[Federal Register Volume 81, Number 215 (Monday, November 7, 2016)]
[Notices]
[Pages 78238-78257]
[FR Doc No: 2016-26797]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79215; File No. SR-FINRA-2016-039]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
Rule 4512 (Customer Account Information) and Adopt FINRA Rule 2165
(Financial Exploitation of Specified Adults)

November 1, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 19, 2016, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC,''
or the ``Commission'') the proposed rule change as described in Items
I, II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to: (1) Amend FINRA Rule 4512 (Customer Account
Information) to require members to make reasonable efforts to obtain
the name of and contact information for a trusted contact person for a
customer's account; and (2) adopt new FINRA Rule 2165 (Financial
Exploitation of Specified Adults) to permit members to place temporary
holds on disbursements of funds or securities from the accounts of
specified customers where there is a reasonable belief of financial
exploitation of these customers.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.

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

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

and C below, of the most significant aspects of such statements.
    A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
    With the aging of the U.S. population, financial exploitation of
seniors and other vulnerable adults is a serious and growing
problem.\3\ FINRA's experience with the FINRA Securities Helpline for
Seniors[supreg] (``Seniors Helpline'') has highlighted issues relating
to financial exploitation of seniors and other vulnerable adults.\4\ A
number of reports and studies also have explored various aspects of
this important topic.\5\ Moreover, studies indicate that financial
exploitation is the most common form of elder abuse.\6\ Financial
exploitation can be difficult for any investor, but it can be
particularly devastating for seniors and other vulnerable adults, many
of whom are living on fixed incomes without the ability to offset
significant losses over time or through other means.\7\ Financial
exploitation can occur suddenly, and once funds leave an account they
can be difficult, if not impossible, to recover, especially when they
ultimately are transferred outside of the U.S.\8\ Members need more
effective tools that will allow them to quickly and effectively address
suspected financial exploitation of seniors and other vulnerable
adults. Currently, however, FINRA rules do not explicitly permit
members to contact a non-account holder or to place a temporary hold on
disbursements of funds or securities where there is a reasonable belief
of financial exploitation of a senior or other vulnerable adult.
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    \3\ See The MetLife Study of Elder Financial Abuse: Crimes of
Occasion, Desperation, and Predation Against America's Elders (June
2011) (discussing the increasing prevalence of elder financial
abuse) (hereinafter ``MetLife Study''). See also FINRA Investor
Education Foundation, Financial Fraud and Fraud Susceptibility in
the United States: Research Report from a 2012 National Survey
(2013) (which found that U.S. adults age 65 and older are more
likely to be targeted for financial fraud, including investment
scams, and more likely to lose money once targeted) (hereinafter
``FINRA Foundation Study'').
    \4\ See FINRA Launches Toll-Free FINRA Securities Helpline for
Seniors (April 20, 2015). See also Report on the FINRA Securities
Helpline for Seniors (December 2015) (stating that from its launch
on April 20, 2015 until December 2015, the Seniors Helpline received
more than 2,500 calls with an average call duration of nearly 25
minutes) (hereinafter ``Seniors Helpline Report'').
    \5\ See, e.g., National Senior Investor Initiative: A
Coordinated Series of Examinations, SEC's Office of Compliance
Inspections and Examinations and FINRA (April 15, 2015) (hereinafter
``Senior Investor Initiative''); MetLife Study; and Seniors Helpline
Report.
    \6\ See Interagency Guidance on Privacy Laws and Reporting
Financial Abuse of Older Adults, Board of Governors of the Federal
Reserve System, Commodity Futures Trading Commission, Consumer
Financial Protection Bureau, Federal Deposit Insurance Corp.,
Federal Trade Commission, National Credit Union Administration,
Office of the Comptroller of the Currency and SEC (September 24,
2013) (hereinafter ``Interagency Guidance'') (citing Acierno, R.,
M.A. Hernandez, A.B. Amstadter, H.S. Resnick, K. Steve, W. Muzzy,
and D.G. Kilpatrick, ``Prevalence and Correlates of Emotional,
Physical, Sexual and Financial Abuse and Potential Neglect in the
United States: The National Elder Mistreatment Study,'' American
Journal of Public Health 100(2): 292-97; Lifespan of Greater
Rochester, Inc., et al., Under the Radar: New York State Elder Abuse
Prevention Study, (Rochester, NY: Lifespan of Greater Rochester,
Inc., May 2011)) (hereinafter ``New York State Elder Abuse
Prevention Study'').
    \7\ See Seniors Helpline Report.
    \8\ See Seniors Helpline Report.
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    To address these issues, the proposed rule change would provide
members with a way to quickly respond to situations in which they have
a reasonable basis to believe that financial exploitation of vulnerable
adults has occurred or will be attempted. FINRA believes that a member
can better protect its customers from financial exploitation if the
member can: (1) Place a temporary hold on a disbursement of funds or
securities from a customer's account; and (2) notify a customer's
trusted contact person when there is concern that, among other things,
the customer may be the victim of financial exploitation. These
measures will assist members in thwarting financial exploitation of
seniors and other vulnerable adults before potentially ruinous losses
occur. As discussed below, FINRA is proposing a number of safeguards to
help ensure that there is not a misapplication of the proposed rule and
that customers' ordinary disbursements are not disrupted.
    A small number of states have enacted statutes that permit
financial institutions, including broker-dealers, to place temporary
holds on ``disbursements'' or ``transactions'' if financial
exploitation of covered persons is suspected.\9\ In addition, the North
American Securities Administrators Association (``NASAA'') created a
model state act to protect vulnerable adults from financial
exploitation (``NASAA model''). Due to the small number of state
statutes currently in effect and the lack of a federal standard in this
area, FINRA believes that the proposed rule change would aid in the
creation of a uniform national standard for the benefit of members and
their customers.
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    \9\ See, e.g., DEL. CODE ANN. tit. 31, Sec.  3910 (2015); MO.
REV. STAT. Sec. Sec.  409.600-.630 (2015); WASH. REV. CODE
Sec. Sec.  74.34.215, 220 (2015); and IND. CODE ANN. Sec.  23-19-4.1
(2016).
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Trusted Contact Person
    The proposed rule change would amend Rule 4512 to require members
to make reasonable efforts to obtain the name of and contact
information for a trusted contact person upon the opening of a non-
institutional customer's account.\10\ The proposed rule change would
require that the trusted contact person be age 18 or older.\11\ While
the proposed rule change does not specify what contact information
should be obtained for a trusted contact person, a mailing address,
telephone number and email address for the trusted contact person may
be the most useful information for members.
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    \10\ See proposed Rule 4512(a)(1)(F).
    \11\ See proposed Rule 4512(a)(1)(F).
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    The proposal does not prohibit members from opening and maintaining
an account if a customer fails to identify a trusted contact person as
long as the member made reasonable efforts to obtain a name and contact
information.\12\ FINRA believes that asking a customer to provide the
name and contact information for a trusted contact person ordinarily
would constitute reasonable efforts to obtain the information and would
satisfy the proposed rule change's requirements.
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    \12\ See proposed Supplementary Material .06(b) to Rule 4512.
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    Consistent with the current requirements of Rule 4512, a member
would not need to attempt to obtain the name of and contact information
for a trusted contact person for accounts in existence prior to the
effective date of the proposed rule change (``existing accounts'')
until such time as the member updates the information for the account
either in the course of the member's routine and customary business or
as otherwise required by applicable laws or rules.\13\ With respect to
any account subject to the requirements of Exchange Act Rule 17a-
3(a)(17) to periodically update customer records, a member shall make
reasonable efforts to obtain or, if previously obtained, to update
where appropriate the name of and contact information for a trusted
contact person consistent with the requirements in Exchange Act Rule
17a-3(a)(17).\14\ With

regard to updating the contact information once provided for other
accounts that are not subject to the requirements in Exchange Act Rule
17a-3, a member should consider asking the customer to review and
update the name of and contact information for a trusted contact person
on a periodic basis or when there is a reason to believe that there has
been a change in the customer's situation.\15\
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    \13\ See Rule 4512(b).
    \14\ See proposed Supplementary Material .06(c) to Rule 4512.
The reference to the requirements of Rule 17a-3(a)(17) includes the
requirements of Rule 17a-3(a)(17)(i)(A) in conjunction with Rule
17a-3(a)(17)(i)(D). In this regard, Rule 17a-3(a)(17)(i)(D) provides
that the account record requirements in Rule 17a-3(a)(17)(i)(A) only
apply to accounts for which the member, broker or dealer is, or has
within the past 36 months been, required to make a suitability
determination under the federal securities laws or under the
requirements of a self-regulatory organization of which it is a
member.
    \15\ A customer's request to change his or her trusted contact
person may be a possible red flag of financial exploitation. For
example, a senior customer instructing his registered representative
to change his trusted contact person from an immediate family member
to a previously unknown third party may be a red flag of financial
exploitation.
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    The proposed rule change would also require that, at the time of
account opening, a member shall disclose in writing (which may be
electronic) to the customer that the member or an associated person is
authorized to contact the trusted contact person and disclose
information about the customer's account to address possible financial
exploitation, to confirm the specifics of the customer's current
contact information, health status, or the identity of any legal
guardian, executor, trustee or holder of a power of attorney, or as
otherwise permitted by proposed Rule 2165. With respect to any account
that was opened pursuant to a prior FINRA rule, a member shall provide
this disclosure in writing, which may be electronic, when updating the
information for the account pursuant to Rule 4512(b) either in the
course of the member's routine and customary business or as otherwise
required by applicable laws or rules.\16\
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    \16\ See proposed Supplementary Material .06(a) to Rule 4512. A
member would be required to provide the disclosure at account
opening or when updating information for existing accounts pursuant
to Rule 4512(b), even if a customer fails to identify a trusted
contact person. Among other things, such disclosure may assist a
customer in making an informed decision about whether to provide the
trusted contact person information.
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    FINRA believes that members and customers will benefit from the
trusted contact information in many different settings. For example,
consistent with the disclosure, if a member has been unable to contact
a customer after multiple attempts, a member could contact a trusted
contact person to inquire about the customer's current contact
information. Or if a customer is known to be ill or infirm and the
member has been unable to contact the customer after multiple attempts,
the member could contact a trusted contact person to inquire about the
customer's health status. A member also could reach out to a trusted
contact person if it suspects that the customer may be suffering from
Alzheimer's disease, dementia or other forms of diminished capacity. A
member could contact a trusted contact person to address possible
financial exploitation of the customer before placing a temporary hold
on a disbursement. In addition, as discussed below, pursuant to
proposed Rule 2165, when information about a trusted contact person is
available, a member must notify the trusted contact person orally or in
writing, which may be electronic, if the member has placed a temporary
hold on a disbursement of funds or securities from a customer's
account, unless the member reasonably believes that the trusted contact
person is engaged in the financial exploitation.\17\
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    \17\ See proposed Rule 2165(b)(1)(B)(ii). With respect to
disclosing information to the trusted contact person, Regulation S-P
excepts from the Regulation's notice and opt-out requirements
disclosures made: (A) To comply with federal, state, or local laws,
rules and other applicable legal requirements; or (B) made with
client consent, provided such consent has not been revoked. See 17
C.F.R Sec. Sec.  248.15(a)(1) and (a)(7)(i). FINRA believes that
disclosures to a trusted contact person pursuant to proposed Rule
2165 or 4512(a)(1)(F) would be consistent with Regulation S-P.
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    The trusted contact person is intended to be a resource for the
member in administering the customer's account, protecting assets and
responding to possible financial exploitation. A member may use its
discretion in relying on any information provided by the trusted
contact person. A member may elect to notify an individual that he or
she was named as a trusted contact person; however, the proposed rule
change would not require such notification.
Temporary Hold on Disbursement of Funds or Securities
    The proposed rule change would permit a member that reasonably
believes that financial exploitation may be occurring to place a
temporary hold on the disbursement of funds or securities from the
account of a ``specified adult'' customer.\18\ The proposed rule change
creates no obligation to withhold a disbursement of funds or securities
where financial exploitation may be occurring. In this regard,
Supplementary Material to proposed Rule 2165 would explicitly state
that the Rule provides members with a safe harbor from FINRA Rules 2010
(Standards of Commercial Honor and Principles of Trade), 2150 (Improper
Use of Customers' Securities or Funds; Prohibition Against Guarantees
and Sharing in Accounts) and 11870 (Customer Account Transfer
Contracts) when members exercise discretion in placing temporary holds
on disbursements of funds or securities from the accounts of specified
adults under the circumstances denoted in the Rule.\19\ The proposed
Supplementary Material would further state that the Rule does not
require members to place temporary holds on disbursements of funds or
securities from the account of a specified adult.\20\
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    \18\ See proposed Rule 2165(b)(1). Members also must consider
any obligations under FINRA Rule 3310 (Anti-Money Laundering
Compliance Program) and the reporting of suspicious transactions
required under 31 U.S.C. 5318(g) and the implementing regulations
thereunder.
    \19\ See proposed Supplementary Material .01 to Rule 2165.
    \20\ See proposed Supplementary Material .01 to Rule 2165. FINRA
understands that some members, pursuant to state law or their own
policies, may already place temporary holds on disbursements from
customers' accounts where financial exploitation is suspected.
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    FINRA believes that ``specified adults'' may be particularly
susceptible to financial exploitation.\21\ Proposed Rule 2165 would
define ``specified adult'' as: (A) A natural person age 65 and older;
\22\ or (B) a natural person age 18 and older who the member reasonably
believes has a mental or physical impairment that renders the
individual unable to protect his or her own interests.\23\
Supplementary Material to proposed Rule 2165 would provide that a
member's reasonable belief that a natural person age 18 and older has a
mental or physical impairment that renders the individual unable to
protect his or her own interests may be based on the facts and
circumstances observed in the member's business relationship with the
person.\24\

The proposed rule change would define the term ``account'' to mean any
account of a member for which a specified adult has the authority to
transact business.\25\
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    \21\ See Senior Investor Initiative (noting the increase in
persons aged 65 and older living in the United States and the
concentration of wealth in those persons during a time of downward
yield pressure on conservative income-producing investments). See
also FINRA Foundation Study (noting that respondents age 65 and over
were more likely to be solicited to invest in a potentially
fraudulent opportunity (93%), more likely to engage with the offer
(49%) and more likely to have lost money (16%) than younger
respondents); MetLife Study (noting the many forms of vulnerability
that ``make elders more susceptible to [financial] abuse,''
including, among others, poor physical or mental health, lack of
mobility, and isolation); Protecting Elderly Investors from
Financial Exploitation: Questions to Consider (February 5, 2015)
(noting that one of the greatest risk factors for diminished
capacity is age).
    \22\ See, e.g., Aging Statistics, U.S. Department of Health and
Human Services Administration on Aging (referring to the ``older
population'' as persons ``65 years or older''); Senior Investor
Initiative (noting the examinations underlying the report ``focused
on investors aged 65 years old or older'').
    \23\ See proposed Rule 2165(a)(1).
    \24\ See proposed Supplementary Material .03 to Rule 2165. A
member also may rely on other sources of information in making a
determination under proposed Rule 2165(a)(1) (e.g., a court or
government agency order finding a customer to be legally
incompetent).
    \25\ See proposed Rule 2165(a)(2).
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    Because financial abuse may take many forms, FINRA has proposed a
broad definition of ``financial exploitation.'' Specifically, financial
exploitation would mean: (A) The wrongful or unauthorized taking,
withholding, appropriation, or use of a specified adult's funds or
securities; or (B) any act or omission by a person, including through
the use of a power of attorney, guardianship, or any other authority,
regarding a specified adult, to: (i) Obtain control, through deception,
intimidation or undue influence, over the specified adult's money,
assets or property; or (ii) convert the specified adult's money, assets
or property.\26\
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    \26\ See proposed Rule 2165(a)(4).
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    The proposed rule change would permit a member to place a temporary
hold on a disbursement of funds or securities from the account of a
specified adult if the member reasonably believes that financial
exploitation of the specified adult has occurred, is occurring, has
been attempted or will be attempted.\27\ A temporary hold pursuant to
proposed Rule 2165 may be placed on a particular suspicious
disbursement(s) but not on other, non-suspicious disbursements.\28\ The
proposed rule change would not apply to transactions in securities.\29\
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    \27\ See proposed Rule 2165(b)(1)(A).
    \28\ FINRA recognizes that a single disbursement could involve
all of the assets in an account.
    \29\ For example, the proposed rule change would not apply to a
customer's order to sell his shares of a stock. However, if a
customer requested that the proceeds of a sale of shares of a stock
be disbursed out of his account at the member, then the proposed
rule change could apply to the disbursement of the proceeds where
the customer is a ``specified adult'' and there is reasonable belief
of financial exploitation.
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    The proposed rule change would require that a member's written
supervisory procedures identify the title of each person authorized to
place, terminate or extend a temporary hold on behalf of the member
pursuant to Rule 2165. The proposed rule change would require that any
such person be an associated person of the member who serves in a
supervisory, compliance or legal capacity for the member.\30\
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    \30\ See proposed Rule 2165(c)(2). This provision is intended to
ensure that a member's decision to place a temporary hold is
elevated to an associated person with appropriate authority.
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    If a member places a temporary hold, the proposed rule change would
require the member to immediately initiate an internal review of the
facts and circumstances that caused the member to reasonably believe
that financial exploitation of the specified adult has occurred, is
occurring, has been attempted or will be attempted.\31\ In addition,
the proposed rule change would require the member to provide
notification of the hold and the reason for the hold to all parties
authorized to transact business on the account, including, but not
limited to, the customer, and, if available, the trusted contact
person, no later than two business days after the date that the member
first placed the hold.\32\ While oral or written (including electronic)
notification would be permitted under the proposed rule change, a
member would be required to retain records evidencing the
notification.\33\
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    \31\ See proposed Rule 2165(b)(1)(C).
    \32\ See proposed Rule 2165(b)(1)(B). FINRA understands that a
member may not necessarily be able to speak with or otherwise get a
response from such persons within the two-business-day period. FINRA
would consider, for example, a member's mailing a letter, sending an
email, or placing a telephone call and leaving a message with
appropriate person(s) within the two-business-day period to
constitute notification for purposes of proposed Rule 2165.
Moreover, as further discussed herein, FINRA would consider the
inability to contact a trusted contact person to mean that the
trusted contact person was not available for purposes of the Rule.
    \33\ See proposed Rule 2165(d).
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    The proposed rule change does not preclude a member from
terminating a temporary hold after communicating with either the
customer or trusted contact person. FINRA believes that a customer's
objection to a temporary hold or information obtained during an
exchange with the customer or trusted contact person may be used in
determining whether a hold should be placed or lifted. FINRA believes
that while not dispositive members should weigh a customer's objection
against other information in determining whether a hold should be
placed or lifted.
    While the proposed rule change does not require notifying the
customer's registered representative of suspected financial
exploitation, a customer's registered representative may be the first
person to detect potential financial exploitation. If the detection
occurs in another way, a member may choose to notify and discuss the
suspected financial exploitation with the customer's registered
representative.
    For purposes of proposed Rule 2165, FINRA would consider the lack
of an identified trusted contact person, the inability to contact the
trusted contact person or a person's refusal to act as a trusted
contact person to mean that the trusted contact person was not
available. A member may use the temporary-hold provision under proposed
Rule 2165 when a trusted contact person is not available.
    The temporary hold authorized by proposed Rule 2165 would expire
not later than 15 business days after the date that the member first
placed the temporary hold on the disbursement of funds or securities,
unless sooner terminated or extended by an order of a state regulator
or agency or court of competent jurisdiction.\34\ In addition, provided
that the member's internal review of the facts and circumstances
supports its reasonable belief that the financial exploitation of the
specified adult has occurred, is occurring, has been attempted or will
be attempted, the proposed rule change would permit the member to
extend the temporary hold for an additional 10 business days, unless
sooner terminated or extended by an order of a state regulator or
agency or court of competent jurisdiction.\35\
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    \34\ See proposed Rule 2165(b)(2).
    \35\ See proposed Rule 2165(b)(3).
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    Proposed Rule 2165 would require members to retain records related
to compliance with the Rule, which shall be readily available to FINRA,
upon request. Retained records required by the proposed rule change are
records of: (1) Requests for disbursement that may constitute financial
exploitation of a specified adult and the resulting temporary hold; (2)
the finding of a reasonable belief that financial exploitation has
occurred, is occurring, has been attempted or will be attempted
underlying the decision to place a temporary hold on a disbursement;
(3) the name and title of the associated person that authorized the
temporary hold on a disbursement; (4) notification(s) to the relevant
parties pursuant to the Rule; and (5) the internal review of the facts
and circumstances supporting the member's reasonable belief that the
financial exploitation of the specified adult has occurred, is
occurring, has been attempted or will be attempted.\36\
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    \36\ See proposed Rule 2165(d).
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    The proposed rule change would require a member that anticipates
using a temporary hold in appropriate circumstances to establish and
maintain written supervisory procedures reasonably designed to achieve
compliance with the Rule, including procedures on the identification,
escalation and reporting of matters related to financial exploitation
of specified adults.\37\ The proposed rule change would require that
the member's written supervisory procedures identify the title of each
person authorized to place, terminate or extend a temporary

hold on behalf of the member pursuant to the Rule.\38\ The proposed
rule change would also require a member that anticipates placing a
temporary hold pursuant to the Rule to develop and document training
policies or programs reasonably designed to ensure that associated
persons comply with the requirements of the Rule.\39\
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    \37\ See proposed Rule 2165(c)(1).
    \38\ See proposed Rule 2165(c)(2).
    \39\ See proposed Supplementary Material .02 to Rule 2165.
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    If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 180 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\40\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The proposed rule change will promote investor
protection by relieving members from FINRA rules that might otherwise
discourage them from exercising discretion to protect customers through
placing a temporary hold on disbursements of funds or securities. Such
a hold, combined with contacting a trusted contact person, also may
assist these customers in stopping unwanted disbursements and better
protecting themselves from financial exploitation.
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    \40\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. All members would be subject to
the proposed amendments to Rule 4512, so they would be affected in the
same manner, and FINRA has narrowly tailored the requirements to
minimize the impacts on members. Moreover, proposed Rule 2165 is a
safe-harbor provision that permits, but does not require, members to
place temporary holds on disbursements in appropriate circumstances.
    The population of seniors and other vulnerable adults in the United
States is large. According to the U.S. Department of Health and Human
Services, the number of older Americans (persons 65 years of age or
older) is estimated to be 44.7 million, slightly over 14% of the U.S.
population.\41\ Of these Americans, approximately 57%, just under 25.5
million individuals, are invested in the stock market.\42\ Further, in
a recent survey, 75% of older households--that is, those where the
survey respondent was 65 years of age or older--reported having
securities investments in retirement or taxable accounts. This compares
to only 61% for households where the survey respondent was younger than
65.\43\ These figures represent conservative estimates of the
individuals who may be better protected by this proposed rule change as
it excludes any estimate of other vulnerable adults along with the
anticipated continued growth of the older population.
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    \41\ See Aging Statistics, U.S. Department of Health and Human
Services Administration.
    \42\ See Gallup 2013 Economy and Personal Finance survey at
http://www.gallup.com/poll/162353/stock-ownership-stays-record-low.aspx.
    \43\ See FINRA Investor Education Foundation's 2015 National
Financial Capability Study (State-by-State Survey) at http://www.usfinancialcapability.org/.
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    As noted above, the proposed rule change would provide members with
a way to quickly respond to situations in which they have a reasonable
basis to believe that financial exploitation of vulnerable adults has
occurred or will be attempted. The proposed rule change not only better
safeguards customers, to the extent that members today do not provide
additional protections for specified adults, but also better protects
those members that are already doing so. FINRA believes that the
proposed rule change would protect investors by relieving members from
FINRA rules that might otherwise discourage members from exercising
discretion to protect customers through placing a temporary hold on
disbursements of funds or securities. Such a hold, combined with
notifying a trusted contact person, also may assist these customers in
stopping unwanted disbursements and better protecting themselves from
financial exploitation.
    FINRA does not believe that the proposed rule change will impose
undue operational costs on members. The proposed amendments to Rule
4512 would require members to attempt to collect the name and contact
information for a trusted contact person at the time of account opening
or, with respect to existing accounts, in the course of the member's
routine and customary business. Members also would incur additional
responsibilities to provide disclosure about the member's right to
share certain personal information with the customer's trusted contact
person.
    While FINRA recognizes that there will be some operational costs to
members in complying with the proposed trusted contact person
requirement, FINRA has lessened the cost of compliance by not requiring
members to notify the trusted contact person of his or her designation
as such. Furthermore, the proposed rule change would permit a member to
deliver the disclosure and notification required by Rule 4512 or 2165
in paper or electronic form thereby giving the member alternative
methods of complying with the requirements.
    In addition, there may be impacts with respect to legal risks and
attendant costs to members that choose to rely on the proposed rule
change in placing temporary holds on disbursements, although the
direction of the impact is ambiguous. The proposed rule change may
provide some legal protection to members if they are sued for
withholding disbursements where there is a reasonable belief of
financial exploitation as they can point to the rule as a rationale for
their actions. At the same time, while proposed Rule 2165 creates no
obligation to withhold disbursements where financial exploitation may
be occurring or to refrain from opening or maintaining an account where
no trusted contact person is identified, the proposed rule change might
serve as a rationale for a private action against members that do not
withhold disbursements when there is a reasonable belief of financial
exploitation. To reduce the latter risk, proposed Rule 2165 explicitly
states that it provides members with a safe harbor from FINRA Rules
2010, 2150 and 11870 when members exercise discretion in placing
temporary holds on disbursements of funds or securities, but does not
require members to place such holds.
    To the extent that members today have reasons to suspect financial
exploitation of their customers, they may make judgments with regard to
withholding disbursements of funds or securities. As such, these
members may already face litigation risk with regard to their actions,
whether or not they choose to disburse funds or securities, and without
the benefit of a rule that supports their actions.
    In developing the proposed rule change, FINRA considered several
alternatives to help to ensure that it is narrowly tailored to achieve
its purposes described previously without

imposing unnecessary costs and burdens on members or resulting in any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change
addresses many of the concerns noted by commenters in response to the
proposal published for public comment in Regulatory Notice 15-37
(``Notice 15-37 Proposal'').
    First, the Notice 15-37 Proposal would have prohibited a person who
is authorized to transact business on an account from being designated
a customer's trusted contact person under Rule 4512(a)(1)(F).
Commenters raised concerns that this restriction may prohibit trustees
or individuals with powers of attorney from being designated as trusted
contact persons. In response to these comments, FINRA agrees that
prohibiting persons authorized to transact business on an account from
being designated a trusted contact person could present an overly
restrictive burden on some customers. Accordingly, FINRA has proposed
removing the prohibition on trusted contact persons being authorized to
transact business on an account so as to permit joint accountholders,
trustees, individuals with powers of attorney and other natural persons
authorized to transact business on an account to be designated as
trusted contact persons.
    Second, under the Notice 15-37 Proposal, the temporary hold on
disbursements of funds or securities would have expired not later than
15 business days after the date that the hold was initially placed,
unless sooner terminated or extended by an order of a court of
competent jurisdiction. Provided that the member's internal review of
the facts and circumstances supported the reasonable belief of
financial exploitation, the Notice 15-37 Proposal would have permitted
the temporary hold to be extended for an additional 15 business days,
unless sooner terminated by an order of a court of competent
jurisdiction. FINRA has proposed revising the time periods to up to 15
business days in the initial period and up to 10 business days (down
from 15 business days) in any subsequent period. The shortened overall
period responds to commenters' concerns about disbursement delays and
better aligns proposed Rule 2165 with the NASAA model. The proposed
subsequent period of up to 10 business days provides members with an
additional period to address the issue if concerns about financial
exploitation exist after the initial period, during which time the
member must contact account holders and perform an appropriate
investigation. FINRA believes that the proposed time periods are
appropriately tailored to provide members with an adequate time period
to address concerns about financial exploitation, while also responding
to commenters' concerns about disbursement delays.
    Third, the Notice 15-37 Proposal incorporated the concept of the
temporary hold being terminated or extended by an order of a court of
competent jurisdiction. In response to comments, FINRA agrees that the
Notice 15-37 Proposal may be considered overly narrow in not permitting
temporary holds to be terminated or extended by a state regulator or
agency of competent jurisdiction in addition to a court of competent
jurisdiction. In light of the important role of state regulators and
agencies in dealing with financial exploitation, FINRA has revised
proposed Rule 2165 to incorporate the concept of a temporary hold being
terminated or extended by a state regulator or agency in addition to a
court of competent jurisdiction.
    Fourth, the Notice 15-37 Proposal would have required a qualified
person to place a temporary hold pursuant to proposed Rule 2165.
Commenters suggested that the member should place a temporary hold, not
the qualified person. In response to comments, FINRA has revised
proposed Rule 2165 to provide that the member would place a hold under
the rule. As revised, proposed Rule 2165 also would require that a
member's written supervisory procedures identify the title of each
person authorized to place, terminate or extend a temporary hold on
behalf of the member pursuant to Rule 2165, and that any such person be
an associated person of the member who serves in a supervisory,
compliance or legal capacity for the member. In addition, proposed Rule
2165 would require that a member's records include the name and title
of the associated person that authorized the temporary hold on a
disbursement. FINRA believes that the revised proposed rule change is
appropriately tailored to apply the obligations at the member-level,
while preserving a role for associated persons serving in a
supervisory, compliance or legal capacity in placing, terminating or
extending the hold on behalf of the member.
    Fifth, the Notice 15-37 Proposal would have required that the
supervisory, compliance or legal capacity be ``reasonably related to
the account'' in question. Commenters raised concerns over how they
should determine whether the capacity was reasonably related to the
account, citing in particular some members' practice of using a
centralized group to respond to senior or fraud issues. After
considering these comments, FINRA is now proposing to eliminate the
requirement that the supervisory, compliance or legal capacity be
``reasonably related to the account.''
    Sixth, under the Notice 15-37 Proposal, if the trusted contact
person was not available or the member reasonably believed that the
trusted contact person was involved in the financial exploitation of
the specified adult, the member would have been required to contact an
immediate family member, unless the member reasonably believed that the
immediate family member was involved in the financial exploitation of
the specified adult. Some commenters raised operational and privacy
concerns regarding disclosing information to an immediate family member
who the customer did not designate as a trusted contact person. In
response to comments, FINRA has proposed removing the requirement to
contact an immediate family member under proposed Rule 2165.
    For these reasons, FINRA believes that the proposed rule change
would strengthen FINRA's regulatory structure and provide additional
protection to investors without imposing any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act.

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

    The proposed rule change was published for comment in Regulatory
Notice 15-37 (October 2015). FINRA received 40 comment letters in
response to the Notice 15-37 Proposal. A copy of Notice 15-37 is
attached as Exhibit 2a to this filing.\44\ Copies of the comment
letters received in response to Notice 15-37 are attached as Exhibit 2c
to this filing.\45\ The comments and FINRA's responses are set forth in
detail below.
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    \44\ Exhibits to File No. SR-FINRA-2016-039 are available on
FINRA's Web site at http://www.finra.org, at the principal office of
FINRA, and at the Commission's Public Reference Room.
    \45\ See Exhibit 2b to this filing for a list of abbreviations
assigned to commenters.
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General Support and Opposition to the Notice 15-37 Proposal
    Twenty-seven commenters supported FINRA's efforts to protect
seniors and other vulnerable adults but did not support all aspects of
the proposal.\46\

Chambers supported the proposal as promoting investor protection and
preventing fraud in customer accounts. Twelve commenters raised
significant concerns about the proposal.\47\
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    \46\ See Cowan, IJEC, NAELA, CFA Institute, GSU, Commonwealth,
NAPSA, ICI, PIABA, CAI, Cetera, Lincoln, Miami Investor Rights
Clinic, PIRC, AARP, Wells Fargo, NASAA, FSI, SIFMA, Coughlin,
Yaakov, IRI, First U.S. Community Credit Union, NAIFA, Alzheimer's
Assoc., BDA and GWFS.
    \47\ See FSR, FIBA, Thomson, Girdler, Christian Financial
Services, Rich, Stoehr, Ros, Hayden, Anderson, Liberman and Pisenti.
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    FINRA has considered the concerns raised by commenters and, as
discussed in detail below, has addressed many of the concerns noted by
commenters in response to the Notice 15-37 Proposal. Seniors are
constantly subjected to a spectrum of exploitation scams, including
scams centered on financial exploitation.\48\ FINRA believes that the
proposed rule change is needed to provide members with a defined way to
respond to situations where there is a reasonable belief of financial
exploitation of seniors and other vulnerable adults, including the
ability to share customer information with a trusted contact person.
Furthermore, the proposed rule change would promote investor protection
by providing members with a safe harbor from FINRA rules that might
otherwise discourage them from exercising discretion to protect
customers through placing a temporary hold on disbursements of funds or
securities.
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    \48\ See, e.g., New York State Elder Abuse Prevention Study
(stating that financial exploitation was the most common form of
mistreatment self-reported by study respondents); and National Adult
Protective Services Association: Policy & Advocacy--Elder Financial
Exploitation (discussing the widespread nature of financial
exploitation of seniors and vulnerable adults) available at http://www.napsa-now.org/policy-advocacy/exploitation/.
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    As noted above, studies indicate that financial exploitation is the
most common form of elder abuse and is a growing concern.\49\ A
member's relationship with its customers and its knowledge of
customers' accounts and financial situations may enable the member to
detect unusual account activity or other indicators of possible
financial exploitation. However, due to uncertainty about the ability
to place holds on disbursements under FINRA rules or privacy-related
concerns about sharing customer information, members may be unsure how
to proceed when there is a reasonable belief of financial exploitation.
---------------------------------------------------------------------------

    \49\ See supra notes 3 and 6.
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Safe Harbor
    Proposed Rule 2165 would provide members with a safe harbor from
FINRA Rules 2010, 2150 and 11870 when members exercise discretion in
placing temporary holds on disbursements of funds or securities from
accounts of specified adults under the circumstances denoted in the
Rule.
    FSI supported providing a safe harbor when members choose to place
temporary holds on disbursements of funds or securities from the
account of a specified adult. CFA Institute supported providing a safe
harbor, but stated that FINRA should encourage, not just permit,
members to make use of the safe harbor. Rather than providing a safe
harbor when members choose to place temporary holds, three commenters
supported requiring members to place temporary holds where there is a
reasonable belief of financial exploitation.\50\ PIABA further
supported penalizing members for willfully ignoring evidence of
financial exploitation.
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    \50\ See GSU, PIABA and Miami Rights Clinic.
---------------------------------------------------------------------------

    The proposed rule change retains the approach in the Notice 15-37
Proposal. FINRA believes that a member can better protect its customers
from financial exploitation if the member can use its discretion in
placing a temporary hold on a disbursement of funds or securities from
a customer's account.
    Other commenters supported expanding the scope of the safe harbor.
CAI supported expanding the scope of the safe harbor to explicitly
extend to situations in which: (1) A name and contact information for a
trusted contact person has not been obtained for an existing account;
and (2) the member was not able to obtain a name and contact
information for a trusted contact person for an account. If, despite
reasonable efforts, the member is unable to obtain or the customer
declines to provide the name and contact information for a trusted
contact person, FINRA would consider the trusted contact person to be
``unavailable'' for purposes of proposed Rule 2165. The unavailability
of a trusted contact person would not preclude a member from availing
itself of the safe harbor in proposed Rule 2165. Furthermore, for
existing accounts, a member may avail itself of the safe harbor even if
the member had not yet sought to obtain trusted contact person
information in the course of its routine and customary business.
    FIBA supported expanding the scope of the safe harbor to explicitly
cover a decision by a member that a temporary hold is not appropriate,
as well as the due diligence process leading to the decision.
Similarly, SIFMA suggested that the scope of the safe harbor be
extended to cover the final decision of a member that financial
exploitation of a specified adult has occurred. FINRA does not
interpret the proposed safe harbor from FINRA rules to cover final
decisions by members that financial exploitation does or does not
exist. Rather, proposed Rule 2165 provides members with a safe harbor
from FINRA rules when members exercise discretion in placing temporary
holds on disbursements of funds or securities from the account of a
specified adult. FINRA believes that the proposal is appropriately
tailored to provide members with a defined way of addressing possible
financial exploitation.
    SIFMA suggested that the safe harbor approach should recognize that
members have the ability to develop and implement alternative
protection structures under existing law (e.g., a customer's right to
voluntarily enter into an alternative protection structure through
agreement with the member). The safe harbor approach in proposed Rule
2165 does not preclude members from developing or implementing
alternative protection structures consistent with existing law and
FINRA rules.
    Two commenters requested that FINRA clarify to which rules the safe
harbor would apply.\51\ In response to these comments, FINRA modified
proposed Rule 2165, which now explicitly states that it provides 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).
---------------------------------------------------------------------------

    \51\ See CAI and SIFMA.
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    Three commenters supported extending the safe harbor protection of
proposed Rule 2165 to associated persons of the member.\52\ Proposed
Rule 2165 would provide a safe harbor from FINRA rules for members and
their associated persons when placing temporary holds on disbursements
in accordance with the Rule.
---------------------------------------------------------------------------

    \52\ See Cetera, NAIFA and BDA.
---------------------------------------------------------------------------

    BDA suggested that any associated person that acted in good faith
not be subject to complaints reportable on Form U4 (Uniform Application
for Securities Industry Registration or Transfer). The proposed safe
harbor from FINRA rules would not extend to complaints about an
associated person that are reportable on Form U4. An associated person
may respond to any such complaints on Form U4, including with an
explanation of actions taken pursuant to proposed Rule 2165. The
proposed safe harbor from FINRA rules also would not extend to
reporting required pursuant to FINRA Rule 4530

(Reporting Requirements), although FINRA would consider whether a
member or associated person had acted consistent with the proposed rule
when FINRA assesses reported information about a hold on a
disbursement.
    NAIFA suggested that the reference to the safe harbor from FINRA
rules be moved out of Supplementary Material and into the body of
proposed Rule 2165. Because Supplementary Material is part of the rule,
FINRA declines to move the reference as requested.
Alternative Approaches
    FINRA requested comment in the Notice 15-37 Proposal regarding
approaches other than the proposed rulemaking that FINRA should
consider. Two commenters suggested that FINRA adopt a principles-based
approach that would allow a member to develop policies and procedures
to fit its business model.\53\ FINRA declines to make the suggested
change. The safe harbor approach in proposed Rule 2165 is optional for
members. Moreover, FINRA believes that the safeguards outlined in the
safe harbor approach are important so that the ability to place
temporary holds is not abused.
---------------------------------------------------------------------------

    \53\ See FSR and Lincoln.
---------------------------------------------------------------------------

    Liberman suggested that FINRA consider alternatives to the proposed
rule change, such as working more closely with authorities that are
knowledgeable about financial exploitation of seniors. FINRA has long
had a strong interest in issues related to financial exploitation of
seniors and other vulnerable adults. FINRA has extensive knowledge
about financial exploitation of seniors, including working with
members, federal and state agencies, and senior groups, and in
administering the Seniors Helpline. Based on that information, FINRA
believes that the ability to place temporary holds on disbursements is
an important tool to guard against financial exploitation of seniors
and other vulnerable adults.\54\
---------------------------------------------------------------------------

    \54\ See also supra note 9 (regarding state laws) and NASAA
model.
---------------------------------------------------------------------------

    Pisenti suggested establishing a government hotline for members to
provide information about customers and allowing the hotline's staffers
to address the situation, including providing a reasonable time to
delay disbursements under the guidance of the staffers. Certain states
require reporting of suspected financial exploitation to adult
protective services or another agency, and FINRA expects members to
comply with these state reporting requirements. However, with the right
tools, members may be able to more effectively serve as the first line
of defense against financial exploitation of seniors and other
vulnerable adults. As discussed above, financial exploitation can occur
suddenly and cause irreversible damage to customers' assets if action
is not taken before funds or securities are disbursed. The proposed
rule change would thus provide members with a critical tool to further
protect customers from financial exploitation by explicitly allowing
members to place temporary holds on disbursements of funds or
securities consistent with the rule's requirements.
    Anderson suggested requiring that members monitor accounts of
senior customers for possible fraud rather than permitting members to
place temporary holds on disbursements. FINRA recognizes that allowing
members to place temporary holds on disbursements of funds or
securities may be viewed as a significant action. Accordingly, the
proposed rule change would impose numerous safeguards to help ensure
that temporary holds are used only in appropriate circumstances and for
the protection of customers. FINRA believes that members understand the
problem of financial exploitation and will act to address potential
financial exploitation of customers. A temporary hold would halt a
potentially fraudulent disbursement or other problematic situation
quickly, before significant harm to the customer occurs.
Reasonable Belief of Financial Exploitation
    The proposed rule change would permit members to place a temporary
hold on disbursements of funds or securities where there is a
reasonable belief of financial exploitation of a specified adult.
Cetera requested guidance as to what would constitute a reasonable
belief of financial exploitation. Ros commented that the reasonable
belief standard is vague.
    Other commenters suggested alternatives to the reasonable belief
standard. Cowen commented that the reasonable belief standard may be
too high and suggested instead ``substantial suspicion'' of potential
fraud or abuse as the standard. To cover red flags of financial
exploitation, FSR suggested an alternative standard of a ``reasonable
basis to suspect the customer may be the subject of financial
exploitation.'' AARP suggested that FINRA consider requiring members
and their associated persons to act with ``reasonable care.''
    FINRA believes that the proposed standard is appropriate in that it
permits members to use their judgment, based on their assessment of the
facts, to place temporary holds without requiring actual knowledge of
financial exploitation. The reasonable belief standard is present in
other FINRA rules (e.g., FINRA Rules 2040 (Payments to Unregistered
Persons) and 2111 (Suitability)). The standard also is consistent with
similar state statutes and the NASAA model.
    While not required by the proposed rule change, members may find it
beneficial to develop their own red flags to guide the formation of a
reasonable belief of financial exploitation. Among the commonly
identified red flags of potential financial exploitation are: (1)
Attempts to transfer money to engage in commonly known fraudulent
schemes (e.g., foreign lottery schemes); (2) uncharacteristic attempts
to wire securities or funds, particularly with a customer who is unable
to explain the attempts; (3) when a caretaker, relative, or friend of
the customer requests disbursements on behalf of the customer without
proper documentation; (4) abrupt increases in disbursements,
particularly with a customer who is accompanied by another person who
appears to be directing the disbursements; (5) attempted forgery of the
customer's signature on account documentation or a power of attorney;
and (6) a customer's unusual degree of fear, anxiety, submissiveness or
deference related to another person. While not dispositive, red flags
may be used by members to detect and prevent financial exploitation.
    Three commenters suggested expanding the proposed rule change
beyond financial exploitation of specified adults to permit temporary
holds on disbursements of funds and securities when a customer is
showing signs of diminished capacity.\55\ FINRA appreciates that
diminished capacity can make seniors especially vulnerable to financial
exploitation and believes that the proposed rule would cover most
situations involving questionable disbursements by customers suffering
from such a condition. In many instances where a customer is suffering
from diminished capacity and requests that a member make a potentially
problematic disbursement, the member is likely to have a reasonable
belief, at least initially, that financial exploitation may be
occurring. For those situations where that may not be the case, FINRA
recognizes that this is an important issue for future consideration.
---------------------------------------------------------------------------

    \55\ See NAELA, Lincoln and Alzheimer's Assoc.
---------------------------------------------------------------------------

Definition of ``Specified Adults''
    The proposed rule change would define ``specified adults'' to
include: (A) A natural person age 65 and older; or (B)

a natural person age 18 and older who the member reasonably believes
has a mental or physical impairment that renders the individual unable
to protect his or her own interests. FINRA requested comment in the
Notice 15-37 Proposal regarding whether the ages used in the definition
of ``specified adult'' in proposed Rule 2165 should be modified or
eliminated.
    Two commenters suggested extending the proposed rule change to
apply to all customers and not be otherwise limited.\56\ Cetera
suggested raising the age in the proposed definition above 65, which it
believes is under the age of retirement for many customers. Other
commenters suggested lowering the age in the proposed definition from
65 to 60.\57\ FINRA has proposed defining specified adults to include
natural persons age 65 and older. Federal agencies, FINRA and NASAA
have focused on persons age 65 and older for various senior
initiatives.\58\ Moreover, FINRA believes that the concentration of
wealth among older investors makes this group more vulnerable to
financial exploitation.\59\ With regard to suggestions to extend
coverage to all customers, the proposed rule, as discussed above, also
would apply to natural persons age 18 and older who the member
reasonably believes has a mental or physical impairment that renders
the individual unable to protect his or her own interest. FINRA
believes that these two categories of ``specified adults''
appropriately protect those adults who are most vulnerable to financial
exploitation and that they are therefore neither over nor under
inclusive in scope.
---------------------------------------------------------------------------

    \56\ See Cowan and Thomson.
    \57\ See IRI, Wells Fargo, NASAA and SIFMA.
    \58\ See supra note 22. See also NASAA model.
    \59\ See supra note 21.
---------------------------------------------------------------------------

    Ros commented that the application of the proposed rule change to
persons age 65 and older is an unreasonable intrusion into the
financial affairs of competent adults. Proposed Rule 2165 would permit
placing a temporary hold only where there is a reasonable belief of
financial exploitation and only with regard to a specific
disbursement(s). Given these limitations, FINRA does not believe that
the proposed rule change is an unreasonable intrusion into the
financial affairs of customers.
    NAPSA suggested revising the definition to cover natural persons
age 60 and older or a natural person deemed vulnerable under a state's
adult protective services statute. FINRA believes that this approach
would present operational challenges for members as the customers
covered by the definition would vary by jurisdiction. As such, FINRA
declines to make the suggested change.
    Girdler suggested that the definition of specified adult be
modified to consider customer vulnerability due to circumstances beyond
cognitive ability. In contrast, CAI suggested that, because of
administrative challenges in implementing the definition, vulnerable
adults should be removed from the definition. FINRA has proposed
defining ``specified adults'' to include an adult who the member
reasonably believes has a mental or physical impairment that renders
the individual unable to protect his or her own interests. FINRA
declines to omit such individuals from the definition of specified
adult; however, FINRA also declines at this time to expand the
definition to include additional potentially vulnerable adults. FINRA
recognizes that customers who do not have a physical or mental
impairment may also be vulnerable; however, the proposed rule change is
intended to cover those customers most susceptible to financial
exploitation.
    Some commenters requested that FINRA provide guidance as to what
would constitute a mental or physical impairment covered by the
proposed definition.\60\ Members have reasonable latitude in
determining whether there is a mental or physical impairment that
renders an adult unable to protect his or her own interests for
purposes of the Rule. A member may base such a determination on the
facts and circumstances observed in the member's business relationship
with the person or on other sources of information, such as a court or
government agency order.
---------------------------------------------------------------------------

    \60\ See SIFMA, Cetera and GWFS.
---------------------------------------------------------------------------

    SIFMA requested clarification as to whether the definition would
cover temporary impairments, as well as permanent or chronic
impairments. FINRA would consider the proposed rule change to apply to
temporary, as well as permanent or chronic impairments that render an
adult unable to protect his or her own interests.
    NAIFA suggested revising proposed Supplementary Material .03 to
Rule 2165 to provide that a member's belief of a customer's impairment
shall not create an assumption or implication that the member or its
associated persons are qualified to make determinations about a
customer's impairment. While FINRA declines to revise the proposed
Supplementary Material as suggested, FINRA does not intend proposed
Rule 2165 to create an assumption or implication that a member or its
associated persons are qualified to make impairment determinations
beyond the limited purposes of the proposed rule. A member's
relationship with its customers and its knowledge of customers'
accounts and financial situations puts the member in a unique position
to thwart possible financial exploitation. The proposal will aid
members in doing so.
    CAI suggested that FINRA work with state regulators to ensure
consistency between the proposed rule change and state requirements for
members. As discussed below, while the proposed rule change and NASAA
model are not identical, FINRA and NASAA have worked together to
achieve consistency where possible and appropriate.
Definition of ``Qualified Person''
    In the Notice 15-37 Proposal, a ``qualified person'' was defined to
include an associated person of a member who serves in a supervisory,
compliance or legal capacity that is reasonably related to an account.
FINRA requested comment in the Notice 15-37 Proposal regarding whether
the scope of the persons included in the definition of ``qualified
person'' in proposed Rule 2165 be modified.
    Some commenters suggested expanding the proposed definition to
include all employees,\61\ all associated persons \62\ or all
registered persons of a member.\63\ GWFS suggested that the definition
cover associated persons designated as qualified by the member. PIABA
further suggested that, at a minimum, registered representatives should
be required to report any suspicious behavior or conduct to a
supervisor. FSR suggested that persons serving in a legal or compliance
capacity not be included in the definition of ``qualified person,'' as
such persons would seldom witness events that would provide a
reasonable belief of financial exploitation.
---------------------------------------------------------------------------

    \61\ See NASAA.
    \62\ See Wells Fargo.
    \63\ See GSU and PIABA.
---------------------------------------------------------------------------

    Under the proposed rule change, a member's written supervisory
procedures shall identify the title of each person authorized to place,
terminate or extend a temporary hold on behalf of the member pursuant
to proposed Rule 2165. Furthermore, any such person shall be an
associated person of a member who serves in a supervisory, compliance
or legal capacity. While the benefits of preventing financial
exploitation are significant to both the member and customer, placing a
temporary hold on a disbursement is a serious action on the part of a
member and may lead to

difficult but necessary conversations with customers that could impact
the member-customer relationship. Given the seriousness of placing a
temporary hold on a disbursement, FINRA believes that it is reasonable
to limit authority for placing holds on disbursements to a select group
of individuals associated with the member and believes that persons
serving in a supervisory, compliance or legal capacity are well
positioned to make these determinations on behalf of the member.
    The scope of proposed Rule 2165(c)(2) does not cover registered
representatives who are not otherwise serving in supervisory,
compliance or legal capacities. FINRA recognizes that registered
representatives may often be the first persons to notice behavior or
conduct indicating financial exploitation. To encourage appropriate
escalation of these matters, proposed Rule 2165(c)(1) would require
that a member relying on proposed Rule 2165 establish and maintain
written supervisory procedures related to the escalation of matters
involving the financial exploitation of specified adults. As such,
FINRA believes that it is reasonable to expect a registered
representative to report any suspicious behavior or conduct to a
supervisor or a person serving in a compliance or legal capacity.
    Some commenters suggested clarifying or eliminating the requirement
in the Notice 15-37 Proposal that the associated person serve in a
supervisory, compliance or legal capacity that is ``reasonably related
to an account.'' \64\ In light of commenters' concerns regarding how to
determine whether a person is serving in a supervisory, compliance or
legal capacity that is ``reasonably related to an account,'' FINRA has
proposed eliminating the ``reasonably related to an account''
requirement.
---------------------------------------------------------------------------

    \64\ See FSR, BDA and SIFMA.
---------------------------------------------------------------------------

    To apply the obligations at the member-level, not the individual
level, SIFMA suggested replacing ``qualified person'' with ``member''
in the provisions in proposed Rule 2165 related to the decision to
place a temporary hold. FINRA has revised proposed Rule 2165 to provide
that the member may place the hold on a disbursement, provided that the
member's written supervisory procedures identify the title of each
person authorized to place, terminate or extend a hold on behalf of the
member and that each such person be serving in a supervisory,
compliance or legal capacity for the member. In addition, proposed Rule
2165 would require that a member's records include the name and title
of the associated person who authorized the temporary hold on a
disbursement.
Definition of ``Account''
    The proposed rule change would define ``account'' to mean any
account of a member for which a specified adult has the authority to
transact business. FINRA requested comment in the Notice 15-37 Proposal
regarding whether the definition of account should be expanded to
include accounts for which a specified adult is a named beneficiary.
    Some commenters supported expanding the definition of account to
accounts for which a specified adult is a named beneficiary.\65\
Commonwealth did not support expanding the definition to include
accounts for which a specified adult is a named beneficiary. FINRA
recognizes that members may not have current contact information for
each named beneficiary. In addition, members may lack other critical
information about beneficiaries that would preclude them from forming a
reasonable belief that the beneficiaries are the subject of financial
exploitation. Due to the operational challenges for members in applying
the proposed rule to beneficiaries, FINRA has not proposed including
accounts for which a specified adult is a named beneficiary.
---------------------------------------------------------------------------

    \65\ See IJEC, AARP and SIFMA.
---------------------------------------------------------------------------

    BDA suggested excluding accounts where there is a designated
guardian, custodian or power of attorney because such accounts should
receive protection under FINRA rules beyond the scope of the safe
harbor. If these accounts are included in the scope of the proposal,
BDA suggested that members should be provided with a heightened level
of protection when they suspect financial exploitation by a designated
guardian, custodian or power of attorney ``since the account holder
themselves would have had to know that this person has transaction
capacity for the account, resulting in an enhanced burden to the firm
when suspicion arose.'' It is not clear what heightened protections the
commenter suggests for members with respect to accounts where there is
a designated guardian, custodian or power of attorney. As discussed
above, the proposed rule does not require members to place temporary
holds on disbursements of funds or securities, and FINRA does not
intend to provide through the proposed rule change additional
protections on accounts where there is guardian, custodian or power of
attorney.
Disbursements
    The proposed rule change would permit members to place temporary
holds on disbursements of funds or securities. The proposed rule change
would not apply to transactions in securities. Some commenters
supported extending the proposed rule change to apply to transactions
in securities.\66\ While the proposed rule change does not apply to
transactions, FINRA may consider extending the safe harbor to
transactions in securities in future rulemaking.
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    \66\ See IRI, FSR, Lincoln, SIFMA and FSI.
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    PIABA requested that the proposed rule change define
``disbursement.'' PIABA also requested that FINRA clarify that the
temporary hold may be placed on particular disbursement(s). FINRA would
consider a disbursement to include a movement of cash or securities out
of an account. In addition, a temporary hold pursuant to proposed Rule
2165 may be placed on a particular suspicious disbursement(s) but not
on other, non-suspicious disbursements (e.g., member may choose to
place a hold on a questionable disbursement but not on a
contemporaneous regular mortgage or tax payment where there is no
reasonable belief of exploitation regarding such payment).
    Two commenters requested that FINRA explicitly permit temporary
holds on Automated Customer Account Transfer Service (``ACATS'')
transfers under the proposed rule change.\67\ For purposes of proposed
Rule 2165, FINRA would consider disbursements to include ACATS
transfers but, as with any temporary hold, a member would need to have
a reasonable belief of financial exploitation in order to place a
temporary hold on the processing of an ACATS transfer request pursuant
to the Rule. FINRA also reminds members of the application of FINRA
Rule 2140 (Interfering With the Transfer of Customer Accounts in the
Context of Employment Disputes) to the extent that there is not a
reasonable belief of financial exploitation.
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    \67\ See FSR and SIFMA.
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    FINRA recognizes that, depending on the facts and circumstances,
placing a temporary hold on the processing of an ACATS transfer request
could also lead the member to place a temporary hold on all assets in
an account, for the same reasons. However, if a temporary hold is
placed on the processing of an ACATS transfer request, the member must
permit disbursements from the account where there is not a reasonable
belief of financial exploitation regarding such disbursements (e.g., a
customer's regular

bill payments). FINRA emphasizes that where a questionable disbursement
involves less than all assets in an account, a member may not place a
blanket hold on the entire account. Each disbursement must be analyzed
separately.
    While supporting the proposed rule change, Yaakov requested
clarification about how the proposed rule change would apply to certain
types of disbursements from a customer's account. Specifically, Yaakov
requested that the proposed rule change provide that disbursements
would include payments from a customer's account to a customer's bank.
Yaakov also requested that FINRA clarify whether a temporary hold may
be placed on disbursements related to a customer's checkbook, credit
card or debit card associated with a brokerage account at a member.
FINRA would consider disbursements to include, among other things,
questionable payments to a bank or other financial institution, credit/
debit card payments or issued checks associated with a brokerage
account at a member. However, members need to consider the recipient of
the disbursement when determining whether there is a reasonable belief
of financial exploitation. For example, a monthly disbursement to a
customer's mortgage lender likely represents a lower risk of financial
exploitation than a one-time, sizable disbursement to a non-U.S.
person. In addition, the temporary hold is on the disbursement-level
not the account-level, so that a member must permit a disbursement
where there is not a reasonable belief of financial exploitation (e.g.,
a regular mortgage payment to a bank), but may place a temporary hold
on another disbursement where there is a reasonable belief of financial
exploitation.
    CAI questioned whether the ability to place temporary holds on
disbursements would conform to the requirements of Section 22(e) of the
Investment Company Act of 1940 (``1940 Act'') for redemptions of a
redeemable security. CAI noted that the proposed rule change could be
seen as reconcilable with the 1940 Act requirements to the extent that
a disbursement request directed to a broker-dealer does not constitute
a disbursement request to the issuer of a variable annuity. Section
22(e) of the 1940 Act generally prohibits registered funds from
suspending the right of redemption, or postponing the date of payment
or satisfaction upon redemption of any redeemable security for more
than seven days after tender of such security to the fund or its agent,
except for certain periods specified in that section. The safe harbor
under proposed Rule 2165 applies to disbursements of proceeds and
securities and does not apply to transactions, including redemptions of
securities.
    Most mutual fund customer accounts are serviced and record kept by
intermediaries, such as broker-dealers. FINRA does not believe that a
member's ability to place a hold on a disbursement of proceeds from its
customer's account under the proposed rule change creates a conflict
with Section 22(e) of the 1940 Act as the mutual fund does not have a
role in the disbursement from the customer's account held by an
intermediary.
    In certain limited circumstances, the customer's account may be
maintained by a mutual fund's principal underwriter. In light of the
role of the principal underwriter with respect to these accounts, the
ability to place a temporary hold on a disbursement of proceeds under
the proposed rule change may be viewed as conflicting with Section
22(e) of the 1940 Act.
Period of Temporary Hold
    Under the Notice 15-37 Proposal, the temporary hold on
disbursements of funds or securities would have expired not later than
15 business days after the date that the hold was initially placed,
unless sooner terminated or extended by an order of a court of
competent jurisdiction. In addition, provided that the member's
internal review of the facts and circumstances supported the reasonable
belief of financial exploitation, the Notice 15-37 Proposal would have
permitted the temporary hold to be extended for an additional 15
business days, unless sooner terminated by an order of a court of
competent jurisdiction. FINRA requested comment in the Notice 15-37
Proposal on whether the permissible time periods for placing and
extending a temporary hold pursuant to proposed Rule 2165 should be
modified.
    Some commenters supported permitting longer time periods. IRI
supported changing the time periods to 45 business days for the initial
period and an additional 45 business days for any subsequent period.
IRI also supported automatic extensions of the temporary hold upon
notification to FINRA until such time that a court of competent
jurisdiction or FINRA takes action.
    First U.S. Community Credit Union commented that 15 business days
may not be sufficient time for a member to obtain a court order or
receive input from adult protective services. FIBA commented that the
proposed time periods may not be sufficient, particularly for non-U.S.
customers and suggested that FINRA create different time periods or
establish different processes for non-U.S. customers. CAI suggested
changing the time periods to 25 business days for the initial period to
recognize the need to have adequate time at the outset and an
additional 10 business days for any subsequent period.
    FSR supported permitting members to place a temporary hold for any
period of time within the reasonable discretion of the member or until
a third party (e.g., a court of competent jurisdiction or adult
protective services) notified the member that the hold has expired or
subsequent events indicate that the threat of financial exploitation no
longer exists.
    Other commenters supported shorter time periods. AARP suggested
that the temporary hold expire no later than 10 business days after the
hold is placed. NASAA commented that the proposed time periods were too
long. NASAA supported requiring both FINRA and state regulatory review
of any extension of a temporary hold by a member.
    FINRA has proposed revising the time periods to up to 15 business
days in the initial period and up to 10 business days (down from 15
business days) in any subsequent period. These time periods are
consistent with the NASAA model and the shortened extension period
responds to commenters' concerns about disbursement delays. The
proposed extension period of up to 10 business days provides members
with a longer period to address the issue if concerns about financial
exploitation exist after the initial period, during which time the
member must contact persons authorized to transact business on the
account and trusted contact persons, as available, and perform an
appropriate investigation.
    CFA Institute supported giving a member the ability to extend the
temporary hold for an additional period if the member's internal review
supported the additional time period. FINRA has tried to strike a
reasonable balance in giving members adequate time to investigate and
contact the relevant parties, as well as seek input from a state
regulator or agency (e.g., state securities regulator or state adult
protective services agency) or a court order if needed, but also not
permitting an open-ended or overly long hold period in recognition of
the seriousness of placing a temporary hold on a disbursement.
    SIFMA supported the proposed time periods but suggested including
language permitting the expiration or

extension of the hold as otherwise permitted by state or federal law,
through agreement with the specified adult or their authorized
representative, or in accordance with prior written instructions or
lawful orders, or sooner terminated or extended by an order of a court
of competent jurisdiction. SIFMA also suggested that an investigating
state government regulator or agency should be able to terminate or
extend a hold on a disbursement. FINRA has revised proposed Rule 2165
to incorporate the concept of a temporary hold being terminated or
extended by a state regulator or agency in addition to a court of
competent jurisdiction.
    FINRA has not revised proposed Rule 2165 to expressly permit
lifting the hold ``through agreement with the specified adult or their
authorized representative, or in accordance with prior written client
instructions or lawful orders.'' While the proposed rule change would
not prohibit members from lifting a hold, for example, upon a
determination that there is no financial exploitation, FINRA believes
that the commenter's suggested language is overly broad (e.g., allowing
an authorized representative to lift the hold may enable an abuser to
lift the hold and gain access to the customer's funds).
    Lincoln requested that FINRA provide guidance on what members
should do after the expiration of the temporary hold. Alzheimer's
Assoc. requested clarification on the process for lifting or extending
a temporary hold. FINRA believes that the proposed time period of up to
25 business days total is sufficient time for a member to resolve an
issue. Moreover, the proposed rule change allows the time to be further
extended by a court or a state regulator or agency. If a member is
unable to resolve an issue due to circumstances beyond its control,
there may be circumstances in which a member may hold a disbursement
after the period provided under the safe harbor. A member should assess
the facts and circumstances to determine whether a disbursement is
appropriate after the expiration of the period provided in the safe
harbor.
    BDA questioned whether the proposed rule change would only permit
terminating the temporary hold with an order of a court of competent
jurisdiction. The proposed rule change would not prohibit a member from
lifting a hold without a court order, provided that the member would
have to comply with an order of a court of competent jurisdiction or of
a state regulator or agency terminating or extending a temporary hold.
    ICI supported limiting the number of temporary holds that a member
may place on an account during a calendar year or other specified
period. FINRA declines to limit the number of holds that a member may
place. However, taking into account a member's size and business, FINRA
would closely examine a member that places an outsized number of holds
on customer accounts to determine whether there was any wrongdoing on
the part of the member.
Potential Harm
    Some commenters expressed concern that permitting members to place
temporary holds may result in customer harm. NAPSA supported allowing
members to place temporary holds where there is a reasonable belief of
financial exploitation but suggested that members be required to take
measures to ensure that any holds will not cause undue harm to
customers (e.g., if a customer's payments are not made in a timely
manner).
    Some commenters questioned whether the proposed rule change would
permit lifting a temporary hold if the customer disagrees with the
hold.\68\ Rich expressed concern that a temporary hold may result in a
customer defaulting on legal or contractual obligations and supported a
mechanism other than a court order for lifting the hold (e.g., the
trusted contact person's approval to lift the hold). Liberman expressed
concern that the proposed rule change could be abused by members in
refusing to disburse funds or securities. ICI supported FINRA providing
customers with recourse for lifting the temporary hold other than
obtaining a court order and indicated that such recourse may limit a
member's civil liability.
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    \68\ See Stoehr and Hayden.
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    FINRA recognizes that placing a temporary hold on a disbursement is
a serious step for a member and the affected customer. While FINRA
recognizes that customers may be affected by temporary holds, the costs
of financial exploitation can be significant and devastating to
customers, particularly older customers who rely on their savings and
investments to pay their living expenses and who may not have the
ability to offset a significant loss over time. FINRA believes that the
harm to customers of financial exploitation justifies permitting
members to place temporary holds.
    To minimize the potential harm to customers that may arise from
unnecessarily holding customer funds, FINRA believes that members
should consider the recipient of the disbursement in determining
whether there is a reasonable belief of financial exploitation. As
noted above, FINRA believes that members should weigh a customer's
objection against other information in determining whether a hold
should be placed or lifted. While not dispositive, a customer's
objection and explanation may indicate to the member that the hold
should be lifted.
    FIBA commented that the proposed rule change does not explicitly
contemplate the customer disagreeing with the temporary hold and that
relying on a trusted contact person to maintain a hold may conflict
with the interests of the customer. Although FINRA believes that a
member may use its discretion in relying on any information provided by
the trusted contact person, a member also must consider a customer's
objection and explanation, as well as other pertinent facts and
circumstances, in determining whether a hold should be maintained or
lifted.
Legal Risks
    FINRA requested comment in the Notice 15-37 Proposal regarding
members' current practices when they suspect financial exploitation has
occurred, is occurring, has been attempted or will be attempted,
including whether the proposed rules would change members' current
practices. Commenters did not provide any information regarding their
current practices when financial exploitation of a customer is
suspected.
    FINRA also requested comment in the Notice 15-37 Proposal on
members' views on any potential legal risks associated with placing or
not placing temporary holds on disbursements of funds or securities at
present and under the proposal. Some commenters suggested that the
proposed rule change creates legal risks for members in placing or not
placing a temporary hold.
    Christian Financial Services objected to the proposed rule change
as making ``a broker responsible for the behavior of an incapacitated
senior'' and that such a rule ``invites lawsuits and abuse.'' GWFS
commented that placing a temporary hold under the proposed rule change
allows for discretion, which causes members to be more susceptible to
litigation for acting or failing to act. GWFS also commented that the
proposed rule change does not provide ``comprehensive immunity'' from
liability in a civil action.
    Lincoln requested that FINRA expressly state that no private right
of action is created by a member's decision to place or not place a
temporary hold. Cetera commented that the safe harbor

under proposed Rule 2165 may not protect members from liability under
state laws. NAIFA requested that the proposed rule change provide
protection from liability for reporting financial exploitation to state
regulators.
    On the other hand, PIABA commented that FINRA should clarify that a
private right of action would exist when a member willfully ignores
evidence of abuse. Yaakov requested that FINRA state that members would
not be ``insure[d]'' for liabilities that may be created by placing a
temporary hold in good faith.
    FINRA believes that members today make judgments with regard to
making or withholding disbursements and already face litigation risks
with respect to these decisions. The proposed rule change is designed
to provide regulatory relief to members by providing a safe harbor from
FINRA rules for a determination to place a hold. Some states may
separately provide immunity to members under state law.
    To mitigate any civil claims that a member had a duty to place a
temporary hold, ICI suggested that FINRA clarify in proposed Rule 2165
that: (1) No member is required by FINRA to place a temporary hold; and
(2) a member's failure to place a temporary hold shall not be deemed an
abrogation of the member's duties under FINRA rules. FINRA believes
that Supplementary Material .01 stating that proposed Rule 2165 is a
safe harbor and that the Rule does not require placing holds clearly
indicates that there is not a requirement to place a hold on a
disbursement.
Notifying Parties Authorized To Transact Business on the Account
    Under the Notice 15-37 Proposal, proposed Rule 2165 would have
required a member to provide notification of the hold and the reason
for the hold to all parties authorized to transact business on the
account no later than two business days after placing the hold.
    PIRC supported requiring notification to all parties authorized to
transact business on an account. SIFMA commented that the term
``authorized to transact business on an account'' is vague and can be
expansive and burdensome. IRI commented that the requirement to notify
all parties authorized to transact business on an account could result
in a member being unable to place a temporary hold on a disbursement
and suggested instead requiring that a member notify ``any'' party
rather than ``all'' parties authorized to transact business on an
account.
    FINRA believes that each person authorized to transact business on
an account should be notified that the member has placed a temporary
hold on a disbursement from the account.\69\ In the case of jointly
held accounts, each person authorized to transact business on the
account should be notified of the temporary hold on a particular
disbursement.
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    \69\ See FINRA Rule 2090 (Know Your Customer) (requiring that
members use reasonable diligence, in regard to the opening and
maintenance of every account, to know (and retain) the essential
facts concerning every customer and concerning the authority of each
person acting on behalf of such customer).
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    There are a number of reasons why it is important to notify all
persons authorized to transact business on the account. By reaching out
to all persons authorized to transact business on an account, there is
a greater likelihood of someone intervening to assist in thwarting the
financial exploitation at an early stage. Moreover, persons authorized
to transact business on an account would have a reasonable expectation
that they would be contacted when a member places a temporary hold on a
disbursement based on a reasonable belief that financial exploitation
may be occurring. The notification requirement, moreover, should not
impact a member's decision to place a hold as it is a post-hold
obligation.
Trusted Contact Person
    The proposed rule change would amend Rule 4512 to require members
to make reasonable efforts to obtain the name of and contact
information for a trusted contact person upon the opening of a non-
institutional customer's account. In addition, under the Notice 15-37
Proposal, proposed Rule 2165 would have required the member to provide
notification of the hold and the reason for the hold to the trusted
contact person, if available, no later than two business days after
placing the hold.
    Some commenters supported requiring members to make reasonable
efforts to obtain the name and contact information for a trusted
contact person, as well as notification to the trusted contact person
when a temporary hold is placed pursuant to proposed Rule 2165.\70\
First U.S. Community Credit Union commented that the trusted contact
person may be useful to members.
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    \70\ See NAPSA, ICI, PIRC and FSI.
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    Ros and SIFMA suggested that members should have the option of
seeking trusted contact person information rather than requiring it
under Rule 4512. FINRA is mindful of the efforts that some members may
need to undertake in order to comply with a requirement that they make
reasonable efforts to obtain trusted contact person information.
However, the benefits to both members and investors of having trusted
contact person information when serious problems arise will be far
greater. And the likelihood of members encountering situations when
such information is necessary will continue to increase with the aging
of our population. Moreover, trusted persons can assist members in any
number of ways beyond the more serious situations of, for example,
financial exploitation or diminished capacity. Members may find them
helpful in administering accounts (e.g., where a customer has been
unresponsive to multiple contact attempts).
    CAI suggested that the requirement that members make reasonable
efforts to obtain the name and contact information for a trusted
contact person apply only when the customer is age 55 or older. Because
members may place temporary holds in situations where financial
exploitation is occurring to a customer younger than age 55 who is
suffering from an incapacity, it is important that members seek to
obtain trusted contact person information for all customers, not simply
those age 55 or older.
    Some comments related to the ability to have more than one trusted
contact person. IJEC suggested revising the proposal to require more
than one trusted contact person and that such persons be independent of
each other. Cowan suggested the alternative approach of having a
``protectors' committee'' consisting of several individuals for each
account of a senior investor. SIFMA requested clarification on whether
an organization or practice could be a trusted contact person and
whether a customer could designate multiple contact persons. While
FINRA declines to require more than one trusted contact person, the
proposed rule change would not prohibit members from requesting or
customers from naming more than one trusted contact person. Given the
role of the trusted contact person and that the member is authorized to
disclose information about the account to such person, FINRA does not
believe that an organization or practice, such as a law firm or an
accounting firm, could serve as the trusted contact person in the
capacity intended by the proposed rule change. However, a customer
could designate an attorney or an accountant as a trusted contact
person.
    SIFMA commented that the proposed rule change should contemplate

situations where a customer orally notifies a member of the name and
contact information for a trusted contact person. Rule 4512 requires
that the member maintain the trusted contact person's name and contact
information, as well as the written notification to the customer that
the member may contact the trusted contact person. The proposed rule
change would allow members to rely on oral conversations with customers
that members then document, provided that the written notification
requirement of proposed Supplementary Material .06 to Rule 4512 is
satisfied.
    With respect to notifying the trusted contact person that a
temporary hold has been placed, SIFMA suggested that FINRA adopt a
voluntary reporting process that is separate from the process for
placing a temporary hold under proposed Rule 2165. SIFMA's concerns are
twofold: (1) Potential difficulty in reaching a trusted contact person;
and (2) a desire not to embarrass a customer by notifying a trusted
contact person if the matter can be resolved through a discussion with
the customer. Not all commenters agreed that the notification to the
trusted contact person should be voluntary and some believed the
requirement should be more stringent. For instance, Rich suggested a
``more substantial'' requirement than ``attempting'' to contact the
trusted contact person.
    Proposed Rule 2165 requires that the member notify the trusted
contact person orally or in writing, which may be electronic, within
two business days of placing a temporary hold. While FINRA appreciates
the desire to ensure that a member actually discusses a hold with a
trusted contact person, doing so may not be possible in every
situation. As discussed above, FINRA would consider a member's mailing
a letter, sending an email, or placing a telephone call and leaving a
message with appropriate person(s) within the two-business-day period
to constitute notification for purposes of proposed Rule 2165.
Moreover, FINRA would consider the inability to contact a trusted
contact person (e.g., an email is returned as undeliverable, a
telephone number is out of service or a trusted contact person does not
respond to a member's notification attempts) to mean that the trusted
contact person was not available for purposes of the Rule. With regard
to SIFMA's concern over potentially embarrassing a customer by being
required to notify a trusted contact person, FINRA notes that a member
may attempt to resolve a matter with a customer before placing a
temporary hold on a disbursement without having to notify a trusted
contact person.\71\ However, once a member places a hold on a
disbursement, FINRA believes a member should notify a trusted contact
person.
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    \71\ As discussed above, FINRA's proposed amendments to Rule
4512 would permit a member to contact a trusted contact person to
address, among other things, potential financial exploitation. In
the context of SIFMA's concern, FINRA emphasizes that Rule 4512, as
amended, would permit, but not require, a member to contact a
trusted contact person about financial exploitation prior to placing
a temporary hold on a disbursement. Thus, a member could resolve a
matter with a customer prior to placing a hold on a disbursement
without having to contact a trusted contact person.
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    Rich further commented that a member should be required to notify
both the customer and the trusted contact person when the member has a
reasonable belief of financial exploitation. When placing a hold on a
disbursement, proposed Rule 2165 would require a member to notify all
persons authorized to transact business on an account, including the
customer, as well as the trusted contact person, if available. Even
where a member has not placed a temporary hold on an account, however,
FINRA would expect a member to reach out to a customer as one step in
addressing potential financial exploitation of the customer.
    FSR requested that FINRA clarify that a member is not liable if it
contacts a trusted contact person designated by a customer pursuant to
Rule 4512 or proposed Rule 2165, so long as the customer has not
directed the member to remove or replace the trusted contact person.
FINRA would consider a member contacting the trusted contact person
identified by a customer to be consistent with the proposed rule
change, provided that the customer had not previously directed the
member to remove or replace the trusted contact person.
    Some commenters requested that FINRA clarify what would constitute
reasonable efforts to obtain a name and contact information for a
trusted contact person.\72\ For purposes of the proposed rule change,
FINRA would consider reasonable efforts to include actions such as
incorporating a request for trusted contact person name and contact
information on an account opening form or sending a letter, an
electronic communication or other similar form of communication to
existing customers requesting the name and contact information for a
trusted contact person.
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    \72\ See CAI, FSR, BDA, GWFS and SIFMA.
---------------------------------------------------------------------------

    SIFMA requested that FINRA provide guidance on the appropriate
place on new account forms for customers to designate a trusted contact
person. Members may use their discretion in determining the appropriate
place on new account forms for customers to designate a trusted contact
person. Commonwealth supported the trusted contact person-related
provisions and suggested that FINRA provide template language that
members can use in account applications or other customer forms. If the
SEC approves the proposed rule change, FINRA will make template
language available for optional use by members in complying with the
trusted contact person-related provisions of Rule 4512.\73\
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    \73\ In 2008, FINRA developed a New Account Application
Template, available on FINRA's Web site that firms may use as a
model form. See http://www.finra.org/industry/new-account-application-template. This New Account Application Template permits
a customer to name a back-up contact who the member may contact. If
the SEC approves the proposed rule change, FINRA will update the New
Account Application Template to reflect the amendments to Rule 4512.
---------------------------------------------------------------------------

    SIFMA also requested that FINRA provide clarification as to whether
the reasonable efforts requirement would apply to accounts opened after
the proposed rule change becomes effective. The reasonable efforts
requirement in Rule 4512 would apply to all accounts. FINRA would
consider reasonable efforts for existing accounts to include asking the
customer for the information when the member updates the information
for the account either in the course of the member's routine and
customary business or as otherwise required by applicable laws or
rules.
    FSR requested clarification on the role of the trusted contact
person and the extent to which a member may rely on the information
provided by the trusted contact person. BDA expressed concern that
members could become responsible for evaluating the mental capabilities
of trusted contact persons and that such capabilities could change over
time. FINRA intends the trusted contact person to be a resource for a
member in administering a customer's account and believes that a member
may use its discretion in relying on any information provided by the
trusted contact person. The proposed rule change does not make a member
responsible for evaluating mental capabilities of trusted contact
persons.
Requirement To Notify Trusted Contact Person of Designation
    In the Notice 15-37 Proposal, FINRA stated that a member may elect
to notify an individual that he or she was named as a trusted contact
person; however, the proposal would not require notification. Some
commenters supported requiring members to notify

an individual that he or she was named as a trusted contact person.\74\
Alzheimer's Assoc. supported also requiring a member to notify an
individual designated as a trusted contact person if the customer later
designates another individual to be his or her trusted contact person.
FSR suggested that the trusted contact person should be required to
acknowledge his or her role at the time of designation by the customer.
---------------------------------------------------------------------------

    \74\ See IJEC, GSU and Alzheimer's Assoc.
---------------------------------------------------------------------------

    The proposed rule change does not require that a member notify a
trusted contact person of his or her designation. FINRA believes that
the administrative burdens of requiring notification would outweigh the
benefits. However, a member may elect to notify a trusted contact
person of his or her designation (e.g., if the member determines that
notifying the trusted contact person may be helpful in administering a
customer account).
Limitations on Who Can Be a Trusted Contact Person
    Under the Notice 15-37 Proposal, the proposed amendments to Rule
4512 would have required that the trusted contact person be age 18 or
older and not be authorized to transact business on behalf of the
account. Commonwealth supported the age limitation but suggested that
FINRA revise the proposed rule to explicitly permit members to rely on
the representations of the customer regarding the trusted contact
person's age so that members do not have to independently verify the
age. While FINRA declines to revise the proposed rule as suggested,
FINRA would not expect a member to verify the age of a designated
trusted contact person.
    SIFMA requested clarification of the meaning of the term ``not
authorized to transact business on the account.'' Some commenters did
not support the limitation on persons not authorized to transact
business on behalf of the account.\75\ NAELA commented that the
limitation would presumably prohibit persons with powers of attorney
from serving as trusted contact persons. FSR and Lincoln supported
permitting individuals with powers of attorney to be trusted contact
persons. Lincoln further supported permitting trustees to be trusted
contact persons.
---------------------------------------------------------------------------

    \75\ See Cowan and NAELA.
---------------------------------------------------------------------------

    In light of the concerns raised by commenters, FINRA has proposed
removing the prohibition on those authorized to transact on the account
so as to permit joint accountholders, trustees, individuals with powers
of attorney and other natural persons authorized to transact business
on an account to be designated as trusted contact persons.
    Authorization To Contact the Trusted Contact Person
    Under the Notice 15-37 Proposal, the proposed amendments to Rule
4512 would have required that, at the time of account opening, a member
shall disclose in writing (which may be electronic) to the customer
that the member or an associated person is authorized to contact the
trusted contact person. In the Notice 15-37 Proposal, FINRA requested
comment on whether Rule 4512 should require customer consent to contact
the trusted contact person or if customer notice is sufficient.
    Some commenters questioned whether customer notice would be
sufficient under the Regulation S-P exception for disclosing
information to a third party with unrevoked customer consent.\76\
Lincoln suggested requiring customer consent to contact the trusted
contact person. Commonwealth stated that customer notice should be
sufficient and that requiring customer consent could jeopardize a
member's ability to protect investors. FINRA believes that disclosures
to a trusted contact person pursuant to proposed Rules 2165 or
4512(a)(1)(F) would be consistent with Regulation S-P.
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    \76\ See CAI, Lincoln and SIFMA.
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    SIFMA requested guidance on how the disclosure requirements in
proposed Supplementary Material .06 to Rule 4512 could be met (e.g., in
an account agreement, privacy policy or other form). The proposed rule
change does not mandate any particular form of written disclosure. A
member has flexibility in choosing which document should include the
required disclosure (e.g., in an account application or another
customer form) or whether to provide the disclosure in a separate
document.
Information That May Be Disclosed to a Trusted Contact Person
    Under the Notice 15-37 Proposal, pursuant to proposed Supplementary
Material .06 to Rule 4512, a member may disclose to the trusted contact
person information about the customer's account to confirm the
specifics of the customer's current contact information, health status,
and the identity of any legal guardian, executor, trustee or holder of
a power of attorney, and as otherwise permitted by proposed Rule 2165.
In the Notice 15-37 Proposal, FINRA requested comment on whether the
types of information that may be disclosed to the trusted contact
person under Rule 4512 should be modified.
    Some commenters supported addressing in Rule 4512 the information
that may be shared by a member with a trusted contact person.\77\ SIFMA
further supported removing any restrictions on the information that may
be discussed with a trusted contact person. IRI commented that members
should have discretion to disclose to and discuss with the trusted
contact person any information relevant to an investment under proposed
Rule 2165. CAI supported a more general ``catch all'' category for
information that may be disclosed to and discussed with a trusted
contact person.
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    \77\ See FSR, Lincoln, BDA and SIFMA.
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    ICI suggested revising the proposed Supplementary Material to Rule
4512 to provide that a member is prohibited from contacting a trusted
contact person except as permitted by Rule 2165 to protect the
customer's privacy. GWFS commented that a member does not request or
receive health information from customers and, if the member should
have health information, it would be responsible for additional
regulatory requirements.
    FINRA has proposed retaining the approach in the Notice 15-37
Proposal regarding the types of information that may be disclosed to
the trusted contact person under Rule 4512, with the addition of
information to address possible financial exploitation. FINRA has
sought to identify reasonable categories of information that may be
discussed with a trusted contact person, including information that
will assist a member in administering the customer's account. Given
privacy considerations, FINRA does not propose to give the member
absolute latitude to discuss any information with trusted contact
persons. With respect to health status, while members generally do not
receive health information from customers, FINRA believes it is
reasonable to permit members to reach out to the trusted contact person
when they are concerned about a customer's health (e.g., when a
customer who is known to be frail or ill has not responded to multiple
telephone calls over a period of time). FINRA also believes that
members should be allowed to contact the trusted contact person to
address possible financial exploitation of the customer (e.g., when the
member is concerned that the customer is being financially exploited
but the member has not yet decided to place a temporary hold on a
particular disbursement).
    Some commenters suggested including in the list of information that

may be disclosed to the trusted contact person the reason for any
temporary hold, as well as details about the disbursement request.\78\
Proposed Supplementary Material to Rule 4512 contemplates a member
contacting the trusted contact person as otherwise permitted by Rule
2165. FINRA would consider discussing the temporary hold, including the
rationale for the hold, with the trusted contact person to be covered
by Supplementary Material to Rule 4512.
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    \78\ See Commonwealth and Alzheimer's Assoc.
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    Two commenters stated that FINRA should explicitly permit members
to share information concerning an account with the financial
institution that is the receiving party in an ACATS transfer.\79\ SIFMA
also stated that such information sharing should be permitted even if a
temporary hold is not placed on a disbursement pursuant to proposed
Rule 2165. As noted above, FINRA would consider disbursements to
include processing of an ACATS transfer but a member would need to have
a reasonable belief of financial exploitation in order to place a
temporary hold on an ACATS transfer request pursuant to proposed Rule
2165. Furthermore, FINRA believes that the reasonableness of a member
discussing a questionable ACATS transfer with the financial institution
that is to receive the transferring assets would depend on the facts
and circumstances. Members considering whether to discuss an ACATS
transfer with another financial institution may wish to consider the
availability of the Regulation S-P exception for allowing sharing of
information in order to protect against or prevent actual or potential
fraud, unauthorized transactions, claims, or other liability.\80\ FINRA
would consider providing guidance, as appropriate, if specific
questions regarding the application of the proposed rule change to
ACATS transfers arise.
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    \79\ See FSR and SIFMA.
    \80\ See 17 CFR 248.15(a)(2)(ii).
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Application of Rule 4512 Requirements to Existing Accounts
    Consistent with the current requirements of Rule 4512, a member
would not need to attempt to obtain the name of and contact information
for a trusted contact person for existing accounts until such time as
the member updates the information for the account either in the course
of the member's routine and customary business or as otherwise required
by applicable laws or rules.
    Some commenters stated that members should be required to request
the name and contact information for a trusted contact person for
existing accounts not later than 12 months after the adoption of the
proposed rule change.\81\ NASAA supported requiring members to obtain
the name and contact information for a trusted contact person from
customers and to update the information on a regular basis in the
manner in which members collect and maintain suitability information.
CFA Institute supported requiring members to update trusted contact
person-related information during periodic reviews and when a
customer's situation changes. Commonwealth stated that members should
be able to rely on existing procedures for updating accounts pursuant
to Rule 17a-3 under the Exchange Act. Commonwealth further stated that
it should be sufficient to indicate that no trusted contact person-
related information has been provided to the member and that the
customer should contact the member if he or she would like to provide
the name of and contact information for a trusted contact person.
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    \81\ See Cowan and Alzheimer's Assoc.
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    With respect to an account that was opened pursuant to a prior
FINRA rule, FINRA Rule 4512(b) requires members to update the
information for such an account in compliance with FINRA Rule 4512
whenever they update the account information in the course of their
routine and customary business, or as required by other applicable laws
or rules. With respect to any account that was opened pursuant to a
prior FINRA rule, a member shall provide the required disclosure in
writing, which may be electronic, when updating the information for the
account pursuant to Rule 4512(b) either in the course of the member's
routine and customary business or as otherwise required by applicable
laws or rules. Such an approach promotes greater uniformity and
consistency of account record information, while also minimizing
burdens to members with respect to updating information for existing
accounts. Applying the same standard to trusted contact person
information would ensure that members use reasonable efforts to obtain
such information for existing accounts in the course of their routine
business, while not imposing undue burdens on firms to immediately
contact all existing accountholders.
Immediate Family Member
    Under the Notice 15-37 Proposal, if the trusted contact person is
not available or the member reasonably believes that the trusted
contact person has engaged, is engaged or will engage in the financial
exploitation of the specified adult, the member would have been
required to contact an immediate family member, unless the member
reasonably believes that the immediate family member has engaged, is
engaged or will engage in the financial exploitation of the specified
adult.
    Some commenters raised privacy concerns regarding disclosing
information to an immediate family member. GSU commented that an
immediate family member who has not been designated as a customer's
trusted contact person should be contacted only for the purpose of
gathering information about the identity of a guardian, executor,
trustee or holder of a power of attorney so as to ensure that the
customer's personal and private information is not disclosed to persons
that the customer does not wish to receive the information. ICI
suggested that contacting an immediate family member or other person
about an account without the customer's explicit approval would not be
permitted by Regulation S-P. NASAA stated that contacting immediate
family members implicates privacy concerns and may exacerbate the
problems that the proposed rule change seeks to address. IRI supported
giving a member discretion not to contact an immediate family member
where the member may have reason to believe that the customer would not
want the family member contacted. Some commenters suggested including
``immediate family members'' in the proposed Supplementary Material .06
to Rule 4512 to make it clear that such persons may be contacted under
proposed Rule 2165.\82\
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    \82\ See CAI and Wells Fargo.
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    Some commenters expressed operational concerns with contacting an
immediate family member. Alzheimer's Assoc. commented that it is
unclear how a member would identify an immediate family member to
contact in the event that the trusted contact person was unavailable.
FSR suggested an alternative approach that where time is of the
essence, a member may in its discretion contact an immediate family
member in instances where the trusted contact person is not immediately
available.
    Some commenters supported looking beyond immediate family members
to provide members with discretion regarding whom to contact about a
customer's account.\83\ FSI suggested permitting members to also
contact an individual who shares a trusted

relationship with a customer (e.g., an attorney or an accountant).
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    \83\ See Lincoln and Wells Fargo.
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    Under the Notice 15-37 Proposal, the term ``immediate family
member'' was defined to include a spouse, child, grandchild, parent,
brother or sister, mother-in-law or father-in-law, brother-in-law or
sister-in-law, and son-in-law or daughter-in-law, each of whom must be
age 18 or older. SIFMA suggested revising the definition to include a
customer's niece or nephew.
    Due to the privacy and operational challenges noted by commenters,
FINRA has proposed removing the requirements in the Notice 15-37
Proposal with respect to notifying an immediate family member when a
temporary hold is placed. While a customer may name an immediate family
member as his or her trusted contact person, the proposed rule change
would not require that a member notify an immediate family member who
is not authorized to transact business on the customer's account or who
has not been named a trusted contact person. However, the proposed rule
change would not preclude a member from contacting an immediate family
member or any other person if the member has customer consent to do so.
Moreover, contacting such persons may be useful to members in
administering customer accounts.
Notification Period
    Under the Notice 15-37 Proposal, proposed Rule 2165 would have
required the member to provide notification of the hold and the reason
for the hold to all parties authorized to transact business on the
account and, if available, the trusted contact person, no later than
two business days after placing the hold. In the Notice 15-37 Proposal,
FINRA requested comment on whether the two-business-day period for
notifying the appropriate parties under proposed Rule 2165 is
appropriate. If not, FINRA requested comment on what circumstances may
warrant a shorter or longer period.
    Commenters suggested extending the period from two business days to
four business days,\84\ five business days \85\ and seven business
days.\86\ Commonwealth commented that the two-business-day period may
be insufficient. Commonwealth suggested that if a member is unable to
reach the trusted contact person or an immediate family member within
two business days, then the member should have up to ten business days