FINRA has adopted amendments to Rule 2165 (Financial Exploitation of Specified Adults) to permit member firms to: (1) place a hold on a securities transaction (in addition to the already-permitted hold on a disbursement of funds or securities) where there is a reasonable belief of financial exploitation; and (2) extend a temporary hold on a disbursement or transaction for an additional 30 business days, beyond the current maximum of 25 business days (for a total of 55 business days), if the member firm has reported the matter to a state regulator or agency, or a court of competent jurisdiction. The amendments to FINRA Rule 2165 became effective March 17, 2022.
Placing Holds on Securities Transactions
The first amendment made to FINRA Rule 2165 makes it so that firms can now place holds on securities transactions when the firm has a reasonable belief that the customer is being financially exploited. FINRA recognized that even if a temporary hold is placed on disbursements, there is still a risk of significant financial loses if securities transactions are permitted in an account where the customer is being financially exploited. These risks include, but are not limited to: adverse tax consequences, surrender charges, and the inability to regain access to a sold investment that has been closed to new investors or trading by a perpetrator in inappropriate high risk or illiquid securities.
It should be noted that a member firm is permitted, but not required, to place a temporary hold on a transaction when there is a reasonable belief that the customer is being financially exploited.
Extending Holds on Customer Accounts
The second amendment made to Rule 2165 allows for firms to extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30 business days if the member firm has reported the matter to a state authority. FINRA recognized that the original 25 day hold period may not be long enough for firms to resolve instances where financial exploitation is suspected, stating that the costs of financial exploitation can be 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.
As a result of this change, member firms would be able to maintain a disbursement or transaction hold up to a maximum of 55 business days where the rule’s criteria are satisfied (including the external reporting to a state authority), unless otherwise terminated or extended by a state authority.
Record Keeping Requirements
Pursuant to Rule 2165(d), member firms are required to retain records related to compliance with the rule, which shall be readily available to FINRA, upon request. To evidence compliance with Rule 2165 in placing or extending a temporary hold, a member firm is required to retain records of the reason and support for any extension of a temporary hold, including information regarding any communications with or by a state authority.
For more information, check out Regulatory Notice 22-05.
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