Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults), 53696-53699 [2021-20970]

Download as PDF 53696 Federal Register / Vol. 86, No. 185 / Tuesday, September 28, 2021 / Notices deadline(s) for each request appear in section II. SECURITIES AND EXCHANGE COMMISSION II. Docketed Proceeding(s) [Release No. 34–93103; File No. SR–FINRA– 2021–016] 1. Docket No(s): MC2021–132 and CP2021–137; Filing Title: USPS Request to Add Priority Mail Contract 721 to Competitive Product List and Notice of Filing Materials Under Seal; Filing Acceptance Date: September 22, 2021; Filing Authority: 39 U.S.C. 3642, 39 CFR 3040.130 through 3040.135, and 39 CFR 3035.105; Public Representative: Kenneth R. Moeller; Comments Due: September 30, 2021. 2. Docket No(s): MC2021–133 and CP2021–138; Filing Title: USPS Request to Add Priority Mail & First-Class Package Service Contract 202 to Competitive Product List and Notice of Filing Materials Under Seal; Filing Acceptance Date: September 22, 2021; Filing Authority: 39 U.S.C. 3642, 39 CFR 3040.130 through 3040.135, and 39 CFR 3035.105; Public Representative: Kenneth R. Moeller; Comments Due: September 30, 2021. This Notice will be published in the Federal Register. Erica A. Barker, Secretary. [FR Doc. 2021–21037 Filed 9–27–21; 8:45 am] BILLING CODE 7710–FW–P POSTAL SERVICE Sunshine Act Meetings TIME AND DATE: October 5, 2021, at 2:30 p.m. PLACE: Minneapolis, MN. Closed. STATUS: MATTERS TO BE CONSIDERED: Tuesday, October 5, 2021, at 2:30 p.m. 1. Strategic Items 2. Financial and Operational Matters 3. Compensation and Personnel Matters 4. Administrative Items General Counsel Certification: The General Counsel of the United States Postal Service has certified that the meeting may be closed under the Government in the Sunshine Act. CONTACT PERSON FOR MORE INFORMATION: Michael J. Elston, Secretary of the Board of Governors, U.S. Postal Service, 475 L’Enfant Plaza SW, Washington, DC 20260–1000. Telephone: (202) 268– 4800. Michael J. Elston, Secretary. [FR Doc. 2021–21165 Filed 9–24–21; 4:15 pm] BILLING CODE 7710–12–P VerDate Sep<11>2014 16:35 Sep 27, 2021 Jkt 253001 Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults) On August 23, 2021, FINRA responded to the comment letters received in response to the Notice.6 The Commission is publishing this order pursuant to Section 19(b)(2)(B) of the Exchange Act 7 to solicit comments on the proposed rule change from interested persons and to institute proceedings to determine whether to approve or disapprove the proposed rule change. II. Description of the Proposed Rule Change Background FINRA’s proposed rule change would I. Introduction amend Rule 2165, which currently On June 9, 2021, the Financial permits a member firm to place a Industry Regulatory Authority, Inc. temporary hold on a disbursement from (‘‘FINRA’’) filed with the Securities and the account of a ‘‘specified adult’’ Exchange Commission (‘‘SEC’’ or customer for up to 25 business days if ‘‘Commission’’) the proposed rule the criteria of the rule are satisfied.8 A change SR–FINRA–2021–016 pursuant ‘‘specified adult’’ is someone either age to Section 19(b)(1) of the Securities 65 and older, or age 18 and older if the Exchange Act of 1934 (‘‘Exchange member firm reasonably believes that a Act’’) 1 and Rule 19b–4 thereunder 2 to mental or physical impairment has amend FINRA Rule 2165 (Financial rendered the person incapable of Exploitation of Specified Adults) to: (1) protecting their own interests.9 Permit member firms to place a According to FINRA, temporary holds temporary hold on a securities on disbursements have played a transaction, subject to the same terms significant role in providing member and restrictions applicable to a firms with a way to respond promptly temporary hold on disbursements of to suspicions of customer financial funds or securities (‘‘disbursements’’), exploitation before a customer where there is a reasonable belief of experiences potentially significant financial exploitation of a ‘‘specified losses.10 3 adult’’ as defined in the rule; (2) permit A member firm’s ability to place a member firms to extend a temporary temporary hold on disbursements is hold, whether on a disbursement or a subject to a number of conditions that transaction, for an additional 30 are designed to help prevent business days if the member firm has misapplication of the rule.11 These reported the matter to a state regulator or agency or a court of competent Assistant Chief Counsel—Sales Practices, Division jurisdiction; and (3) require member of Trading and Markets, Commission, dated July 20, firms to retain records of the reason and 2021. This letter is available at https:// www.finra.org/sites/default/files/2021-07/SRsupport for any extension of any FINRA-2021-016-Extension1.pdf. temporary hold, including information 6 See letter from Jeanette Wingler, Associate regarding any communications with, or General Counsel, FINRA, to Vanessa Countryman, Secretary, Commission dated August 23, 2021 by, a state regulator or agency of (‘‘FINRA Letter’’). The FINRA Letter is available at competent jurisdiction or a court of the Commission’s website at https://www.sec.gov/ competent jurisdiction. The proposed comments/sr-finra-2021-016/srfinra2021016rule change was published for comment 9160159-247786.pdf. 7 15 U.S.C. 78s(b)(2)(B). in the Federal Register on June 28, 8 See infra for a discussion of existing safeguards 2021.4 On July 20, 2021, FINRA incorporated into Rule 2165. consented to extend until September 24, 9 See Rule 2165(a)(1). Supplementary Material .03 2021, the time period in which the to Rule 2165 provides that a member firm’s Commission must approve the proposed reasonable belief that a natural person age 18 and older has a mental or physical impairment that rule change, disapprove the proposed renders the individual unable to protect their own rule change, or institute proceedings to interests may be based on the facts and determine whether to approve or circumstances observed in the member firm’s business relationship with the person. See Notice disapprove the proposed rule change.5 September 22, 2021. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See infra note 9 and accompanying text. 4 See Exchange Act Release No. 92225 (Jun. 22, 2021), 86 FR 34084 (Jun. 28, 2021) (File No. SR– FINRA–2021–016) (‘‘Notice’’). 5 See letter from Jeanette Wingler, Associate General Counsel, FINRA, to Lourdes Gonzalez, PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 at 34086 n.17. 10 See Notice at 34086. For example, according to FINRA member firms have placed temporary holds to prevent senior investors from losing: (1) $200,000 (representing approximately two-thirds of the investor’s account) related to a lawsuit scam; (2) $10,000 in a lottery scam; (3) $60,000 in a romance scam; and (4) $50,000 to financial exploitation by a brother-in-law. Id. 11 Id. E:\FR\FM\28SEN1.SGM 28SEN1 Federal Register / Vol. 86, No. 185 / Tuesday, September 28, 2021 / Notices safeguards would apply equally to the proposed rule change permitting temporary holds on transactions. The safeguards include requiring that member firms provide notification of both the hold, and the reason for the hold, to all parties authorized to transact business on the customer’s account, including the customer and a trusted contact person of the customer, no later than two business days after the day on which the firm first placed the hold.12 Temporary holds may only be placed based on a member’s reasonable belief of financial exploitation—for example, a customer payment related to a commonly known scam, such as a lottery scam.13 Once the temporary hold has been placed, the member firm must immediately initiate an internal review of the facts and circumstances that caused the firm to reasonably believe that the financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted.14 Furthermore, the general supervisory and recordkeeping requirements of certain FINRA rules 15 require a member firm relying on Rule 2165 to establish and maintain written supervisory procedures that are reasonably designed to achieve compliance with the rule, including, but not limited to, procedures related to the identification, escalation, and reporting of matters related to the financial exploitation of specified adults.16 With respect to associated persons who may be handling the customer’s account, Rule 2165 also requires that any request for a hold be escalated to a supervisor, compliance department or legal department rather than allowing the associated person to independently place a hold.17 In addition, a member firm relying on the rule is required to develop and document training policies or programs reasonably designed to ensure that such associated persons comply with the requirements of the rule,18 as well as retain records related to compliance with the rule, which must be made readily available to FINRA upon request.19 The proposed rule change would expand upon Rule 2165 in both scope and temporal reach by: (1) Expanding the scope of Rule 2165(b)(1) by permitting member firms to place a 12 See Rule 2165(b)(1)(B). Notice at 34086. 14 See Rule 2165(b)(1)(C). 15 See Rules 3110, 3120, 3130, 3150, and the Rule 4510 Series. 16 See Rule 2165(c)(1). 17 See Rule 2165(c)(2). 18 See Supplementary Material .02 to Rule 2165. 19 See Rule 2165(d). 13 See VerDate Sep<11>2014 16:35 Sep 27, 2021 Jkt 253001 temporary hold on a securities transaction, in addition to the alreadypermitted hold on disbursements, where the preexisting conditions of the rule, including the member’s reasonable belief of customer financial exploitation, are met; 20 (2) permitting firms to extend the maximum time period for any temporary hold initiated pursuant to Rule 2165(b)(1) for an additional 30 business days beyond the current maximum of 25 business days, if the firm has reported the matter to a state regulator or agency of competent jurisdiction, or a court of competent jurisdiction; 21 and (3) requiring member firms to retain records of the reason and support for any extension of a temporary hold, including information regarding any communications with, or by, a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.22 According to FINRA, the proposed rule change is designed to protect investors and the public interest by strengthening the tools available to FINRA’s member firms to combat the financial exploitation of vulnerable investors, which presents the potential for significant and longstanding harm to those investors.23 Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the Account of a Specified Adult) With respect to placing holds on securities transactions, FINRA indicated that a hold on disbursements may be insufficient to protect certain investors from financial exploitation. In support of its proposal, FINRA pointed out that even if a temporary hold is placed on the resulting disbursement out of a customer’s account, the execution of the transaction may still subject the customer to significant, negative financial consequences.24 Additionally, 20 See proposed Rule 2165(b). 21 Id. 22 See proposed Rule 2165(d). August 2019, FINRA engaged in a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes designed to protect senior investors from financial exploitation, including Rule 2165. FINRA stated that information gathered during the review supported the need for additional time for firms to resolve matters arising from suspected financial exploitation, as well as extending the rule to allow firms to place securities transaction holds. See Notice at 34087. 24 See Notice at 34087. For example, according to FINRA such customers may be subject to adverse tax consequences, early withdrawal penalties (such as surrender charges), the inability to regain access to a sold investment that was subsequently closed to new investors, or unauthorized trading in the customer’s account, including in inappropriately high risk or illiquid securities. Id. A ‘‘surrender charge’’ is a type of sales charge that must be paid if money from a variable annuity is sold or withdrawn during the ‘‘surrender period’’—a set 23 In PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 53697 and as noted above, the safeguards in Rule 2165 are designed to help prevent misapplication of the rule with respect to temporary holds on disbursements, and these safeguards would apply equally to temporary holds on transactions. Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period) By increasing the potential maximum duration of the temporary hold, whether for disbursements or transactions, from 25 business days to 55 business days, the proposed rule change would provide member firms with additional time to resolve matters arising from suspected financial exploitation in instances where the firm has reported the suspected exploitation to state regulators, adult protective services (‘‘APS’’) agencies, or law enforcement.25 FINRA indicated that information it gathered during the retrospective review supported the need for member firms to have additional time to resolve financial exploitation matters.26 Although some retrospective review stakeholders and commenters on a FINRA regulatory notice 27 stated that some matters, such as activity that generally occurs as a result of a commonly-known scam, can be quickly resolved after placing a temporary hold, other matters are more complex and may require additional time.28 For example, suspected financial exploitation of an elderly customer by a family member or caregiver may require additional time to resolve because of the need to interview multiple individuals, as well as to collect and review relevant documents according to FINRA. In these more complex cases, both the firm that has reported the suspected exploitation and the government or law enforcement entity investigating the conduct often need additional time to collect and share information to bring the investigation to resolution. In support of a maximum time period of 55 business days, FINRA cited to data indicating that the average duration of an period of time that typically lasts six to eight years after the annuity is purchased. See, e.g., Commission, Office of Investor Education and Advocacy, Variable Annuity Surrender Charges (Glossary), Investor.gov website, (Aug. 11, 2021), https://www.investor.gov/introduction-investing/ investing-basics/glossary/variable-annuitysurrender-charges. 25 See Notice at 34087; 34089. 26 See Notice at 34087. 27 The commenters referenced in this instance are commenters on FINRA Regulatory Notice 20–34 (Oct. 2020). See Notice at 34086. FINRA stated that it considered the collective feedback from the retrospective review stakeholders and comments to the Notice 20–34 proposal in assessing Rule 2165 and the proposed amendments. See Notice at 34091. 28 See Notice at 34088. E:\FR\FM\28SEN1.SGM 28SEN1 53698 Federal Register / Vol. 86, No. 185 / Tuesday, September 28, 2021 / Notices investigation for matters reported to the federal National Adult Maltreatment Reporting System (NAMRS) is 52.6 days.29 Proposed Rule Change As noted above, proposed Rule 2165 would: (1) Expand the current rule by permitting member firms to place a temporary hold on a securities transaction, subject to the same terms and restrictions currently applicable to a temporary hold on disbursements, where there is a reasonable belief of financial exploitation,30 (2) permit member firms to extend the maximum time period for any temporary hold initiated under the rule for an additional 30 business days if the firm has reported the matter to a state regulator or agency of competent jurisdiction, or a court of competent jurisdiction,31 and (3) require member firms to retain records of the reason and support for any extension of any temporary hold, including information regarding any communications with, or by, a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.32 Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the Account of a Specified Adult) Rule 2165 currently permits temporary holds to be placed on disbursements of funds or securities when the firm has a reasonable belief that the customer is being financially exploited. Although this serves to stop funds or securities from leaving a customer’s account, the rule does not permit a firm to place a hold on a securities transaction where the same financial exploitation is suspected.33 Accordingly, FINRA is proposing to amend Rule 2165 to permit firms to place a temporary hold on securities transactions when the firm has a reasonable belief that the customer is being financially exploited.34 In accordance with the Rule’s safe harbor approach for holds on disbursements,35 29 See 30 See Notice at 34092. proposed Rule 2165(b). 31 Id. 32 See proposed Rule 2165(d). example, FINRA stated that Rule 2165 currently would not apply to a customer’s order to sell his shares of a stock. However, FINRA elaborated that if a customer requested that the proceeds of a sale of shares of a stock be disbursed out of his account at the member firm, then the rule could apply to the disbursement of the proceeds where the customer is a ‘‘specified adult’’ and there is reasonable belief of financial exploitation. See Notice at 34087 at n.33. 34 See proposed Rule 2165(b). 35 FINRA stated that Rule 2165 provides member firms and their associated persons with a safe harbor from FINRA Rules 2010 (Standards of 33 For VerDate Sep<11>2014 16:35 Sep 27, 2021 Jkt 253001 the proposed rule change would permit, but not require, firms to place a hold on transactions in these circumstances. Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period); Rule 2165(d) (Record Retention) Rule 2165 currently allows a member firm to place a temporary disbursement hold on a specified adult customer’s account for up to 15 business days if the specified conditions required by the rule are satisfied, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction, or a court of competent jurisdiction.36 The member firm may extend that hold for an additional 10 business days, for a maximum of 25 business days total, if the member firm’s internal review of the facts and circumstances supports its reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction, or a court of competent jurisdiction.37 Under FINRA’s proposal, these hold periods would also apply to transactions held under the same conditions described above. FINRA is proposing to amend Rule 2165 to permit firms to extend any temporary hold under the rule for an additional 30 business days if the member firm has reported the matter to a state regulator or agency of competent jurisdiction, or a court of competent jurisdiction.38 Thus, firms would be able to extend a transaction or disbursement hold up to a maximum of 55 business days only in instances where they have externally reported the suspicious conduct. In addition, Rule 2165(d) currently requires member firms to retain records related to compliance with the rule, which must be readily available to FINRA upon request. To evidence compliance with Rule 2165 in placing or extending a temporary hold, FINRA is proposing to amend Rule 2165(d) to require that a member firm retain Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts) when member firms exercise discretion in placing temporary holds on disbursements of funds or securities from the accounts of specified adults consistent with the requirements of Rule 2165. See Notice at 34086. 36 See Rule 2165(b)(2). 37 See Rule 2165(b)(3). 38 FINRA stated that the 30 business day hold period in proposed Rule 2165(b)(4) would be in addition to the 15 business day hold in Rule 2165(b)(2) and the 10 business day hold in Rule 2165(b)(3). See Notice at 34087 n.31. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 records of the reason and support for any extension of a temporary hold, including information regarding any communications with, or by, a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.39 III. Proceedings To Determine Whether To Approve or Disapprove File Number SR–FINRA–2021–016 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings to further consider the proposed rule change and the issues raised by commenters. Specifically, the Commission is providing notice of the following grounds for possible disapproval under consideration: • Whether FINRA has demonstrated how its proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.40 Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a proposed rule change is consistent with the [Exchange Act] and the rules and regulations issued thereunder . . . is on the [SRO] that proposed the rule change.’’ 41 The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,42 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations issued thereunder.43 For the reasons discussed above, the Commission believes it is appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act to allow for additional consideration of the issues raised by the proposed rule change as it determines whether the proposed rule change should be approved or disapproved.44 Institution of proceedings does not indicate that the Commission has reached any 39 See proposed Rule 2165(d)(6). U.S.C. 78o–3(b)(6). 41 Rule 700(b)(3), Commission Rules of Practice, 17 CFR 201.700(b)(3). 42 See id. 43 See id. 44 15 U.S.C. 78s(b)(2)(B). 40 15 E:\FR\FM\28SEN1.SGM 28SEN1 Federal Register / Vol. 86, No. 185 / Tuesday, September 28, 2021 / Notices conclusions with respect to the proposed rule change. IV. Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposed rule change. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is consistent with the Exchange Act and the rules thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.45 Interested persons are invited to submit written data, views, and arguments regarding whether the proposed rule change should be approved or disapproved by October 13, 2021. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by October 19, 2021. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (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. 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/ 45 Section 19(b)(2) of the Exchange Act, as amended by the Securities Acts Amendments of 1975, Public Law 94–29, 89 Stat. 97 (1975), grants the Commission flexibility to determine what type of proceeding—either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a selfregulatory organization. See Securities Acts Amendments of 1975, Report of the Senate Committee on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). VerDate Sep<11>2014 16:35 Sep 27, 2021 Jkt 253001 rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2021–016 and should be submitted on or before October 13, 2021. If comments are received, any rebuttal comments should be submitted on or before October 19, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.46 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–20970 Filed 9–27–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–93112; File No. PCAOB– 2021–01] Public Company Accounting Oversight Board; Notice of Filing of Proposed Rule on Board Determinations Under the Holding Foreign Companies Accountable Act September 23, 2021. Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the ‘‘Act’’), notice is hereby given that on September 23, 2021, the Public Company Accounting Oversight Board (the ‘‘Board’’ or ‘‘PCAOB’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’ or ‘‘SEC’’) the proposed rule described in 46 17 CFR 200.30–3(a)(12); 17 CFR 200.30– 3(a)(57). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 53699 items I and II below, which items have been prepared by the Board. The Commission is publishing this notice to solicit comments on the proposed rule from interested persons. I. Board’s Statement of the Terms of Substance of the Proposed Rule On September 22, 2021, the Board adopted PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act (the ‘‘proposed rule’’). The text of the proposed rule appears in Exhibit A to the SEC Filing Form 19b–4 and is available on the Board’s website at https://pcaobus.org/about/rulesrulemaking/rulemaking-dockets/docket048-proposed-rule-governing-boarddeterminations-under-holding-foreigncompanies-accountable-act and at the Commission’s Public Reference Room. II. Board’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule In its filing with the Commission, the Board included statements concerning the purpose of, and basis for, the proposed rule and discussed comments it received on the proposed rule. The text of these statements may be examined at the places specified in Item IV below. The Board has prepared summaries, set forth in Sections A, B, C, and D below, of the most significant aspects of such statements. In addition, the Board is requesting that the Commission determine that Section 103(a)(3)(C) of the Act does not apply to the proposed rule. The Board’s conclusion in this regard is set forth in Section D. A. Board’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule (a) Purpose The Act mandates that the Board inspect registered public accounting firms and investigate possible statutory, rule, and professional standards violations committed by those firms and their associated persons. That mandate applies with equal force to the Board’s oversight of registered firms in the United States and in foreign jurisdictions. Over the course of more than a decade, the Board has worked effectively with authorities in foreign jurisdictions to fulfill its mandate to oversee registered firms located outside the United States. With rare exceptions, foreign audit regulators have cooperated with the Board and allowed it to exercise its oversight authority as it relates to registered firms located within E:\FR\FM\28SEN1.SGM 28SEN1

Agencies

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


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SECURITIES AND EXCHANGE COMMISSION

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


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

September 22, 2021.

I. Introduction

    On June 9, 2021, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change SR-FINRA-2021-016 pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder \2\ to amend FINRA Rule 2165 
(Financial Exploitation of Specified Adults) to: (1) Permit member 
firms to place a temporary hold on a securities transaction, subject to 
the same terms and restrictions applicable to a temporary hold on 
disbursements of funds or securities (``disbursements''), where there 
is a reasonable belief of financial exploitation of a ``specified 
adult'' as defined in the rule; \3\ (2) permit member firms to extend a 
temporary hold, whether on a disbursement or a transaction, for an 
additional 30 business days if the member firm has reported the matter 
to a state regulator or agency or a court of competent jurisdiction; 
and (3) require member firms to retain records of the reason and 
support for any extension of any temporary hold, including information 
regarding any communications with, or by, a state regulator or agency 
of competent jurisdiction or a court of competent jurisdiction. The 
proposed rule change was published for comment in the Federal Register 
on June 28, 2021.\4\ On July 20, 2021, FINRA consented to extend until 
September 24, 2021, the time period in which the Commission must 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On August 23, 2021, FINRA responded to the 
comment letters received in response to the Notice.\6\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 9 and accompanying text.
    \4\ See Exchange Act Release No. 92225 (Jun. 22, 2021), 86 FR 
34084 (Jun. 28, 2021) (File No. SR-FINRA-2021-016) (``Notice'').
    \5\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Division of Trading and Markets, Commission, dated July 
20, 2021. This letter is available at https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf.
    \6\ See letter from Jeanette Wingler, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission dated August 23, 
2021 (``FINRA Letter''). The FINRA Letter is available at the 
Commission's website at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf.
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    The Commission is publishing this order pursuant to Section 
19(b)(2)(B) of the Exchange Act \7\ to solicit comments on the proposed 
rule change from interested persons and to institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

Background

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

[[Page 53697]]

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

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

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

    By increasing the potential maximum duration of the temporary hold, 
whether for disbursements or transactions, from 25 business days to 55 
business days, the proposed rule change would provide member firms with 
additional time to resolve matters arising from suspected financial 
exploitation in instances where the firm has reported the suspected 
exploitation to state regulators, adult protective services (``APS'') 
agencies, or law enforcement.\25\
---------------------------------------------------------------------------

    \25\ See Notice at 34087; 34089.
---------------------------------------------------------------------------

    FINRA indicated that information it gathered during the 
retrospective review supported the need for member firms to have 
additional time to resolve financial exploitation matters.\26\ Although 
some retrospective review stakeholders and commenters on a FINRA 
regulatory notice \27\ stated that some matters, such as activity that 
generally occurs as a result of a commonly-known scam, can be quickly 
resolved after placing a temporary hold, other matters are more complex 
and may require additional time.\28\ For example, suspected financial 
exploitation of an elderly customer by a family member or caregiver may 
require additional time to resolve because of the need to interview 
multiple individuals, as well as to collect and review relevant 
documents according to FINRA. In these more complex cases, both the 
firm that has reported the suspected exploitation and the government or 
law enforcement entity investigating the conduct often need additional 
time to collect and share information to bring the investigation to 
resolution. In support of a maximum time period of 55 business days, 
FINRA cited to data indicating that the average duration of an

[[Page 53698]]

investigation for matters reported to the federal National Adult 
Maltreatment Reporting System (NAMRS) is 52.6 days.\29\
---------------------------------------------------------------------------

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

    \30\ See proposed Rule 2165(b).
    \31\ Id.
    \32\ See proposed Rule 2165(d).
---------------------------------------------------------------------------

Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the 
Account of a Specified Adult)

    Rule 2165 currently permits temporary holds to be placed on 
disbursements of funds or securities when the firm has a reasonable 
belief that the customer is being financially exploited. Although this 
serves to stop funds or securities from leaving a customer's account, 
the rule does not permit a firm to place a hold on a securities 
transaction where the same financial exploitation is suspected.\33\ 
Accordingly, FINRA is proposing to amend Rule 2165 to permit firms to 
place a temporary hold on securities transactions when the firm has a 
reasonable belief that the customer is being financially exploited.\34\ 
In accordance with the Rule's safe harbor approach for holds on 
disbursements,\35\ the proposed rule change would permit, but not 
require, firms to place a hold on transactions in these circumstances.
---------------------------------------------------------------------------

    \33\ For example, FINRA stated that Rule 2165 currently would 
not apply to a customer's order to sell his shares of a stock. 
However, FINRA elaborated that if a customer requested that the 
proceeds of a sale of shares of a stock be disbursed out of his 
account at the member firm, then the rule could apply to the 
disbursement of the proceeds where the customer is a ``specified 
adult'' and there is reasonable belief of financial exploitation. 
See Notice at 34087 at n.33.
    \34\ See proposed Rule 2165(b).
    \35\ FINRA stated that Rule 2165 provides member firms and their 
associated persons with a safe harbor from FINRA Rules 2010 
(Standards of Commercial Honor and Principles of Trade), 2150 
(Improper Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts) and 11870 (Customer Account 
Transfer Contracts) when member firms exercise discretion in placing 
temporary holds on disbursements of funds or securities from the 
accounts of specified adults consistent with the requirements of 
Rule 2165. See Notice at 34086.
---------------------------------------------------------------------------

Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period); Rule 
2165(d) (Record Retention)
    Rule 2165 currently allows a member firm to place a temporary 
disbursement hold on a specified adult customer's account for up to 15 
business days if the specified conditions required by the rule are 
satisfied, unless otherwise terminated or extended by a state regulator 
or agency of competent jurisdiction, or a court of competent 
jurisdiction.\36\ The member firm may extend that hold for an 
additional 10 business days, for a maximum of 25 business days total, 
if the member firm's internal review of the facts and circumstances 
supports its reasonable belief that the financial exploitation of the 
specified adult has occurred, is occurring, has been attempted or will 
be attempted, unless otherwise terminated or extended by a state 
regulator or agency of competent jurisdiction, or a court of competent 
jurisdiction.\37\ Under FINRA's proposal, these hold periods would also 
apply to transactions held under the same conditions described above.
---------------------------------------------------------------------------

    \36\ See Rule 2165(b)(2).
    \37\ See Rule 2165(b)(3).
---------------------------------------------------------------------------

    FINRA is proposing to amend Rule 2165 to permit firms to extend any 
temporary hold under the rule for an additional 30 business days if the 
member firm has reported the matter to a state regulator or agency of 
competent jurisdiction, or a court of competent jurisdiction.\38\ Thus, 
firms would be able to extend a transaction or disbursement hold up to 
a maximum of 55 business days only in instances where they have 
externally reported the suspicious conduct.
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    \38\ FINRA stated that the 30 business day hold period in 
proposed Rule 2165(b)(4) would be in addition to the 15 business day 
hold in Rule 2165(b)(2) and the 10 business day hold in Rule 
2165(b)(3). See Notice at 34087 n.31.
---------------------------------------------------------------------------

    In addition, Rule 2165(d) currently requires member firms to retain 
records related to compliance with the rule, which must be readily 
available to FINRA upon request. To evidence compliance with Rule 2165 
in placing or extending a temporary hold, FINRA is proposing to amend 
Rule 2165(d) to require that a member firm retain records of the reason 
and support for any extension of a temporary hold, including 
information regarding any communications with, or by, a state regulator 
or agency of competent jurisdiction or a court of competent 
jurisdiction.\39\
---------------------------------------------------------------------------

    \39\ See proposed Rule 2165(d)(6).
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove File 
Number SR-FINRA-2021-016 and Grounds for Disapproval Under 
Consideration

    The Commission is instituting proceedings to further consider the 
proposed rule change and the issues raised by commenters. Specifically, 
the Commission is providing notice of the following grounds for 
possible disapproval under consideration:
     Whether FINRA has demonstrated how its proposed rule 
change is consistent with Section 15A(b)(6) of the Exchange Act, which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest.\40\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the 
[Exchange Act] and the rules and regulations issued thereunder . . . is 
on the [SRO] that proposed the rule change.'' \41\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\42\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations issued thereunder.\43\
---------------------------------------------------------------------------

    \41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \42\ See id.
    \43\ See id.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Exchange Act to allow for additional consideration of the issues 
raised by the proposed rule change as it determines whether the 
proposed rule change should be approved or disapproved.\44\ Institution 
of proceedings does not indicate that the Commission has reached any

[[Page 53699]]

conclusions with respect to the proposed rule change.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Request for Written Comments

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

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by October 13, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 19, 2021. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (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.

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 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2021-016 and 
should be submitted on or before October 13, 2021. If comments are 
received, any rebuttal comments should be submitted on or before 
October 19, 2021.
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    \46\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

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