FINRA asks SEC to double fraud-hold window to 10 business days

FINRA has formally asked the Securities and Exchange Commission to approve a rule that would let member firms freeze a suspicious transaction for ten business days — twice the five-day window the regulator proposed in January under Regulatory Notice 26-02, InvestmentNews reports. The proposal is numbered Rule 2166.

The hold is a safe harbor, not a mandate. A firm that blocks a disbursement or trade on a reasonable suspicion of fraud gets the rule's protection, but nothing forces the freeze. The coverage is broader than existing senior protections: Rule 2166 applies to any customer 18 or older, while FINRA's Rule 2165 protects only older and impaired investors.

The comment period closed March 9, and the response leaned toward a longer leash. Broker-dealers and industry groups said five days was too tight to investigate a scam before the money moved out of the firm. FINRA's filing makes the same case: ten business days gives a firm room to gather documents, contact the customer, even arrange an in-person meeting. The filing concedes the cost: the client's assets stay locked up for a full two weeks.

Not everyone wants the longer hold. Chris Iacovella, president and CEO of ASA, wrote in March that firms should be able to act on red flags without making an innocent customer endure months of freezes, account holds, or intrusive data collection. The conflict is plain: every day a firm holds a legitimate payout is a day a client's money is unavailable.

Rule 2166 is only half the filing. FINRA also wants to rewrite Rule 2165, its anti-exploitation rule for Specified Adults — people 65 or older, or 18 and older with a reasonable belief they are impaired. Today a firm can hold a payout for an initial 15 to 25 business days, then add a single 30-business-day extension after reporting the matter to a court or regulator, for a maximum of 55 business days. The proposal would add three more 30-business-day extensions, raising the ceiling to 145 business days — about seven months.

For the compliance teams that will live inside this rule, the mechanics matter more than the politics. The people who hold client assets must decide which red flags trigger a hold, how to document a reasonable belief, and how to answer a customer on the phone demanding money on day eight. The longer vulnerable-adult timeline extends the recordkeeping burden by the same measure.

The safe harbor is where the leverage sits. A firm that blocks a payout on a reasonable suspicion is protected by the rule; the customer whose money is frozen is not. That tilts the cost-benefit math toward freezing first and resolving questions later. For an advisor who has watched a client wire money to a fraudster, the extra days are the difference between stopping the transfer and explaining why it was not stopped. For the innocent client, they are two weeks of their own money sitting in limbo.

The decision now moves to the SEC. It can approve the filing as written, request changes, or extend the process. If the 145-business-day ceiling survives, compliance teams will be tracking vulnerable-adult holds for the better part of a year, and the ten-day fraud hold will be the shortest window in the rulebook.