Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults), 4974-4980 [2022-01843]
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Federal Register / Vol. 87, No. 20 / Monday, January 31, 2022 / Notices
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–2022–02 and should
be submitted on or before February 22,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–01842 Filed 1–28–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94054; File No. SR–
NYSEArca–2021–53]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of a
Longer Period for Commission Action
on Proceedings To Determine Whether
To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares
of the Teucrium Bitcoin Futures Fund
Under NYSE Arca Rule 8.200–E,
Commentary .02 (Trust Issued
Receipts)
January 25, 2022.
On July 23, 2021, NYSE Arca, Inc.
(‘‘NYSE Arca’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares of the Teucrium
Bitcoin Futures Fund under NYSE Arca
Rule 8.200–E, Commentary .02 (Trust
Issued Receipts). The proposed rule
change was published for comment in
the Federal Register on August 11,
2021.3
On September 15, 2021, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On November 8,
2021, the Commission instituted
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–01854 Filed 1–28–22; 8:45 am]
BILLING CODE 8011–01–P
10 17
khammond on DSKJM1Z7X2PROD with NOTICES
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 92573
(Aug. 5, 2021), 86 FR 44062. Comments on the
proposed rule change can be found at: https://
www.sec.gov/comments/sr-nysearca-2021-53/
srnysearca202153.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 92999,
86 FR 52539 (Sept. 21, 2021).
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7
Section 19(b)(2) of the Act 8 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of filing
of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for comment in
the Federal Register on August 11,
2021.9 The 180th day after publication
of the proposed rule change is February
7, 2022. The Commission is extending
the time period for approving or
disapproving the proposed rule change
for an additional 60 days.
The Commission finds that it is
appropriate to designate a longer period
within which to issue an order
approving or disapproving the proposed
rule change so that it has sufficient time
to consider the proposed rule change
and the issues raised in the comments
that have been submitted in connection
therewith. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,10 designates April 8,
2022, as the date by which the
Commission shall either approve or
disapprove the proposed rule change
(File No. SR–NYSEArca–2021–53).
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94061; File No. SR–FINRA–
2021–016]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change To Amend Rule
2165 (Financial Exploitation of
Specified Adults)
January 25, 2022.
I. Introduction
On June 9, 2021, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend FINRA Rule 2165
(Financial Exploitation of Specified
Adults) to: (1) Permit member firms to
place a temporary hold on a securities
transaction, subject to the same terms
and restrictions applicable to a
temporary hold on disbursements of
funds or securities (‘‘disbursements’’),
where there is a reasonable belief of
financial exploitation of a ‘‘specified
adult’’ as defined in the rule; 3 (2) permit
member firms to extend a temporary
hold, whether on a disbursement or a
transaction, for an additional 30
business days, if the member firm has
reported the matter to a state regulator
or agency of competent jurisdiction, or
a court of competent jurisdiction
(hereinafter collectively referred to as a
‘‘State Authority’’); and, (3) require
member firms to retain records of the
reason and support for any extension of
any temporary hold, including
information regarding any
communications with, or by, a State
Authority.
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,
1 15
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1 15
6 15
U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 93534,
86 FR 63082 (Nov. 15, 2021).
8 15 U.S.C. 78s(b)(2).
9 See supra note 3.
10 15 U.S.C. 78s(b)(2).
11 17 CFR 200.30–3(a)(57).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See infra note 9 and accompanying text.
4 See Exchange Act Release No. 92225 (June 22,
2021), 86 FR 34084 (June 28, 2021) (File No. SR–
FINRA–2021–016) (‘‘Notice’’).
5 See letter from Jeanette Wingler, Associate
General Counsel, FINRA, to Lourdes Gonzalez,
Assistant Chief Counsel—Sales Practices, Division
2 17
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FINRA responded to the comment
letters received in response to the
Notice.6 On September 22, 2021, the
Commission filed an Order Instituting
Proceedings (‘‘OIP’’) to determine
whether to approve or disapprove the
proposed rule change.7 On November 2,
2021, FINRA responded to the comment
letters received in response to the OIP.8
On December 6, 2021, FINRA consented
to extend until February 23, 2022 the
time period in which the Commission
must approve or disapprove the
proposed rule change.9 This order
approves the proposed rule change.
II. Description of the Proposed Rule
Change
A. Background
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FINRA’s proposed rule change would
amend Rule 2165, which currently
permits a member firm to place a
temporary hold on a disbursement from
the account of a ‘‘specified adult’’
customer for up to 25 business days if
the criteria of the rule are satisfied. A
‘‘specified adult’’ is someone either age
65 and older, or age 18 and older if the
member firm reasonably believes that a
mental or physical impairment has
rendered the person incapable of
protecting their own interests.10
According to FINRA, temporary holds
on disbursements have played a
significant role in providing member
firms with a way to respond promptly
to suspicions of customer financial
exploitation before a customer
of Trading and Markets, Commission, dated July 20,
2021, available at https://www.finra.org/sites/
default/files/2021-07/SR-FINRA-2021-016Extension1.pdf.
6 See letter from Jeanette Wingler, Associate
General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated August 23, 2021
(‘‘FINRA Response Letter 1’’), available at https://
www.sec.gov/comments/sr-finra-2021-016/
srfinra2021016-9160159-247786.pdf.
7 See Exchange Act Release No. 93103 (September
22, 2021) 86 FR 53696 (September 28, 2021) (File
No. SR–FINRA–2021–016) (‘‘OIP’’).
8 See letter from Jeanette Wingler, Associate
General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated November 2, 2021
(‘‘FINRA Response Letter 2’’), available at https://
www.sec.gov/comments/sr-finra-2021-016/
srfinra2021016-9363745-261806.pdf.
9 See letter from Jeanette Wingler, Associate
General Counsel, FINRA, to Lourdes Gonzalez,
Assistant Chief Counsel—Sales Practices, Division
of Trading and Markets, Commission, dated
December 6, 2021, available at https://
www.finra.org/sites/default/files/2021-12/sr-finra2021-016-extension2.pdf.
10 See Rule 2165(a)(1). Supplementary Material
.03 to Rule 2165 provides that a member firm’s
reasonable belief that a natural person age 18 and
older has a mental or physical impairment that
renders the individual unable to protect their own
interests may be based on the facts and
circumstances observed in the member firm’s
business relationship with the person. See Notice
at 34086 n.17.
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experiences potentially significant
losses.11
A member firm’s ability to place a
temporary hold on disbursements is
subject to a number of conditions that
are designed to help prevent
misapplication of the rule.12 The
safeguards include requiring that
member firms provide notification of
both the hold, and the reason for the
hold, to all parties authorized to transact
business on the customer’s account,
including the customer and any trusted
contact person of the customer, no later
than two business days after the day on
which the firm first placed the hold.13
In addition, after placing the hold the
member firm must immediately initiate
an internal review of the facts and
circumstances that caused the firm to
reasonably believe that the financial
exploitation of the specified adult has
occurred, is occurring, has been
attempted, or will be attempted.14
Furthermore, the general supervisory
and recordkeeping requirements of
certain FINRA Rules 15 require a
member firm relying on Rule 2165 to
establish and maintain written
supervisory procedures that are
reasonably designed to achieve
compliance with the rule, including, but
not limited to, procedures related to the
identification, escalation, and reporting
of matters related to the financial
exploitation of specified adults.16 With
respect to associated persons who may
be handling the customer’s account,
Rule 2165 also requires that any request
for a hold be escalated to a supervisor,
compliance department or legal
department rather than allowing the
associated person to independently
place a hold.17 In addition, a member
firm relying on the rule is required to
develop and document training policies
or programs reasonably designed to
ensure that such associated persons
comply with the requirements of the
rule,18 as well as retain records related
to compliance with the rule, which
must be made readily available to
FINRA upon request.19 With respect to
11 See Notice at 34086. For example, according to
FINRA member firms have placed temporary holds
to prevent senior investors from losing: (1) $200,000
(representing approximately two-thirds of the
investor’s account) related to a Central Intelligence
Agency lawsuit scam; (2) $10,000 in a lottery scam;
(3) $60,000 in a romance scam; and (4) $50,000 to
financial exploitation by a brother-in-law. Id.
12 See Notice at 34086.
13 See Rule 2165(b)(1)(B).
14 See Rule 2165(b)(1)(C).
15 See Rules 3110, 3120, 3130, 3150, and the Rule
4510 Series.
16 See Rule 2165(c)(1).
17 See Rule 2165(c)(2).
18 See Supplementary Material .02 to Rule 2165.
19 See Rule 2165(d).
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4975
the specific disbursements on which a
hold may be placed, temporary holds
pursuant to Rule 2165 may only be
placed where the member has a
reasonable belief of customer financial
exploitation—for example, a customer
payment related to a commonly known
scam, such as a lottery scam.20 Each of
these safeguards incorporated into Rule
2165 would apply equally to the
proposed rule change permitting
temporary holds on securities
transactions.21
In August 2019, FINRA commenced a
retrospective review to assess the
effectiveness and efficiency of its rules
and administrative processes designed
to protect senior investors from
financial exploitation, including Rule
2165.22 FINRA stated that information
gathered during the review supported
the need for firms to have additional
time to resolve matters arising from
suspected financial exploitation, as well
as extending the rule to allow firms to
place securities transaction holds.23
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 alreadypermitted hold on disbursements, where
the conditions of the rule, including the
member’s reasonable belief of customer
financial exploitation, are met; 24 (2)
permitting member firms to extend the
maximum time period for any
temporary hold initiated pursuant to
Rule 2165(b)(1) for an additional 30
business days, beyond the current
maximum of 25 business days, if the
firm has reported the matter to a State
20 See
Notice at 34086.
Notice at 34088.
22 According to FINRA, the retrospective review
process had two phases: (1) The assessment phase
and (2) the action phase. FINRA stated that during
the assessment phase, it first sought comment via
Regulatory Notice 19–27 (August 2019) on several
questions with respect to addressing financial
exploitation and other circumstances of financial
vulnerability for senior investors. The assessment
phase of this review included discussions during
member exams in 2019 that focused on Rule 2165,
as well as a survey of FINRA members on these
issues. In addition, FINRA obtained input from
several advisory committees comprising member
firms of different sizes and business models,
investor protection advocates, member firms, and
trade associations. FINRA stated that it also
obtained the perspective of its operating
departments that help administer Rule 2165, and
considered examination observations and findings
involving senior issues. Finally, FINRA stated that
it also developed an anonymous survey that was
distributed to all member firms in the first quarter
of 2020. See Notice at 34085.
23 See Notice at 34087.
24 See proposed Rule 2165(b).
21 See
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Authority; 25 and (3) requiring member
firms to retain records of the reason and
support for any extension of a
temporary hold, including information
regarding any communications with, or
by, a State Authority.26 According to
FINRA, the proposed rule change is
designed to protect investors and the
public interest by strengthening the
tools available to FINRA’s member firms
to combat the financial exploitation of
vulnerable investors, which presents the
potential for significant and
longstanding harm to those investors.27
B. Proposed Rule Change
1. Proposed Temporary Hold on
Securities Transactions in the Account
of a Specified Adult (Proposed Rule
2165(b))
Rule 2165 currently permits member
firms to place temporary holds on
disbursements of funds or securities
when the firm has a reasonable belief
that the customer is being financially
exploited.28 Although this serves to stop
funds or securities from leaving a
customer’s account, FINRA indicated
that a hold on disbursements may be
insufficient to protect certain investors
from financial exploitation with respect
to their securities transactions.29
Specifically, FINRA believes that even if
a temporary hold is placed on the
resulting disbursement out of a
customer’s account, the execution of the
transaction may still subject the
customer to significant, negative
financial consequences.30
Accordingly, FINRA is proposing to
amend Rule 2165 to permit firms to
place a temporary hold on securities
transactions when the firm has a
reasonable belief that the customer is
being financially exploited.31 In
accordance with the rule’s current safe
harbors for holds on disbursements,32
25 See
proposed Rule 2165(b)(4).
proposed Rule 2165(d).
27 See Notice at 34087.
28 See Rule 2165(b).
29 For example, FINRA stated that Rule 2165
currently would not apply to a customer’s order to
sell his shares of a stock. However, FINRA
elaborated that if a customer requested that the
proceeds of a sale of shares of a stock be disbursed
out of his or her account at the member firm, then
the rule could apply to the disbursement of the
proceeds where the customer is a ‘‘specified adult’’
and there is reasonable belief of financial
exploitation. See Notice at 34087 at n.33.
30 See Notice at 34087. For example, according to
FINRA such customers may be subject to adverse
tax consequences, early withdrawal penalties (such
as surrender charges), or the inability to regain
access to a sold investment that was subsequently
closed to new investors. Id.
31 See proposed Rule 2165(b).
32 FINRA stated that Rule 2165 provides member
firms and their associated persons with a safe
harbor from FINRA Rules 2010 (Standards of
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26 See
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the proposed rule change would permit,
but not require, firms to place a hold on
transactions in these circumstances.
FINRA believes that the safeguards in
Rule 2165 33 would help prevent
misapplication of the rule with respect
to temporary holds on disbursements,
and would apply equally to temporary
holds on transactions.34
2. Proposed 30-Day Extension of the
Temporary Hold Period (Proposed Rule
2165(b)(4))
Rule 2165 currently allows a member
firm to place a temporary disbursement
hold on a specified adult customer’s
account for up to 15 business days if the
specified conditions required by the
rule are satisfied, unless otherwise
terminated or extended by a State
Authority.35 The member firm may
extend that hold for an additional 10
business days, for a maximum of 25
business days total, if the member firm’s
internal review of the facts and
circumstances supports its reasonable
belief that the financial exploitation of
the specified adult has occurred, is
occurring, has been attempted or will be
attempted, unless otherwise terminated
or extended by a State Authority.36
FINRA stated that although some
matters can be quickly resolved after
placing a temporary hold (e.g., by
explaining to the customer that the
activity and requested disbursement fit
a commonly-known scam), other
matters are more complex and may
require additional time.37 For example,
a more complex matter like suspected
financial exploitation of an elderly
customer by a family member or
caregiver may entail investigations by
state regulators or agencies, or legal
actions in a court, and thus may require
additional time for firms to resolve since
both the firm and the other parties
investigating the matter need time to
gather and share information.38 In
particular, FINRA stated that the
average duration of an investigation for
matters reported to the federal National
Commercial Honor and Principles of Trade), 2150
(Improper Use of Customers’ Securities or Funds;
Prohibition Against Guarantees and Sharing in
Accounts) and 11870 (Customer Account Transfer
Contracts) when member firms exercise discretion
in placing temporary holds on disbursements of
funds or securities from the accounts of specified
adults consistent with the requirements of Rule
2165. See Notice at 34086.
33 See supra notes 11–20 and accompanying
language.
34 See Notice at 34086.
35 See Rule 2165(b)(2).
36 See Rule 2165(b)(3).
37 See Notice at 34088, 34092.
38 See id.
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Adult Maltreatment Reporting System
(NAMRS) is 52.6 days.39
Accordingly, FINRA is proposing to
amend Rule 2165 to permit firms to
extend any temporary hold (of a
securities transaction or disbursement)
under the rule for an additional 30
business days provided that: (1) The
member firm’s internal review of the
facts and circumstances supports the
firm’s reasonable belief that financial
exploitation of the specified adult has
occurred, is occurring, has been
attempted, or will be attempted, and (2)
the member firm has reported or
provided notification of its reasonable
belief to a State Authority.40 Thus, firms
would be able to extend a transaction or
disbursement hold up to a maximum of
55 business days only in instances
where they have externally reported the
suspicious conduct.
3. Proposed Addition To Record
Retention (Proposed Rule 2165(d))
Rule 2165(d) currently requires
member firms to retain records related
to compliance with the rule, which
must be readily available to FINRA
upon request. To evidence compliance
with Rule 2165 in placing or extending
a temporary hold (of a securities
transaction or disbursement), FINRA is
proposing to amend Rule 2165(d) to
require that a member firm retain
records of the reason and support for
any extension of a temporary hold,
including information regarding any
communications with, or by, a State
Authority.41
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the comment letters, and
FINRA’s responses to the comments, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities association.42 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,43 which
requires, among other things, that
FINRA rules be designed to prevent
39 Id.
40 See proposed Rule 2165(b)(4). FINRA stated
that the 30-business-day-hold period in proposed
Rule 2165(b)(4) would be in addition to the 15business-day-hold period in Rule 2165(b)(2) and the
10-business-day-hold period in Rule 2165(b)(3). See
Notice at 34087 n.31.
41 See proposed Rule 2165(d)(6).
42 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
competition, and capital formation. See 15 U.S.C.
78c(f).
43 15 U.S.C. 78o–3(b)(6).
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fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
A. Temporary Holds on Securities
Transactions in the Account of a
Specified Adult (Proposed Rule 2165(b))
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The proposed rule change would
amend Rule 2165 to permit firms to
place a temporary hold on securities
transactions when the firm has a
reasonable belief that the customer is
being financially exploited.
All commenters generally supported
this aspect of the proposal.44 For
example, commenters asserted that
extending Rule 2165 to cover securities
transactions would provide additional
tools that firms could use to protect
senior investors from financial
exploitation and its detrimental
consequences.45 One of these
commenters further stated that the
proposed rule change would ‘‘provide
more clarity on the manner in which
member firms can attempt to combat
financial exploitation with respect to
direct held securities products, such as
variable annuities, that are not usually
held in a brokerage account that has a
disbursement [feature].’’ 46 Another
commenter stated that expanding the
rule to include temporary holds on
transactions would allow member firms
to protect their customers to a greater
degree, noting that customers may be
financially exploited with regard to
transactions just as they are with
disbursements, and additionally
member firms are in the best position to
identify common characteristics of
scams and exploitation and to recognize
44 See letter to Vanessa Countryman, Secretary,
Commission, from William A. Jacobson, Esq.,
Clinical Professor of Law and Director of Cornell
Securities Law Clinic, Cornell University Law
School, dated October 13, 2021 (‘‘Cornell Clinic
Letter’’); letter to Vanessa Countryman, Secretary,
Commission, from William Benson, National Policy
Adviser, and Kendra Kuehn, National Policy
Analyst, National Adult Protective Services
Association (‘‘NAPSA’’), dated July 29, 2021
(‘‘NAPSA Letter’’); letter to Vanessa Countryman,
Secretary, Commission, from Lisa Bleier and Marin
Gibson, Securities Industry and Financial Markets
Association (‘‘SIFMA’’), dated July 28, 2021
(‘‘SIFMA Letter’’); letter to Vanessa Countryman,
Secretary, Commission, from Christine Lazaro,
Director of the Securities Arbitration Clinic and,
Professor of Clinical Legal Education, St. John’s
University (the ‘‘St. John’s Clinic’’), dated July 19,
2021 (‘‘St. John’s Clinic Letter’’); letter to Vanessa
Countryman, Secretary, Commission, from
Eversheds Sutherland (US) LLP on behalf of the
Committee of Annuity Insurers (‘‘CAI’’), dated July
19, 2021 (‘‘CAI Letter’’); letter to Vanessa
Countryman, Secretary, Commission, from Ron
Long, Head of Aging Client Services, Wells Fargo
(‘‘Wells Fargo’’), dated July 15, 2021 (‘‘Wells Fargo
Letter’’).
45 See CAI Letter at 2; NAPSA Letter at 1.
46 CAI Letter at 2.
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red flags in individual customers’
accounts.47 This commenter further
stated that ‘‘[c]onsistent with this state
law trend, FINRA’s proposal to now
include temporary holds on securities
transactions within 2165 will help
protect against financial exploitation
relating to purchases or sales, and thus
protect senior investors from significant
harm.’’ 48
One commenter suggested that
notwithstanding its general support for
the proposed rule change as drafted,
‘‘more may be done to further protect
senior investors’’ and requested that
‘‘FINRA further consider making the
Rule proscriptive rather than
permissive.’’ 49 In particular, this
commenter stated that ‘‘small and midsized firms have declined to utilize the
safe harbor offered by Rule 2165
because of concerns associated with
litigation risks,’’ 50 and that investors
‘‘would benefit from a uniform national
standard of mandated reporting where
financial exploitation is suspected, even
if placing a hold is not mandated.’’ 51
In response, FINRA stated that
permitting a member firm to use
discretion in placing a temporary hold
would allow for the judicious use of
temporary holds to protect customers
from financial exploitation.52 FINRA
stated that some states mandate
reporting of suspected financial
exploitation by financial institutions,
including broker-dealers, within a
specified period of time, and FINRA
expects member firms to comply with
all applicable state requirements,
including reporting requirements.53
FINRA further stated that where state
reporting is not required, mandatory
reporting of every temporary hold
pursuant to Rule 2165 could lead to an
inefficient or ineffective use of time and
resources for state regulators and
agencies, particularly where firms were
able to quickly resolve matters by
engaging a customer’s trusted contact
person or using other tools.54 For these
reasons, FINRA declined amending the
proposed rule change.
Permitting firms to impose a
temporary hold on transactions where
appropriate, in addition to the authority
firms already have to impose temporary
holds on disbursements, would provide
an additional measure of protection to
customers from the harmful impact of
47 See
Cornell Clinic Letter at 2–3.
at 1.
49 St. John’s Clinic Letter at 2.
50 Id.
51 Id.
52 See FINRA Response Letter 1 at 4.
53 Id.
54 Id.
48 Id.
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4977
exploitative transactions, such as
adverse tax consequences, early
withdrawal penalties, or investing in
securities that do not align with their
investor profiles. A temporary hold on
disbursements may not be sufficient to
prevent or redress customer harm from
financial exploitation in certain
instances, such as financial exploitation
involving the purchase and sale of
securities. Therefore, authorizing firms
to place temporary holds on securities
transactions represents an important
mechanism to help firms prevent
harmful financial consequences that
could result from a customer being
subject to an exploitative securities
transaction. Moreover, FINRA’s
approach, which balances the
importance of reporting against the risk
of an inefficient or ineffective use of
time and resources for state regulators
and agencies, is reasonable. In addition,
the Commission expects firms to
comply with applicable state laws
mandating that firms report suspected
financial exploitation. For these reasons,
the Commission finds the proposed rule
change is consistent with the protection
of investors and in the public interest.
B. Proposed 30-Day Extension of the
Temporary Hold Period (Proposed Rule
2165(b)(4))
The proposed rule change would
permit firms to extend the temporary
hold on disbursements or transactions
authorized by this rule for an additional
30 business days where the member
firm has reported or provided
notification of the member’s reasonable
belief of financial exploitation of a
specified adult to a State Authority.
Several commenters suggested that
more time is needed for the
investigation of senior financial
exploitation cases.55 One commenter
stated that compared to the average 52.6
day duration of an investigation for all
cases reported to NAMRS, ‘‘financial
exploitation investigations are often
more complicated and time consuming’’
and thus the commenter recommended
that the 30-business-day extension be
treated only as a starting point, which
could be revisited as more data become
available.56 Another commenter stated
that data show ‘‘there will still be a
sizeable percentage of cases of potential
financial exploitation that are not
resolved in a timely manner, even with
the 30-business day extension . . . so
firms will still be in the unenviable
position of determining whether to
engage in the disbursement, or execute
the securities transaction, prior to their
55 See
56 See
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NAPSA Letter at 1.
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ability to conclude the investigation and
ensure that the customer has not been
exploited.’’ 57 In addition, a commenter
stated that because ‘‘[s]tate laws do not
conform to the additional 30-business
days granted under’’ the proposed rule
change ‘‘firms will be forced to continue
to wade through a patchwork of
requirements.’’ 58 Therefore, this
commenter recommended that FINRA
work with state agencies and the courts
to foster consistency with respect to the
permitted timeframe, as well as review
the timeline again in the future to assess
its efficacy.59
In response, FINRA stated that the
proposed rule change strikes a
reasonable balance between giving
member firms adequate time to
investigate and contact the relevant
parties, as well as to seek input from a
State Authority if needed, while
prohibiting an open-ended hold
period.60 FINRA emphasized that Rule
2165 already permits a temporary hold
to be terminated or extended by a State
Authority.61 Furthermore, FINRA stated
that it has met, and will continue to
meet, with adult protective services
(‘‘APS’’) staff in multiple states and
NAPSA to increase the coordination of
senior investor protection efforts and
highlight Rule 2165’s provision that
APS has the ability to direct a member
firm to terminate or extend a temporary
hold authorized by the Rule.62 In
addition, FINRA asserted that if the
proposed hold period does not provide
member firms with adequate time for
investigation, FINRA may consider
extending the temporary hold period in
future rulemaking.63
Another commenter opposed the
proposed extension of the temporary
hold period because the basis for
whether to exercise the 10-business-day
extension currently permitted by the
rule 64 and the proposed 30-businessday extension 65 would use different
standards.66 The commenter
recommended that FINRA amend the
proposed rule change to require that the
basis for exercising both extensions
require that an internal investigation
support a reasonable belief in financial
exploitation (the current standard for
the 10-business-day extension).67 The
commenter also suggested that FINRA
57 CAI
Letter at 2–3.
at 2.
59 Id. at 3.
60 See FINRA Response Letter 1 at 3.
61 Id.
62 Id.
63 See FINRA Response Letter 1 at 3–4.
64 See Rule 2165(b)(3).
65 See Proposed Rule 2165(b)(4).
66 See Cornell Clinic Letter at 3.
67 Id.
consolidate the two extensions into a
single 40-business-day extension.68
In response, FINRA stated that, as
with the 10-business-day extension
currently provided under Rule
2165(b)(3), the 30-business-day
extension would require that the
member firm’s internal review of the
facts and circumstances support a
reasonable belief of the existence of, or
potential for, financial exploitation
necessitating the temporary hold.69
However, the additional 30-businessday extension also would require the
firm to report or notify a State
Authority.70 The additional 30 business
days would provide firms with
additional time to resolve complex
matters, often involving investigations
by state regulators or agencies or legal
actions in a court.71 FINRA stated that
it does not support consolidating the
two extensions of the temporary hold
into a single 40-business day extension
because doing so would not differentiate
between matters of varying
complexity.72 FINRA stated that the
proposed rule change strikes a
reasonable balance in giving member
firms adequate time to investigate and
contact the relevant parties, as well as
seek input from a state regulator or
agency or a court if needed.73
The commenter also opposed the
proposed 30-business-day extension
because ‘‘a non-overridable limit on
customers’ ability to transact and
disburse, even though temporary,
unduly limits the customers autonomy,
which does not strike the right balance
of interests under the Exchange Act.’’ 74
Accordingly, the commenter
recommended that FINRA provide a
mechanism for customers to override
the temporary hold in limited
circumstances, since customers may be
aware of the risks and choose to proceed
nonetheless.75
In response, FINRA stated that
customers are given opportunities to
help resolve any circumstance giving
rise to a temporary hold. For instance,
FINRA stated that unless a member firm
reasonably believes that doing so would
cause further harm to a specified adult,
FINRA encourages the firm to attempt to
resolve the matter with a customer
before placing a temporary hold.76 In
addition, FINRA stated that Rule
2165(b)(1)(B)(i) requires that, not later
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58 Id.
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Jkt 256001
68 Id.
69 See
FINRA Response Letter 2 at 2–3.
id. at 2.
71 See id. at 3.
72 See id.
73 Id.
74 Cornell Clinic Letter at 3.
75 See id.
76 See FINRA Response Letter 2 at 3.
70 See
PO 00000
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Sfmt 4703
than two days after placing a temporary
hold, the firm notify all persons
authorized to transact business on the
account, including the customer.77
FINRA stated, however, that allowing a
customer to ‘‘override a temporary hold
when the member firm has a reasonable
belief that the customer is being
financially exploited would give a
powerful tool to the person exploiting
the customer and deprive the member
firm of a tool to address the
exploitation.’’ 78 For example, the
exploiter could direct the customer to
override the hold so that the exploiter
could access the customer’s funds.79 For
these reasons, FINRA declined
amending the proposed rule change.
Providing firms with the ability to
extend the temporary hold period from
a maximum of 25 business days to 55
business days reasonably aligns with
FINRA’s stated purpose of providing
firms with additional time to resolve
financial exploitation matters where
circumstances warrant. FINRA has
found that the average duration of an
investigation for matters reported to
NAMRS is 52.6 days, and the proposed
rule change would extend the potential
maximum duration of the hold to 55
business days—a sum that is more in
line with the average amount of time
needed to conduct an investigation. As
FINRA noted, firms as well as the
government or law enforcement entities
that investigate suspected financial
exploitation often need additional time
to collect and share information in order
to bring the investigation to
resolution.80 But if a State Authority
determines that additional time is
needed the proposed rule change
permits it to further extend the
temporary hold. Moreover, it is
reasonable to condition a firm’s ability
to extend the temporary hold for an
additional 30 business days on the firm
reporting the matter to a State
Authority, given that the extension is a
serious step for both the firm and
affected customer. These additional
requirements, combined with the
existing safeguards incorporated into
Rule 2165, should provide firms with an
effective mechanism to obtain
additional time that may be necessary to
resolve suspected financial exploitation
of specified adults.
Furthermore, allowing a customer to
override a temporary hold when the
firm has a reasonable belief that the
customer is being financially exploited
77 Id.
78 Id.
79 Id.
80 See supra notes 21 and 37–39 and
accompanying text.
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could potentially serve to aid the person
who is exploiting the customer, while
also potentially diminishing the
effectiveness of the firm’s means to
address the exploitation. At the same
time, a maximum hold time of no more
than 55 business days, combined with
other safeguards, would provide a
reasonable upper limit on holds that
serves to protect customers from being
subject to unduly lengthy or even
indefinite holds on transactions or
disbursements. For these reasons, the
Commission finds that the proposed 30day extension of the temporary hold
period is consistent with the protection
of investors and in the public interests.
C. Record Retention (Rule 2165(d))
The proposed rule change would also
extend Rule 2165’s record retention
obligation to temporary hold extensions
by requiring firms to retain records of
the reason and support for any
extension of a temporary hold,
including information regarding any
communications with, or by, a State
Authority—so that firms have a means
to demonstrate compliance with the rule
upon request by FINRA.
One commenter stated that retaining
records that justify a reasonable belief of
financial exploitation would help
‘‘justify the imposition of a protective
temporary hold, justify limiting a
customer’s autonomy, justify the
member firm’s decision-making process,
and ensure member firms do not feel
free to impose unnecessary holds.’’ 81
For these reasons, the commenter stated
that the proposed record retention
requirement would benefit member
firms, customers and the public.82
FINRA’s determination to require
firms to maintain records evidencing
those communications so that they can
demonstrate compliance with the rule
upon FINRA’s request, as set forth in the
proposed rule change, is reasonable. For
these reasons, the Commission finds
FINRA’s proposed rule change is
consistent with the protection of
investors and in the public interest.
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D. Additional Issues Raised by
Commenters
1. Cognitive Decline or Diminished
Capacity
One commenter recommended that
FINRA consider extending the Rule
2165 safe harbor to apply where there is
a reasonable belief that the investor has
an impairment that renders the
individual unable to protect his or her
own interests, irrespective of whether
there is evidence the customer may be
81 Cornell
82 See
Clinic Letter at 4.
id.
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the victim of financial exploitation by a
third party.83
In response, FINRA stated that it did
not extend Rule 2165 to situations
where a member firm has a reasonable
belief that the customer has cognitive
decline or diminished capacity, but
there is no evidence of financial
exploitation because such an extension
would give member firms too much
discretion or would unfairly impede
customer autonomy.84 FINRA also
stated that member firms are not wellpositioned to determine if a customer is
suffering from cognitive decline or
diminished capacity.85 However, FINRA
reminded firms of the guidance it
provided in this area in Regulatory
Notice 20–34 to assist member firms and
investors address issues related to
cognitive decline and diminished
capacity.86
The Commission finds that expanding
the proposed rule change to capture
investors with cognitive decline or
diminished capacity where there is no
evidence of financial exploitation is
beyond the scope of this proposed rule
change.
2. Investment Companies
One commenter recommended that
the temporary hold rules apply to
investment companies, such as mutual
funds, noting that because these
companies are often the custodian of the
actual assets, ‘‘there is nothing to be
done to hold the actual assets if the
client goes to them directly and
circumvents the broker-dealer.’’ 87
In response, FINRA stated that the
Commission, not FINRA, has
jurisdiction over investment companies
and their transfer agents and, in fact, has
already addressed the commenter’s
concern.88 Furthermore, FINRA stated
that based on discussions with SEC staff
83 See
84 See
Wells Letter at 2.
FINRA Response Letter 1 at 5.
85 Id.
86 See
FINRA Response Letter 1 at 5.
Letter at 1.
88 See FINRA Response Letter 1 at 2. FINRA
stated that Division of Investment Management staff
issued a no-action letter in 2018 to the Investment
Company Institute permitting mutual fund transfer
agents to protect specified adult shareholders from
financial exploitation to the same extent that
broker-dealers may do so currently under FINRA
Rule 2165. Specifically, the no-action letter stated
that the staff would not recommend enforcement
action if, consistent with the conditions in the
letter, a transfer agent, acting on behalf of a mutual
fund, temporarily delayed for more than seven days
the disbursement of redemption proceeds from the
mutual fund account of a specified adult held
directly with the transfer agent based on a
reasonable belief that financial exploitation of the
specified adult has occurred, is occurring, has been
attempted, or will be attempted. See also
Investment Company Institute, SEC No-Action
Letter (June 1, 2018).
87 NAPSA
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4979
regarding Section 22(e) of the
Investment Company Act of 1940,
FINRA does not believe that a brokerdealer’s delay of a redemption of mutual
fund shares pursuant to its customer’s
mutual fund redemption request, or of
a disbursement of mutual fund
redemption proceeds to its customer, in
reliance on Rule 2165 as amended by
the Proposal and based on a reasonable
belief of financial exploitation of the
customer would be imputed to the
mutual fund, including where the
broker-dealer is the fund’s principal
underwriter.89
In general, FINRA rules apply to all
members and persons associated with a
member. The term ‘‘member’’ means
any registered broker-dealer whose
regular course of business consists in
actually transacting securities business
that is admitted to membership in
FINRA.90 Therefore, the commenter’s
recommendation is beyond the scope of
this proposed rule change.
In sum, for the above reasons, the
Commission finds that the proposed
rule change would strengthen the tools
available to FINRA’s member firms to
combat the financial exploitation of
vulnerable investors. In addition, the
Commission finds that conditioning the
ability to extend the temporary hold by
requiring firms to report the matter to a
specified external authority, as well as
requiring firms to maintain records
evidencing those communications,
would aid in preventing misapplication
of the rule, and complement the existing
safeguards already present in Rule 2165.
Accordingly, the Commission finds that
the proposed rule change would
facilitate a greater measure of protection
for investors by providing firms with
additional means to prevent customer
harm by imposing temporary holds on
securities transactions where
appropriate, and also by providing firms
with additional time to resolve financial
exploitation matters through extending
the duration of a temporary hold when
necessary. For these reasons, the
Commission finds FINRA’s proposed
rule change is designed to protect
investors and the public interest.
89 See letter from Jeanette Wingler, Associate
General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated January 24, 2022,
available at https://www.sec.gov/comments/srfinra-2021-016/srfinra2021016-20112614265430.pdf. See also Notice of Filing of Partial
Amendment No. 1 and Order Granting Accelerated
Approval of File No. SR–FINRA–2016–039,
Securities Exchange Act Release No. 79964
(February 3, 2017), 82 FR 10059, 10066 (February
9, 2017).
90 See FINRA Rule 0160(d)(10) and Article III,
Section 1(a) of the FINRA Bylaws.
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Federal Register / Vol. 87, No. 20 / Monday, January 31, 2022 / Notices
IV. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 91
that the proposed rule change (SR–
FINRA–2021–016) be, and hereby is,
approved.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–01843 Filed 1–28–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
The meeting will be conducted
by remote means (videoconference) and/
or at the Commission’s headquarters,
100 F Street NE, Washington, DC 20549.
Members of the public may watch the
webcast of the meeting on the
Commission’s website at www.sec.gov.
PLACE:
The meeting will begin at 10:00
a.m. (ET) and will be open to the public.
This Sunshine Act notice is being
issued because a majority of the
Commission may attend the meeting.
STATUS:
The agenda
for the meeting includes matters relating
to rules and regulations affecting small
and emerging businesses and their
investors under the federal securities
laws.
MATTER TO BE CONSIDERED:
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
Dated: January 27, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022–02030 Filed 1–27–22; 4:15 pm]
khammond on DSKJM1Z7X2PROD with NOTICES
BILLING CODE 8011–01–P
U.S.C. 78s(b)(2).
VerDate Sep<11>2014
17:38 Jan 28, 2022
[Release No. 34–94055; File No. SR–
CboeBZX–2021–051]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on Proceedings To
Determine Whether To Approve or
Disapprove a Proposed Rule Change,
as Modified by Amendment No. 1, To
List and Trade Shares of the ARK
21Shares Bitcoin ETF Under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares
January 25, 2022.
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission Small Business
Capital Formation Advisory Committee
will hold a public meeting on Thursday,
February 10, 2022, via videoconference.
TIME AND DATE:
91 15
SECURITIES AND EXCHANGE
COMMISSION
Jkt 256001
On July 20, 2021, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares of the
ARK 21Shares Bitcoin ETF under BZX
Rule 14.11(e)(4), Commodity-Based
Trust Shares. The proposed rule change
was published for comment in the
Federal Register on August 6, 2021.3
On September 15, 2021, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On November 2,
2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 On December 9, 2021, the
Exchange filed Amendment No. 1,
which replaced and superseded the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 92543
(Aug. 2, 2021), 86 FR 43289. Comments on the
proposed rule change can be found at: https://
www.sec.gov/comments/sr-cboebzx-2021-051/
srcboebzx2021051.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 92989,
86 FR 52530 (Sept. 21, 2021). The Commission
designated November 4, 2021, as the date by which
it should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 93510,
86 FR 61820 (Nov. 8, 2021).
2 17
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Fmt 4703
Sfmt 4703
proposed rule change as originally filed.
On December 17, 2021, the Commission
published notice of Amendment No. 1
to the proposed rule change.8
Section 19(b)(2) of the Act 9 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of filing
of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for comment in
the Federal Register on August 6,
2021.10 The 180th day after publication
of the proposed rule change is February
2, 2022. The Commission is extending
the time period for approving or
disapproving the proposed rule change,
as modified by Amendment No. 1, for
an additional 60 days.
The Commission finds that it is
appropriate to designate a longer period
within which to issue an order
approving or disapproving the proposed
rule change, as modified by Amendment
No. 1, so that it has sufficient time to
consider the proposed rule change, as
modified by Amendment No. 1, and the
issues raised in the comments that have
been submitted in connection therewith.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,11
designates April 3, 2022, as the date by
which the Commission shall either
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1 (File No. SR–CboeBZX–2021–
051).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–01845 Filed 1–28–22; 8:45 am]
BILLING CODE 8011–01–P
8 See Securities Exchange Act Release No. 93822,
86 FR 73360 (Dec. 27, 2021).
9 15 U.S.C. 78s(b)(2).
10 See supra note 3.
11 15 U.S.C. 78s(b)(2).
12 17 CFR 200.30–3(a)(57).
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]]>Agencies
[Federal Register Volume 87, Number 20 (Monday, January 31, 2022)]
[Notices]
[Pages 4974-4980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01843]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94061; File No. SR-FINRA-2021-016]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend Rule
2165 (Financial Exploitation of Specified Adults)
January 25, 2022.
I. Introduction
On June 9, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rule 2165
(Financial Exploitation of Specified Adults) to: (1) Permit member
firms to place a temporary hold on a securities transaction, subject to
the same terms and restrictions applicable to a temporary hold on
disbursements of funds or securities (``disbursements''), where there
is a reasonable belief of financial exploitation of a ``specified
adult'' as defined in the rule; \3\ (2) permit member firms to extend a
temporary hold, whether on a disbursement or a transaction, for an
additional 30 business days, if the member firm has reported the matter
to a state regulator or agency of competent jurisdiction, or a court of
competent jurisdiction (hereinafter collectively referred to as a
``State Authority''); and, (3) require member firms to retain records
of the reason and support for any extension of any temporary hold,
including information regarding any communications with, or by, a State
Authority.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See infra note 9 and accompanying text.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on June 28, 2021.\4\ On July 20, 2021, FINRA consented to
extend until September 24, 2021, the time period in which the
Commission must approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\5\ On August 23, 2021,
[[Page 4975]]
FINRA responded to the comment letters received in response to the
Notice.\6\ On September 22, 2021, the Commission filed an Order
Instituting Proceedings (``OIP'') to determine whether to approve or
disapprove the proposed rule change.\7\ On November 2, 2021, FINRA
responded to the comment letters received in response to the OIP.\8\ On
December 6, 2021, FINRA consented to extend until February 23, 2022 the
time period in which the Commission must approve or disapprove the
proposed rule change.\9\ This order approves the proposed rule change.
---------------------------------------------------------------------------
\4\ See Exchange Act Release No. 92225 (June 22, 2021), 86 FR
34084 (June 28, 2021) (File No. SR-FINRA-2021-016) (``Notice'').
\5\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Trading and Markets, Commission, dated July
20, 2021, available at https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf.
\6\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Vanessa Countryman, Secretary, Commission, dated August
23, 2021 (``FINRA Response Letter 1''), available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf.
\7\ See Exchange Act Release No. 93103 (September 22, 2021) 86
FR 53696 (September 28, 2021) (File No. SR-FINRA-2021-016)
(``OIP'').
\8\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Vanessa Countryman, Secretary, Commission, dated November
2, 2021 (``FINRA Response Letter 2''), available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9363745-261806.pdf.
\9\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Trading and Markets, Commission, dated
December 6, 2021, available at https://www.finra.org/sites/default/files/2021-12/sr-finra-2021-016-extension2.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
FINRA's proposed rule change would amend Rule 2165, which currently
permits a member firm to place a temporary hold on a disbursement from
the account of a ``specified adult'' customer for up to 25 business
days if the criteria of the rule are satisfied. A ``specified adult''
is someone either age 65 and older, or age 18 and older if the member
firm reasonably believes that a mental or physical impairment has
rendered the person incapable of protecting their own interests.\10\
According to FINRA, temporary holds on disbursements have played a
significant role in providing member firms with a way to respond
promptly to suspicions of customer financial exploitation before a
customer experiences potentially significant losses.\11\
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\10\ See Rule 2165(a)(1). Supplementary Material .03 to Rule
2165 provides that a member firm's reasonable belief that a natural
person age 18 and older has a mental or physical impairment that
renders the individual unable to protect their own interests may be
based on the facts and circumstances observed in the member firm's
business relationship with the person. See Notice at 34086 n.17.
\11\ See Notice at 34086. For example, according to FINRA member
firms have placed temporary holds to prevent senior investors from
losing: (1) $200,000 (representing approximately two-thirds of the
investor's account) related to a Central Intelligence Agency lawsuit
scam; (2) $10,000 in a lottery scam; (3) $60,000 in a romance scam;
and (4) $50,000 to financial exploitation by a brother-in-law. Id.
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A member firm's ability to place a temporary hold on disbursements
is subject to a number of conditions that are designed to help prevent
misapplication of the rule.\12\ The safeguards include requiring that
member firms provide notification of both the hold, and the reason for
the hold, to all parties authorized to transact business on the
customer's account, including the customer and any trusted contact
person of the customer, no later than two business days after the day
on which the firm first placed the hold.\13\ In addition, after placing
the hold the member firm must immediately initiate an internal review
of the facts and circumstances that caused the firm to reasonably
believe that the financial exploitation of the specified adult has
occurred, is occurring, has been attempted, or will be attempted.\14\
Furthermore, the general supervisory and recordkeeping requirements of
certain FINRA Rules \15\ require a member firm relying on Rule 2165 to
establish and maintain written supervisory procedures that are
reasonably designed to achieve compliance with the rule, including, but
not limited to, procedures related to the identification, escalation,
and reporting of matters related to the financial exploitation of
specified adults.\16\ With respect to associated persons who may be
handling the customer's account, Rule 2165 also requires that any
request for a hold be escalated to a supervisor, compliance department
or legal department rather than allowing the associated person to
independently place a hold.\17\ In addition, a member firm relying on
the rule is required to develop and document training policies or
programs reasonably designed to ensure that such associated persons
comply with the requirements of the rule,\18\ as well as retain records
related to compliance with the rule, which must be made readily
available to FINRA upon request.\19\ With respect to the specific
disbursements on which a hold may be placed, temporary holds pursuant
to Rule 2165 may only be placed where the member has a reasonable
belief of customer financial exploitation--for example, a customer
payment related to a commonly known scam, such as a lottery scam.\20\
Each of these safeguards incorporated into Rule 2165 would apply
equally to the proposed rule change permitting temporary holds on
securities transactions.\21\
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\12\ See Notice at 34086.
\13\ See Rule 2165(b)(1)(B).
\14\ See Rule 2165(b)(1)(C).
\15\ See Rules 3110, 3120, 3130, 3150, and the Rule 4510 Series.
\16\ See Rule 2165(c)(1).
\17\ See Rule 2165(c)(2).
\18\ See Supplementary Material .02 to Rule 2165.
\19\ See Rule 2165(d).
\20\ See Notice at 34086.
\21\ See Notice at 34088.
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In August 2019, FINRA commenced a retrospective review to assess
the effectiveness and efficiency of its rules and administrative
processes designed to protect senior investors from financial
exploitation, including Rule 2165.\22\ FINRA stated that information
gathered during the review supported the need for firms to have
additional time to resolve matters arising from suspected financial
exploitation, as well as extending the rule to allow firms to place
securities transaction holds.\23\
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\22\ According to FINRA, the retrospective review process had
two phases: (1) The assessment phase and (2) the action phase. FINRA
stated that during the assessment phase, it first sought comment via
Regulatory Notice 19-27 (August 2019) on several questions with
respect to addressing financial exploitation and other circumstances
of financial vulnerability for senior investors. The assessment
phase of this review included discussions during member exams in
2019 that focused on Rule 2165, as well as a survey of FINRA members
on these issues. In addition, FINRA obtained input from several
advisory committees comprising member firms of different sizes and
business models, investor protection advocates, member firms, and
trade associations. FINRA stated that it also obtained the
perspective of its operating departments that help administer Rule
2165, and considered examination observations and findings involving
senior issues. Finally, FINRA stated that it also developed an
anonymous survey that was distributed to all member firms in the
first quarter of 2020. See Notice at 34085.
\23\ See Notice at 34087.
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The proposed rule change would expand upon Rule 2165 in both scope
and temporal reach by: (1) Expanding the scope of Rule 2165(b)(1) by
permitting member firms to place a temporary hold on a securities
transaction, in addition to the already-permitted hold on
disbursements, where the conditions of the rule, including the member's
reasonable belief of customer financial exploitation, are met; \24\ (2)
permitting member firms to extend the maximum time period for any
temporary hold initiated pursuant to Rule 2165(b)(1) for an additional
30 business days, beyond the current maximum of 25 business days, if
the firm has reported the matter to a State
[[Page 4976]]
Authority; \25\ and (3) requiring member firms to retain records of the
reason and support for any extension of a temporary hold, including
information regarding any communications with, or by, a State
Authority.\26\ According to FINRA, the proposed rule change is designed
to protect investors and the public interest by strengthening the tools
available to FINRA's member firms to combat the financial exploitation
of vulnerable investors, which presents the potential for significant
and longstanding harm to those investors.\27\
---------------------------------------------------------------------------
\24\ See proposed Rule 2165(b).
\25\ See proposed Rule 2165(b)(4).
\26\ See proposed Rule 2165(d).
\27\ See Notice at 34087.
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B. Proposed Rule Change
1. Proposed Temporary Hold on Securities Transactions in the Account of
a Specified Adult (Proposed Rule 2165(b))
Rule 2165 currently permits member firms to place temporary holds
on disbursements of funds or securities when the firm has a reasonable
belief that the customer is being financially exploited.\28\ Although
this serves to stop funds or securities from leaving a customer's
account, FINRA indicated that a hold on disbursements may be
insufficient to protect certain investors from financial exploitation
with respect to their securities transactions.\29\ Specifically, FINRA
believes that even if a temporary hold is placed on the resulting
disbursement out of a customer's account, the execution of the
transaction may still subject the customer to significant, negative
financial consequences.\30\
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\28\ See Rule 2165(b).
\29\ For example, FINRA stated that Rule 2165 currently would
not apply to a customer's order to sell his shares of a stock.
However, FINRA elaborated that if a customer requested that the
proceeds of a sale of shares of a stock be disbursed out of his or
her account at the member firm, then the rule could apply to the
disbursement of the proceeds where the customer is a ``specified
adult'' and there is reasonable belief of financial exploitation.
See Notice at 34087 at n.33.
\30\ See Notice at 34087. For example, according to FINRA such
customers may be subject to adverse tax consequences, early
withdrawal penalties (such as surrender charges), or the inability
to regain access to a sold investment that was subsequently closed
to new investors. Id.
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Accordingly, FINRA is proposing to amend Rule 2165 to permit firms
to place a temporary hold on securities transactions when the firm has
a reasonable belief that the customer is being financially
exploited.\31\ In accordance with the rule's current safe harbors for
holds on disbursements,\32\ the proposed rule change would permit, but
not require, firms to place a hold on transactions in these
circumstances. FINRA believes that the safeguards in Rule 2165 \33\
would help prevent misapplication of the rule with respect to temporary
holds on disbursements, and would apply equally to temporary holds on
transactions.\34\
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\31\ See proposed Rule 2165(b).
\32\ FINRA stated that Rule 2165 provides member firms and their
associated persons with a safe harbor from FINRA Rules 2010
(Standards of Commercial Honor and Principles of Trade), 2150
(Improper Use of Customers' Securities or Funds; Prohibition Against
Guarantees and Sharing in Accounts) and 11870 (Customer Account
Transfer Contracts) when member firms exercise discretion in placing
temporary holds on disbursements of funds or securities from the
accounts of specified adults consistent with the requirements of
Rule 2165. See Notice at 34086.
\33\ See supra notes 11-20 and accompanying language.
\34\ See Notice at 34086.
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2. Proposed 30-Day Extension of the Temporary Hold Period (Proposed
Rule 2165(b)(4))
Rule 2165 currently allows a member firm to place a temporary
disbursement hold on a specified adult customer's account for up to 15
business days if the specified conditions required by the rule are
satisfied, unless otherwise terminated or extended by a State
Authority.\35\ The member firm may extend that hold for an additional
10 business days, for a maximum of 25 business days total, if the
member firm's internal review of the facts and circumstances supports
its reasonable belief that the financial exploitation of the specified
adult has occurred, is occurring, has been attempted or will be
attempted, unless otherwise terminated or extended by a State
Authority.\36\
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\35\ See Rule 2165(b)(2).
\36\ See Rule 2165(b)(3).
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FINRA stated that although some matters can be quickly resolved
after placing a temporary hold (e.g., by explaining to the customer
that the activity and requested disbursement fit a commonly-known
scam), other matters are more complex and may require additional
time.\37\ For example, a more complex matter like suspected financial
exploitation of an elderly customer by a family member or caregiver may
entail investigations by state regulators or agencies, or legal actions
in a court, and thus may require additional time for firms to resolve
since both the firm and the other parties investigating the matter need
time to gather and share information.\38\ In particular, FINRA stated
that the average duration of an investigation for matters reported to
the federal National Adult Maltreatment Reporting System (NAMRS) is
52.6 days.\39\
---------------------------------------------------------------------------
\37\ See Notice at 34088, 34092.
\38\ See id.
\39\ Id.
---------------------------------------------------------------------------
Accordingly, FINRA is proposing to amend Rule 2165 to permit firms
to extend any temporary hold (of a securities transaction or
disbursement) under the rule for an additional 30 business days
provided that: (1) The member firm's internal review of the facts and
circumstances supports the firm's reasonable belief that financial
exploitation of the specified adult has occurred, is occurring, has
been attempted, or will be attempted, and (2) the member firm has
reported or provided notification of its reasonable belief to a State
Authority.\40\ Thus, firms would be able to extend a transaction or
disbursement hold up to a maximum of 55 business days only in instances
where they have externally reported the suspicious conduct.
---------------------------------------------------------------------------
\40\ See proposed Rule 2165(b)(4). FINRA stated that the 30-
business-day-hold period in proposed Rule 2165(b)(4) would be in
addition to the 15-business-day-hold period in Rule 2165(b)(2) and
the 10-business-day-hold period in Rule 2165(b)(3). See Notice at
34087 n.31.
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3. Proposed Addition To Record Retention (Proposed Rule 2165(d))
Rule 2165(d) currently requires member firms to retain records
related to compliance with the rule, which must be readily available to
FINRA upon request. To evidence compliance with Rule 2165 in placing or
extending a temporary hold (of a securities transaction or
disbursement), FINRA is proposing to amend Rule 2165(d) to require that
a member firm retain records of the reason and support for any
extension of a temporary hold, including information regarding any
communications with, or by, a State Authority.\41\
---------------------------------------------------------------------------
\41\ See proposed Rule 2165(d)(6).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposed rule change, the comment
letters, and FINRA's responses to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\42\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Exchange Act,\43\ which requires, among other
things, that FINRA rules be designed to prevent
[[Page 4977]]
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
---------------------------------------------------------------------------
\42\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\43\ 15 U.S.C. 78o-3(b)(6).
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A. Temporary Holds on Securities Transactions in the Account of a
Specified Adult (Proposed Rule 2165(b))
The proposed rule change would amend Rule 2165 to permit firms to
place a temporary hold on securities transactions when the firm has a
reasonable belief that the customer is being financially exploited.
All commenters generally supported this aspect of the proposal.\44\
For example, commenters asserted that extending Rule 2165 to cover
securities transactions would provide additional tools that firms could
use to protect senior investors from financial exploitation and its
detrimental consequences.\45\ One of these commenters further stated
that the proposed rule change would ``provide more clarity on the
manner in which member firms can attempt to combat financial
exploitation with respect to direct held securities products, such as
variable annuities, that are not usually held in a brokerage account
that has a disbursement [feature].'' \46\ Another commenter stated that
expanding the rule to include temporary holds on transactions would
allow member firms to protect their customers to a greater degree,
noting that customers may be financially exploited with regard to
transactions just as they are with disbursements, and additionally
member firms are in the best position to identify common
characteristics of scams and exploitation and to recognize red flags in
individual customers' accounts.\47\ This commenter further stated that
``[c]onsistent with this state law trend, FINRA's proposal to now
include temporary holds on securities transactions within 2165 will
help protect against financial exploitation relating to purchases or
sales, and thus protect senior investors from significant harm.'' \48\
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\44\ See letter to Vanessa Countryman, Secretary, Commission,
from William A. Jacobson, Esq., Clinical Professor of Law and
Director of Cornell Securities Law Clinic, Cornell University Law
School, dated October 13, 2021 (``Cornell Clinic Letter''); letter
to Vanessa Countryman, Secretary, Commission, from William Benson,
National Policy Adviser, and Kendra Kuehn, National Policy Analyst,
National Adult Protective Services Association (``NAPSA''), dated
July 29, 2021 (``NAPSA Letter''); letter to Vanessa Countryman,
Secretary, Commission, from Lisa Bleier and Marin Gibson, Securities
Industry and Financial Markets Association (``SIFMA''), dated July
28, 2021 (``SIFMA Letter''); letter to Vanessa Countryman,
Secretary, Commission, from Christine Lazaro, Director of the
Securities Arbitration Clinic and, Professor of Clinical Legal
Education, St. John's University (the ``St. John's Clinic''), dated
July 19, 2021 (``St. John's Clinic Letter''); letter to Vanessa
Countryman, Secretary, Commission, from Eversheds Sutherland (US)
LLP on behalf of the Committee of Annuity Insurers (``CAI''), dated
July 19, 2021 (``CAI Letter''); letter to Vanessa Countryman,
Secretary, Commission, from Ron Long, Head of Aging Client Services,
Wells Fargo (``Wells Fargo''), dated July 15, 2021 (``Wells Fargo
Letter'').
\45\ See CAI Letter at 2; NAPSA Letter at 1.
\46\ CAI Letter at 2.
\47\ See Cornell Clinic Letter at 2-3.
\48\ Id. at 1.
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One commenter suggested that notwithstanding its general support
for the proposed rule change as drafted, ``more may be done to further
protect senior investors'' and requested that ``FINRA further consider
making the Rule proscriptive rather than permissive.'' \49\ In
particular, this commenter stated that ``small and mid-sized firms have
declined to utilize the safe harbor offered by Rule 2165 because of
concerns associated with litigation risks,'' \50\ and that investors
``would benefit from a uniform national standard of mandated reporting
where financial exploitation is suspected, even if placing a hold is
not mandated.'' \51\
---------------------------------------------------------------------------
\49\ St. John's Clinic Letter at 2.
\50\ Id.
\51\ Id.
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In response, FINRA stated that permitting a member firm to use
discretion in placing a temporary hold would allow for the judicious
use of temporary holds to protect customers from financial
exploitation.\52\ FINRA stated that some states mandate reporting of
suspected financial exploitation by financial institutions, including
broker-dealers, within a specified period of time, and FINRA expects
member firms to comply with all applicable state requirements,
including reporting requirements.\53\ FINRA further stated that where
state reporting is not required, mandatory reporting of every temporary
hold pursuant to Rule 2165 could lead to an inefficient or ineffective
use of time and resources for state regulators and agencies,
particularly where firms were able to quickly resolve matters by
engaging a customer's trusted contact person or using other tools.\54\
For these reasons, FINRA declined amending the proposed rule change.
---------------------------------------------------------------------------
\52\ See FINRA Response Letter 1 at 4.
\53\ Id.
\54\ Id.
---------------------------------------------------------------------------
Permitting firms to impose a temporary hold on transactions where
appropriate, in addition to the authority firms already have to impose
temporary holds on disbursements, would provide an additional measure
of protection to customers from the harmful impact of exploitative
transactions, such as adverse tax consequences, early withdrawal
penalties, or investing in securities that do not align with their
investor profiles. A temporary hold on disbursements may not be
sufficient to prevent or redress customer harm from financial
exploitation in certain instances, such as financial exploitation
involving the purchase and sale of securities. Therefore, authorizing
firms to place temporary holds on securities transactions represents an
important mechanism to help firms prevent harmful financial
consequences that could result from a customer being subject to an
exploitative securities transaction. Moreover, FINRA's approach, which
balances the importance of reporting against the risk of an inefficient
or ineffective use of time and resources for state regulators and
agencies, is reasonable. In addition, the Commission expects firms to
comply with applicable state laws mandating that firms report suspected
financial exploitation. For these reasons, the Commission finds the
proposed rule change is consistent with the protection of investors and
in the public interest.
B. Proposed 30-Day Extension of the Temporary Hold Period (Proposed
Rule 2165(b)(4))
The proposed rule change would permit firms to extend the temporary
hold on disbursements or transactions authorized by this rule for an
additional 30 business days where the member firm has reported or
provided notification of the member's reasonable belief of financial
exploitation of a specified adult to a State Authority.
Several commenters suggested that more time is needed for the
investigation of senior financial exploitation cases.\55\ One commenter
stated that compared to the average 52.6 day duration of an
investigation for all cases reported to NAMRS, ``financial exploitation
investigations are often more complicated and time consuming'' and thus
the commenter recommended that the 30-business-day extension be treated
only as a starting point, which could be revisited as more data become
available.\56\ Another commenter stated that data show ``there will
still be a sizeable percentage of cases of potential financial
exploitation that are not resolved in a timely manner, even with the
30-business day extension . . . so firms will still be in the
unenviable position of determining whether to engage in the
disbursement, or execute the securities transaction, prior to their
[[Page 4978]]
ability to conclude the investigation and ensure that the customer has
not been exploited.'' \57\ In addition, a commenter stated that because
``[s]tate laws do not conform to the additional 30-business days
granted under'' the proposed rule change ``firms will be forced to
continue to wade through a patchwork of requirements.'' \58\ Therefore,
this commenter recommended that FINRA work with state agencies and the
courts to foster consistency with respect to the permitted timeframe,
as well as review the timeline again in the future to assess its
efficacy.\59\
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\55\ See CAI Letter; NAPSA Letter; SIFMA Letter.
\56\ See NAPSA Letter at 1.
\57\ CAI Letter at 2-3.
\58\ Id. at 2.
\59\ Id. at 3.
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In response, FINRA stated that the proposed rule change strikes a
reasonable balance between giving member firms adequate time to
investigate and contact the relevant parties, as well as to seek input
from a State Authority if needed, while prohibiting an open-ended hold
period.\60\ FINRA emphasized that Rule 2165 already permits a temporary
hold to be terminated or extended by a State Authority.\61\
Furthermore, FINRA stated that it has met, and will continue to meet,
with adult protective services (``APS'') staff in multiple states and
NAPSA to increase the coordination of senior investor protection
efforts and highlight Rule 2165's provision that APS has the ability to
direct a member firm to terminate or extend a temporary hold authorized
by the Rule.\62\ In addition, FINRA asserted that if the proposed hold
period does not provide member firms with adequate time for
investigation, FINRA may consider extending the temporary hold period
in future rulemaking.\63\
---------------------------------------------------------------------------
\60\ See FINRA Response Letter 1 at 3.
\61\ Id.
\62\ Id.
\63\ See FINRA Response Letter 1 at 3-4.
---------------------------------------------------------------------------
Another commenter opposed the proposed extension of the temporary
hold period because the basis for whether to exercise the 10-business-
day extension currently permitted by the rule \64\ and the proposed 30-
business-day extension \65\ would use different standards.\66\ The
commenter recommended that FINRA amend the proposed rule change to
require that the basis for exercising both extensions require that an
internal investigation support a reasonable belief in financial
exploitation (the current standard for the 10-business-day
extension).\67\ The commenter also suggested that FINRA consolidate the
two extensions into a single 40-business-day extension.\68\
---------------------------------------------------------------------------
\64\ See Rule 2165(b)(3).
\65\ See Proposed Rule 2165(b)(4).
\66\ See Cornell Clinic Letter at 3.
\67\ Id.
\68\ Id.
---------------------------------------------------------------------------
In response, FINRA stated that, as with the 10-business-day
extension currently provided under Rule 2165(b)(3), the 30-business-day
extension would require that the member firm's internal review of the
facts and circumstances support a reasonable belief of the existence
of, or potential for, financial exploitation necessitating the
temporary hold.\69\ However, the additional 30-business-day extension
also would require the firm to report or notify a State Authority.\70\
The additional 30 business days would provide firms with additional
time to resolve complex matters, often involving investigations by
state regulators or agencies or legal actions in a court.\71\ FINRA
stated that it does not support consolidating the two extensions of the
temporary hold into a single 40-business day extension because doing so
would not differentiate between matters of varying complexity.\72\
FINRA stated that the proposed rule change strikes a reasonable balance
in giving member firms adequate time to investigate and contact the
relevant parties, as well as seek input from a state regulator or
agency or a court if needed.\73\
---------------------------------------------------------------------------
\69\ See FINRA Response Letter 2 at 2-3.
\70\ See id. at 2.
\71\ See id. at 3.
\72\ See id.
\73\ Id.
---------------------------------------------------------------------------
The commenter also opposed the proposed 30-business-day extension
because ``a non-overridable limit on customers' ability to transact and
disburse, even though temporary, unduly limits the customers autonomy,
which does not strike the right balance of interests under the Exchange
Act.'' \74\ Accordingly, the commenter recommended that FINRA provide a
mechanism for customers to override the temporary hold in limited
circumstances, since customers may be aware of the risks and choose to
proceed nonetheless.\75\
---------------------------------------------------------------------------
\74\ Cornell Clinic Letter at 3.
\75\ See id.
---------------------------------------------------------------------------
In response, FINRA stated that customers are given opportunities to
help resolve any circumstance giving rise to a temporary hold. For
instance, FINRA stated that unless a member firm reasonably believes
that doing so would cause further harm to a specified adult, FINRA
encourages the firm to attempt to resolve the matter with a customer
before placing a temporary hold.\76\ In addition, FINRA stated that
Rule 2165(b)(1)(B)(i) requires that, not later than two days after
placing a temporary hold, the firm notify all persons authorized to
transact business on the account, including the customer.\77\ FINRA
stated, however, that allowing a customer to ``override a temporary
hold when the member firm has a reasonable belief that the customer is
being financially exploited would give a powerful tool to the person
exploiting the customer and deprive the member firm of a tool to
address the exploitation.'' \78\ For example, the exploiter could
direct the customer to override the hold so that the exploiter could
access the customer's funds.\79\ For these reasons, FINRA declined
amending the proposed rule change.
---------------------------------------------------------------------------
\76\ See FINRA Response Letter 2 at 3.
\77\ Id.
\78\ Id.
\79\ Id.
---------------------------------------------------------------------------
Providing firms with the ability to extend the temporary hold
period from a maximum of 25 business days to 55 business days
reasonably aligns with FINRA's stated purpose of providing firms with
additional time to resolve financial exploitation matters where
circumstances warrant. FINRA has found that the average duration of an
investigation for matters reported to NAMRS is 52.6 days, and the
proposed rule change would extend the potential maximum duration of the
hold to 55 business days--a sum that is more in line with the average
amount of time needed to conduct an investigation. As FINRA noted,
firms as well as the government or law enforcement entities that
investigate suspected financial exploitation often need additional time
to collect and share information in order to bring the investigation to
resolution.\80\ But if a State Authority determines that additional
time is needed the proposed rule change permits it to further extend
the temporary hold. Moreover, it is reasonable to condition a firm's
ability to extend the temporary hold for an additional 30 business days
on the firm reporting the matter to a State Authority, given that the
extension is a serious step for both the firm and affected customer.
These additional requirements, combined with the existing safeguards
incorporated into Rule 2165, should provide firms with an effective
mechanism to obtain additional time that may be necessary to resolve
suspected financial exploitation of specified adults.
---------------------------------------------------------------------------
\80\ See supra notes 21 and 37-39 and accompanying text.
---------------------------------------------------------------------------
Furthermore, allowing a customer to override a temporary hold when
the firm has a reasonable belief that the customer is being financially
exploited
[[Page 4979]]
could potentially serve to aid the person who is exploiting the
customer, while also potentially diminishing the effectiveness of the
firm's means to address the exploitation. At the same time, a maximum
hold time of no more than 55 business days, combined with other
safeguards, would provide a reasonable upper limit on holds that serves
to protect customers from being subject to unduly lengthy or even
indefinite holds on transactions or disbursements. For these reasons,
the Commission finds that the proposed 30-day extension of the
temporary hold period is consistent with the protection of investors
and in the public interests.
C. Record Retention (Rule 2165(d))
The proposed rule change would also extend Rule 2165's record
retention obligation to temporary hold extensions by requiring firms to
retain records of the reason and support for any extension of a
temporary hold, including information regarding any communications
with, or by, a State Authority--so that firms have a means to
demonstrate compliance with the rule upon request by FINRA.
One commenter stated that retaining records that justify a
reasonable belief of financial exploitation would help ``justify the
imposition of a protective temporary hold, justify limiting a
customer's autonomy, justify the member firm's decision-making process,
and ensure member firms do not feel free to impose unnecessary holds.''
\81\ For these reasons, the commenter stated that the proposed record
retention requirement would benefit member firms, customers and the
public.\82\
---------------------------------------------------------------------------
\81\ Cornell Clinic Letter at 4.
\82\ See id.
---------------------------------------------------------------------------
FINRA's determination to require firms to maintain records
evidencing those communications so that they can demonstrate compliance
with the rule upon FINRA's request, as set forth in the proposed rule
change, is reasonable. For these reasons, the Commission finds FINRA's
proposed rule change is consistent with the protection of investors and
in the public interest.
D. Additional Issues Raised by Commenters
1. Cognitive Decline or Diminished Capacity
One commenter recommended that FINRA consider extending the Rule
2165 safe harbor to apply where there is a reasonable belief that the
investor has an impairment that renders the individual unable to
protect his or her own interests, irrespective of whether there is
evidence the customer may be the victim of financial exploitation by a
third party.\83\
---------------------------------------------------------------------------
\83\ See Wells Letter at 2.
---------------------------------------------------------------------------
In response, FINRA stated that it did not extend Rule 2165 to
situations where a member firm has a reasonable belief that the
customer has cognitive decline or diminished capacity, but there is no
evidence of financial exploitation because such an extension would give
member firms too much discretion or would unfairly impede customer
autonomy.\84\ FINRA also stated that member firms are not well-
positioned to determine if a customer is suffering from cognitive
decline or diminished capacity.\85\ However, FINRA reminded firms of
the guidance it provided in this area in Regulatory Notice 20-34 to
assist member firms and investors address issues related to cognitive
decline and diminished capacity.\86\
---------------------------------------------------------------------------
\84\ See FINRA Response Letter 1 at 5.
\85\ Id.
\86\ See FINRA Response Letter 1 at 5.
---------------------------------------------------------------------------
The Commission finds that expanding the proposed rule change to
capture investors with cognitive decline or diminished capacity where
there is no evidence of financial exploitation is beyond the scope of
this proposed rule change.
2. Investment Companies
One commenter recommended that the temporary hold rules apply to
investment companies, such as mutual funds, noting that because these
companies are often the custodian of the actual assets, ``there is
nothing to be done to hold the actual assets if the client goes to them
directly and circumvents the broker-dealer.'' \87\
---------------------------------------------------------------------------
\87\ NAPSA Letter at 1.
---------------------------------------------------------------------------
In response, FINRA stated that the Commission, not FINRA, has
jurisdiction over investment companies and their transfer agents and,
in fact, has already addressed the commenter's concern.\88\
Furthermore, FINRA stated that based on discussions with SEC staff
regarding Section 22(e) of the Investment Company Act of 1940, FINRA
does not believe that a broker-dealer's delay of a redemption of mutual
fund shares pursuant to its customer's mutual fund redemption request,
or of a disbursement of mutual fund redemption proceeds to its
customer, in reliance on Rule 2165 as amended by the Proposal and based
on a reasonable belief of financial exploitation of the customer would
be imputed to the mutual fund, including where the broker-dealer is the
fund's principal underwriter.\89\
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\88\ See FINRA Response Letter 1 at 2. FINRA stated that
Division of Investment Management staff issued a no-action letter in
2018 to the Investment Company Institute permitting mutual fund
transfer agents to protect specified adult shareholders from
financial exploitation to the same extent that broker-dealers may do
so currently under FINRA Rule 2165. Specifically, the no-action
letter stated that the staff would not recommend enforcement action
if, consistent with the conditions in the letter, a transfer agent,
acting on behalf of a mutual fund, temporarily delayed for more than
seven days the disbursement of redemption proceeds from the mutual
fund account of a specified adult held directly with the transfer
agent based on a reasonable belief that financial exploitation of
the specified adult has occurred, is occurring, has been attempted,
or will be attempted. See also Investment Company Institute, SEC No-
Action Letter (June 1, 2018).
\89\ See letter from Jeanette Wingler, Associate General
Counsel, FINRA, to Vanessa Countryman, Secretary, Commission, dated
January 24, 2022, available at https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-20112614-265430.pdf. See also Notice
of Filing of Partial Amendment No. 1 and Order Granting Accelerated
Approval of File No. SR-FINRA-2016-039, Securities Exchange Act
Release No. 79964 (February 3, 2017), 82 FR 10059, 10066 (February
9, 2017).
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In general, FINRA rules apply to all members and persons associated
with a member. The term ``member'' means any registered broker-dealer
whose regular course of business consists in actually transacting
securities business that is admitted to membership in FINRA.\90\
Therefore, the commenter's recommendation is beyond the scope of this
proposed rule change.
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\90\ See FINRA Rule 0160(d)(10) and Article III, Section 1(a) of
the FINRA Bylaws.
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In sum, for the above reasons, the Commission finds that the
proposed rule change would strengthen the tools available to FINRA's
member firms to combat the financial exploitation of vulnerable
investors. In addition, the Commission finds that conditioning the
ability to extend the temporary hold by requiring firms to report the
matter to a specified external authority, as well as requiring firms to
maintain records evidencing those communications, would aid in
preventing misapplication of the rule, and complement the existing
safeguards already present in Rule 2165. Accordingly, the Commission
finds that the proposed rule change would facilitate a greater measure
of protection for investors by providing firms with additional means to
prevent customer harm by imposing temporary holds on securities
transactions where appropriate, and also by providing firms with
additional time to resolve financial exploitation matters through
extending the duration of a temporary hold when necessary. For these
reasons, the Commission finds FINRA's proposed rule change is designed
to protect investors and the public interest.
[[Page 4980]]
IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \91\ that the proposed rule change (SR-FINRA-2021-016) be,
and hereby is, approved.
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\91\ 15 U.S.C. 78s(b)(2).
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01843 Filed 1-28-22; 8:45 am]
BILLING CODE 8011-01-P
