allow 
for holds on securities transactions and disbursements. Pittsburgh 
Clinic expressed concern that the proposed extension gives too much 
authority to member firms with limited oversight and that the customer 
may bear the risk of loss if firm makes the wrong call in placing a 
hold.
    NASAA stated that if FINRA extends Rule 2165 to permit placing 
holds on securities transactions, the supervision and documentation 
requirements under

[[Page 34093]]

Rule 2165(c)-(d), and the training specified in Supplementary Material 
.02 to Rule 2165, should be enhanced to require a documented rationale 
stating why the customer's financial professional and the member firm 
believe that a transaction hold will protect the customer whereas a 
disbursement hold would not. NASAA stated that documentation should be 
reviewed as a part of FINRA examinations. NASAA believes that 
disbursement holds should be the default and that a transaction hold 
should be utilized only where a disbursement hold cannot adequately 
protect a customer. Furthermore, NASAA supports member firms 
establishing policies and procedures to address any harm that may 
result to the customer from a transaction hold.
    FINRA recognizes that placing a temporary hold on a transaction is 
a serious step for a member and the affected customer. Requiring that a 
member firm make a disbursement hold the default and use transaction 
holds only where a disbursement hold cannot adequately protect the 
customer would add complexity and uncertainty into the decision to 
place a temporary hold as the member firm would be required to weigh 
the consequences to the customer of placing the hold at different 
stages. Moreover, placing a temporary hold on the underlying 
transaction may prevent significant negative financial consequences for 
the customer. These negative financial consequences can result even if 
a temporary hold is placed on any related disbursement of funds out of 
the customer's account.
    Importantly, the ability to place a hold on a transaction pursuant 
to Rule 2165 would apply only if the firm had a reasonable belief that 
the customer was being financially exploited. As noted above, FINRA 
would pursue disciplinary action against a firm that uses Rule 2165 for 
inappropriate purposes. As discussed in Regulatory Notice 20-34 and 
NASAA's comment letter to Regulatory Notice 20-34, neither FINRA nor 
the states have brought an action against a member firm for misuse of a 
temporary hold to address suspected financial exploitation.
    Some member firms already place holds on securities transactions 
pursuant to state law. As noted in section A of this filing, currently, 
20 states (with approximately half of the U.S. population) have enacted 
laws permitting investment advisers and broker-dealers to place 
temporary holds on disbursements and transactions. Amending Rule 2165 
as proposed would create the first uniform national standard for 
placing holds on transactions related to suspected financial 
exploitation. Moreover, extending Rule 2165 to transactions would allow 
for consistent, national safeguards to avoid misapplication of 
temporary holds.
    NASAA also noted that the NASAA Model Act is limited to 
disbursements, in part, because a delay in a securities transaction 
could be deemed inconsistent with best execution requirements. 
Regarding whether the best execution obligation applies to a member 
firm's decision to place a temporary hold on a securities transaction 
where there is a reasonable belief of customer financial exploitation, 
``[b]roker-dealers are reminded that nothing under the federal 
securities laws or FINRA rules obligates them to accept an order where 
they believe that the associated compliance or legal risks are 
unacceptable.'' \57\
---------------------------------------------------------------------------

    \57\ See SEC Staff Bulletin: Risks Associated with Omnibus 
Accounts Transacting in Low-Priced Securities (Nov. 12, 2020), 
available at https://www.sec.gov/tm/risks-omnibus-accounts-transacting-low-priced-securities (SEC Staff Bulletin). The SEC 
Staff Bulletin provides that, where the broker-dealer determines 
that the risks cannot be appropriately managed, and particularly in 
the context of low-priced securities transactions, a broker-dealer 
should consider, among other things, restricting or rejecting 
transactions effected on behalf of the customers of a foreign 
financial institution.
---------------------------------------------------------------------------

Mandatory Holds
    Miami Investor Rights Clinic noted that Rule 2165 is a safe harbor 
and that FINRA should consider amendments to Rule 2165 requiring that 
member firms place temporary holds. FINRA believes that a member firm 
using its discretion to place a temporary hold allows for the judicious 
use of temporary holds to protect customers from financial 
exploitation.
Cognitive Decline or Diminished Capacity
    Some commenters supported extending Rule 2165 to situations where a 
firm has a reasonable belief that the customer has an impairment, such 
as diminished capacity, that renders the individual unable to protect 
his or her own interests, even though there is no evidence of financial 
exploitation.\58\ Some Retrospective Review Stakeholders also supported 
extending Rule 2165 to these situations. However, other Retrospective 
Review Stakeholders expressed concerns that member firms are not well-
positioned to determine if a customer is suffering from cognitive 
decline or diminished capacity in the absence of suspected financial 
exploitation. In addition, in comments to Regulatory Notice 19-27, the 
Cornell Clinic, NASAA, PIABA and Pittsburgh Clinic expressed concerns 
that such an extension would give member firms too much discretion or 
would unfairly impede customer autonomy.
---------------------------------------------------------------------------

    \58\ See Miami Investor Rights Clinic, NAPSA, Philadelphia 
Financial Exploitation Task Force and Wells Fargo.
---------------------------------------------------------------------------

    FINRA has not proposed to extend Rule 2165 to situations where a 
member firm has a reasonable belief that the customer has cognitive 
decline or diminished capacity but there is no evidence of financial 
exploitation due to the concerns expressed that such an extension would 
give member firms too much discretion or would unfairly impede customer 
autonomy. Rather than rulemaking, FINRA summarized the information 
obtained about member firms' procedures and practices in this area in 
Regulatory Notice 20-34 to assist other member firms and investors.
Trusted Contact Person
    Where a customer has not named a trusted contact person, Wells 
Fargo suggested that FINRA give member firms the flexibility to contact 
a person ``reasonably associated'' with the customer's account.
    Under Rule 2165 as originally proposed in Regulatory Notice 15-37 
(October 2015) (Notice 15-37 Proposal), if the trusted contact person 
was unavailable, a member firm placing a hold would have been required 
to contact an immediate family member, unless the member reasonably 
believed that the immediate family member was financially exploiting 
the customer. Commenters to the Notice 15-37 Proposal expressed 
concerns that the proposed requirement would impinge upon customer 
privacy and would be operationally challenging for member firms in 
identifying the customer's immediate family members. Due to these 
concerns, FINRA removed the requirements in the Notice 15-37 Proposal 
with respect to notifying an immediate family member when a temporary 
hold is placed. In the rule filing to adopt Rule 2165, FINRA noted that 
Rule 2165 would not preclude a member firm from contacting an immediate 
family member or any other person if the member has customer consent to 
do so and that contacting such persons may be useful to member firms in 
administering customer accounts.\59\
---------------------------------------------------------------------------

    \59\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

    NAPSA and the Philadelphia Financial Exploitation Task Force 
recommended that FINRA pursue efforts to promote use of trusted contact

[[Page 34094]]

persons by customers. FINRA has taken steps to encourage customers to 
name trusted contact persons. For example, the SEC's Office of Investor 
Education and Advocacy and FINRA collaborated on an Investor Bulletin 
that helps customers understand the purpose of designating a trusted 
contact person for brokerage accounts, and encourages customers to 
designate a trusted contact person.\60\ In addition, in April 2018, 
FINRA published a similar article providing information on the trusted 
contact person-related amendments to Rule 4512 and Rule 2165 for 
investors and member firms.\61\ FINRA and the FINRA Investor Education 
Foundation have highlighted these articles on FINRA-managed social 
media channels, including Facebook and Twitter, and staff regularly 
discuss the benefits of designating a trusted contact when speaking 
with individual investors.
---------------------------------------------------------------------------

    \60\ The Investor Bulletin was published in March 2020 and is 
available on the SEC's website at https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-trusted-contact and on FINRA's website 
at https://www.finra.org/investors/insights/consider-adding-trusted-contact-to-your-account.
    \61\ FINRA made a downloadable print version of the article 
available at https://www.finra.org/sites/default/files/Protecting-Seniors-From-Financial-Exploitation_0.pdf.
---------------------------------------------------------------------------

Reporting Requirements
    Several commenters expressed concern that Rule 2165's safe harbor 
does not extend to complaints reportable on Forms U4 (Uniform 
Application for Securities Industry Registration or Transfer) or U5 
(Uniform Termination Notice for Securities Industry Registration), or 
pursuant to Rule 4530 about an associated person whose actions were 
within the safe harbor and stated that some member firms and associated 
persons may choose not to place a hold pursuant to Rule 2165 because of 
concerns about a possible customer complaint.\62\ These commenters 
requested guidance on when a Rule 2165-related complaint would be 
reportable and supported developing a specific problem code for 
reporting any Rule 2165-related complaint to FINRA pursuant to FINRA 
Rule 4530. FSI suggested that FINRA consider additional protections for 
financial professionals so they can confidently act when there is 
possible exploitation that could have long-term negative consequences 
on a client's financial future and overall well-being.
---------------------------------------------------------------------------

    \62\ See Cambridge, FSI and SIFMA.
---------------------------------------------------------------------------

    As discussed in Regulatory Notice 20-34, to date, based on FINRA's 
review of reported complaints, member firms have not reported a 
complaint on Forms U4 or U5 or pursuant to Rule 4530 related to placing 
a temporary hold pursuant to Rule 2165. Moreover, survey respondents 
indicated that they had not reported a complaint on Form U4 or Form U5 
or pursuant to Rule 4530 related to placing any temporary holds.
    FINRA does not currently plan to propose guidance regarding when a 
Rule 2165-related complaint would be reportable or develop a specific 
problem code for reporting any Rule 2165-related complaint to FINRA 
pursuant to FINRA Rule 4530. In considering whether a complaint is 
reportable, member firms should use the existing publicly available 
guidance. FINRA may reconsider this issue or develop a specified 
problem code for reporting any Rule 2165-related complaint to FINRA 
pursuant to FINRA Rule 4530 if complaints are reported in the future 
and they appear to have a detrimental impact on the protection of 
seniors and other vulnerable adults.
Customer Actions
    Cambridge supported extending the safe harbor provided by Rule 2165 
to protecting member firms and registered representatives from customer 
actions as a result of steps taken by a member firm pursuant to Rule 
2165. FINRA previously addressed this issue when adopting Rule 2165, 
noting that member firms today make judgments with regard to making or 
withholding disbursements and already face litigation risks with 
respect to these decisions.\63\ Rule 2165 is designed to provide 
regulatory relief to member firms by providing a safe harbor from FINRA 
rules for a determination to place a hold. Some states may separately 
provide immunity to member firms under state law.
---------------------------------------------------------------------------

    \63\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

Scope of Rule 2165
    Because some state temporary hold laws cover customers younger than 
65 years of age, LPL suggested that FINRA amend the definition of 
``specified adult'' in Rule 2165(a)(1) to include persons 60 years of 
age and older. In adopting Rule 2165, FINRA solicited feedback 
regarding whether the ages used in the definition of ``specified 
adult'' in proposed Rule 2165 should be modified or eliminated. As 
discussed in the rule filing proposing Rule 2165, some commenters 
suggested including an age lower than 65 and some commenters suggested 
including an age over 65 in the definition.\64\ The inclusion of 
persons 65 and older in the definition reflects, in part, that federal 
agencies, FINRA and NASAA have focused on persons age 65 and older for 
various senior initiatives. In addition, the definition of ``specified 
adult'' in Rule 2165(a)(1) also includes persons age 18 and older who 
the member reasonably believes has a mental or physical impairment that 
renders the individual unable to protect his or her own interests.
---------------------------------------------------------------------------

    \64\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

    Manabat stated that FINRA rules protecting senior investors should 
apply to non-U.S. investors. For clarity, FINRA rules apply to U.S. and 
non-U.S. customers of member firms.
    NAPSA and the Philadelphia Financial Exploitation Task Force 
recommended that investment companies, such as mutual funds, be 
permitted to place temporary holds. In 2018, staff in the SEC's 
Division of Investment Management issued a no-action letter to the 
Investment Company Institute stating that the staff would not recommend 
enforcement action if, consistent with the conditions in the letter, a 
transfer agent, acting on behalf of a mutual fund, temporarily delayed 
for more than seven days the disbursement of redemption proceeds from 
the mutual fund account of a specified adult held directly with the 
transfer agent based on a reasonable belief that financial exploitation 
of the specified adult has occurred, is occurring, has been attempted, 
or will be attempted.\65\ The no-action letter permits mutual fund 
transfer agents to protect specified adult shareholders from financial 
exploitation to the same extent that broker-dealers may do so currently 
under FINRA Rule 2165.
---------------------------------------------------------------------------

    \65\ See Investment Company Institute, SEC No-Action Letter 
(June 1, 2018).
---------------------------------------------------------------------------

    If a member firm places a temporary hold, Rule 2165 requires 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. FSI recommended 
that FINRA provide additional guidance to member firms on conducting 
these internal reviews. FSI stated that state regulators and agencies 
have the appropriate expertise to conduct these types of investigations 
and member firms work cooperatively to provide state regulators and 
agencies with requested information. FSI stated that member firms have 
access to internal records that evidence the customer's regular trading 
and account disbursement activity, but firms do not want to, for 
example, front-run and jeopardize a criminal investigation by trying to 
contact and interview witnesses.

[[Page 34095]]

    As stated in the rule filing proposing the adoption of Rule 2165, 
FINRA believes that the appropriate internal review will depend on the 
facts and circumstances of the situation.\66\ Member firms have 
discretion in conducting a reasonable internal review under proposed 
Rule 2165. In addition, Rule 2165 gives member firms flexibility 
regarding notifying some parties when the member firm reasonably 
suspects that the party is involved in the financial exploitation. 
Specifically, Rule 2165(b)(1)(B)(i)-(ii) provides that a member firm is 
not required to provide notification of a temporary hold to a party 
authorized to transact business on the account or the trusted contact 
person if the member firm reasonably suspects that the authorized party 
or trusted contact person, respectively, may be engaged in the 
financial exploitation of the specified adult.
---------------------------------------------------------------------------

    \66\ See File No. SR-FINRA-2016-039.
---------------------------------------------------------------------------

    If Rule 2165 is extended to allow for temporary holds on 
transactions in securities, FSI suggested that FINRA expand the 
application of the safe harbor provided by Rule 2165 to cover both 
FINRA Rule 3260 (Discretionary Accounts) and FINRA Rule 5310.01 
(Execution of Marketable Customer Orders).
    Rule 3260's scope and purpose are distinguishable from permitting a 
member firm to place a temporary hold on a transaction when there is a 
reasonable belief that the customer is being financially exploited. 
Rules 3260 addresses the creation and maintenance of discretionary 
accounts and requires firms to have procedures to identify and prevent 
excessive trading or ``churning'' in such accounts. Rule 3260 is 
intended to protect customers from the misuse of discretionary power by 
firms and associated persons.
    In considering whether Rule 2165's safe harbor needs to be extended 
to address rules relating to order execution, ``[b]roker-dealers are 
reminded that nothing under the federal securities laws or FINRA rules 
obligates them to accept an order where they believe that the 
associated compliance or legal risks are unacceptable.'' \67\
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    \67\ See SEC Staff Bulletin.
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Outreach and Collaboration
    CAI requested that FINRA coordinate with state authorities and SEC 
on measures to address financial exploitation. FINRA has and will 
continue to prioritize senior investors and address financial 
exploitation of senior investors, including through:
     Carrying out a multi-faceted investor protection campaign 
through the FINRA Foundation aimed at promoting awareness about, and 
support for, the prevention of financial fraud and exploitation, while 
simultaneously empowering financial consumers to protect themselves and 
their loved ones, using tactics including:
    [cir] Training law enforcement and victim advocates to detect, 
investigate, and assist consumers with concerns of financial fraud and 
exploitation in collaboration with federal and state securities 
regulators, APS groups, NAPSA, the National Center for Victims of 
Crime, the National White Collar Crime Center, and staff from FINRA's 
National Cause and Financial Crimes Detection Programs;
    [cir] Engaging in consumer outreach--often in coordination with the 
SEC, CFPB, state securities regulators, and nonprofits such as AARP and 
Better Business Bureaus--to empower financial consumers to spot, avoid, 
and report financial fraud;
    [cir] Conducting, supporting, and disseminating research focused on 
financial exploitation and fraud as well as aging and financial 
decision-making, which is shared with internal and external 
stakeholders; \68\
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    \68\ See FINRA Investor Education Foundation Investor Protection 
Campaign Research, available at www.finrafoundation.org/fraudresearch.
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    [cir] Collaborating with Committees and Task Forces focused on 
issues of financial fraud and exploitation, including working with the 
Department of Justice's Elder Justice Initiative, serving on NAPSA's 
Financial Exploitation Advisory Board, serving on NASAA's Senior Issues 
and Diminished Capacity Committee Advisory Council, participating on 
various multi-disciplinary teams (MDTs) aimed at protecting and 
assisting vulnerable adults, and holding joint trainings with the 
CFPB's Office of Older Americans, and meeting periodically with state 
securities regulators and states' attorneys general to discuss senior 
investor protection issues; \69\
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    \69\ See Protecting Senior Investors 2015-2020: An Update on the 
FINRA Securities Helpline for Seniors, Other FINRA Initiatives and 
Member Firm Practices (Apr. 2020).
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     Issuing alerts and articles that educate investors about 
important issues and highlighting risks facing senior investors; \70\
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    \70\ See, e.g., articles such as Protecting Seniors from 
Financial Exploitation and Don't Give in to Power of Attorney 
Pressure; Investor Alerts such as Power of Attorney and Your 
Investments-10 Tips, Plan for Transition: What You Should Know About 
the Transfer of Brokerage Account Assets on Death, and Seniors 
Beware: What You Should Know About Life Settlements; and FINRA's 
Retirement web page for investors.
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     Launching the dedicated FINRA Securities Helpline for 
Seniors[supreg]--available at (844) 57-HELPS--to provide senior 
investors and their family members with a supportive place to get 
assistance from specially trained FINRA staff related to concerns they 
have with their brokerage accounts and investments;
     Collaborating with NASAA and the SEC to address senior 
investor protection, including issuing a Senior Safe Act Fact Sheet 
designed to raise awareness among member firms, investment advisers and 
transfer agents about the Act and its immunity provisions; \71\
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    \71\ See https://www.finra.org/sites/default/files/senior_safe_act_factsheet.pdf.
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     Producing and presenting on in-person and virtual panels 
addressing senior investor protection with the SEC, state securities 
regulators, NASAA, APS offices, NAPSA, FBI and other agencies; and
     Meeting with adult protective services staff in multiple 
states, in part through NAPSA, to increase coordination of senior 
investor protection efforts and highlight FINRA Rule 2165's provision 
that APS can direct a member firm to terminate or extend a temporary 
hold authorized by the Rule.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, 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 [email protected]. Please include 
File Number SR-FINRA-2021-016 on the subject line.

[[Page 34096]]

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2021-016. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2021-016 and should be submitted on or before July 19, 2021.
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    \72\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\72\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13653 Filed 6-25-21; 8:45 am]
BILLING CODE 8011-01-P

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