[Federal Register Volume 87, Number 20 (Monday, January 31, 2022)]
[Notices]
[Pages 4974-4980]
[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,

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \35\ See Rule 2165(b)(2).
    \36\ See Rule 2165(b)(3).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \90\ See FINRA Rule 0160(d)(10) and Article III, Section 1(a) of
the FINRA Bylaws.
---------------------------------------------------------------------------

    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.

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.
---------------------------------------------------------------------------

    \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