Bill Singer Comment On Regulatory Notice 26-02

Re: Regulatory Notice 26-02 – Request for Comment on Enhancements to Protect Senior Investors and All Investors from Fraud

I submit this comment as a veteran legal/regulatory/compliance lawyer, who has represented securities-industry firms, individual registered persons, Wall Street whistleblowers, and defrauded public investors. In 2015, I achieved a significant award of approximately $1.5 million from the Securities and Exchange Commission on behalf of a whistleblower client, who was the first in-house compliance officer to be declared eligible for an award under the Dodd-Frank Act. Having sat at all sides of the table, I am able to offer my unique perspective.

Let me be clear at the outset: Protecting senior investors from financial exploitation is a legitimate, necessary, and overdue regulatory priority. Financial predators target seniors with alarming frequency, and FINRA’s Rules 2165 and 4512 were meaningful steps in addressing that sordid reality. Good intentions, however, do not excuse poor drafting -- nor do they justify the erosion of Due Process under the guise of "investor protection.” While well-meaning, Regulatory Notice 26-02 risks repeating a familiar FINRA mistake by attempting to expand discretionary authority without providing clear standards, enforceable guardrails, or timely redress for harmed customers.

Senior Exploitation -- A Pernicious Threat

To FINRA’s credit, the regulator's focus on preventing/minimizing senior exploitation seeks to address a particularly pernicious threat. As such, the problem is not whether FINRA member firms should act when exploitation is suspected, but how, under what standards, and what happens when the firm is wrong. I wholeheartedly applaud Notice 26-02's proposed expansion of member firm authority to delay or restrict customer disbursements based on suspicions of exploitation, diminished capacity, or cognitive decline. Unfortunately, despite the best of intentions the expanded regulatory effort is dangerously predicated upon nebulous, subjective language. Thankfully, that is largely a challenge to be overcome through careful drafting; however, FINRA must carefully define such terms as reasonable belief, vulnerability, and impairment.

The Uncomfortable Scenario

Let’s confront the scenario that FINRA’s Notice conspicuously avoids:

A senior customer’s account is frozen because a registered representative or supervisor believes there are “indicators” of cognitive decline. The customer adamantly denies any impairment, produces medical documentation to the contrary, demands immediate access to funds, and insists that the hold itself is causing financial and emotional harm.

Now what?

Regulatory Notice 26-02 does not set out an articulate accelerated redress mechanism for customers whose assets are frozen incorrectly, prematurely, or indefinitely. The Notice focuses on firm discretion and internal processes but offers little comfort to the investor who finds themselves effectively locked out of their own money. Unquestionably, a temporary hold that lasts days may be protective and in the senior's best interests; however, if that same hold extends for weeks or months without a truly independent review, it could easily transition from protective to punitive.

Accelerated Redress

Investor protection -- even when prompted by legitimate concerns for vulnerable seniors -- cannot come at the expense of fundamental fairness. Seniors should not be expected to forfeit autonomy simply as a byproduct of their age. Due Process is not to be sacrificed as a precaution. Further, if a senior should disagree with a firm's judgment, that objection, in and of itself, should not automatically be deemed proof of mental incapacity. There is a danger if the member firm is empowered to act as a sole and arbitrary investigator, judge, and gatekeep of customer assets. Clearly, the new rules must provide for a prompt and easy pathway for a senior to disprove any articulated suspicions about mental capacity. Additionally, that avenue of accelerated redress should not rely upon a recourse such as mandatory arbitration because that process is often dilatory and expensive -- and would impose burdens and stress upon particularly susceptible seniors.

Giving FINRA full credit for focusing on harm to seniors and having noted my support for efficient and effective rulemaking in that regard, I still have concerns that Regulatory Notice 26-02 does not meaningfully propose an expedited, independent review process for disputed holds. As a senior myself and having advocated for seniors during my career, I do not consider such an omission as trivial. At this juncture of the process, I would deem it the central flaw of the proposal. Thankfully, this is an obstacle that can be overcome by thoughtful drafting. If FINRA intends to expand hold authority, it must simultaneously mandate accelerated redress, including:

Mandatory Written Findings

Firms should be required to provide the customer, within a short, defined period (e.g., 3 business days), a written explanation specifying:

The factual basis for the hold;

The specific behaviors or transactions at issue;

The rule provisions being relied upon.

Independent Review Mechanism

Customers should have access to a neutral third-party review, whether through:

FINRA-appointed independent reviewers; or

A rapid-response FINRA ombuds or adjudicatory unit.

Strict Timelines

Any disputed hold should trigger:

A mandatory review within 5 business days; and

A written determination within 10 business days, absent extraordinary circumstances.

Presumption in Favor of Access

Where credible evidence contradicts the firm’s suspicion (e.g., medical certification, coherent customer instructions), the DEFAULT should be release of the hold, not its extension.

Data Collection and Transparency

FINRA should require firms to report:

The number of holds imposed;

The duration of holds;

The number of holds later determined to be unfounded.

Final Thoughts

Investor protection and market integrity are not served when vague standards empower firms to freeze assets without meaningful accountability. The challenge for FINRA is to absolutely protect vulnerable seniors; however, in seeking to accomplish that admirable goal, FINRA must not infantilize those same seniors. Just as the road to hell is paved with good intentions, regulatory overreach can be just as harmful as regulatory neglect. In proceeding with its effort to draft rules to protect seniors, FINRA must ensure due process, transparency, and timely redress.

Respectfully submitted,

Bill Singer, Esq.