Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Rule 2340 Concerning Customer Account Statements, 54105-54107 [E6-15186]

Download as PDF Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Notices of the information directly from agents’ Web sites. Therefore, DTC will no longer post ABS notices on LENS. DTC will distribute an Important Notice to its participants to notify them of this change to the LENS service and inform participants as to how they may obtain DTC’s assistance in obtaining ABS information. DTC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act8 and the rules and regulations thereunder because it controls costs associated with a service provided by DTC and therefore does not significantly affect the respective rights or obligations of DTC or persons using this service. B. Self-Regulatory Organization’s Statement on Burden on Competition DTC does not believe that the proposed rule change will have any impact or impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others DTC has not solicited or received written comments relating to the proposed rule change. hsrobinson on PROD1PC61 with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act9 and Rule 19b–4(f)(4) 10 thereunder because it effects a change in an existing service of DTC that does not adversely affect the safeguarding of securities or funds in DTC’s control or for which DTC is responsible and does not significantly affect DTC’s or its participants’ respective rights or obligations. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: U.S.C. 78q–1. U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b–4(f)(4). Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/ sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–DTC–2006–12 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–DTC–2006–12. This file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/ rules/ sro.shtml). 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 inspection and copying in the Commission’s Public Reference Section, 100 F Street, NE., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at DTC’s principal office and on DTC’s Web site at http://www.dtc.org/impNtc/ mor/index.html. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submission should refer to File No. SR–DTC–2006– 12 and should be submitted on or before October 4, 2006. For the Commission by the Division of Market Regulation, pursuant to delegated authority.11 J. Lynn Taylor, Assistant Secretary. [FR Doc. E6–15191 Filed 9–12–06; 8:45 am] BILLING CODE 8010–01–P 8 15 9 15 VerDate Aug<31>2005 16:19 Sep 12, 2006 11 17 Jkt 208001 PO 00000 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54411; File No. SR–NASD– 2004–171] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Rule 2340 Concerning Customer Account Statements September 7, 2006. I. Introduction On November 2, 2004, the National Association of Securities Dealers, Inc. (‘‘NASD’’), filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 a proposed rule change to amend NASD Rule 2340, which relates to customer account statements. On February 2, 2005, NASD filed Amendment No. 1 to the proposed rule change.4 The proposed rule change, as amended, was published for comment in the Federal Register on February 16, 2005.5 The Commission received fifteen comment letters in response to the proposed rule change.6 This order 1 15 U.S.C. 78s(b)(1). U.S.C. 78a et seq. 3 17 CFR 240.19b–4. 4 In Amendment No. 1, NASD changed the proposed effective date from 30 days following Commission approval to 180 days following Commission approval, and changed the reference to ‘‘each customer’’ to ‘‘the customer’’ in the sentence proposed to be added as the second sentence to paragraph (a) of Rule 2340. 5 Securities Exchange Act Release No. 51181 (Feb. 10, 2005), 70 FR 7990 (Feb. 16, 2005) (‘‘Notice’’). 6 See letter dated February 17, 2005 from Christopher Charles, President, Wulff, Hansen & Co. (‘‘Wulff, Hansen’’); email dated April 21, 2005 from Geraldine Genco (‘‘Genco’’); eight letters (dated February 28, 2005 from Lisa Roth, President, ComplianceMax Financial, LLC, dated March 2, 2005 from Candy J. Lee, NCM, CFP, President, Financial Services International Corp., dated March 7, 2005 from Rod P. Michel, World Trade Financial Corporation, dated March 4, 2005 from Robert L. Savage, President, Leonard Securities, Inc., dated March 7, 2005 from Robert J. Schoen, President, Quest Securities, Inc., dated March 2, 2005 from Matthew S. Merwin, CFP, President, FMN Capital Corporation, dated March 7, 2005 from Warner Griswold, Chief Operating Officer, Green Street Advisors, Inc., and dated March 11, 2005 from Craig Biddick, President, Mission Securities Corporation) that were versions of a form letter that the National Association of Independent Broker Dealers posted on its website and encouraged its members to submit (‘‘NAIBD’’); letter dated March 2, 2005 from John Miller (‘‘Miller’’); letter dated March 9, 2005 from Rosemary J. Shockman, President, Public Investors Arbitration Bar Association (‘‘PIABA’’); letter dated March 8, 2005 from Andrew C. Small, General Counsel, Scottrade, Inc. (‘‘Scottrade’’); letter dated March 9, 2005 from John Polanin, Jr., Chairman, Self Regulation and Supervisory Practices Committee, Securities Industry 2 15 CFR 200.30–3(a)(12). Frm 00088 Fmt 4703 Sfmt 4703 54105 Continued E:\FR\FM\13SEN1.SGM 13SEN1 54106 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Notices approves the proposed rule change, as amended. II. Description of the Proposal and Comment Summary hsrobinson on PROD1PC61 with NOTICES A. Description Currently, clearing firms may include language in customer account statements advising customers to immediately report to the firm any discrepancies in balances or positions. However, these advisories may not necessarily direct customers to report discrepancies in writing, nor are the advisories required to be included on customer account statements. In 2001, the U.S. General Accounting Office (‘‘GAO’’) recommended, among other things, that self-regulatory organizations (‘‘SROs’’), such as NASD, seek to inform investors that they should document any unauthorized trading in their accounts in writing.7 Written documentation is important because, in the event a firm goes into liquidation, SIPC and the trustee generally will assume that the firm’s records are accurate unless the customer can prove otherwise.8 Consistent with GAO’s recommendation, the proposed rule change would amend NASD Rule 2340 to require general securities firms to include in monthly account statements an advisory indicating that a customer should report promptly any inaccuracy or discrepancy in its account to its clearing firm and (if it is a different firm) its introducing firm. The advisory statement also would inform customers that any oral communications should be re-confirmed in writing to further protect customers’ rights, including rights under SIPA. The proposed disclosure requirement would not impose any limitation on a customer’s right to raise concerns regarding inaccuracies or discrepancies in his or her account at any time, either in writing or orally. Further, a customer’s failure to promptly raise such concerns, either in writing or orally, would not preclude a customer from reporting an Association (‘‘SIA’’); and letter dated April 4, 2005 from Josephine Wang, General Counsel, Securities Investor Protection Corporation (‘‘SIPC’’). 7 See GAO, Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors, GAO–01–653 (May 25, 2001). See also GAO–03– 811 (July 11, 2003); GAO–04–848R Follow-Up on SIPC (July 9, 2004). GAO has since been renamed the Government Accountability Office. 8 SIPC advises investors who discover an error in a confirmation or statement to immediately bring the error to the attention of their brokerage firm in writing and to keep a copy of any such writing. See SIPC, ‘‘Documenting Unauthorized Trading’’ (available at http://www.sipc.org/how/ unauthorized.cfm); SIPC, ‘‘How SIPC Protects You’’ (available at http://www.sipc.org/how/ brochure.cfm). VerDate Aug<31>2005 16:19 Sep 12, 2006 Jkt 208001 inaccuracy or discrepancy in his or her account during any SIPC liquidation of his or her brokerage or clearing firm.9 The 180-day delay in the rule’s effectiveness requested in Amendment No. 1 to the proposal is intended to give NASD member firms time to make necessary changes to their customer documentation and systems. B. Comment Summary The Commission received fifteen comments in response to the proposed rule change.10 Four commenters generally supported the proposal.11 Eleven generally opposed it.12 Impact on Investors Three commenters argued that the proposal could lead to claims that customers who do not promptly report errors or document them in writing would give up rights to assert claims against brokerage firms, or that brokerage firms could misuse the proposed advisory statement by arguing that customers who fail to follow it are barred from bringing claims.13 Contact Information Four commenters suggested that the advisory statement direct customers to address reports to a specific area within a firm where responses could be managed and supervised, rather than to an address or phone number that might cause a report to be received initially by the registered representative handling the account of the customer making the report.14 Including Advisory Statement on Confirmations Three commenters suggested requiring that the proposed advisory statement be included not only in 9 See Notice at 70 FR 7991. The NYSE has proposed a similar rule change. See initial proposed rule change and Amendment No. 1 thereto in File No. SR–NYSE–2005–09 (available on the NYSE’s Web site). 10 See footnote 6, supra. 11 Genco; Scottrade; SIA; and SIPC. 12 Miller, NAIBD (eight commenters submitted letters based on the NAIBD form letter), PIABA, and Wulff, Hansen. Wulff, Hansen suggested abandoning the proposal or, in the alternative, modifying it to require the new advisory statement only at account opening and annually thereafter, to reduce printing costs and other burdens. 13 Miller, PIABA, and Wulff, Hansen. Miller recommended clarifying that a customer’s failure to make a report does not limit the customer’s right to raise concerns regarding account inaccuracies or discrepancies at any time, including during a SIPC liquidation. PIABA also recommended clarifying that the proposed additional statement shall not be used to defend against a customer claim. 14 Genco, Miller, PIABA, and SIPC. Miller also recommended that the statement identify a person at a clearing firm to whom errors should be reported, if the clearing and introducing firms for the account are different. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 account statements, but also in trade confirmations.15 Scope of Statement Two commenters believed that the proposed statement is overbroad and suggested narrowing it to apply only to unauthorized trades.16 Role of Clearing Firms Two commenters sought clarification as to the role clearing firms would have in connection with disputed transactions.17 Method of Delivering Notice One commenter recommended amending the proposal to allow brokers to deliver the proposed advisory statement ‘‘with’’ (rather than ‘‘in’’) account statements, which the commenter believes would better accommodate certain click-through processes for delivering regulatory disclosures to customers.18 Time for Reporting Discrepancies Two commenters recommended setting a specified period within which investors should report discrepancies to avoid customer abuses, such as using post-settlement market information to undo transactions.19 Level Playing Field One commenter maintained that the proposal would subject brokerage firms to a standard not applicable to commercial banks.20 Similar NYSE Proposal One commenter 21 recommended that, in the interest of regulatory consistency, the proposal be conformed to a similar proposed NYSE rule change.22 III. Discussion and Findings The Commission finds that the proposed rule change is consistent with the Act, and in particular, with section 15A(b)(6) of the Act,23 which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of 15 Miller, PIABA, and SIPC. Miller and PIABA also suggested requiring that the statement be presented in bold type. PIABA recommended requiring that the statement be presented in plain language on the first page of account statements. 16 Miller and PIABA. 17 Genco and NAIBD. For example, Genco asked whether the proposal is intended to require clearing firms to escalate a complaint to the proper party in the executing firm. 18 Scottrade. 19 NAIBD and SIPC. 20 Wulff, Hansen. 21 SIA. 22 See footnote 9, supra. 23 15 U.S.C. 78o–3(b)(6). E:\FR\FM\13SEN1.SGM 13SEN1 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Notices trade, and, in general, to protect investors and the public interest. The Commission believes that the proposed rule change is consistent with the provision of the Act noted above because it will help investors understand procedures for preserving their rights in the event of erroneous or unauthorized transactions in their accounts. While the Commission believes that the proposal would improve NASD’s current customer account disclosure requirements, we believe that the disclosure would be more beneficial to investors if it required NASD members to include on account statements both introducing and clearing firm contact information sufficient to allow investors to timely report unauthorized transactions or other account discrepancies to both firms (if the firms are different). We believe such disclosure would be consistent with current Commission guidance on this issue.24 We also believe that such disclosure would address the concerns of some commenters that the current proposal could be enhanced to ensure that a customer’s concern is delivered to the most appropriate person at the firm.25 The Commission therefore encourages NASD to issue a Notice to Members regarding the proposed change to Rule 2340 that reminds member firms of their current obligations with respect to customer account statements.26 hsrobinson on PROD1PC61 with NOTICES IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act 27 that the proposed rule change (SR–NASD–2004– 171), as amended, be, and hereby is, approved,28 effective 180 days from the date of this order. NASD has committed to announce the effective date of the 24 See Securities Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992) (amending the SEC’s net capital rule and explaining the staff’s interpretation that to avoid more stringent capital requirements under the rule, an introducing firm must have in place a clearing agreement with a registered broker-dealer that, among other things, contains ‘‘the name and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries regarding the customer’s account.’’). See also NYSE Interpretation Handbook at 4105 (carrying organization phone number may appear on the back of the customer account statement, but, if so, it must be in ‘‘bold’’ or ‘‘highlighted’’ text). 25 See footnote 14, supra. 26 See footnote 24, supra. 27 15 U.S.C. 78s(b)(2). 28 In approving this proposed rule change, the Commission notes that it has considered the proposed rule change’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). In particular, the Commission considered and granted NASD’s request to delay effectiveness of the proposal by 180 days to allow NASD member firms sufficient time to implement the change required by the proposal. VerDate Aug<31>2005 16:19 Sep 12, 2006 Jkt 208001 proposed rule change in a Notice to Members to be published no later than 30 days following approval of the proposal. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29 Jill M. Peterson, Assistant Secretary. [FR Doc. E6–15186 Filed 9–12–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54409; File No. SR–OCC– 2006–13] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to a Name Change of a Board Committee and of a Securities Market September 6, 2006. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 notice is hereby given that on July 17, 2006, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by OCC. OCC filed the proposed rule change pursuant to section 19(b)(3)(A) of the Act 2 whereby the proposal was effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change reflects the renaming of OCC’s Membership/Margin Committee to the Membership/Risk Committee and of Nasdaq National Market to the Nasdaq Global Market. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared 29 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 15 U.S.C. 78s(b)(3)(A)(ii). PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 54107 summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.3 (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of the proposed rule change is to reflect that OCC has renamed the Membership/Margin Committee to the Membership/Risk Committee and that Nasdaq has renamed the Nasdaq National Market to the Nasdaq Global Market. OCC believes that the proposed rule change is consistent with the purposes and requirements of section 17A of the Act because it reflects the appropriate titles of an OCC Board committee and a securities marketplace. The rule change is not inconsistent with the existing bylaws and rules of OCC, including those proposed to be amended. (B) Self-Regulatory Organization’s Statement on Burden on Competition OCC does not believe that the proposed rule change would impose any burden on competition. (C) Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were not and are not intended to be solicited with respect to the proposed rule change, and none have been received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to section 19(b)(3)(A)(iii) of the Act 4 and Rule 19b–4(f)(4) 5 promulgated thereunder because the proposal effects a change in an existing service of OCC that (A) does not adversely affect the safeguarding of securities or funds in the custody or control of OCC or for which it is responsible and (B) does not significantly affect the respective rights or obligations of OCC or persons using the service. At any time within sixty days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 3 The Commission has modified parts of these statements. 4 15 U.S.C. 78s(b)(3)(A)(iii). 5 17 CFR 240.19b–4(f)(4). E:\FR\FM\13SEN1.SGM 13SEN1

Agencies

[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Notices]
[Pages 54105-54107]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-15186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54411; File No. SR-NASD-2004-171]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to Rule 
2340 Concerning Customer Account Statements

September 7, 2006.

I. Introduction

    On November 2, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) 
\1\ of the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to amend NASD Rule 2340, which 
relates to customer account statements. On February 2, 2005, NASD filed 
Amendment No. 1 to the proposed rule change.\4\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on February 16, 2005.\5\ The Commission received fifteen comment 
letters in response to the proposed rule change.\6\ This order

[[Page 54106]]

approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, NASD changed the proposed effective date 
from 30 days following Commission approval to 180 days following 
Commission approval, and changed the reference to ``each customer'' 
to ``the customer'' in the sentence proposed to be added as the 
second sentence to paragraph (a) of Rule 2340.
    \5\ Securities Exchange Act Release No. 51181 (Feb. 10, 2005), 
70 FR 7990 (Feb. 16, 2005) (``Notice'').
    \6\ See letter dated February 17, 2005 from Christopher Charles, 
President, Wulff, Hansen & Co. (``Wulff, Hansen''); email dated 
April 21, 2005 from Geraldine Genco (``Genco''); eight letters 
(dated February 28, 2005 from Lisa Roth, President, ComplianceMax 
Financial, LLC, dated March 2, 2005 from Candy J. Lee, NCM, CFP, 
President, Financial Services International Corp., dated March 7, 
2005 from Rod P. Michel, World Trade Financial Corporation, dated 
March 4, 2005 from Robert L. Savage, President, Leonard Securities, 
Inc., dated March 7, 2005 from Robert J. Schoen, President, Quest 
Securities, Inc., dated March 2, 2005 from Matthew S. Merwin, CFP, 
President, FMN Capital Corporation, dated March 7, 2005 from Warner 
Griswold, Chief Operating Officer, Green Street Advisors, Inc., and 
dated March 11, 2005 from Craig Biddick, President, Mission 
Securities Corporation) that were versions of a form letter that the 
National Association of Independent Broker Dealers posted on its 
website and encouraged its members to submit (``NAIBD''); letter 
dated March 2, 2005 from John Miller (``Miller''); letter dated 
March 9, 2005 from Rosemary J. Shockman, President, Public Investors 
Arbitration Bar Association (``PIABA''); letter dated March 8, 2005 
from Andrew C. Small, General Counsel, Scottrade, Inc. 
(``Scottrade''); letter dated March 9, 2005 from John Polanin, Jr., 
Chairman, Self Regulation and Supervisory Practices Committee, 
Securities Industry Association (``SIA''); and letter dated April 4, 
2005 from Josephine Wang, General Counsel, Securities Investor 
Protection Corporation (``SIPC'').
---------------------------------------------------------------------------

II. Description of the Proposal and Comment Summary

A. Description

    Currently, clearing firms may include language in customer account 
statements advising customers to immediately report to the firm any 
discrepancies in balances or positions. However, these advisories may 
not necessarily direct customers to report discrepancies in writing, 
nor are the advisories required to be included on customer account 
statements. In 2001, the U.S. General Accounting Office (``GAO'') 
recommended, among other things, that self-regulatory organizations 
(``SROs''), such as NASD, seek to inform investors that they should 
document any unauthorized trading in their accounts in writing.\7\ 
Written documentation is important because, in the event a firm goes 
into liquidation, SIPC and the trustee generally will assume that the 
firm's records are accurate unless the customer can prove otherwise.\8\
---------------------------------------------------------------------------

    \7\ See GAO, Securities Investor Protection: Steps Needed to 
Better Disclose SIPC Policies to Investors, GAO-01-653 (May 25, 
2001). See also GAO-03-811 (July 11, 2003); GAO-04-848R Follow-Up on 
SIPC (July 9, 2004). GAO has since been renamed the Government 
Accountability Office.
    \8\ SIPC advises investors who discover an error in a 
confirmation or statement to immediately bring the error to the 
attention of their brokerage firm in writing and to keep a copy of 
any such writing. See SIPC, ``Documenting Unauthorized Trading'' 
(available at http://www.sipc.org/how/unauthorized.cfm); SIPC, ``How 
SIPC Protects You'' (available at http://www.sipc.org/how/
brochure.cfm).
---------------------------------------------------------------------------

    Consistent with GAO's recommendation, the proposed rule change 
would amend NASD Rule 2340 to require general securities firms to 
include in monthly account statements an advisory indicating that a 
customer should report promptly any inaccuracy or discrepancy in its 
account to its clearing firm and (if it is a different firm) its 
introducing firm. The advisory statement also would inform customers 
that any oral communications should be re-confirmed in writing to 
further protect customers' rights, including rights under SIPA. The 
proposed disclosure requirement would not impose any limitation on a 
customer's right to raise concerns regarding inaccuracies or 
discrepancies in his or her account at any time, either in writing or 
orally. Further, a customer's failure to promptly raise such concerns, 
either in writing or orally, would not preclude a customer from 
reporting an inaccuracy or discrepancy in his or her account during any 
SIPC liquidation of his or her brokerage or clearing firm.\9\
---------------------------------------------------------------------------

    \9\ See Notice at 70 FR 7991. The NYSE has proposed a similar 
rule change. See initial proposed rule change and Amendment No. 1 
thereto in File No. SR-NYSE-2005-09 (available on the NYSE's Web 
site).
---------------------------------------------------------------------------

    The 180-day delay in the rule's effectiveness requested in 
Amendment No. 1 to the proposal is intended to give NASD member firms 
time to make necessary changes to their customer documentation and 
systems.

B. Comment Summary

    The Commission received fifteen comments in response to the 
proposed rule change.\10\ Four commenters generally supported the 
proposal.\11\ Eleven generally opposed it.\12\
---------------------------------------------------------------------------

    \10\ See footnote 6, supra.
    \11\ Genco; Scottrade; SIA; and SIPC.
    \12\ Miller, NAIBD (eight commenters submitted letters based on 
the NAIBD form letter), PIABA, and Wulff, Hansen. Wulff, Hansen 
suggested abandoning the proposal or, in the alternative, modifying 
it to require the new advisory statement only at account opening and 
annually thereafter, to reduce printing costs and other burdens.
---------------------------------------------------------------------------

Impact on Investors
    Three commenters argued that the proposal could lead to claims that 
customers who do not promptly report errors or document them in writing 
would give up rights to assert claims against brokerage firms, or that 
brokerage firms could misuse the proposed advisory statement by arguing 
that customers who fail to follow it are barred from bringing 
claims.\13\
---------------------------------------------------------------------------

    \13\ Miller, PIABA, and Wulff, Hansen. Miller recommended 
clarifying that a customer's failure to make a report does not limit 
the customer's right to raise concerns regarding account 
inaccuracies or discrepancies at any time, including during a SIPC 
liquidation. PIABA also recommended clarifying that the proposed 
additional statement shall not be used to defend against a customer 
claim.
---------------------------------------------------------------------------

Contact Information
    Four commenters suggested that the advisory statement direct 
customers to address reports to a specific area within a firm where 
responses could be managed and supervised, rather than to an address or 
phone number that might cause a report to be received initially by the 
registered representative handling the account of the customer making 
the report.\14\
---------------------------------------------------------------------------

    \14\ Genco, Miller, PIABA, and SIPC. Miller also recommended 
that the statement identify a person at a clearing firm to whom 
errors should be reported, if the clearing and introducing firms for 
the account are different.
---------------------------------------------------------------------------

Including Advisory Statement on Confirmations
    Three commenters suggested requiring that the proposed advisory 
statement be included not only in account statements, but also in trade 
confirmations.\15\
---------------------------------------------------------------------------

    \15\ Miller, PIABA, and SIPC. Miller and PIABA also suggested 
requiring that the statement be presented in bold type. PIABA 
recommended requiring that the statement be presented in plain 
language on the first page of account statements.
---------------------------------------------------------------------------

Scope of Statement
    Two commenters believed that the proposed statement is overbroad 
and suggested narrowing it to apply only to unauthorized trades.\16\
---------------------------------------------------------------------------

    \16\ Miller and PIABA.
---------------------------------------------------------------------------

Role of Clearing Firms
    Two commenters sought clarification as to the role clearing firms 
would have in connection with disputed transactions.\17\
---------------------------------------------------------------------------

    \17\ Genco and NAIBD. For example, Genco asked whether the 
proposal is intended to require clearing firms to escalate a 
complaint to the proper party in the executing firm.
---------------------------------------------------------------------------

Method of Delivering Notice
    One commenter recommended amending the proposal to allow brokers to 
deliver the proposed advisory statement ``with'' (rather than ``in'') 
account statements, which the commenter believes would better 
accommodate certain click-through processes for delivering regulatory 
disclosures to customers.\18\
---------------------------------------------------------------------------

    \18\ Scottrade.
---------------------------------------------------------------------------

Time for Reporting Discrepancies
    Two commenters recommended setting a specified period within which 
investors should report discrepancies to avoid customer abuses, such as 
using post-settlement market information to undo transactions.\19\
---------------------------------------------------------------------------

    \19\ NAIBD and SIPC.
---------------------------------------------------------------------------

Level Playing Field
    One commenter maintained that the proposal would subject brokerage 
firms to a standard not applicable to commercial banks.\20\
---------------------------------------------------------------------------

    \20\ Wulff, Hansen.
---------------------------------------------------------------------------

Similar NYSE Proposal
    One commenter \21\ recommended that, in the interest of regulatory 
consistency, the proposal be conformed to a similar proposed NYSE rule 
change.\22\
---------------------------------------------------------------------------

    \21\ SIA.
    \22\ See footnote 9, supra.
---------------------------------------------------------------------------

III. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the Act, and in particular, with section 15A(b)(6) of the Act,\23\ 
which requires, among other things, that NASD rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of

[[Page 54107]]

trade, and, in general, to protect investors and the public interest. 
The Commission believes that the proposed rule change is consistent 
with the provision of the Act noted above because it will help 
investors understand procedures for preserving their rights in the 
event of erroneous or unauthorized transactions in their accounts.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    While the Commission believes that the proposal would improve 
NASD's current customer account disclosure requirements, we believe 
that the disclosure would be more beneficial to investors if it 
required NASD members to include on account statements both introducing 
and clearing firm contact information sufficient to allow investors to 
timely report unauthorized transactions or other account discrepancies 
to both firms (if the firms are different). We believe such disclosure 
would be consistent with current Commission guidance on this issue.\24\ 
We also believe that such disclosure would address the concerns of some 
commenters that the current proposal could be enhanced to ensure that a 
customer's concern is delivered to the most appropriate person at the 
firm.\25\ The Commission therefore encourages NASD to issue a Notice to 
Members regarding the proposed change to Rule 2340 that reminds member 
firms of their current obligations with respect to customer account 
statements.\26\
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    \24\ See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973 (Dec. 2, 1992) (amending the SEC's net capital 
rule and explaining the staff's interpretation that to avoid more 
stringent capital requirements under the rule, an introducing firm 
must have in place a clearing agreement with a registered broker-
dealer that, among other things, contains ``the name and telephone 
number of a responsible individual at the clearing firm whom a 
customer can contact with inquiries regarding the customer's 
account.''). See also NYSE Interpretation Handbook at 4105 (carrying 
organization phone number may appear on the back of the customer 
account statement, but, if so, it must be in ``bold'' or 
``highlighted'' text).
    \25\ See footnote 14, supra.
    \26\ See footnote 24, supra.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\27\ that the proposed rule change (SR-NASD-2004-171), as amended, be, 
and hereby is, approved,\28\ effective 180 days from the date of this 
order. NASD has committed to announce the effective date of the 
proposed rule change in a Notice to Members to be published no later 
than 30 days following approval of the proposal.
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    \27\ 15 U.S.C. 78s(b)(2).
    \28\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f). In 
particular, the Commission considered and granted NASD's request to 
delay effectiveness of the proposal by 180 days to allow NASD member 
firms sufficient time to implement the change required by the 
proposal.
    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-15186 Filed 9-12-06; 8:45 am]
BILLING CODE 8010-01-P