Notice2021-20970
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change To Amend Rule 2165 (Financial Exploitation of Specified Adults)
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Published
September 28, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 185 (Tuesday, September 28, 2021)</title>
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[Federal Register Volume 86, Number 185 (Tuesday, September 28, 2021)]
[Notices]
[Pages 53696-53699]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20970]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93103; File No. SR-FINRA-2021-016]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove the Proposed Rule Change To Amend Rule 2165
(Financial Exploitation of Specified Adults)
September 22, 2021.
I. Introduction
On June 9, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change SR-FINRA-2021-016 pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder \2\ to amend FINRA Rule 2165
(Financial Exploitation of Specified Adults) to: (1) Permit member
firms to place a temporary hold on a securities transaction, subject to
the same terms and restrictions applicable to a temporary hold on
disbursements of funds or securities (``disbursements''), where there
is a reasonable belief of financial exploitation of a ``specified
adult'' as defined in the rule; \3\ (2) permit member firms to extend a
temporary hold, whether on a disbursement or a transaction, for an
additional 30 business days if the member firm has reported the matter
to a state regulator or agency or a court of competent jurisdiction;
and (3) require member firms to retain records of the reason and
support for any extension of any temporary hold, including information
regarding any communications with, or by, a state regulator or agency
of competent jurisdiction or a court of competent jurisdiction. The
proposed rule change was published for comment in the Federal Register
on June 28, 2021.\4\ On July 20, 2021, FINRA consented to extend until
September 24, 2021, the time period in which the Commission must
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\5\ On August 23, 2021, FINRA responded to the
comment letters received in response to the Notice.\6\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See infra note 9 and accompanying text.
\4\ See Exchange Act Release No. 92225 (Jun. 22, 2021), 86 FR
34084 (Jun. 28, 2021) (File No. SR-FINRA-2021-016) (``Notice'').
\5\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Trading and Markets, Commission, dated July
20, 2021. This letter is available at <a href="https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf">https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2021-016-Extension1.pdf</a>.
\6\ See letter from Jeanette Wingler, Associate General Counsel,
FINRA, to Vanessa Countryman, Secretary, Commission dated August 23,
2021 (``FINRA Letter''). The FINRA Letter is available at the
Commission's website at <a href="https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf">https://www.sec.gov/comments/sr-finra-2021-016/srfinra2021016-9160159-247786.pdf</a>.
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The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \7\ to solicit comments on the proposed
rule change from interested persons and to institute proceedings to
determine whether to approve or disapprove the proposed rule change.
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\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
Background
FINRA's proposed rule change would amend Rule 2165, which currently
permits a member firm to place a temporary hold on a disbursement from
the account of a ``specified adult'' customer for up to 25 business
days if the criteria of the rule are satisfied.\8\ A ``specified
adult'' is someone either age 65 and older, or age 18 and older if the
member firm reasonably believes that a mental or physical impairment
has rendered the person incapable of protecting their own interests.\9\
According to FINRA, temporary holds on disbursements have played a
significant role in providing member firms with a way to respond
promptly to suspicions of customer financial exploitation before a
customer experiences potentially significant losses.\10\
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\8\ See infra for a discussion of existing safeguards
incorporated into Rule 2165.
\9\ See Rule 2165(a)(1). Supplementary Material .03 to Rule 2165
provides that a member firm's reasonable belief that a natural
person age 18 and older has a mental or physical impairment that
renders the individual unable to protect their own interests may be
based on the facts and circumstances observed in the member firm's
business relationship with the person. See Notice at 34086 n.17.
\10\ See Notice at 34086. For example, according to FINRA member
firms have placed temporary holds to prevent senior investors from
losing: (1) $200,000 (representing approximately two-thirds of the
investor's account) related to a lawsuit scam; (2) $10,000 in a
lottery scam; (3) $60,000 in a romance scam; and (4) $50,000 to
financial exploitation by a brother-in-law. Id.
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A member firm's ability to place a temporary hold on disbursements
is subject to a number of conditions that are designed to help prevent
misapplication of the rule.\11\ These
[[Page 53697]]
safeguards would apply equally to the proposed rule change permitting
temporary holds on transactions. The safeguards include requiring that
member firms provide notification of both the hold, and the reason for
the hold, to all parties authorized to transact business on the
customer's account, including the customer and a trusted contact person
of the customer, no later than two business days after the day on which
the firm first placed the hold.\12\ Temporary holds may only be placed
based on a member's reasonable belief of financial exploitation--for
example, a customer payment related to a commonly known scam, such as a
lottery scam.\13\
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\11\ Id.
\12\ See Rule 2165(b)(1)(B).
\13\ See Notice at 34086.
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Once the temporary hold has been placed, the member firm must
immediately initiate an internal review of the facts and circumstances
that caused the firm to reasonably believe that the financial
exploitation of the specified adult has occurred, is occurring, has
been attempted, or will be attempted.\14\ Furthermore, the general
supervisory and recordkeeping requirements of certain FINRA rules \15\
require a member firm relying on Rule 2165 to establish and maintain
written supervisory procedures that are reasonably designed to achieve
compliance with the rule, including, but not limited to, procedures
related to the identification, escalation, and reporting of matters
related to the financial exploitation of specified adults.\16\ With
respect to associated persons who may be handling the customer's
account, Rule 2165 also requires that any request for a hold be
escalated to a supervisor, compliance department or legal department
rather than allowing the associated person to independently place a
hold.\17\ In addition, a member firm relying on the rule is required to
develop and document training policies or programs reasonably designed
to ensure that such associated persons comply with the requirements of
the rule,\18\ as well as retain records related to compliance with the
rule, which must be made readily available to FINRA upon request.\19\
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\14\ See Rule 2165(b)(1)(C).
\15\ See Rules 3110, 3120, 3130, 3150, and the Rule 4510 Series.
\16\ See Rule 2165(c)(1).
\17\ See Rule 2165(c)(2).
\18\ See Supplementary Material .02 to Rule 2165.
\19\ See Rule 2165(d).
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The proposed rule change would expand upon Rule 2165 in both scope
and temporal reach by: (1) Expanding the scope of Rule 2165(b)(1) by
permitting member firms to place a temporary hold on a securities
transaction, in addition to the already-permitted hold on
disbursements, where the preexisting conditions of the rule, including
the member's reasonable belief of customer financial exploitation, are
met; \20\ (2) permitting firms to extend the maximum time period for
any temporary hold initiated pursuant to Rule 2165(b)(1) for an
additional 30 business days beyond the current maximum of 25 business
days, if the firm has reported the matter to a state regulator or
agency of competent jurisdiction, or a court of competent jurisdiction;
\21\ and (3) requiring member firms to retain records of the reason and
support for any extension of a temporary hold, including information
regarding any communications with, or by, a state regulator or agency
of competent jurisdiction or a court of competent jurisdiction.\22\
According to FINRA, the proposed rule change is designed to protect
investors and the public interest by strengthening the tools available
to FINRA's member firms to combat the financial exploitation of
vulnerable investors, which presents the potential for significant and
longstanding harm to those investors.\23\
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\20\ See proposed Rule 2165(b).
\21\ Id.
\22\ See proposed Rule 2165(d).
\23\ In August 2019, FINRA engaged in a retrospective review to
assess the effectiveness and efficiency of its rules and
administrative processes designed to protect senior investors from
financial exploitation, including Rule 2165. FINRA stated that
information gathered during the review supported the need for
additional time for firms to resolve matters arising from suspected
financial exploitation, as well as extending the rule to allow firms
to place securities transaction holds. See Notice at 34087.
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Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the
Account of a Specified Adult)
With respect to placing holds on securities transactions, FINRA
indicated that a hold on disbursements may be insufficient to protect
certain investors from financial exploitation. In support of its
proposal, FINRA pointed out that even if a temporary hold is placed on
the resulting disbursement out of a customer's account, the execution
of the transaction may still subject the customer to significant,
negative financial consequences.\24\ Additionally, and as noted above,
the safeguards in Rule 2165 are designed to help prevent misapplication
of the rule with respect to temporary holds on disbursements, and these
safeguards would apply equally to temporary holds on transactions.
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\24\ See Notice at 34087. For example, according to FINRA such
customers may be subject to adverse tax consequences, early
withdrawal penalties (such as surrender charges), the inability to
regain access to a sold investment that was subsequently closed to
new investors, or unauthorized trading in the customer's account,
including in inappropriately high risk or illiquid securities. Id. A
``surrender charge'' is a type of sales charge that must be paid if
money from a variable annuity is sold or withdrawn during the
``surrender period''--a set period of time that typically lasts six
to eight years after the annuity is purchased. See, e.g.,
Commission, Office of Investor Education and Advocacy, Variable
Annuity Surrender Charges (Glossary), <a href="http://Investor.gov">Investor.gov</a> website, (Aug.
11, 2021), <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/variable-annuity-surrender-charges">https://www.investor.gov/introduction-investing/investing-basics/glossary/variable-annuity-surrender-charges</a>.
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Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period)
By increasing the potential maximum duration of the temporary hold,
whether for disbursements or transactions, from 25 business days to 55
business days, the proposed rule change would provide member firms with
additional time to resolve matters arising from suspected financial
exploitation in instances where the firm has reported the suspected
exploitation to state regulators, adult protective services (``APS'')
agencies, or law enforcement.\25\
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\25\ See Notice at 34087; 34089.
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FINRA indicated that information it gathered during the
retrospective review supported the need for member firms to have
additional time to resolve financial exploitation matters.\26\ Although
some retrospective review stakeholders and commenters on a FINRA
regulatory notice \27\ stated that some matters, such as activity that
generally occurs as a result of a commonly-known scam, can be quickly
resolved after placing a temporary hold, other matters are more complex
and may require additional time.\28\ For example, suspected financial
exploitation of an elderly customer by a family member or caregiver may
require additional time to resolve because of the need to interview
multiple individuals, as well as to collect and review relevant
documents according to FINRA. In these more complex cases, both the
firm that has reported the suspected exploitation and the government or
law enforcement entity investigating the conduct often need additional
time to collect and share information to bring the investigation to
resolution. In support of a maximum time period of 55 business days,
FINRA cited to data indicating that the average duration of an
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investigation for matters reported to the federal National Adult
Maltreatment Reporting System (NAMRS) is 52.6 days.\29\
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\26\ See Notice at 34087.
\27\ The commenters referenced in this instance are commenters
on FINRA Regulatory Notice 20-34 (Oct. 2020). See Notice at 34086.
FINRA stated that it considered the collective feedback from the
retrospective review stakeholders and comments to the Notice 20-34
proposal in assessing Rule 2165 and the proposed amendments. See
Notice at 34091.
\28\ See Notice at 34088.
\29\ See Notice at 34092.
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Proposed Rule Change
As noted above, proposed Rule 2165 would: (1) Expand the current
rule by permitting member firms to place a temporary hold on a
securities transaction, subject to the same terms and restrictions
currently applicable to a temporary hold on disbursements, where there
is a reasonable belief of financial exploitation,\30\ (2) permit member
firms to extend the maximum time period for any temporary hold
initiated under the rule for an additional 30 business days if the firm
has reported the matter to a state regulator or agency of competent
jurisdiction, or a court of competent jurisdiction,\31\ and (3) require
member firms to retain records of the reason and support for any
extension of any temporary hold, including information regarding any
communications with, or by, a state regulator or agency of competent
jurisdiction or a court of competent jurisdiction.\32\
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\30\ See proposed Rule 2165(b).
\31\ Id.
\32\ See proposed Rule 2165(d).
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Rule 2165(b) (Temporary Hold on Disbursements or Transactions in the
Account of a Specified Adult)
Rule 2165 currently permits temporary holds to be placed on
disbursements of funds or securities when the firm has a reasonable
belief that the customer is being financially exploited. Although this
serves to stop funds or securities from leaving a customer's account,
the rule does not permit a firm to place a hold on a securities
transaction where the same financial exploitation is suspected.\33\
Accordingly, FINRA is proposing to amend Rule 2165 to permit firms to
place a temporary hold on securities transactions when the firm has a
reasonable belief that the customer is being financially exploited.\34\
In accordance with the Rule's safe harbor approach for holds on
disbursements,\35\ the proposed rule change would permit, but not
require, firms to place a hold on transactions in these circumstances.
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\33\ For example, FINRA stated that Rule 2165 currently would
not apply to a customer's order to sell his shares of a stock.
However, FINRA elaborated that if a customer requested that the
proceeds of a sale of shares of a stock be disbursed out of his
account at the member firm, then the rule could apply to the
disbursement of the proceeds where the customer is a ``specified
adult'' and there is reasonable belief of financial exploitation.
See Notice at 34087 at n.33.
\34\ See proposed Rule 2165(b).
\35\ FINRA stated that Rule 2165 provides member firms and their
associated persons with a safe harbor from FINRA Rules 2010
(Standards of Commercial Honor and Principles of Trade), 2150
(Improper Use of Customers' Securities or Funds; Prohibition Against
Guarantees and Sharing in Accounts) and 11870 (Customer Account
Transfer Contracts) when member firms exercise discretion in placing
temporary holds on disbursements of funds or securities from the
accounts of specified adults consistent with the requirements of
Rule 2165. See Notice at 34086.
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Rule 2165(b)(4) (30-Day Extension of the Temporary Hold Period); Rule
2165(d) (Record Retention)
Rule 2165 currently allows a member firm to place a temporary
disbursement hold on a specified adult customer's account for up to 15
business days if the specified conditions required by the rule are
satisfied, unless otherwise terminated or extended by a state regulator
or agency of competent jurisdiction, or a court of competent
jurisdiction.\36\ The member firm may extend that hold for an
additional 10 business days, for a maximum of 25 business days total,
if the member firm's internal review of the facts and circumstances
supports its reasonable belief that the financial exploitation of the
specified adult has occurred, is occurring, has been attempted or will
be attempted, unless otherwise terminated or extended by a state
regulator or agency of competent jurisdiction, or a court of competent
jurisdiction.\37\ Under FINRA's proposal, these hold periods would also
apply to transactions held under the same conditions described above.
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\36\ See Rule 2165(b)(2).
\37\ See Rule 2165(b)(3).
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FINRA is proposing to amend Rule 2165 to permit firms to extend any
temporary hold under the rule for an additional 30 business days if the
member firm has reported the matter to a state regulator or agency of
competent jurisdiction, or a court of competent jurisdiction.\38\ Thus,
firms would be able to extend a transaction or disbursement hold up to
a maximum of 55 business days only in instances where they have
externally reported the suspicious conduct.
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\38\ FINRA stated that the 30 business day hold period in
proposed Rule 2165(b)(4) would be in addition to the 15 business day
hold in Rule 2165(b)(2) and the 10 business day hold in Rule
2165(b)(3). See Notice at 34087 n.31.
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In addition, Rule 2165(d) currently requires member firms to retain
records related to compliance with the rule, which must be readily
available to FINRA upon request. To evidence compliance with Rule 2165
in placing or extending a temporary hold, FINRA is proposing to amend
Rule 2165(d) to require that a member firm retain records of the reason
and support for any extension of a temporary hold, including
information regarding any communications with, or by, a state regulator
or agency of competent jurisdiction or a court of competent
jurisdiction.\39\
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\39\ See proposed Rule 2165(d)(6).
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III. Proceedings To Determine Whether To Approve or Disapprove File
Number SR-FINRA-2021-016 and Grounds for Disapproval Under
Consideration
The Commission is instituting proceedings to further consider the
proposed rule change and the issues raised by commenters. Specifically,
the Commission is providing notice of the following grounds for
possible disapproval under consideration:
<bullet> Whether FINRA has demonstrated how its proposed rule
change is consistent with Section 15A(b)(6) of the Exchange Act, which
requires, among other things, that FINRA rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.\40\
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\40\ 15 U.S.C. 78o-3(b)(6).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the
[Exchange Act] and the rules and regulations issued thereunder . . . is
on the [SRO] that proposed the rule change.'' \41\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding,\42\ and any failure of an SRO to provide this
information may result in the Commission not having a sufficient basis
to make an affirmative finding that a proposed rule change is
consistent with the Exchange Act and the applicable rules and
regulations issued thereunder.\43\
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\41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\42\ See id.
\43\ See id.
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For the reasons discussed above, the Commission believes it is
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of
the Exchange Act to allow for additional consideration of the issues
raised by the proposed rule change as it determines whether the
proposed rule change should be approved or disapproved.\44\ Institution
of proceedings does not indicate that the Commission has reached any
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conclusions with respect to the proposed rule change.
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\44\ 15 U.S.C. 78s(b)(2)(B).
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IV. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposed rule change. In particular, the Commission invites
the written views of interested persons concerning whether the proposed
rule change is consistent with the Exchange Act and the rules
thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\45\
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\45\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by October 13, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 19, 2021. Comments may be submitted by any of the following
methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b7c5c2dbd29ad4d8dadad2d9c3c4f7c4d2d499d0d8c1"><span class="__cf_email__" data-cfemail="2d5f584148004e4240404843595e6d5e484e034a425b">[email protected]</span></a>. Please include
File Number SR-FINRA-2021-016 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR- FINRA-2021-016. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of FINRA.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-FINRA-2021-016 and
should be submitted on or before October 13, 2021. If comments are
received, any rebuttal comments should be submitted on or before
October 19, 2021.
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\46\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20970 Filed 9-27-21; 8:45 am]
BILLING CODE 8011-01-P
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