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Federal Register / Vol. 86, No. 121 / Monday, June 28, 2021 / Notices Rule 2165cd, and the training specified in Supplementary Material .02
to Rule 2165, should be enhanced to require a documented rationale stating why the customers financial professional and the member firm believe that a transaction hold will protect the customer whereas a disbursement hold would not. NASAA
stated that documentation should be reviewed as a part of FINRA
examinations. NASAA believes that disbursement holds should be the default and that a transaction hold should be utilized only where a disbursement hold cannot adequately protect a customer. Furthermore, NASAA supports member firms establishing policies and procedures to address any harm that may result to the customer from a transaction hold.
FINRA recognizes that placing a temporary hold on a transaction is a serious step for a member and the affected customer. Requiring that a member firm make a disbursement hold the default and use transaction holds only where a disbursement hold cannot adequately protect the customer would add complexity and uncertainty into the decision to place a temporary hold as the member firm would be required to weigh the consequences to the customer of placing the hold at different stages.
Moreover, placing a temporary hold on the underlying transaction may prevent significant negative financial consequences for the customer. These negative financial consequences can result even if a temporary hold is placed on any related disbursement of funds out of the customers account.
Importantly, the ability to place a hold on a transaction pursuant to Rule 2165 would apply only if the firm had a reasonable belief that the customer was being financially exploited. As noted above, FINRA would pursue disciplinary action against a firm that uses Rule 2165 for inappropriate purposes. As discussed in Regulatory Notice 2034 and NASAAs comment letter to Regulatory Notice 2034, neither FINRA nor the states have brought an action against a member firm for misuse of a temporary hold to address suspected financial exploitation.
Some member firms already place holds on securities transactions pursuant to state law. As noted in section A of this filing, currently, 20
states with approximately half of the U.S. population have enacted laws permitting investment advisers and broker-dealers to place temporary holds on disbursements and transactions.
Amending Rule 2165 as proposed would create the first uniform national
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standard for placing holds on transactions related to suspected financial exploitation. Moreover, extending Rule 2165 to transactions would allow for consistent, national safeguards to avoid misapplication of temporary holds.
NASAA also noted that the NASAA
Model Act is limited to disbursements, in part, because a delay in a securities transaction could be deemed inconsistent with best execution requirements. Regarding whether the best execution obligation applies to a member firms decision to place a temporary hold on a securities transaction where there is a reasonable belief of customer financial exploitation, broker-dealers are reminded that nothing under the federal securities laws or FINRA rules obligates them to accept an order where they believe that the associated compliance or legal risks are unacceptable. 57

capacity in the absence of suspected financial exploitation. In addition, in comments to Regulatory Notice 1927, the Cornell Clinic, NASAA, PIABA and Pittsburgh Clinic expressed concerns that such an extension would give member firms too much discretion or would unfairly impede customer autonomy.
FINRA has not proposed to extend Rule 2165 to situations where a member firm has a reasonable belief that the customer has cognitive decline or diminished capacity but there is no evidence of financial exploitation due to the concerns expressed that such an extension would give member firms too much discretion or would unfairly impede customer autonomy. Rather than rulemaking, FINRA summarized the information obtained about member firms procedures and practices in this area in Regulatory Notice 2034 to assist other member firms and investors.

Mandatory Holds Miami Investor Rights Clinic noted that Rule 2165 is a safe harbor and that FINRA should consider amendments to Rule 2165 requiring that member firms place temporary holds. FINRA believes that a member firm using its discretion to place a temporary hold allows for the judicious use of temporary holds to protect customers from financial exploitation.

Trusted Contact Person Where a customer has not named a trusted contact person, Wells Fargo suggested that FINRA give member firms the flexibility to contact a person reasonably associated with the customers account.
Under Rule 2165 as originally proposed in Regulatory Notice 1537
October 2015 Notice 1537 Proposal, if the trusted contact person was unavailable, a member firm placing a hold would have been required to contact an immediate family member, unless the member reasonably believed that the immediate family member was financially exploiting the customer.
Commenters to the Notice 1537
Proposal expressed concerns that the proposed requirement would impinge upon customer privacy and would be operationally challenging for member firms in identifying the customers immediate family members. Due to these concerns, FINRA removed the requirements in the Notice 1537
Proposal with respect to notifying an immediate family member when a temporary hold is placed. In the rule filing to adopt Rule 2165, FINRA noted that Rule 2165 would not preclude a member firm from contacting an immediate family member or any other person if the member has customer consent to do so and that contacting such persons may be useful to member firms in administering customer accounts.59
NAPSA and the Philadelphia Financial Exploitation Task Force recommended that FINRA pursue efforts to promote use of trusted contact
Cognitive Decline or Diminished Capacity Some commenters supported extending Rule 2165 to situations where a firm has a reasonable belief that the customer has an impairment, such as diminished capacity, that renders the individual unable to protect his or her own interests, even though there is no evidence of financial exploitation.58
Some Retrospective Review Stakeholders also supported extending Rule 2165 to these situations. However, other Retrospective Review Stakeholders expressed concerns that member firms are not well-positioned to determine if a customer is suffering from cognitive decline or diminished 57 See SEC Staff Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities Nov. 12, 2020, available at https
www.sec.gov/tm/risks-omnibus-accountstransacting-low-priced-securities SEC Staff Bulletin. The SEC Staff Bulletin provides that, where the broker-dealer determines that the risks cannot be appropriately managed, and particularly in the context of low-priced securities transactions, a broker-dealer should consider, among other things, restricting or rejecting transactions effected on behalf of the customers of a foreign financial institution.
58 See Miami Investor Rights Clinic, NAPSA, Philadelphia Financial Exploitation Task Force and Wells Fargo.

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