Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 2231 (Customer Account Statements), 55641-55656 [2021-21767]
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Federal Register / Vol. 86, No. 191 / Wednesday, October 6, 2021 / Notices
are available at www.prc.gov, Docket
Nos. MC2021–134, CP2021–141.
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2021–21841 Filed 10–5–21; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93215; File No. SR–FINRA–
2021–024]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 2231 (Customer Account
Statements)
September 30, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 29, 2021, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to: (1) Amend
Rule 2231 (Customer Account
Statements) to (a) add new
supplementary materials pertaining to
compliance with Rule 4311 (Carrying
Agreements), the transmission of
customer account statements to other
persons or entities, the use of electronic
media to satisfy delivery obligations,
and compliance with Rule 3150
(Holding of Customer Mail); and (b)
incorporate without substantive change
specified provisions derived from
Temporary Dual FINRA–NYSE Rule
Interpretation 409T (Statements of
Accounts to Customers) pertaining to
information disclosed on customer
account statements, externally held
assets, use of logos and trademarks, and
use of summary statements; (2) delete
Temporary Dual FINRA–NYSE Rule
409T (Statements of Accounts to
Customers) and Temporary Dual
FINRA–NYSE Rule Interpretation
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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409T; 3 and (3) make other nonsubstantive and technical changes in
Rule 2231 and to other FINRA rules due
to this proposed rule change.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
Rule 2231 and NYSE Rule 409T
govern the obligation of members to
deliver customer account statements to
customers. Specifically, Rule 2231 and
NYSE Rule 409T require each ‘‘general
3 As part of the process of completing a
consolidated FINRA rulebook, FINRA adopted,
without substantive changes, the remaining legacy
NASD rules as FINRA rules in the consolidated
FINRA rulebook and the remaining Incorporated
NYSE Rules and Incorporated NYSE Rule
Interpretations in the consolidated FINRA rulebook
as a separate Temporary Dual FINRA–NYSE
Member Rules Series. These NYSE rules and their
corresponding interpretations now bear a ‘‘T’’
modifier after the rule and interpretation number to
denote their placement in the Temporary Dual
FINRA–NYSE Member Rules Series. The
Temporary Dual FINRA–NYSE Member Rules
Series apply only to those members of FINRA that
are also members of the NYSE (‘‘dual members’’).
The FINRA rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. Among the remaining NASD rules
was NASD Rule 2340 (Customer Account
Statements), which was adopted, without
substantive changes, as FINRA Rule 2231.
Incorporated NYSE Rule 409 (Statements of
Accounts to Customers) and Incorporated NYSE
Rule Interpretation 409 (Statements of Accounts to
Customers) were adopted, without substantive
changes, under the Temporary Dual FINRA–NYSE
Rules Series as Rule 409T and Interpretation 409T,
respectively. See Securities Exchange Act Release
No. 85589 (April 10, 2019), 84 FR 15646 (April 16,
2019) (Notice of Filing and Immediate Effectiveness
of File No. SR–FINRA–2019–009). For convenience,
the rules and interpretations under the Temporary
Dual FINRA–NYSE Member Rules Series are
referred to as ‘‘NYSE Rule’’ and ‘‘NYSE Rule
Interpretation,’’ as appropriate.
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securities member’’ 4 and each member
organization carrying customer
accounts, respectively, to send account
statements to customers at least
quarterly showing security and money
positions or account activity during the
preceding quarter, except if carried on a
Delivery versus Payment/Receive versus
Payment (‘‘DVP/RVP’’) basis.
At the time FINRA adopted Rule
2231, along with NYSE Rule 409T and
NYSE Rule Interpretation 409T
(together, ‘‘NYSE provisions’’), among
others, into the consolidated FINRA
rulebook, FINRA noted that it would
continue to review the substance of
such rules and expected to propose
substantive changes to some or all of the
rules as part of future rulemakings.5 As
part of that effort and as described
further below, FINRA is now proposing
to amend Rule 2231 that would
incorporate several existing provisions
from the NYSE provisions. As a result
of this proposed harmonization, the
NYSE provisions would be deleted in
their entirety.
Rule 2231 differs from the NYSE
provisions in several ways. First, Rule
2231(c) sets forth requirements for
disclosure of values for unlisted or
illiquid direct participation programs or
real estate investment trust securities.
Neither NYSE Rule 409T nor NYSE Rule
Interpretation 409T have a
corresponding provision. Second, the
NYSE provisions address the delivery of
confirmations, account statements or
other communications to third parties
subject to specified conditions and
exceptions. In addition, NYSE Rule
409T(g) provides that members carrying
margin accounts for customers should
send duplicate copies of monthly
statements of guaranteed accounts to the
respective guarantors unless such
guarantors have specifically provided in
writing that they do not want such
statements sent to them. Rule 2231 does
not have similar provisions. Third, Rule
2231(d) expressly defines several terms
(e.g., ‘‘account activity,’’ ‘‘DVP/RVP
account,’’ ‘‘general securities member’’)
and Rule 2231(e) provides for exemptive
relief from the rule. NYSE Rule 409T
expressly defines only one term, ‘‘DVP/
RVP account,’’ and does not provide for
exemptive relief from the rule. Finally,
unlike Rule 2231, NYSE Rule
4 Rule 2231(d) defines the term ‘‘general
securities member’’ to mean ‘‘any member that
conducts a general securities business and is
required to calculate its net capital pursuant to the
provisions of SEA Rule 15c3–1(a). Notwithstanding
the foregoing definition, a member that does not
carry customer accounts and does not hold
customer funds or securities is exempt from the
provisions of this section.’’
5 See supra note 3.
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Interpretation 409T dictates the
disclosures that must be made in a
customer account statement, including
for externally held assets, and
requirements for use of third party
agents, logos and trademarks, summary
statements, and sets forth the standards
for holding mail for a customer.
In light of these differences, FINRA is
specifically proposing to: (a) Add as
new Supplementary Materials .01
(Compliance with Rule 4311 (Carrying
Agreements)), .02 (Transmission of
Customer Account Statements to Other
Persons or Entities), .03 (Use of
Electronic Media to Satisfy Delivery
Obligations), and .04 (Compliance with
Rule 3150 (Holding of Customer Mail));
and (b) incorporate provisions derived
from NYSE Rule Interpretation 409T,
without substantive change, as
Supplementary Materials .05
(Information to be Disclosed on
Statement), .06 (Assets Externally Held),
.07 (Use of Logos, Trademarks, etc.), and
.08 (Use of Summary Statements).
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Rule Filing History
In 2009, FINRA had filed with the
SEC a proposed rule change to adopt
then NASD Rule 2340 and legacy NYSE
Rule 409, including its related
interpretations, as Rule 2231 into the
consolidated FINRA rulebook (‘‘Initial
Rule Filing’’) as part of the process of
developing the consolidated FINRA
rulebook.6 Among other things, the
Initial Rule Filing had set forth a
number of proposed supplementary
materials, most of which were derived
largely from then NYSE Rule
Interpretation 409 to address customer
account disclosures, including for
externally held assets, and requirements
for use of third party agents, logos and
trademarks, summary statements, and
holding customer mail.7
Among these proposed
supplementary materials was one, based
in part on legacy NYSE Rule 409(b),
which would have required written
instructions from the customer to
address or send customer statements,
confirmations or other communications
relating to the customer’s account to
other persons or entities. However,
unlike legacy NYSE Rule 409(b), the
proposed supplementary material was
6 See Securities Exchange Act Release No. 59921
(May 14, 2009), 74 FR 23912 (May 21, 2009) (Notice
of Filing of File No. SR–FINRA–2009–028).
7 FINRA had also proposed amending then NASD
Rule 2340 to change the frequency of the delivery
of account statements to a customer from quarterly
to monthly where the customer had account activity
during the preceding month, and with a frequency
of not less than once every calendar quarter to each
customer whose account had a security position or
money balance during the period since the last such
statement was sent to the customer.
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silent on whether a firm would have to
continue sending account statements to
the customer. Commenters to the Initial
Rule Filing expressed concerns relating
to the need for written customer consent
to transmit customer account statements
to third parties and sought clarification
on whether firms would be required to
obtain written consent when complying
with then NASD Rule 3050
(Transactions for or by Associated
Persons) and then NYSE Rule 407
(Transactions—Employees of Members,
Member Organizations and the
Exchange).8 In response to these
comments, among others, FINRA
amended the Initial Rule Filing in 2011
(‘‘Amended Rule Filing’’).9 With respect
to the transmission of customer account
statements to third parties, FINRA had
proposed clarifying that member firms
would not be required to obtain prior
written consent from their associated
persons to send duplicate account
statements or other communications
with respect to such associated persons’
accounts that were subject to then
NASD Rule 3050 and NYSE Rule 407.
To address concerns regarding potential
fraud, especially with senior investors,
where a third party receives the account
statements in lieu of such customer,
FINRA had also proposed clarifying that
firms would have to continue to deliver
account statements to customers, either
in paper format or electronically, even
when directed by the customer, in
writing, to send statements to a third
party. FINRA made this clarification in
an effort to remain consistent with any
SEC release, interpretation, ‘‘no-action’’
position or exemption issued by the SEC
or its staff in the context of SEA Rule
10b–10 (Confirmation of transactions)
that have established the policy that
customers should continue to receive
periodic account statements when not
receiving immediate trade confirmations
8 NASD Rule 3050 and NYSE Rule 407 are the
predecessor rules to Rule 3210 (Accounts at Other
Broker-Dealers and Financial Institutions). In 2015,
FINRA adopted Rule 3210 in the consolidated
FINRA rulebook to replace NASD Rule 3050, NYSE
Rules 407 and 407A (Disclosure of All Member
Accounts) and the corresponding NYSE
interpretations. See Securities Exchange Act
Release No. 75655 (August 10, 2015), 80 FR 48941
(August 14, 2015) (Notice of Filing of File No. SR–
FINRA–2015–029). Rule 3210 governs accounts that
associated persons open or establish at firms other
than their employer and in which they have a
beneficial interest. In general, the rule requires that
the associated person must obtain the prior written
consent of his or her employer to open or establish
the account, and provides that the member firm
where the account is held must transmit duplicate
copies of confirmations and statements to the
employer upon the employer’s request.
9 See Securities Exchange Act Release No. 64969
(July 26, 2011), 76 FR 46340 (August 2, 2011)
(Notice of Filing of Amendment No. 1 to File No.
SR–FINRA–2009–028).
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under SEA Rule 10b-10.10 Further
comments were received in response to
the Amended Rule Filing. Commenters
objected to the proposed requirement to
deliver account statements to customers
even when directed by customers, in
writing, to send the statements to third
parties. Some commenters believed that
members should not be required to
continue delivering account statements
to customers, particularly where there
was a power of attorney (‘‘POA’’) or
incapacity. FINRA withdrew the filing
to further consider the comments.11
To address the concerns raised in the
prior filing, FINRA published
Regulatory Notice 14–35 (September
2014) (‘‘Notice’’ or ‘‘Notice 14–35
Proposal’’), seeking comment on a
revised proposal to transfer then NASD
Rule 2340 and Incorporated NYSE Rule
409 and its related interpretations,
largely unchanged, into the
consolidated FINRA rulebook as Rule
2231. With respect to the proposed
supplementary material pertaining to
the transmission of customer account
statements to other persons or entities,
the Notice 14–35 Proposal set forth
changes to that provision that aligned
more closely with then NYSE Rule
409(b) and were intended to help ensure
that a customer continues to receive the
account statement even when such
customer directs the firm to send the
statement to a third party. As described
further below, the proposed rule change
differs in some respects from the terms
set forth in the Notice 14–35 Proposal as
to proposed Supplementary Material
.02. In all other respects, subject to some
technical changes, the proposed
amendments to Rule 2231 remain
substantively unchanged from the
Notice 14–35 Proposal.
Proposed Amendments to Rule 2231
In 2019, after the publication of the
Notice, FINRA adopted the remaining
legacy NASD rules as FINRA rules in
the consolidated FINRA rulebook and
the remaining Incorporated NYSE Rules
and Incorporated NYSE Rule
Interpretations in the consolidated
FINRA rulebook as a separate
Temporary Dual FINRA–NYSE Member
Rules Series.12 No substantive changes
to these rules were made in connection
with the move into the consolidated
FINRA rulebook. NASD Rule 2340 was
renumbered as Rule 2231 and
Incorporated NYSE Rule 409 and
Incorporated NYSE Rule Interpretation
10 17
CFR 240.10b–10. See also note 9, supra.
Securities Exchange Act Release No. 67588
(August 2, 2012), 77 FR 47470 (August 8, 2012)
(Notice of Withdrawal of File No. SR–FINRA–2009–
028).
12 See supra note 3.
11 See
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409 were renumbered as NYSE Rule
409T and NYSE Rule Interpretation
409T, respectively.
A. Paragraphs (a) Through (e) Under
Rule 2231 To Remain Substantively
Unchanged
In general, paragraph (a) (General)
under Rule 2231 addresses the
frequency of the delivery of customer
account statements, and the requirement
for account statements to include a
statement advising customers to report
to the firm (introducing firm and
clearing firm, if different) inaccuracies
in their accounts in writing. Paragraph
(b) (Delivery Versus Payment/Receive
Versus Payment (DVP/RVP) Accounts)
addresses account statement delivery
requirements for DVP/RVP
arrangements. Paragraph (c) (DPP and
Unlisted REIT Securities) requires,
among other things, general securities
members to include in customer
account statements a per share
estimated value for a direct
participation program (‘‘DPP’’) or real
estate investment trust (‘‘REIT’’) security
developed in a manner reasonably
designed to ensure that the per share
estimated value is reliable. In addition,
paragraph (c) provides two
methodologies for calculating the per
share estimated value for a DPP or REIT
security that is deemed to have been
developed in a manner reasonably
designed to ensure that it is reliable: the
net investment methodology and the
appraised value methodology.
Paragraph (d) (Definitions) sets forth
several definitions and finally,
paragraph (e) (Exemptions) permits
FINRA to exempt any member firm from
the rule upon a showing of good cause.
Consistent with the Notice 14–35
Proposal, FINRA is proposing to retain,
without substantive changes, the
existing requirements set forth in
paragraphs (a) through (e) under Rule
2231.
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B. Proposed Supplementary Materials to
Rule 2231
In an effort to harmonize the NYSE
provisions with Rule 2231, FINRA is
proposing to add new supplementary
materials relating to compliance with
Rule 4311, the transmission of customer
account statements to other persons or
entities, the use of electronic media, and
compliance with Rule 3150. In addition,
the proposed change would transfer,
with clarifying and technical changes,
the existing requirements in NYSE Rule
Interpretation 409T relating to the
information to be disclosed on
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statements,13 assets externally held and
included on statements solely as a
service to customers,14 the use of logos
and trademarks, etc.,15 and the use of
summary statements.16 As a result of
this harmonization, some provisions
would be new for FINRA members that
are not also members of the NYSE (or
‘‘non-NYSE members’’) and for dual
members. FINRA believes that
harmonizing the NYSE provisions into
Rule 2231 would provide greater clarity
and regulatory efficiency to all FINRA
member firms.
1. Compliance With Rule 4311 (Carrying
Agreements) (Proposed Supplementary
Material .01)
FINRA is proposing to add new
Supplementary Material .01 to Rule
2231 that would remind firms of their
obligations under Rule 4311, including
specifically the rights and obligations of
the carrying firm under Rule 4311(c)(2).
Rule 4311 generally governs the
requirements applicable to member
firms when entering into agreements for
the carrying of any customer accounts in
which securities transactions can be
effected. In general, Rule 4311(c)
requires that each carrying agreement in
which accounts are to be carried on a
fully disclosed basis must specify the
responsibilities of each party to the
agreement, setting forth the minimum
responsibilities that the agreement must
allocate. Among those responsibilities,
outlined in Rule 4311(c)(2), is to require
each carrying agreement in which
accounts are carried on a fully disclosed
basis to expressly allocate to the
carrying firm the responsibility for the
safeguarding of funds and securities for
the purposes of SEA Rule 15c3–3
(Customer protection—reserves and
custody of securities.) and for preparing
and transmitting statements of account
to customers.17 To emphasize the
importance of ensuring the accuracy
and integrity of customer account
statements, proposed Supplementary
Material .01 would remind firms of their
obligations under Rule 4311, including
paragraph (c)(2).
13 See NYSE Rule Interpretation 409T(a)/02
(Information to be Disclosed).
14 See NYSE Rule Interpretation 409T(a)/04
(Assets Externally Held and Included in Statements
Solely as a Service to Customers).
15 See NYSE Rule Interpretation 409T(a)/05 (Use
of Logos, Trademarks, etc.).
16 See NYSE Rule Interpretation 409T(a)/06 (Use
of Summary Statements).
17 17 CFR 240.15c3–3. Rule 4311(c)(2) also
provides that the carrying firm may authorize the
introducing firm to prepare and/or transmit
statements of account to customers on the carrying
firm’s behalf with the prior written approval of
FINRA.
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2. Transmission of Customer Account
Statements to Other Persons or Entities
(Proposed Supplementary Material .02)
Unlike NYSE Rule 409T, Rule 2231
does not address the transmission of
customer account statements to third
parties. To harmonize NYSE Rule 409T
with Rule 2231, FINRA is proposing to
add new Supplementary Material .02 to
Rule 2231 to address the transmission of
customer account statements to other
persons or entities in similar fashion as
NYSE Rule 409T. In general, NYSE Rule
409T(b) prohibits, without the NYSE’s
consent, the delivery of statements,
confirmations or other communications
to a nonmember customer: (1) In care of
a person holding POA over the
customer’s account unless either (A) the
customer has provided written
instructions to the member organization
to send such confirmations, statements
or communications in care of such
person, or (B) duplicate copies are sent
to the customer at some other address
designated in writing by the customer;
or (2) at the address of any member,
member organization, or in care of a
partner, stockholder who is actively
engaged in the member corporation’s
business or employee of any member
organization.18
In the Notice, FINRA had proposed
that, except as required to comply with
Rule 3210 (the successor rule to NASD
Rule 3050 and NYSE Rule 407), a
member may not address or send
account statements or other
communications relating to a customer’s
account to other persons or entities or
in care of a person holding POA over
the customer’s account unless (1) the
customer provided written instructions
to the firm to send such statements or
other communications to such person or
entity or in care of a person holding
POA over the customer’s account; and
(2) the firm sent duplicates of such
statements or other communications, in
accordance with Rule 2231, directly to
the customer either in paper format or
electronically as provided in proposed
Supplementary Material .03. FINRA
notes that unlike NYSE Rule 409T(b),
which provides a firm the option (using
the disjunctive ‘‘or’’) to continue
delivering account statements to the
customer that has an arrangement with
the firm to deliver account statements to
a third party, proposed Supplementary
Material .02 as described in the Notice
14–35 Proposal did not. Omitting this
18 NYSE Rule 409T(b) also provides that NYSE
may, upon written request, waive the requirements
therein. NYSE Rule 409T(b)(2) waivers are
addressed in NYSE Rule Interpretation 409T(b)/01
(Standards for Holding Mail for Foreign
Customers—Rule 409T(b)(2) Waivers), discussed
below.
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option limited a customer’s ability to
decline receiving statements.
Commenters to the Notice 14–35
Proposal expressed concerns with this
limitation, particularly where the
customer’s health or capacity was in
question. In consideration of comments
received to that proposal, FINRA is
proposing to adjust the proposed
supplementary material in several ways.
The term ‘‘or other communications’’
would be deleted from the proposed
rule text to clarify that proposed
Supplementary Material .02 would be
confined to only customer account
statements. The specific reference to ‘‘or
in care of a person holding power of
attorney over the customer’s account’’
would also be deleted from the
proposed rule text, leaving the general
reference to ‘‘other persons or entities’’
that could include any third party the
customer may designate to receive the
account statements.
In addition, while proposed
Supplementary Material .02 would
retain the continuous statement delivery
requirement to the customer as
described in the Notice 14–35 Proposal,
the proposed supplementary material
would be adjusted to create a limited
exception to the general requirement to
continue to deliver account statements
to a customer in cases where there is a
court-appointed fiduciary. Specifically,
proposed Supplementary Material .02(b)
would provide that where a court of
competent jurisdiction has appointed a
guardian, conservator, trustee, personal
representative or other person with legal
authority to act on behalf of a customer,
a member may cease sending account
statements to the customer upon written
instructions from such court-appointed
fiduciary provided that the courtappointed fiduciary furnishes to the
member an official copy of the court
appointment that establishes authority
over the customer’s account(s). As
adjusted, proposed Supplementary
Material .02(a) would state that, except
as provided for in proposed paragraph
(b) relating to the existence of a courtappointed fiduciary, a member may not
send account statements relating to a
customer’s account(s) to other persons
or entities unless: (1) The customer has
provided written instructions to the
member to send the statements to such
person or entity; and (2) the member
continues to send accounts statements
directly to the customer either in paper
format or electronically as provided in
Supplementary Material. 03 (Use of
Electronic Media to Satisfy Delivery
Obligations) of Rule 2231.
Finally, proposed Supplementary
Material .02(c) would maintain, in
similar fashion to the Notice 14–35
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Proposal, that notwithstanding
proposed Supplementary Material
.02(a), a member may provide duplicate
customer account statements under Rule
2070 (Transactions Involving FINRA
Employees), Rule 3210, or other similar
applicable federal securities laws, rules,
and regulations in accordance with the
requirements of such rule.19
FINRA believes that the proposed
supplementary material, as adjusted
herein, achieves the appropriate balance
between ensuring that customers
continue to receive their account
statements in accordance with Rule
2231(a) to retain the ability to readily
monitor their account activity while
recognizing that there are special
circumstances where a firm may stop
the delivery of account statements to
customers.
3. Use of Electronic Media To Satisfy
Delivery Obligations (Proposed
Supplementary Material .03)
FINRA is proposing to add new
Supplementary Material .03 to Rule
2231 that would expressly allow a
member firm to satisfy its delivery
obligations under the rule by using
electronic media, subject to compliance
with standards established by the SEC
on the use of electronic media for
delivery purposes.20 This provision
would be consistent with prior guidance
FINRA has issued on the use of
electronic media to satisfy delivery
obligations.21
4. Compliance With Rule 3150 (Holding
of Customer Mail) (Proposed
Supplementary Material .04)
In general, Rule 3150 allows a firm to
hold a customer’s mail for a specific
time period in accordance with the
customer’s written instructions if the
firm meets specified conditions. FINRA
is proposing to add new Supplementary
Material .04 to Rule 2231 that would
permit member firms to hold customer
mail, including customer account
statements, subject to the requirements
of Rule 3150.
19 See
supra note 8.
20 SEC guidance to date on the use of electronic
media generally requires the affirmative consent of
the investor or customer. See Securities Act Release
No. 7233 (October 6, 1995); 60 FR 53458 (October
13, 1995); Securities Act Release No. 7288 (May 9,
1996); 61 FR 24644 (May 15, 1996); and Securities
Act Release No. 7856 (April 28, 2000); 65 FR 25843,
25854 (May 4, 2000).
21 See Notice to Members 98–3 (January 1998)
(stating in part that members are permitted to
electronically transmit documents that they are
required or permitted to furnish to customers under
FINRA rules, provided they comply with all aspects
of the SEC’s electronic delivery requirements).
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5. Information To Be Disclosed on
Statement (Proposed Supplementary
Material .05)
NYSE Rule Interpretation 409T(a)/02
describes the information that must be
disclosed on the front of a customer
account statement: The identity of the
introducing and carrying organizations,
and their respective phone numbers for
service; that the carrying organization is
a member of Securities Investor
Protection Corporation (‘‘SIPC’’); and
the opening and closing account
balances. Note 1 to NYSE Rule
Interpretation 409T(a)/02 provides that
‘‘[t]he SEC has stated that under the
SEA Rule 15c3–1(a)(2)(iv), certain
carrying firms must issue customer
account statements, and the account
statements must contain the name and
telephone number of a person at the
carrying firm who the customer can
contact with inquiries regarding the
account (See SEA Release No. 34–
31511, dated November 24, 1992). The
phone number of the carrying
organization may appear on the back of
the statement. If it does, it must be in
‘bold’ or ‘highlighted’ letters.’’ Unlike
NYSE Rule Interpretation 409T(a)/02,
Rule 2231 does not detail the
information that must be clearly and
prominently disclosed on the front of an
account statement. FINRA is proposing
to transfer NYSE Rule Interpretation
409T(a)/02, inclusive of note 1, without
substantive changes, as Supplementary
Material .05 to Rule 2231. Proposed
Supplementary Material .05 to Rule
2231 would specify the following
information to be clearly and
prominently disclosed on the front of
the account statement: (1) The identity
of the introducing and clearing firm, if
different, and their respective contact
information for customer service,
permitting the identity of the clearing
firm and its contact information to
appear on the back of the statement
provided such information is in ‘‘bold’’
or ‘‘highlighted’’ letters; (2) that the
clearing firm is a member of SIPC; and
(3) the opening and closing balances for
the account.
6. Assets Externally Held (Proposed
Supplementary Material .06)
NYSE Rule Interpretation 409T(a)/04
provides that where the account
statement includes assets for which a
member organization does not have
fiduciary responsibility, does not have
access to and which are not included on
the member organization’s books and
records, such assets must be clearly
separated on the statement. In addition,
the statement must indicate that such
externally held assets are included on
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the statement solely as a service to the
customer and are not covered by SIPC,
and that information is derived from the
customer or other external source for
which the member organization is not
responsible.22 Rule 2231 does not
contain a similar provision.
FINRA is proposing to transfer the
requirements of NYSE Rule
Interpretation 409T(a)/04, without
substantive changes, as proposed
Supplementary Material .06 to Rule
2231. Under proposed Supplementary
Material .06, where the account
statement includes assets that the
member firm does not carry on behalf of
a customer and that are not included on
the member firm’s books and records,
such assets must be clearly and
distinguishably separated on the
statement. In addition, in such cases,
the statement must: (1) Clearly indicate
that such externally held assets are
included on the statement solely as a
courtesy to the customer; (2) disclose
that information, including valuation,
for such externally held assets is
derived from the customer or other
external source for which the member
firm is not responsible; and (3) identify
that such externally held assets may not
be covered by SIPC.
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7. Use of Logos, Trademarks, Etc.
(Proposed Supplementary Material .07)
NYSE Rule Interpretation 409T(a)/05
provides that where the logo, trademark
or other identification of a person (other
than the introducing firm or clearing
firm) appears on an account statement,
then the identity of such person and the
relationship to the introducing, carrying
or other organization included on the
statement must be provided and may
not be misleading or confusing to
customers. Rule 2231 does not contain
a similar provision. FINRA is proposing
to transfer, without substantive change,
NYSE Rule Interpretation 409T(a)/05 as
proposed Supplementary Material .07.
FINRA notes that proposed
Supplementary Material .07 would be
consistent with the general
requirements of Rule 2210
(Communications with the Public).
8. Use of Summary Statements
(Proposed Supplementary Material .08)
NYSE Rule Interpretation 409T(a)/06
addresses the responsibilities associated
with the practice of firms, with other
related financial institutions, to jointly
formulate and distribute to their
common customers their respective
22 See NYSE Information Memo 97–56 (December
1997) (stating, ‘‘[t]his provision is not intended to
cover assets (e.g., stocks or mutual funds) to which
the member organization has access that may be
held at a depository or mutual fund.’’).
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customer account statements, together
with ‘‘summary statements.’’ 23 In
general, a summary statement reflects
information from entities that is part of
a financial services ‘‘group’’ or ‘‘family’’
or where a firm carries accounts for
another broker-dealer that is part of
such group or family. A summary
statement provides an overview of the
customer’s accounts at the separate
entities and is supported by and derived
from the detail on the separate
underlying respective account
statements. NYSE Rule Interpretation
409T(a)/06 sets forth several
requirements for the use of summary
statements that include: (1) An
indication that such summary statement
is provided for informational purposes
and includes assets held at different
entities; (2) the summary statement
identifies each entity from which
information is provided or assets are
being held are included, their
relationship to each other, and their
respective functions (e.g., introducing or
carrying brokerage firms, fund
distributor, banking or insurance
product providers, etc.); (3) relative to
services provided for assets included on
the summary, the summary statement
must clearly distinguish between assets
held by each entity, identify the
customer’s account numbers at each
entity, and provide a customer service
telephone number at each entity (if the
account number and customer service
numbers are not included on the
underlying statements); and (4) identify
each entity that is a member of SIPC.
These requirements help ensure that
customer account statements clearly
identify the respective entities involved
and distinguish brokerage assets from
non-brokerage assets.24 Rule 2231 does
not have a counterpart provision.25 In
23 See generally NYSE Information Memo 97–56
(December 1997).
24 NYSE Rule Interpretation 409T(a)/06 also
provides that to the extent that the summary
statement aggregates the values of the various
accounts summarized or portions thereof, such
aggregation must be recognizable as having been
arithmetically derived from the separately stated
totals or their components. In addition, the
summary statement, and the beginning and end of
each underlying account statement, must be clearly
distinguishable from each other by using some
distinct form of demarcation (e.g., color, pagination
or columns). Further, there must be a written
agreement between the parties that are jointly
distributing the combined statements with the
summary, that each entity has developed
procedures and controls for testing the accuracy of
its own information included on the customer
statement. Finally, NYSE Rule Interpretation
409T(a)/06 requires that summary statements must
comply with NYSE Rule 409T and all
interpretations thereof.
25 While Rule 2231 does not have a counterpart
provision to NYSE Rule Interpretation 409T(a)/06,
FINRA has issued guidance reminding firms of their
responsibilities when providing customers with
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the Notice, FINRA had proposed
transferring the requirements of NYSE
Rule Interpretation 409T(a)/06, without
substantive changes, as proposed
Supplementary Material .08 to Rule
2231.
FINRA is proposing to retain this
approach, but with some clarifying
revisions to proposed Supplementary
Material .08 to expressly state that the
summary statement is for a customer’s
convenience and includes assets that
may not be held by the broker-dealer,
and does not replace any other
statement the customer may receive
from other financial institutions that
may hold the customer’s assets. Under
proposed Supplementary Material .08,
as revised, if a multi-entity summary
statement is sent to customers, it must:
(1) Indicate that the summary statement
is provided for the customer’s
convenience and includes assets that
may not be held by the broker-dealer; (2)
indicate that the summary statement
does not replace any other statement(s)
the customer may receive from other
financial institutions that hold the
customer’s assets; (3) identify each
entity from which information is
provided or assets being held are
included, their relationship to each
other (e.g., parent, subsidiary or
affiliated organization), and their
respective functions (introducing firm,
carrying firm, fund distributor, banking
or insurance product provider, etc.); (4)
clearly distinguish between assets held
or categories of assets held by each
entity included in the summary; (5)
identify the customer’s account number
at each entity and provide a customer
service contact information at each
entity (if the account number and
customer service information at each
entity are included on their respective
account statements, then such
information need not be included on the
summary statement); and (6) identify
each entity that is a member of SIPC.
Proposed Supplementary Material .08
would also require a member firm to
ensure that to the extent that the
summary statement aggregates the
values of the various accounts
summarized or portions thereof, such
consolidated financial account reports or
‘‘consolidated reports,’’ which offer a broad view of
customers’ investments, may include assets held
away from the firm, and may provide not only
account balances and valuations, but performance
data as well. In that guidance, FINRA noted that
these types of communications ‘‘may supplement,
but do not replace, the customer account statement
required pursuant to [Rule 2231] and [NYSE Rule
409T], which is prepared and disseminated to the
customer through a separate process. Consolidated
reports may not be represented as a substitute for,
and must be distinguished from, account statements
that are required by rule.’’ See Regulatory Notice
10–19 (April 2010).
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aggregation is recognizable as having
been arithmetically derived from the
separately stated totals or their
components. In addition, proposed
Supplementary Material .08 would
require that a member firm also must
distinguish the beginning and end of
each separate statement by a distinct
form of demarcation. Finally, the
proposed supplementary material
would require a member firm to ensure
that there is a written agreement
between the parties jointly formulating
or distributing the combined statements
with the summary attesting that each
entity has developed procedures and
controls for testing the accuracy of its
own information included on the
statements, and that the summary
statement complies with Rule 2231.
C. NYSE Provisions To Be Eliminated
and Not Harmonized With Rule 2231
FINRA is proposing to delete NYSE
Rule 409T and NYSE Rule
Interpretation 409T in their entirety on
the basis that the underlying concepts in
these provisions have been included in
Rule 2231, are duplicative of other
rules, or are outdated. The following
describes concepts found in the NYSE
provisions that would not be
incorporated into Rule 2231.
1. NYSE Rule 409T Provisions
a. Confirmations or Other
Communications (NYSE Rule 409T(b))
As described above, the proposed rule
change would confine proposed
Supplementary Material .02 to customer
account statements to lend clarity to the
scope of the provision. FINRA notes that
the delivery requirements of
confirmations are governed by SEA Rule
10b–10 (Confirmation of transactions)
and FINRA Rule 2232 (Customer
Confirmations).
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b. Person Holding Power of Attorney (or
Attorney-in-Fact) (NYSE Rule 409T(b)
and Paragraphs (1) Through (6) Under
NYSE Rule 409T.10 (Exceptions to Rule
409T(b))
In addition to eliminating NYSE Rule
409T(b), the proposed rule change
would eliminate NYSE Rule 409T.10(1)
through (6), which provides exceptions
to the requirements of NYSE Rule
409T(b) for certain identified persons or
entities, such as persons having powers
of attorney.26 As described above,
26 See NYSE Rule 409T.10(4): ‘‘Corporations of
which partners, stockholders or employees are
officers or directors, and corporation accounts over
which such persons have powers of attorney,
provided, in each such case, the partner,
stockholder or employee is duly authorized by the
corporation to receive communications covering the
account.’’
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FINRA is proposing to adopt proposed
Supplementary Material .02 relating to
the transmission of customer account
statements to other persons or entities,
which would provide an exception for
court-appointed fiduciaries.
c. Legend on Account Statements
Pertaining to Firm’s Financial
Statements (NYSE Rule 409T(e)(1))
In general, NYSE Rule 409T(e)(1)
requires the inclusion of a legend on all
account statements that notifies a
customer that the firm’s financial
statements are available for inspection
at its offices or a copy can be mailed
upon request. The proposed rule change
would eliminate this requirement in
light of existing requirements under
paragraph (c) (Customer Statements) of
SEA Rule 17a–5 (Reports to be Made by
Certain Brokers and Dealers),27 which
generally requires broker-dealers that
carry customer accounts to provide
statements of the broker-dealer’s
financial condition to their customers,
and FINRA Rule 2261 (Disclosure of
Financial Condition), which requires a
member to make information relative to
a member’s financial condition available
to inspection by customers, upon
request.
d. Duplicate Copies of Monthly
Statements to Guarantors (NYSE Rule
409T(g))
NYSE Rule 409T(g) provides that
member firms carrying margin accounts
for customers should send duplicate
copies of monthly statements of
guaranteed accounts to the respective
guarantors unless such guarantors have
specifically provided in writing that
they do not want such statements sent
to them. The proposed rule change
would eliminate NYSE Rule 409T(g)
because this provision, which provides
that members should send duplicate
account statements to guarantors, would
be addressed by the general requirement
in proposed Supplementary Material .02
to obtain written instructions from the
customer to send account statements to
a third party.
e. Holding Customer Mail (NYSE Rule
409T.10(7))
As noted above, the proposed rule
change would eliminate the concept of
holding customer mail set forth in
paragraph (7) under NYSE Rule
409T.10, as a member’s obligations with
respect to this activity are addressed in
Rule 3150, and proposed
Supplementary Material .04 would
expressly permit a member to hold
27 17
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customer mail consistent with Rule
3150.
2. NYSE Rule Interpretation 409T
a. Use of Third Party Agents (NYSE Rule
Interpretation 409T(a)/03)
In general, NYSE Rule Interpretation
409T(a)/03 requires a written
representation or undertaking from the
member organization to the NYSE,
representing that certain conditions are
satisfied when using third party agents
(e.g., service bureaus or other
independent entities) to prepare and
transmit customer account statements.28
The proposed rule change would
eliminate NYSE Rule Interpretation
409T(a)/03 because such arrangements
are addressed under Rule 4311 and
other relevant guidance.29
b. Standards for Holding Mail for
Foreign Customers—Rule 409T(b)(2)
Waivers (NYSE Rule Interpretation
409T(b)/01)
The proposed rule change would
eliminate NYSE Rule Interpretation
409T(b)/01, which provides guidelines
for holding confirmations, statements,
and broker-dealer financial statements
for foreign customers. A member’s
obligations with respect to holding
customer mail are addressed in Rule
3150, which is referenced in proposed
Supplementary Material .04.
D. Technical Changes to Other FINRA
Rules
The proposed harmonization of the
NYSE provisions with Rule 2231 would
require technical amendments to
Interpretative Material (‘‘IM’’)–1013–1
(Membership Waive-In Process for
Certain New York Stock Exchange
Member Organizations) and IM–1013–2
(Membership Waive-In Process for
Certain NYSE American LLC Member
Organizations), which describe a waivein membership application process for
some member organizations of the
28 Under NYSE Rule Interpretation 409T(a)/03, a
member organization must represent that the third
party is acting as agent for the member organization,
that the member organization retains responsibility
for compliance with NYSE Rule 409T(a), and that
the member organization has developed procedures
and controls for reviewing and testing the accuracy
of statements, and will retain copies of all such
statements in accordance with applicable books and
records requirements. In addition, NYSE Rule
Interpretation 409T(a)/03 addresses the allocation
of responsibilities for preparation and transmissions
of statements under a carrying agreement and
provides that an introducing organization that is a
provider of services included in a member
organization’s statements of accounts may not
function as a third party agent and may not itself
prepare or transmit such statements.
29 See Notice to Members 05–48 (July 2005)
(describing a member’s responsibilities when
outsourcing activities to third party service
providers).
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NYSE and NYSE American LLC. In
general, subject to specified terms set
forth in these interpretative materials, a
firm admitted to FINRA membership
through either of these provisions (i.e.,
‘‘waived-in firm’’) is not subject to the
remaining FINRA rules that have yet to
be harmonized with their corresponding
NYSE rules or interpretations under the
Temporary Dual FINRA–NYSE Member
Rule Series. Currently, these rules are
Rule 2231 and the NYSE provisions.
FINRA is proposing to amend IM–1013–
1 and IM–1013–2 to remove the
reference to Rule 2231 as all waived-in
firms will become subject to Rule 2231,
as amended herein.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice. The effective date will be no
later than 365 days following
publication of the Regulatory Notice
announcing Commission approval of the
proposed rule change.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,30 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed rule change will further the
purposes of the Act because the
proposed rule change will help protect
investors and the public interest by
largely retaining the existing
requirements under Rule 2231 that
promotes effective regulation of account
statements. FINRA believes that by
proposing several new supplementary
materials that provide clarity in areas
such as compliance with other FINRA
rules, the use of electronic delivery,
transmission of account statements to
other persons or entities, information to
be disclosed on statements, assets
externally held, the use of logos and
trademarks, and the use of summary
statements, the proposed rule change
will establish consistent industry
standards pertaining to the substance
and the presentation of customer
account statements.
In addition, FINRA believes proposed
Supplementary Material .02, as revised
in light of comments received in
response to the Notice, strikes an
appropriate balance to protect investors
by ensuring that customers continue to
receive their account statements while
30 15
U.S.C. 78o–3(b)(6).
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reducing the proposed rule change’s
impact on member firms. As discussed
previously, these revisions include: (1)
Confining the scope only to customer
account statements; (2) adding a limited
exception from the general requirement
to continue providing account
statements to customers who have
authorized third party delivery by
permitting member firms to cease
sending such statements to customers
upon written instructions from a courtappointed fiduciary acting on behalf of
the customer; and (3) clarifying that,
notwithstanding the general
requirement to obtain written
instructions from a customer to
establish third party delivery of account
statements, firms may provide duplicate
customer account statements under Rule
2070, Rule 3210 or other similar
applicable federal securities laws, rules
and regulations in accordance with the
requirements of such rules.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic
impact assessment, as set forth below, to
analyze the regulatory need for the
proposed rule change and its potential
economic impacts, including
anticipated costs and benefits, and the
alternatives FINRA considered in
assessing how to meet its regulatory
objectives.
1. Regulatory Need
Rule 2231 and the NYSE provisions
have remained substantively unchanged
since their adoption into the
consolidated FINRA rulebook. Having
two sets of rules with differing
application or scope may prevent firms
from consistently applying the rules and
thus create uncertainties in compliance
and lead to unnecessary costs. In an
effort to harmonize these rules, FINRA
is proposing to amend Rule 2231 to
incorporate guidance and several
provisions that exist under the NYSE
provisions and in other FINRA rules as
supplementary materials. Notably,
FINRA is proposing to adopt new
Supplementary Material .02, derived in
large part from NYSE Rule 409T(b), but
with some adjustments from the terms
set forth in the Notice that would
address a situation in which a customer
may want to transmit account
statements to other persons or entities,
and stop receiving statements due to
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particular circumstances. As a result of
the proposed harmonization, FINRA is
proposing to eliminate the NYSE
provisions in their entirety as they are,
to some degree, duplicative of Rule 2231
or would become obsolete by the
proposed rule change.
2. Economic Baseline
The current provisions governing
customer account statements under Rule
2231 and the NYSE provisions, and
other related rules and current industry
practices serve as an economic baseline
for the proposed rule change. While all
FINRA members are subject to Rule
2231, dual members are also subject to
several additional requirements existing
only in the NYSE provisions. As of
December 31, 2020, there are 3,435
FINRA members, of which 134 are dual
members.
3. Economic Impacts
The substantive changes to Rule 2231
described in this proposed rule change
relate to the supplementary materials,
most of which are derived from the
NYSE provisions and for that reason,
the economic impacts herein focus
primarily on the proposed
supplementary materials, particularly
proposed Supplementary Material .02.
Proposed Supplementary Material .02
In general, proposed Supplementary
Material .02 addresses a situation where
a customer instructs the firm, in writing,
to send his or her account statements to
another person or entity and limits the
customer’s ability to stop receiving
them, except where there is a courtappointed fiduciary.31 One issue some
commenters raised was the requirement
for firms to continue delivering account
statements to the customer even where
the customer directs the firm, in writing,
to send the customer’s account
statements to a third party, and does not
wish to continue receiving them due to
health concerns, among other reasons.
For example, SIFMA expressed the
belief that the requirement to continue
delivering account statements to the
customer may result in the fraud that
will likely arise from identity theft
where account statements are sent to a
customer against his or her request or
against the request of a person with the
legal authority to act on behalf of the
customer. SIFMA added that proposed
Supplementary Material .02 may have a
31 Proposed Supplementary Material .02 also
provides that members are not required to obtain
prior written consent to send customer account
statements in compliance with Rule 2070, Rule
3210, or other similar applicable federal securities
laws, rules, and regulations in accordance with the
requirements of such rule.
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material negative impact on the client
experience and serve to drive clients to
advocacy models without this
requirement.
FINRA believes that the customer’s
ability to stop receiving his or her own
account statements when there is a
court-appointed fiduciary strikes the
appropriate balance between the
investor protection functions of Rule
2231 to ensure that the customer is able
to monitor and verify the transactions
occurring in the customer’s account and
the concerns raised by some
commenters about ceasing the delivery
of account statements to a customer
under compelling circumstances.
FINRA recognizes that some customers
may incur supplemental costs to
conform to the continuous delivery
requirement in proposed
Supplementary Material .02. Customers
who do not wish to receive their
account statements may bear some
burden in controlling and destroying
them. Alternatively, customers may
incur costs associated with seeking the
exception through a court-appointed
fiduciary. Customers may incur the
direct cost of seeking a court-appointed
fiduciary as well as the indirect cost of
giving away other rights not associated
with account statements when a
fiduciary is appointed by the court. To
alleviate the potential compliance costs
associated with continuous statement
delivery to customers and the concern
over possible identity theft and fraud,
members could encourage, if
appropriate, their customers to choose
to receive their statements electronically
in a manner consistent with proposed
Supplementary Material .03, a further
discussion of which follows below.
In addition, firms may also incur costs
to conform to proposed Supplementary
Material .02 including the tracking and
retention of each customer’s written
instructions and official documents
related to the court appointment of a
fiduciary, and where statements are
delivered in paper format, the costs of
additional postage, printing, and other
attendant expenses.32 However, FINRA
understands that in practice, some firms
already provide continuous account
statement delivery to their customers
even with third party delivery
32 In the Notice, FINRA asked specific questions
concerning, among other things, the direct and
indirect costs that may result from proposed
Supplementary Material .02. See generally Notice,
Section C (Request for Comment). SIFMA
commented that a firm with approximately 7.4
million accounts provided a cost estimate of over
14 million dollars just for the postage and mailings
associated with the nearly 2.2 million accounts
potentially impacted by the prospective application
of proposed Supplementary Material .02, excluding
substantial staffing and technology costs.
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arrangements in place except in special
circumstances (e.g., validated medical
excuse), and that concerns related third
party delivery arrangements rarely arise.
Other Proposed Supplementary
Materials
Proposed Supplementary Materials
.01, .03, and .04, respectively, would
remind firms of existing requirements
under Rule 4311, SEC guidance on
using electronic media to satisfy
delivery obligations, and Rule 3150. The
NYSE provisions that FINRA is
proposing to incorporate into Rule 2231
as Supplementary Materials .05, .06, .07,
and .08 would address, respectively, the
information to be disclosed on
statements, externally held assets, the
use of logos and trademarks, etc., and
the use of summary statements. FINRA
does not expect these proposed
harmonizing amendments to Rule 2231
to impose material burdens on member
firms as these proposed supplementary
materials are substantially similar to
existing rules or otherwise consistent
with current guidance.
4. Alternatives Considered
FINRA considered various
suggestions in developing the proposed
rule change. The proposed rule change
reflects the changes that FINRA believes
at this time to be the most appropriate
for the reasons discussed herein.
a. Frequency of Delivery of Account
Statements to Customer
In the Initial Rule Filing and
Amended Rule Filing, FINRA had
considered amending then NASD Rule
2340 to change the frequency of the
delivery of account statements to
customers from quarterly to monthly.
The comments FINRA received in
response to these prior filings suggested
that such a proposed change would
result in significant compliance costs for
the industry without commensurate
benefits for customers, and could create
conflicts with some securities laws and
regulations, among other things. Based
on these comments, FINRA has
determined to retain the quarterly
delivery requirement for customer
accounts statements currently set forth
in Rule 2231(a).33
b. Definition of ‘‘General Securities
Member’’
Currently, under Rule 2231(d)(2) a
‘‘general securities member’’ refers to
‘‘any member that conducts a general
securities business and is required to
calculate its net capital pursuant to the
33 The account delivery frequency aligns with
NYSE Rule 409T(a).
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provisions of SEA Rule 15c3–1(a).
Notwithstanding the foregoing
definition, a member that does not carry
customer accounts and does not hold
customer funds or securities is exempt
from the provisions of this section.’’ 34
In the Notice, FINRA specifically
requested comment on potential
clarifications to the definition of
‘‘general securities member.’’ 35 At this
time, FINRA is not proposing to amend
Rule 2231(d)(2).
c. Exception From the General
Requirement To Send Account
Statements to Customers
Proposed Supplementary Material .02
as presented in the Notice did not
contemplate an exception from the
firm’s general requirement to continue
sending account statements to
customers. In the Notice, FINRA
specifically requested comment on
whether the proposal should include
specific exclusions that would allow
members not to send account statements
to customers under identified situations.
FINRA also specifically sought
comment on current industry practices,
safeguards, or best practices with
respect to sending account statements to
a customer who is disabled or
incapacitated, resides in a nursing
home, has a trusted person to review
statements, or where there is a valid
POA or guardianship established.
In consideration of the comments to
the Notice, FINRA has modified
proposed Supplementary Material .02
from the terms outlined in the Notice. In
addition to limiting the scope of the
proposed supplementary material to
only customer account statements and
omitting the specific reference to POA,
the proposed provision would create a
limited exception from the general
requirement for firms to continue to
deliver account statements to a
customer in cases where there is a courtappointed fiduciary acting on behalf of
the customer. The other aspects of the
proposed supplementary material
would remain substantively unchanged
from the terms set forth in the Notice,
including the option to send account
statements to the customer either in
paper format or electronically as
provided in proposed Supplementary
Material. 03.
FINRA notes that members could
request customers that provide written
instructions to the member to send
account statements to other persons or
entities to authorize the member to
34 The NYSE provisions do not have a
corresponding definition.
35 FINRA did not receive comments in this area,
but FAF noted that registered investment advisors
(‘‘RIAs’’) do not fall under the definition.
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satisfy the requirement to continue
delivering statements to the customer
through electronic delivery consistent
with proposed Supplementary Material
.03. In this manner, FINRA believes that
member firms could both mitigate the
concerns relating to the costs of postage,
printing and mailing account
statements, and address concerns
relating to possible identity theft and
fraud in circumstances where account
statements are sent. With respect to the
general requirement for firms to
continue to deliver account statements
to the customer even when the customer
has directed the firm, in writing, to send
account statements to other persons or
entities, FINRA understands that even
where there is a third party delivery
arrangement in place, in general, firms
continue to send account statements to
their customers except under
extenuating circumstances (e.g.,
validated medical excuse). This
industry practice accords with Rule
2231(a), which reflects the core
principle that customers should be fully
informed of the status of their accounts.
FINRA believes that proposed
Supplementary Material .02, as
modified, lends the appropriate balance
between ensuring that customers
continue to receive their account
statements in accordance with Rule
2231(a) to ensure that they have the
ability to monitor their account activity
while recognizing that there may be
special circumstances where a firm may
stop the delivery of account statements
to customers.
meaningful changes in response to
comments on the Initial Rule Filing.38
However, as discussed below,
commenters to the Notice 14–35
Proposal objected to limiting a
customer’s ability to decline receiving
statements, particularly where the
customer’s health or capacity was in
question. In addition, the commenters
raised concerns regarding existing
customer account relationships with
third party delivery arrangements in
place. FINRA considered the
commenters’ concerns, including the
attendant operational aspects of sending
account statements to customers and
third parties. The comments and
FINRA’s responses are set forth below.
1. General (Rule 2231(a))
A. Quarterly Customer Account
Statement Delivery Requirement
Currently, Rule 2231(a) generally
requires a general securities member to
send account statements to customers at
least once each calendar quarter
containing a description of any
securities positions, money balances or
account activity in the accounts since
the prior account statements were sent,
except if carried on a DVP/RVP basis.
NYSE Rule 409T(a) similarly establishes
a quarterly account statement delivery
requirement.
Several commenters expressed
support for retaining the delivery
frequency in the current rule, noting
that the quarterly delivery requirement
is consistent with industry practices.39
NASAA, however, urged FINRA to
revert to the monthly delivery frequency
C. Self-Regulatory Organization’s
as originally proposed in the prior rule
Statement on Comments on the
filings, stating that monthly delivery
Proposed Rule Change Received From
would allow customers to better
Members, Participants, or Others
monitor their accounts and identify any
The proposed rule change was
potential unauthorized fraudulent
published for comment in the Notice
activity. PIRC recommended that
14–35 Proposal. FINRA received 14
customers should have the option of
comment letters in response to the
receiving quarterly or monthly
Notice 14–35 Proposal. A copy of the
statements based on their own
Notice 14–35 Proposal is available on
individual needs, and also
FINRA’s website at https://
recommended that customers be
www.finra.org. A list of the comment
provided with the option to receive
letters received in response to the Notice account statements electronically and to
14–35 Proposal is available on FINRA’s
make available to customers a status of
website.36 Copies of the comment letters their accounts via telephone or online at
received in response to the Notice 14–
the customer’s request.
35 Proposal are also available on
FINRA notes that nothing in the rule,
FINRA’s website.
in its current form, precludes a firm
Several commenters expressed
from sending account statements to a
general support for the purpose and
customer on a more frequent schedule
intent of the Notice 14–35 Proposal.37 In
in a particular medium to meet the
addition, several commenters noted that
needs of the customer. Consistent with
the proposed rule change includes
the Notice 14–35 Proposal, FINRA is
proposing to retain the existing
36 See SR–FINRA–2021–024 (Form 19b–4, Exhibit
2e) for a list of abbreviations assigned to
commenters (available on FINRA’s website at
https://www.finra.org).
37 See GSU, PIRC, SIFMA, WFA, and Wulff.
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38 See Edward Jones, FSI, PIRC, SIFMA, WFA,
and Wulff.
39 See Edward Jones, FSI, SIFMA, and WFA.
PO 00000
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requirement in Rule 2231(a) for
members to send customer account
statements at least once each quarter.
B. Securities Investor Protection Act
(‘‘SIPA’’) Disclosure Requirement
Rule 2231(a) requires a general
securities member to include in the
account statement a statement advising
a customer to report promptly any
inaccuracy or discrepancy in that
person’s account to the member firm,
and that any oral communication to the
member firm should be reconfirmed in
writing to further protect the customer’s
rights, including rights under SIPA.
NYSE Rule 409T(e)(2) similarly requires
a member organization to include a
legend in the account statement with
the same advice.
PIRC expressed concerns with the
SIPA disclosure requirement in Rule
2231(a). PIRC stated that it has
encountered firms that have used the
disclosure as a defense to claims in
arbitration, suggesting that the
disclosure only appears to be intended
to protect investors. PIRC recommended
that FINRA amend this portion of the
rule to ensure that such disclosure
cannot be used against a customer in a
dispute.
In 2001, the then U.S. General
Accounting Office, now known as the
Government Accountability Office
(‘‘GAO’’), issued a report in which it
made recommendations to the SEC and
SIPC about ways to improve the
information available to the public
about SIPC and SIPA.40 Among other
things, the GAO recommended that selfregulatory organizations, such as
FINRA, consider requiring firms to
include information on periodic
statements or trade confirmations to
advise investors that they should
document account discrepancies in
writing. In response to that
recommendation, Rule 2231(a) was
amended in 2006 to require that account
statements include a statement advising
each customer to report promptly any
inaccuracy or discrepancy in that
person’s account to his or her brokerage
firm and clearing firm (where these are
different firms), and such statement also
must advise the customer that any oral
communication should be re-confirmed
in writing to further protect the
customer’s rights, including rights
under SIPA.41 Written documentation is
40 See Securities Investor Protection: Steps
Needed to Better Disclose SIPC Policies to
Investors, GAO–01–653 (May 25, 2001), https://
www.gao.gov/products/gao-01-653.
41 See Securities Exchange Act Release No. 54411
(September 7, 2006), 71 FR 54105 (September 13,
2006) (Order Approving File No. SR–NASD–2004–
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important because in the event a firm
goes into SIPC liquidation, SIPC and the
trustee generally will assume that the
firm’s records are accurate unless the
customer is able to prove otherwise.42
As FINRA noted in the 2006 rule filing
to amend Rule 2231(a), the disclosure
requirement does not impose any
limitation whatsoever 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.43 Further, a customer’s
failure to promptly raise such concerns,
either in writing or orally, does 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.44
FINRA believes that the provision
continues to enhance customer
protection in accordance with GAO’s
recommendation and has determined to
maintain Rule 2231(a) pertaining to
SIPA disclosure in its current form.
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2. DVP/RVP Accounts (Rule 2231(b))
Currently, Rule 2231(b) and NYSE
Rule 409T(a) provide that quarterly
account statements do not need to be
sent to a customer if the customer’s
account is carried solely for execution
on a DVP/RVP basis, subject to specified
conditions.45
Auerbach recommended that Rule
2231 provide an exemption from the
requirement to issue periodic account
statements in the case of DVP/RVP
customers of a member firm that use a
171), as corrected by Securities Exchange Act
Release No. 54411A (October 6, 2006), 71 FR 61115
(October 17, 2006). See also Notice to Members 06–
72 (December 2006).
42 See supra note 41. 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, How SIPC Protects You:
Understanding the Securities Investor Protection
Corporation (2015), https://www.sipc.org/media/
brochures/HowSIPCProtectsYou-English-Web.pdf.
More recently, FINRA, NASAA, and SIPC jointly
issued an investor alert discussing the importance
of regularly reviewing brokerage account
statements, and the steps a customer should take to
document concerns with an error on a brokerage
statement or trade confirmation. See FINRA
Investor Alert, It Pays to Pay Attention to Your
Brokerage Account Statements (December 18, 2019),
https://www.finra.org/investors/alerts/payattention-brokerage-account-statements. See also
NASAA Investor Advisory, It Pays to Pay Attention
to Your Brokerage Account Statements’’ (December
2019), https://www.nasaa.org/53392/53392/
?qoid=investor-advisories and SIPC News Release, It
Pays to Pay Attention to Your Brokerage Account
Statements, https://www.sipc.org/news-and-media/
news-releases/20191218).
43 See supra note 42.
44 See supra note 42.
45 These rules do not qualify or condition the
obligations of members under SEA Rule 15c3–
3(j)(1) concerning quarterly notices of free credit
balances on statements.
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third party custodian selected by the
customer that is required to issue
periodic account statements to the
customer. Auerbach stated that in such
cases, periodically issued brokerage firm
account statements are duplicative,
unnecessary and increase costs for the
broker, the customer, and the third party
custodian, and such accounts
statements will compel the customer
and its custodian to reconcile their
records with the statement from the
broker and require all three parties to
expend additional time, energy, and
cost on a matter that is already handled
through the normal clearance and
settlement process. SIFMA requested
confirmation that members may treat an
institutional customer trading pursuant
to discretionary authority in the DVP/
RVP account or the authorized person or
institution that opened the account as
the ‘‘customer’’ for these purposes and
collect and maintain the consents from
such institutions, instead of the
underlying customers.
FINRA believes that the issues raised
by the commenters are better addressed
through FINRA’s interpretative
guidance process so that FINRA has the
opportunity to fully consider the
relevant facts and circumstances. In
addition, FINRA emphasizes that the
rule in its current form allows a DVP/
RVP customer to affirmatively elect not
to receive account statements. By
requiring the customer’s affirmative
consent, the customer’s ability to
receive quarterly statements is
preserved, and the member is precluded
from unilaterally terminating delivery of
customer statements. Moreover, the
customer is able to promptly receive
particular account statements upon
request, and promptly reinstate the
delivery of account statements upon
request.46
3. Definitions (Rule 2231(d))
Rule 2231(d)(2) provides that a
‘‘‘general securities member’ refers to
any member that conducts a general
securities business and is required to
calculate its net capital pursuant to the
provisions of SEA Rule 15c3–1(a).
Notwithstanding the foregoing
definition, a member that does not carry
customer accounts and does not hold
customer funds or securities is exempt
from the provisions of [Rule 2231].’’
FAF noted that RIAs need to have
access to customer information in order
to perform their duties to their
customers or clients. FAF expressed
concern that RIAs are not covered by the
definition of ‘‘general securities
member’’ in Rule 2231(d) and
46 See
PO 00000
Notice to Members 06–68 (November 2006).
Frm 00084
Fmt 4703
Sfmt 4703
consequently, RIAs would not be
entitled to receive customer or client
information.
The term ‘‘general securities member’’
identifies which FINRA member firms
are required to deliver account
statements, not which firms are entitled
to receive such statements. Moreover,
FINRA notes that nothing in proposed
Supplementary Material .02 would
preclude a customer from providing
written consent to his or her member
firm to send account statements to an
RIA, subject to the conditions set forth
in the proposed rule.47
4. Compliance With Rule 4311 (Carrying
Agreements) (Proposed Supplementary
Material .01)
Proposed Supplementary Material .01
to Rule 2231 would remind firms that
Rule 4311(c)(2) generally requires each
carrying agreement, in which accounts
are carried on a fully disclosed basis, to
expressly allocate to the carrying firm
the responsibility for the safeguarding of
funds and securities for the purposes of
SEA Rule 15c3–3 and for preparing and
transmitting statements of account to
customers.48 Rule 4311(c)(2) provides
that the carrying firm may authorize the
introducing firm to prepare and transmit
such statements on the carrying firm’s
behalf with the prior written approval of
FINRA.
SIFMA requested clarification from
FINRA regarding the obligation to
obtain written authorization from a
customer regarding the mailing of
statements to a third party, and the
ability of a clearing firm to rely on
introducing brokers in asserting the
authenticity of a written approval.
SIFMA stated that introducing firms are
in the best position to know the
customer and, as long recognized
through contract and in practice, and as
permitted under Rule 4311, introducing
firms are typically allocated the
responsibility for opening accounts as
well as maintaining and updating
customer addresses, which ultimately
drives the delivery of account
statements.
FINRA agrees that consistent with
guidance on the allocation of
responsibilities between carrying firms
and introducing firms and as permitted
under Rule 4311, clearing firms may
reasonably rely on introducing firms
with respect to updating and keeping
track of required consents and addresses
for third parties that may receive
account statements under this rule.
47 RIAs also should consider their obligations
under the Investment Advisors Act of 1940,
including Rule 206(4)–2 (Custody of Funds or
Securities of Clients by Investment Advisors).
48 See Regulatory Notice 11–26 (May 2011).
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However, both carrying firms and
introducing firms must have policies
and procedures in place to ensure that
their respective responsibilities are
met.49
5. Transmission of Customer Account
Statements to Other Persons or Entities
(Proposed Supplementary Material .02)
Many commenters, while supportive
of the Notice 14–35 Proposal overall,
expressed views on proposed
Supplementary Material .02.50 NAELA
expressed doubt that the proposed
provision would protect vulnerable
persons (e.g., persons with disabilities
or who are incapacitated) in any
meaningful way. The views of many
other commenters generally related to
the scope of the proposed provision,
customer instructions to establish
delivery of the customer’s account
statements to a third party, the
circumstances that may warrant an
exception to the general requirement for
a firm to continue delivering account
statements to the customer even where
there is a third party delivery
arrangement in place, operational
concerns, and implementation.
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A. Scope
In the Notice 14–35 Proposal,
proposed Supplementary Material .02
pertained to account statements ‘‘or
other communications’’ relating to the
customer’s account. Commenters
expressed concerns and sought
clarification relating to the scope of the
proposed provision.
SIFMA raised concerns with the
inclusion of ‘‘other communications,’’
stating that the proposed supplementary
material could include a host of
operational communications with third
parties (e.g., custodians, issue and
transfer agents, counterparties to trades,
banks in connection with disbursements
and deposits and a member firm’s own
vendors) where firms need to send
‘‘communications’’ about a customer’s
account in order to provide a service
requested for the customer. SIFMA
requested clarity regarding the scope of
‘‘other communications’’ in the context
of the proposed rule. FINRA agrees with
the concerns raised by SIFMA in this
regard and for clarity, has adjusted the
language by deleting the references to
‘‘or other communications’’ from
49 See Regulatory Notice 09–64 (November 2009)
(stating that while firms may allocate responsibility
for complying with particular requirements
between the clearing and the introducing firms,
both firms must have policies and procedures in
place to ensure that their respective responsibilities
are met).
50 See Edward Jones, FAF, Feaver, FSI, GSU,
Malecki, NAELA, NASAA, PIRC, SIFMA, WFA, and
Wulff.
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proposed Supplementary Material .02 so
that the scope of the propose provision
is limited solely to customer account
statements.
SIFMA also sought clarification
pertaining to the implications of
Supplementary Material .02 on a firm’s
existing obligations under SEA Rule
17a–3(a)(17)(B)(2) and FINRA Rule
3110(c)(2) to confirm a customer’s
address change. FINRA notes that
proposed Supplementary Material .02 is
not intended to impose additional
requirements that would impact a firm’s
current obligations to validate a change
in address for a customer under the
applicable SEA and FINRA rules.
B. Customer Instructions To Deliver
Account Statements to Third Party
Proposed Supplementary Material .02
provides that in general, a member may
not send account statements relating to
a customer’s account to other persons or
entities unless the customer has
provided written instructions to the
member to send such statements to a
designated third party. However, in
order to comply with Rule 2070, Rule
3210 or other similar applicable federal
securities laws, rules and regulations,
proposed Supplementary Material .02
would provide that a firm is not
required to obtain written instructions
from the customer to meet the
requirements of such applicable rules or
regulations.
Several commenters expressed views
on the general requirement for firms to
obtain written instructions from
customers.51 PIRC expressed its support
for the general requirement. NAELA
noted that persons with disabilities or
who are incapacitated are unlikely able
to send written direction to their
financial institution to send account
statements to a third party. Two
commenters questioned the need for
written instructions, suggesting that oral
instructions should suffice.52 Other
commenters recommended imposing
additional methods to validate customer
instructions and the nature of the
relationship between the customer and
third party.53
a. Oral Instructions
Two commenters recommended that
oral consent of the customer, combined
with prominent disclosure on the
customer’s account statements,
identifying the third party or interested
party that is also receiving statements or
other appropriate documentation of
such instruction, would lend more
Edward Jones, FAF, NASAA, and SIFMA.
Edward Jones and SIFMA.
53 See Malecki and NASAA.
flexibility to firms and customers to
establish third party delivery of account
statements.54 Edward Jones explained
that there was a regulatory distinction
between adding a third party to an
account to receive account statements
and directing all account statements to
a third party instead of to the customer,
noting that when a third party is being
added to an account, a more effective
approach would be to require the oral
consent of the customer. SIFMA added
that oral instructions would prevent the
operational challenge of obtaining
written consent in instances where
written consent is impracticable. These
commenters stated that oral consent and
disclosure would be consistent with
current industry practice.
FINRA notes that similar views were
expressed by commenters to the prior
rule filing,55 and FINRA continues to
maintain the view that instructions from
customers with respect to the delivery
of account statements should be in
writing to ensure proper consent is
received and can be evidenced. FINRA
believes that oral instructions are
insufficient in this context due to
several concerns such as identify theft
and privacy concerns, among others,
and that firms must be able to document
and record a customer’s consent to send
account statements to a third party.
FINRA has permitted firms to act on
oral instructions from customers in
other circumstances (e.g., trading
instructions) largely to allow customer
and firms to act expeditiously to execute
securities transactions that are time
sensitive in nature. However, the
delivery of customer account statements
to a third party presents no such
concerns and therefore must require
written customer consent for this
delivery arrangement.
b. Written Instructions From Third Party
or Account Holder of Joint Account
Two commenters raised practical
concerns with procuring written
instructions from customers.56 FAF
noted that some third parties such as
RIAs or retirement custodians have a
need to receive customer account
statements in order to perform their
duties for customers, and these third
parties that commonly receive customer
account statements may have their own
paperwork or form that a customer
completes to authorize a designated
third party to receive account
statements. FAF recommended
adjusting the language in the proposed
supplementary material to permit a firm
51 See
54 See
52 See
55 See
PO 00000
Frm 00085
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Sfmt 4703
55651
Edward Jones and SIFMA.
supra note 6.
56 See FAF and SIFMA.
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to treat a customer’s completion of the
third party’s own paperwork or form as
the written instructions from the
customer, suggesting that this
adjustment would represent a more
practical approach to the process by
permitting a firm to accept written
instructions to authorize the
transmission of account statements to a
third party directly from such third
party rather than from the customer
directly. In the alternative, FAF
recommended allowing firms to send
account statements to third parties
without customer consent ‘‘by simply
relying on the nature of the third
party[,]’’ reasoning that third parties
such as RIAs or custodians of individual
retirement accounts ‘‘have a need to
receive a duplicate statement of the
client for the client’s benefit.’’ FINRA
believes that FAF’s recommendation
does not assure the goal of limiting
provision of customer account
information to situations where the
customer affirmatively instructed or
consented to delivery of account
statements to third parties. Moreover,
FINRA believes that proposed
Supplementary Material .02 in its
current form would not preclude a
customer from using a thirty party’s
form or other template to help a
customer convey the written
instructions directly to the firm to
establish the delivery account
statements to a third party such as an
RIA or other custodian of customer
assets.
With respect to accounts that have
more than one owner, SIFMA noted that
there could be significant operational
challenges in requiring all joint account
holders to consent to a third party
delivery arrangement requested by one
of the account holders. SIFMA
expressed the belief that in such cases,
a firm should be able to accept
instructions from one accountholder to
send statements to a third party,
provided the accountholder making the
request would not be seeking to
suppress the delivery of customer
account statements to the other joint
accountholder(s) in accordance with the
rule. FINRA believes that the proposed
provision would contemplate the
situation SIFMA described to require a
customer, irrespective of the type of
account—joint or individual—to
provide written instructions to the firm
to send account statements to a third
party without affecting the delivery of
account statements to the other joint
accountholders.
c. Validation of Customer Instructions
Proposed Supplementary Material .02
does not specify the manner in which
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firms must validate a customer’s written
instructions or the nature of the
relationship between the customer and
third party receiving the account
statements. Two commenters
recommended ways to verify a
customer’s instructions and the nature
of the customer’s relationship to the
third party.57
NASAA recommended rigorous
verification of a customer’s instructions
by requiring a firm to obtain a medallion
signature guarantee or notarization to
help ensure that a customer in fact
wishes to have the account statements
delivered to a third party. NASAA also
recommend requiring the firm to
provide the customer with notices,
delivered on the same frequency as
account statements, indicating that the
account statements have been delivered
to the third party pursuant to the
customer’s instructions, and directing
the customer to contact the firm to
inform the firm if he or she no longer
desires to have the account statements
delivered to the designated third party.
Feaver seemed to express support for a
customer’s ability to send account
statements to a third party, but also
seemed to suggest that some verification
or confirmation practices as to the
identity of the third party be imposed.
Malecki expressed its support for the
ability for a customer to elect to have
account statement delivered to a third
party, noting that the ability for a family
member, tax professional, estate lawyer
or trusted friend to be able to obtain
copies of statements may be important
to quickly identify and prevent fraud.
However, Malecki suggested that the
proposed provision go further and
require a firm to identify the
relationship between the customer and
the third party receiving the account
statements in order to clearly delineate
the roles of the respective parties, noting
that a firm should clearly understand
the third party’s relationship to the
customer.
FINRA believes that a firm’s
obligation to conduct the requisite
validation pertaining to servicing a
customer’s account are addressed under
Rule 2090 (Know Your Customer). Rule
2090 requires a firm to use reasonable
diligence in regard to the opening and
maintenance of every account, to know
the essential facts concerning every
customer and concerning the authority
of each person acting on behalf of such
customer. The ‘‘essential facts’’ to
‘‘knowing the customer’’ include,
among other things, those facts required
to act in accordance with any special
handling instructions for the account
and understand the authority of each
person acting on behalf of the customer.
Thus, under Rule 2090, member firms
are generally required to know the
names of any persons authorized to act
on behalf of a customer and any limits
on their authority that the customer
establishes and communicates to the
member firm.
d. Exception to the Requirement To
Obtain Instructions From Customer
As noted above, proposed
Supplementary Material .02 would
clarify that notwithstanding the general
requirement for a firm to obtain written
instructions from the customer to
transmit accounts statements to a third
party, a firm may provide such
statements under Rule 2070, Rule 3210,
or other similar applicable federal
securities laws, rules and regulations in
accordance with the requirements of
such rules or regulations.
SIFMA expressed its appreciation for
this clarification, but stated that the
exception should be broadened to
permit firms to send customer account
statements to an employer that is a
registered investment company or RIA,
both of which are also required to obtain
this information about their associated
person’s personal securities dealings
under Rule 17j–1 under the Investment
Company Act of 1940 58 and the
provisions of an investment advisor’s
code of ethics as required by Rule
204A–1 under the Investment Advisors
Act of 1940,59 respectively. In response
to this comment, FINRA has adjusted
the language in proposed
Supplementary Material .02 to refer, in
general terms, to other similar
applicable federal securities laws, rules
and regulations in accordance with the
requirements of such rule.
C. The Requirement To Continue
Delivery of Account Statements to
Customer Even With Third Party
Delivery Arrangement in Place
Consistent with the Notice 14–35
Proposal, the proposed rule change
would limit a customer’s ability to
decline receiving account statements by
requiring a firm to continue sending
account statements to the customer even
where the customer directs the firm, in
writing, to send the customer’s account
statements to a third party. This general
requirement is intended to serve
investor protection functions by
ensuring that the customer is able to
monitor and verify the transactions
occurring in the customer’s account.
The proposed provision accords with
58 17
57 See
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the Commission’s policy view in the
context of the delivery of transaction
confirmations to a third party (e.g., a
fiduciary); that is, where a customer has
duly waived receipt of confirmations,
the customer may not waive the receipt
of periodic account statements.60
With the exception of GSU favoring
the continuous statement delivery
requirement, several other commenters
expressed concerns with it, asserting, in
general, that the proposed provision
would undermine a customer’s express
wishes to decline receiving account
statements and would not further
customer protections by increasing the
risk for fraudulent activity, particularly
for investors who are elderly, disabled
or incapacitated, or who rely on a
caregiver in an assisted living facility or
at home.61 SIFMA offered several
suggestions for FINRA to consider,
including to delete the proposed general
continuous delivery requirement or in
the alternative, follow the existing
approach under NYSE Rule 409T(b).
Other suggestions included creating
exceptions to the general delivery
requirement under specified
circumstances (e.g., incapacitation) 62 or
permitting a customer to opt-out of
receiving statements.63 The comments
to proposed Supplementary Material .02
as presented in the Notice 14–35
Proposal are set forth below.
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a. The Existing Approach Set Forth
Under NYSE Rule 409T(b)
As described above, NYSE Rule
409T(b) currently allows a customer to
60 In adopting amendments to SEA Rule 10b–10
in 1994, the Commission acknowledged that a
customer may waive the personal receipt of an
immediate confirmation in the context of where a
fiduciary has discretion over the customer’s account
under the following conditions: ‘‘the broker-dealer
must (1) obtain from the customer a written
agreement that the fiduciary receive the immediate
confirmation; and (2) send to the customer a
periodic report, not less frequently than quarterly,
containing the same information that would have
been contained in an immediate confirmation.
[Citation omitted]. The customer may not waive this
periodic report. [Citation omitted].’’ See Securities
Exchange Act Release No. 34962 (November 10,
1994), 59 FR 59612, 59614 (November 17, 1994)
(‘‘SEA Rule 10b–10 Release’’). As indicated in the
Amended Rule Filing, FINRA reiterates the
reminder to members that they remain subject to
any conditions or requirements specified in any
release, interpretation, ‘‘no-action’’ position or
exemption issued by the SEC or its staff in the
context of SEA Rule 10b–10 that members may rely
on for relief from certain delivery obligations of
trade confirmations as specified in such rule (e.g.,
the manner and frequency of delivering periodic
account statements in lieu of immediate trade
confirmations) and Rule 2231, as proposed herein,
is not intended to alter any such conditions or
requirements.
61 See Edward Jones, FSI, NAELA, NASAA,
SIFMA, WFA, and Wulff.
62 See SIFMA and Wulff.
63 See PIRC.
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instruct a firm to direct account
statements, confirmations or other
communications to a third party holding
a POA over the account where the
customer either provided the firm
written instructions or the firm
continued to send the customer
duplicate copies of the statements,
confirmations or other communications.
Thus, under NYSE Rule 409T(b), a
customer who has declined or waived
the receipt of account statements may
then effectively forego the opportunity
to directly monitor account activities.
SIFMA noted that in the SEA Rule
10b–10 Release, the Commission did not
invalidate NYSE Rule 409T(b).
However, when discussing the
application of the Commission’s policy
and its relationship with NYSE Rule
409T, the Commission suggested that
NYSE Rule 409T was less restrictive
than the Commission’s policy view by
noting that under NYSE Rule 409T, a
customer ‘‘who waived receipt of the
immediate confirmation would receive
more information with his quarterly
account statement than that currently
required under NYSE Rule [409T]. To
the extent the rule of the NYSE, or any
self-regulatory organization, conflict
with the Commission’s stated policy,
the more restrictive requirement would
govern. Thus, an NYSE member wishing
to take advantage of a waiver would be
required to adhere to these Commission
requirements in addition to any
obligations imposed by Rule [409T]’’ 64
SIFMA observed that proposed
Supplementary Material .02 would be
more restrictive than NYSE Rule
409T(b), particularly as applied to the
delivery of account statements in
connection with the custody of advisory
accounts, noting that duplicate account
statements are not required to be sent to
customers when a designee has been
appointed under Rule 206(4)–2 of the
Investment Advisers Act of 1940
(‘‘Advisers Act’’).65 SIFMA expressed
the belief that NYSE Rule 409T(b) has
served both the investing public and the
industry well, and that FINRA has not
established widespread complaints or
problems in this area that would justify
such a substantial, potentially risky, and
costly expansion of account statement
delivery obligations. SIFMA urged
FINRA to delete the general requirement
or alternatively, retain the more flexible
approach in NYSE Rule 409T(b). By
taking the approach in NYSE Rule
409T(b), SIFMA expressed the view that
firms would then be able to honor the
requests of customers, and those with
64 See SEA Rule 10b–10 Release, supra note 60,
at 59 FR 59614 n.36.
65 17 CFR 275.206(4)–2.
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55653
appropriate legal standing on behalf of
their customers, to direct account
statements to a designated third party
and avoid the additional costs and
potential account security concerns
associated with sending account
statements to the customer’s address of
record. SIFMA recommended that
FINRA amend proposed Supplementary
Material .02 to model the requirements
of NYSE Rule 409T(b) by replacing
‘‘and’’ with ‘‘or’’ in the proposed rule
text to provide firms with greater
flexibility to comply with the proposed
rule and defining the term ‘‘customer,’’
for purposes of proposed
Supplementary Material .02 to mean a
person with the legal authority to act on
behalf of an accountholder, including an
attorney-in-fact, a court-appointed
fiduciary or person with similar legal
authority.
SIFMA also noted that firms are
currently subject to rules that mitigate
concerns that a customer might be
financially exploited by an individual
who has authority over the customer’s
financial affairs. For example, SIFMA
stated that Rule 2090 requires a firm to
use reasonable diligence in regard to the
opening and maintenance of every
account, to know the essential facts
concerning every customer, and
essential facts would include those
about anyone who has authority over a
customer’s account. In addition, SIFMA
noted that a firm is required to have
reasonable procedures in place to
identify and react to ‘‘red flags’’ that
might indicate the occurrence of
potential fraud.
b. Create Exceptions to the General
Requirement To Continue Delivery of
Account Statements to Customer
In the Notice 14–35 Proposal, FINRA
requested comment on the situations
that would merit an exception from the
general requirement to continue
delivery of account statements to a
customer. Several commenters
expressed views on the general
requirement for a firm to continue
delivering account statements to the
customer even where there is a third
party delivery arrangement in place,
stating that imposing such a
requirement as a matter of course would
increase a customer’s risk of exposure to
fraud or other misconduct.66 FINRA
recognizes that in some cases, it may not
be in the customer’s interest to continue
receiving account statements when
there is an arrangement to deliver the
statements to a third party. In response
to comments, FINRA has adjusted
66 See Edward Jones, FSI, NASAA, SIFMA, WFA,
and Wulff.
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proposed Supplementary Material .02 as
presented in the Notice 14–35 Proposal
by creating an exception that would
permit a ‘‘court-appointed fiduciary’’ (as
that term is described in the proposed
provision) to stop sending account
statements to the customer upon written
instructions from the court-appointed
fiduciary, and other specified
conditions. Absent a court-appointed
fiduciary, a firm cannot cease delivering
account statements to a customer.
Further, FINRA believes that a customer
may authorize the firm to satisfy the
requirement to continue delivering
account statements through electronic
delivery consistent with proposed
Supplementary Material .03, which
would eliminate the need for delivery of
physical statements to the customer’s
home, while still providing the
customer the opportunity to review
their account statements in a timely
manner. FINRA believes that proposed
Supplementary Material .02, as
adjusted, creates an appropriate balance
between investor protection and the
concerns raised by the commenters. As
set forth below, some commenters
described a variety of circumstances
that should warrant an exception to the
general requirement. These
circumstances relate to customers with
legal representatives and other trusted
contacts; customers who are elderly,
disabled or incapacitated; and foreign
and high net worth customers.
(I) Legal Representative and Other
Trusted Contacts
SIFMA expressed concern that
proposed Supplementary Material .02
could potentially erode the legal
authority of the person granted a POA
and may potentially create a conflict
with state laws governing POAs. SIFMA
noted that 17 states have laws that
outline penalties for financial
institutions that refuse to respect the
legal standing of a person acting with
the authority of a POA. Two
commenters expressed concern that the
proposed provision would also prevent
the operability of a springing POA or
limit its usefulness because a springing
POA only becomes effective under
certain circumstances outlined by the
customer.67 SIFMA added that the
proposed provision would create a
situation where a person with the power
to stand in the shoes of the
incapacitated person, and perform many
other aspects of his or her legal rights,
would not be able to redirect mail away
from an address at which the
incapacitated person once resided. Two
commenters indicated that an exception
67 See
SIFMA and WFA.
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should also be made for legal executors
of a decedent’s estate or for a person
with legal authority to act on behalf of
a customer.68 FAF expressed concern
that the proposed provision does not
create an exception for certain third
parties, such as investment advisers,
trust departments, custodians and
pension plan trustees. FAF indicated
that these entities need to receive
customer accounts statements to
perform their duties for the customer.
(II) Elderly, Disabled or Incapacitated
Customers
Several commenters contended that
mandating the delivery of account
statements to a customer who is deemed
incapacitated or impaired, living in a
nursing facility or receives in-home
care, or an elderly customer who has
expressly designated another person or
entity to receive the statements would
increase the risk of unintended or
involuntary exposure of financially
sensitive information to third parties.69
Wulff noted that these persons would
involuntarily have their financial affairs
and personally identifiable information
exposed to unvetted third parties. PIRC
recommended that a customer be
permitted to opt-out, in writing, of
receiving account statements,
particularly where the customer is
disabled or incapacitated, or a customer
resides in a nursing home facility. Two
commenters stated that this class of
investors should be able to decline
delivery of their statements and instead
have them delivered to an authorized
third party.70 Edward Jones
recommended that FINRA consider an
exemption to the general requirement
where a firm has received written
documentation from a medical
professional verifying the disability or
incapacity of the customer. Several
commenters expressed the view that the
preference of the customer, as to his or
her own best interests, should govern.71
(III) Foreign and High Net Worth
Customers
SIFMA raised similar concerns with
respect to foreign or high net worth
customers who would also be at risk of
exposure of their financial information
since in some foreign jurisdictions, mail
delivery may not be secure, and a
display of wealth may put such
customers at risk of harm (e.g.,
kidnapping for ransom). SIFMA noted
that high net worth customers do not
68 See
FSI and Wulff.
Edward Jones, FSI, NASAA, SIFMA, WFA,
and Wulff.
70 See Edward Jones and FSI.
71 See FSI, PIRC, and Wulff.
69 See
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Fmt 4703
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want sensitive information contained
within statements to be delivered to
their homes because of unique
challenges such as frequent travel or
multiple homes and, as such, often
delegate the handling and review of
statements to a trusted agent or third
party, who may not be a legal
representative of the customer. While
Rule 3150, incorporated under proposed
Supplementary Material .04, cites safety
or security concerns as examples of
acceptable reasons for a customer’s
written instruction to ‘‘hold mail,’’
SIFMA noted that the circumstances
described above are not ‘‘hold mail’’
arrangements under Rule 3150. SIFMA
indicated that arrangements to deliver
statements to a third party for similar
reasons should be permitted with
written customer instruction.
D. Operational Concerns and
Implementation of Proposed
Supplementary Material .02
Two commenters requested
prospective application of the
provision.72 Edward Jones stated that
requiring remediation of existing
accounts would impose significant costs
and would not provide meaningful
additional protection to investors.
SIFMA emphasized the need for
prospective application due to material
operational challenges, which include
persons who have become incapacitated
since providing the original instruction
to direct mail to a third party, as well
as the significant costs associated with
remediating hundreds of thousands of
account relationships. The proposed
rule change would apply prospectively,
and FINRA intends to give member
firms sufficient time to comply with the
proposed rule change.73
72 Edward
Jones and SIFMA.
member firm with a customer having a preexisting arrangement to deliver account statements
to a third party that was established before the
effective date of proposed Rule 2231.02 would not
be subject to the requirements of the proposed new
rule solely with respect to such account until that
pre-existing third party delivery arrangement is
modified in any manner. Where any existing or new
customer of the firm seeks to establish a third party
delivery arrangement on or after the effective date
of proposed Rule 2231.02, the firm would be subject
to the terms of the new rule. Relatedly, in
connection with its support for the proposed rule
change to eliminate NYSE Rule Interpretation
409T(a)/03, SIFMA requested that FINRA confirm
in a rule release commentary or an adopting
Regulatory Notice that though the conditions in
NYSE Rule Interpretation 409T(a)/03 would no
longer apply, firms may continue to rely on this
NYSE interpretation for preexisting agreements that
use third party agents. The proposed rule change is
not intended to impact preexisting agreements that
use third party agents if they comport with
applicable FINRA rules and guidance.
73 A
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6. Proposed Supplementary Material .03
(Use of Electronic Media To Satisfy
Delivery Obligations)
Proposed Supplementary Material .03
would allow a firm to satisfy its account
statement delivery obligations under
Rule 2231 by using electronic media,
subject to compliance with standards
established by the SEC on the use of
electronic media for delivery purposes.
As stated above, this provision is
consistent with prior guidance FINRA
has issued on the use of electronic
media to satisfy delivery obligations.74
SIFMA asserted that the cost burden
associated with this new requirement
would be particularly severe for
members where customers have not
elected to receive electronic account
communications. GSU supported the
use of electronic delivery of account
statements only if the customer
affirmatively elects that option on the
basis that a customer who is not
technologically savvy might not know
how to electronically opt-out of an
electronic statement policy, creating
confusion as well as the possibility of a
customer not being able to access his or
her statements. The Center for Copyright
Integrity urged that customer account
statements should be delivered in paper
form only on the belief that paper
format will keep customers better
informed on the contents of their files.
Proposed Supplementary Material .03
does not mandate the use of electronic
media to deliver account statements, but
permits a firm to do so subject to the
standards established by the SEC. A
firm may be able to evidence
satisfaction of delivery obligations, for
example, by obtaining the intended
recipient’s informed consent to deliver
through a specified electronic medium
and ensuring that the recipient has
appropriate notice and access. SEC
guidance describes ‘‘informed consent’’
as one that specifies the electronic
medium or source through which the
information will be delivered and the
period during which the consent will be
effective, and describes the information
that will be delivered using such
means.75 FINRA notes that proposed
Supplementary Material .03 is not
intended to impose any new delivery
obligations beyond existing
requirements.
7. Proposed Supplementary Material .05
(Information To Be Disclosed on
Statement)
Proposed Supplementary Material .05,
derived largely from NYSE Rule
Interpretation 409T(a)/02, including
74 See
75 See
supra note 20.
supra note 20.
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note 1, would specify the information
that must be clearly and prominently
disclosed on the front of a customer
account statement, i.e., the identity of
the introducing and carrying
organizations, that the carrying
organization is a member of SIPC, and
the opening and closing account
balances for the customer’s account.
Two commenters expressed views on
the appearance of SIPA disclosures on
account statements.76 GSU indicated its
support for the requirement to provide
the SIPA disclosure on the front of an
account statement because doing so
would aid smaller investors to seek the
help they might need in order to better
understand their statements and
monitor their accounts. PIRC
recommended that FINRA provide
guidelines with respect to how the SIPA
disclosure should appear on an account
statement, citing as an example, that
FINRA should consider requiring firms
clearly highlight the SIPA disclosure to
prevent firms from ‘‘burying SIPA
disclosures in the back of accounts
statements or in the fine print, which
customers may not be able to locate
easily.’’
FINRA believes that proposed
Supplementary Material .05 gives
member firms adequate guidance and
allows flexibility in providing this
information while also ensuring that the
SIPC status of the clearing firm is
disclosed on the front of the
statement.77
8. Use of Logos, Trademarks, etc.
(Proposed Supplementary Material .07)
Proposed Supplementary Material. 07
incorporates, without substantive
change, NYSE Rule Interpretation
409(a)/05, which governs the use of
trademarks and logos of other persons
on account statements by requiring that
firms not use the logo, trademark or
other similar identification of a person
(other than the introducing firm or
clearing firm) on a customer account
statement in a manner that is misleading
or causes customer confusion. SIFMA
requested clarification as to what logos,
trademarks, and other similar
identification would be ‘‘misleading’’ to
76 See
GSU and PIRC.
77 Rule 2266 (SIPC Information) requires all
member firms, unless they are excluded from SIPC
membership and are not SIPC members, or whose
business consists exclusively of the sale of
investments that are ineligible for SIPC protection,
to advise all new customers, in writing, at the
opening of an account, that they may obtain
information about SIPC, including the SIPC
brochure, by contacting SIPC. Such member firms
also must provide SIPC’s website address and
telephone number, and provide all customers with
the same information, in writing, at least once each
year.
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55655
customers or cause ‘‘customer
confusion.’’ To the extent commenters
have questions about the application of
the proposed rule to particular facts and
circumstances, FINRA will work with
the industry to address interpretive
issues as needed.
9. Other Comments
SIFMA requested confirmation that
unless a customer requests otherwise, a
firm may combine account statements
for accounts of two or more customers
sharing the same address in the same
envelope addressed to one member of
the household. In the SEC Householding
Release, the SEC stated that it was
adopting the ‘‘householding’’ rules
because ‘‘the distribution of multiple
copies of the same document to security
holders who share the same address
often inundates security holders with
unwanted mail and causes the company
to incur higher than necessary printing
and mailing costs.’’ 78 To avoid
duplication, the SEC rule allows funds
to deliver a single copy of the same
document to investors who share the
same address.79 FINRA has not formally
provided guidance on the issue of
‘‘householding’’ customer account
statements and believes that the
commenter raises an issue that is
outside the scope of this proposed rule
change. As such, FINRA believes that
the questions raised by SIFMA requires
further discussion with the industry and
investors to better understand the
relevant facts and circumstances.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
78 See Securities Act Release No. 7912 (October
27, 2000), 65 FR 65736 (November 2, 2000) (‘‘SEC
Householding Release’’).
79 See Rule 154 (Delivery of prospectuses to
investors at the same address) under the Securities
Act of 1933. 17 CFR 230.154. See also SEA Rule
14a–3 (Information to be furnished to security
holders). 17 CFR 240.14a–3. Rules 154 and 14a–3
permit the ‘‘householding’’ of prospectuses, annual
reports, investment company semi-annual reports,
and proxy statements or information statements to
investors who share an address. Firms must obtain
affirmative consent from investors or may rely on
a finding of implied consent, subject to the
conditions outlined in the Rule.
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(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
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Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.80
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21767 Filed 10–5–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93223; File No. SR–
NYSEAMER–2021–40]
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2021–024 on the subject line.
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Extend the Pilot
Related to the Market-Wide Circuit
Breaker in Rule 7.12E
Paper Comments
September 30, 2021.
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2021–024. This file
number should be included on the
subject line if email 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 website (https://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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2021–024 and should be submitted on
or before October 27, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on
September 30, 2021, NYSE American
LLC (‘‘NYSE American’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. 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 Exchange proposes to extend the
pilot related to the market-wide circuit
breaker in Rule 7.12E to the close of
business on March 18, 2022. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
15 U.S.C. 78s(b)(1).
15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1
2
CFR 200.30–3(a)(12).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Electronic Comments
80 17
of the most significant parts of such
statements.
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The Exchange proposes to extend the
pilot related to the market-wide circuit
breaker in Rule 7.12E to the close of
business on March 18, 2022.
Background
The Market-Wide Circuit Breaker
(‘‘MWCB’’) rules, including the
Exchange’s Rule 7.12E, provide an
important, automatic mechanism that is
invoked to promote stability and
investor confidence during periods of
significant stress when cash equities
securities experience extreme marketwide declines. The MWCB rules are
designed to slow the effects of extreme
price declines through coordinated
trading halts across both cash equity
and equity options securities markets.
The cash equities rules governing
MWCBs were first adopted in 1988 and,
in 2012, all U.S. cash equity exchanges
and FINRA amended their cash equities
uniform rules on a pilot basis (the ‘‘Pilot
Rules,’’ i.e., Rule 7.12E (a)–(d)).4 The
Pilot Rules currently provide for trading
halts in all cash equity securities during
a severe market decline as measured by
a single-day decline in the S&P 500
Index (‘‘SPX’’).5 Under the Pilot Rules,
a market-wide trading halt will be
triggered if SPX declines in price by
specified percentages from the prior
day’s closing price of that index. The
triggers are set at three circuit breaker
thresholds: 7% (Level 1), 13% (Level 2),
and 20% (Level 3). A market decline
that triggers a Level 1 or Level 2 halt
after 9:30 a.m. and before 3:25 p.m.
would halt market-wide trading for 15
minutes, while a similar market decline
at or after 3:25 p.m. would not halt
market-wide trading. (Level 1 and Level
2 halts may occur only once a day.) A
market decline that triggers a Level 3
halt at any time during the trading day
4 See Securities Exchange Act Release No. 67090
(May 31, 2012), 77 FR 33531 (June 6, 2012) (SR–
BATS–2011–038; SR–BYX–2011–025; SR–BX–
2011–068; SR–CBOE–2011–087; SR–C2–2011–024;
SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX–
2011–30; SR–FINRA–2011–054; SR–ISE–2011–61;
SR–NASDAQ–2011–131; SR–NSX–2011–11; SR–
NYSE–2011–48; SR–NYSEAmex–2011–73; SR–
NYSEArca–2011–68; SR–Phlx–2011–129) (‘‘Pilot
Rules Approval Order’’).
5 The rules of the equity options exchanges
similarly provide for a halt in trading if the cash
equity exchanges invoke a MWCB Halt. See, e.g.,
NYSE Arca Rule 6.65–O(d)(4).
E:\FR\FM\06OCN1.SGM
06OCN1
]]>Agencies
[Federal Register Volume 86, Number 191 (Wednesday, October 6, 2021)]
[Notices]
[Pages 55641-55656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21767]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93215; File No. SR-FINRA-2021-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 2231 (Customer Account Statements)
September 30, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 29, 2021, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by FINRA.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to: (1) Amend Rule 2231 (Customer Account
Statements) to (a) add new supplementary materials pertaining to
compliance with Rule 4311 (Carrying Agreements), the transmission of
customer account statements to other persons or entities, the use of
electronic media to satisfy delivery obligations, and compliance with
Rule 3150 (Holding of Customer Mail); and (b) incorporate without
substantive change specified provisions derived from Temporary Dual
FINRA-NYSE Rule Interpretation 409T (Statements of Accounts to
Customers) pertaining to information disclosed on customer account
statements, externally held assets, use of logos and trademarks, and
use of summary statements; (2) delete Temporary Dual FINRA-NYSE Rule
409T (Statements of Accounts to Customers) and Temporary Dual FINRA-
NYSE Rule Interpretation 409T; \3\ and (3) make other non-substantive
and technical changes in Rule 2231 and to other FINRA rules due to this
proposed rule change.
---------------------------------------------------------------------------
\3\ As part of the process of completing a consolidated FINRA
rulebook, FINRA adopted, without substantive changes, the remaining
legacy NASD rules as FINRA rules in the consolidated FINRA rulebook
and the remaining Incorporated NYSE Rules and Incorporated NYSE Rule
Interpretations in the consolidated FINRA rulebook as a separate
Temporary Dual FINRA-NYSE Member Rules Series. These NYSE rules and
their corresponding interpretations now bear a ``T'' modifier after
the rule and interpretation number to denote their placement in the
Temporary Dual FINRA-NYSE Member Rules Series. The Temporary Dual
FINRA-NYSE Member Rules Series apply only to those members of FINRA
that are also members of the NYSE (``dual members''). The FINRA
rules apply to all FINRA members, unless such rules have a more
limited application by their terms. Among the remaining NASD rules
was NASD Rule 2340 (Customer Account Statements), which was adopted,
without substantive changes, as FINRA Rule 2231. Incorporated NYSE
Rule 409 (Statements of Accounts to Customers) and Incorporated NYSE
Rule Interpretation 409 (Statements of Accounts to Customers) were
adopted, without substantive changes, under the Temporary Dual
FINRA-NYSE Rules Series as Rule 409T and Interpretation 409T,
respectively. See Securities Exchange Act Release No. 85589 (April
10, 2019), 84 FR 15646 (April 16, 2019) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2019-009). For
convenience, the rules and interpretations under the Temporary Dual
FINRA-NYSE Member Rules Series are referred to as ``NYSE Rule'' and
``NYSE Rule Interpretation,'' as appropriate.
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Rule 2231 and NYSE Rule 409T govern the obligation of members to
deliver customer account statements to customers. Specifically, Rule
2231 and NYSE Rule 409T require each ``general securities member'' \4\
and each member organization carrying customer accounts, respectively,
to send account statements to customers at least quarterly showing
security and money positions or account activity during the preceding
quarter, except if carried on a Delivery versus Payment/Receive versus
Payment (``DVP/RVP'') basis.
---------------------------------------------------------------------------
\4\ Rule 2231(d) defines the term ``general securities member''
to mean ``any member that conducts a general securities business and
is required to calculate its net capital pursuant to the provisions
of SEA Rule 15c3-1(a). Notwithstanding the foregoing definition, a
member that does not carry customer accounts and does not hold
customer funds or securities is exempt from the provisions of this
section.''
---------------------------------------------------------------------------
At the time FINRA adopted Rule 2231, along with NYSE Rule 409T and
NYSE Rule Interpretation 409T (together, ``NYSE provisions''), among
others, into the consolidated FINRA rulebook, FINRA noted that it would
continue to review the substance of such rules and expected to propose
substantive changes to some or all of the rules as part of future
rulemakings.\5\ As part of that effort and as described further below,
FINRA is now proposing to amend Rule 2231 that would incorporate
several existing provisions from the NYSE provisions. As a result of
this proposed harmonization, the NYSE provisions would be deleted in
their entirety.
---------------------------------------------------------------------------
\5\ See supra note 3.
---------------------------------------------------------------------------
Rule 2231 differs from the NYSE provisions in several ways. First,
Rule 2231(c) sets forth requirements for disclosure of values for
unlisted or illiquid direct participation programs or real estate
investment trust securities. Neither NYSE Rule 409T nor NYSE Rule
Interpretation 409T have a corresponding provision. Second, the NYSE
provisions address the delivery of confirmations, account statements or
other communications to third parties subject to specified conditions
and exceptions. In addition, NYSE Rule 409T(g) provides that members
carrying margin accounts for customers should send duplicate copies of
monthly statements of guaranteed accounts to the respective guarantors
unless such guarantors have specifically provided in writing that they
do not want such statements sent to them. Rule 2231 does not have
similar provisions. Third, Rule 2231(d) expressly defines several terms
(e.g., ``account activity,'' ``DVP/RVP account,'' ``general securities
member'') and Rule 2231(e) provides for exemptive relief from the rule.
NYSE Rule 409T expressly defines only one term, ``DVP/RVP account,''
and does not provide for exemptive relief from the rule. Finally,
unlike Rule 2231, NYSE Rule
[[Page 55642]]
Interpretation 409T dictates the disclosures that must be made in a
customer account statement, including for externally held assets, and
requirements for use of third party agents, logos and trademarks,
summary statements, and sets forth the standards for holding mail for a
customer.
In light of these differences, FINRA is specifically proposing to:
(a) Add as new Supplementary Materials .01 (Compliance with Rule 4311
(Carrying Agreements)), .02 (Transmission of Customer Account
Statements to Other Persons or Entities), .03 (Use of Electronic Media
to Satisfy Delivery Obligations), and .04 (Compliance with Rule 3150
(Holding of Customer Mail)); and (b) incorporate provisions derived
from NYSE Rule Interpretation 409T, without substantive change, as
Supplementary Materials .05 (Information to be Disclosed on Statement),
.06 (Assets Externally Held), .07 (Use of Logos, Trademarks, etc.), and
.08 (Use of Summary Statements).
Rule Filing History
In 2009, FINRA had filed with the SEC a proposed rule change to
adopt then NASD Rule 2340 and legacy NYSE Rule 409, including its
related interpretations, as Rule 2231 into the consolidated FINRA
rulebook (``Initial Rule Filing'') as part of the process of developing
the consolidated FINRA rulebook.\6\ Among other things, the Initial
Rule Filing had set forth a number of proposed supplementary materials,
most of which were derived largely from then NYSE Rule Interpretation
409 to address customer account disclosures, including for externally
held assets, and requirements for use of third party agents, logos and
trademarks, summary statements, and holding customer mail.\7\
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\6\ See Securities Exchange Act Release No. 59921 (May 14,
2009), 74 FR 23912 (May 21, 2009) (Notice of Filing of File No. SR-
FINRA-2009-028).
\7\ FINRA had also proposed amending then NASD Rule 2340 to
change the frequency of the delivery of account statements to a
customer from quarterly to monthly where the customer had account
activity during the preceding month, and with a frequency of not
less than once every calendar quarter to each customer whose account
had a security position or money balance during the period since the
last such statement was sent to the customer.
---------------------------------------------------------------------------
Among these proposed supplementary materials was one, based in part
on legacy NYSE Rule 409(b), which would have required written
instructions from the customer to address or send customer statements,
confirmations or other communications relating to the customer's
account to other persons or entities. However, unlike legacy NYSE Rule
409(b), the proposed supplementary material was silent on whether a
firm would have to continue sending account statements to the customer.
Commenters to the Initial Rule Filing expressed concerns relating to
the need for written customer consent to transmit customer account
statements to third parties and sought clarification on whether firms
would be required to obtain written consent when complying with then
NASD Rule 3050 (Transactions for or by Associated Persons) and then
NYSE Rule 407 (Transactions--Employees of Members, Member Organizations
and the Exchange).\8\ In response to these comments, among others,
FINRA amended the Initial Rule Filing in 2011 (``Amended Rule
Filing'').\9\ With respect to the transmission of customer account
statements to third parties, FINRA had proposed clarifying that member
firms would not be required to obtain prior written consent from their
associated persons to send duplicate account statements or other
communications with respect to such associated persons' accounts that
were subject to then NASD Rule 3050 and NYSE Rule 407. To address
concerns regarding potential fraud, especially with senior investors,
where a third party receives the account statements in lieu of such
customer, FINRA had also proposed clarifying that firms would have to
continue to deliver account statements to customers, either in paper
format or electronically, even when directed by the customer, in
writing, to send statements to a third party. FINRA made this
clarification in an effort to remain consistent with any SEC release,
interpretation, ``no-action'' position or exemption issued by the SEC
or its staff in the context of SEA Rule 10b-10 (Confirmation of
transactions) that have established the policy that customers should
continue to receive periodic account statements when not receiving
immediate trade confirmations under SEA Rule 10b-10.\10\ Further
comments were received in response to the Amended Rule Filing.
Commenters objected to the proposed requirement to deliver account
statements to customers even when directed by customers, in writing, to
send the statements to third parties. Some commenters believed that
members should not be required to continue delivering account
statements to customers, particularly where there was a power of
attorney (``POA'') or incapacity. FINRA withdrew the filing to further
consider the comments.\11\
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\8\ NASD Rule 3050 and NYSE Rule 407 are the predecessor rules
to Rule 3210 (Accounts at Other Broker-Dealers and Financial
Institutions). In 2015, FINRA adopted Rule 3210 in the consolidated
FINRA rulebook to replace NASD Rule 3050, NYSE Rules 407 and 407A
(Disclosure of All Member Accounts) and the corresponding NYSE
interpretations. See Securities Exchange Act Release No. 75655
(August 10, 2015), 80 FR 48941 (August 14, 2015) (Notice of Filing
of File No. SR-FINRA-2015-029). Rule 3210 governs accounts that
associated persons open or establish at firms other than their
employer and in which they have a beneficial interest. In general,
the rule requires that the associated person must obtain the prior
written consent of his or her employer to open or establish the
account, and provides that the member firm where the account is held
must transmit duplicate copies of confirmations and statements to
the employer upon the employer's request.
\9\ See Securities Exchange Act Release No. 64969 (July 26,
2011), 76 FR 46340 (August 2, 2011) (Notice of Filing of Amendment
No. 1 to File No. SR-FINRA-2009-028).
\10\ 17 CFR 240.10b-10. See also note 9, supra.
\11\ See Securities Exchange Act Release No. 67588 (August 2,
2012), 77 FR 47470 (August 8, 2012) (Notice of Withdrawal of File
No. SR-FINRA-2009-028).
---------------------------------------------------------------------------
To address the concerns raised in the prior filing, FINRA published
Regulatory Notice 14-35 (September 2014) (``Notice'' or ``Notice 14-35
Proposal''), seeking comment on a revised proposal to transfer then
NASD Rule 2340 and Incorporated NYSE Rule 409 and its related
interpretations, largely unchanged, into the consolidated FINRA
rulebook as Rule 2231. With respect to the proposed supplementary
material pertaining to the transmission of customer account statements
to other persons or entities, the Notice 14-35 Proposal set forth
changes to that provision that aligned more closely with then NYSE Rule
409(b) and were intended to help ensure that a customer continues to
receive the account statement even when such customer directs the firm
to send the statement to a third party. As described further below, the
proposed rule change differs in some respects from the terms set forth
in the Notice 14-35 Proposal as to proposed Supplementary Material .02.
In all other respects, subject to some technical changes, the proposed
amendments to Rule 2231 remain substantively unchanged from the Notice
14-35 Proposal.
Proposed Amendments to Rule 2231
In 2019, after the publication of the Notice, FINRA adopted the
remaining legacy NASD rules as FINRA rules in the consolidated FINRA
rulebook and the remaining Incorporated NYSE Rules and Incorporated
NYSE Rule Interpretations in the consolidated FINRA rulebook as a
separate Temporary Dual FINRA-NYSE Member Rules Series.\12\ No
substantive changes to these rules were made in connection with the
move into the consolidated FINRA rulebook. NASD Rule 2340 was
renumbered as Rule 2231 and Incorporated NYSE Rule 409 and Incorporated
NYSE Rule Interpretation
[[Page 55643]]
409 were renumbered as NYSE Rule 409T and NYSE Rule Interpretation
409T, respectively.
---------------------------------------------------------------------------
\12\ See supra note 3.
---------------------------------------------------------------------------
A. Paragraphs (a) Through (e) Under Rule 2231 To Remain Substantively
Unchanged
In general, paragraph (a) (General) under Rule 2231 addresses the
frequency of the delivery of customer account statements, and the
requirement for account statements to include a statement advising
customers to report to the firm (introducing firm and clearing firm, if
different) inaccuracies in their accounts in writing. Paragraph (b)
(Delivery Versus Payment/Receive Versus Payment (DVP/RVP) Accounts)
addresses account statement delivery requirements for DVP/RVP
arrangements. Paragraph (c) (DPP and Unlisted REIT Securities)
requires, among other things, general securities members to include in
customer account statements a per share estimated value for a direct
participation program (``DPP'') or real estate investment trust
(``REIT'') security developed in a manner reasonably designed to ensure
that the per share estimated value is reliable. In addition, paragraph
(c) provides two methodologies for calculating the per share estimated
value for a DPP or REIT security that is deemed to have been developed
in a manner reasonably designed to ensure that it is reliable: the net
investment methodology and the appraised value methodology. Paragraph
(d) (Definitions) sets forth several definitions and finally, paragraph
(e) (Exemptions) permits FINRA to exempt any member firm from the rule
upon a showing of good cause. Consistent with the Notice 14-35
Proposal, FINRA is proposing to retain, without substantive changes,
the existing requirements set forth in paragraphs (a) through (e) under
Rule 2231.
B. Proposed Supplementary Materials to Rule 2231
In an effort to harmonize the NYSE provisions with Rule 2231, FINRA
is proposing to add new supplementary materials relating to compliance
with Rule 4311, the transmission of customer account statements to
other persons or entities, the use of electronic media, and compliance
with Rule 3150. In addition, the proposed change would transfer, with
clarifying and technical changes, the existing requirements in NYSE
Rule Interpretation 409T relating to the information to be disclosed on
statements,\13\ assets externally held and included on statements
solely as a service to customers,\14\ the use of logos and trademarks,
etc.,\15\ and the use of summary statements.\16\ As a result of this
harmonization, some provisions would be new for FINRA members that are
not also members of the NYSE (or ``non-NYSE members'') and for dual
members. FINRA believes that harmonizing the NYSE provisions into Rule
2231 would provide greater clarity and regulatory efficiency to all
FINRA member firms.
---------------------------------------------------------------------------
\13\ See NYSE Rule Interpretation 409T(a)/02 (Information to be
Disclosed).
\14\ See NYSE Rule Interpretation 409T(a)/04 (Assets Externally
Held and Included in Statements Solely as a Service to Customers).
\15\ See NYSE Rule Interpretation 409T(a)/05 (Use of Logos,
Trademarks, etc.).
\16\ See NYSE Rule Interpretation 409T(a)/06 (Use of Summary
Statements).
---------------------------------------------------------------------------
1. Compliance With Rule 4311 (Carrying Agreements) (Proposed
Supplementary Material .01)
FINRA is proposing to add new Supplementary Material .01 to Rule
2231 that would remind firms of their obligations under Rule 4311,
including specifically the rights and obligations of the carrying firm
under Rule 4311(c)(2). Rule 4311 generally governs the requirements
applicable to member firms when entering into agreements for the
carrying of any customer accounts in which securities transactions can
be effected. In general, Rule 4311(c) requires that each carrying
agreement in which accounts are to be carried on a fully disclosed
basis must specify the responsibilities of each party to the agreement,
setting forth the minimum responsibilities that the agreement must
allocate. Among those responsibilities, outlined in Rule 4311(c)(2), is
to require each carrying agreement in which accounts are carried on a
fully disclosed basis to expressly allocate to the carrying firm the
responsibility for the safeguarding of funds and securities for the
purposes of SEA Rule 15c3-3 (Customer protection--reserves and custody
of securities.) and for preparing and transmitting statements of
account to customers.\17\ To emphasize the importance of ensuring the
accuracy and integrity of customer account statements, proposed
Supplementary Material .01 would remind firms of their obligations
under Rule 4311, including paragraph (c)(2).
---------------------------------------------------------------------------
\17\ 17 CFR 240.15c3-3. Rule 4311(c)(2) also provides that the
carrying firm may authorize the introducing firm to prepare and/or
transmit statements of account to customers on the carrying firm's
behalf with the prior written approval of FINRA.
---------------------------------------------------------------------------
2. Transmission of Customer Account Statements to Other Persons or
Entities (Proposed Supplementary Material .02)
Unlike NYSE Rule 409T, Rule 2231 does not address the transmission
of customer account statements to third parties. To harmonize NYSE Rule
409T with Rule 2231, FINRA is proposing to add new Supplementary
Material .02 to Rule 2231 to address the transmission of customer
account statements to other persons or entities in similar fashion as
NYSE Rule 409T. In general, NYSE Rule 409T(b) prohibits, without the
NYSE's consent, the delivery of statements, confirmations or other
communications to a nonmember customer: (1) In care of a person holding
POA over the customer's account unless either (A) the customer has
provided written instructions to the member organization to send such
confirmations, statements or communications in care of such person, or
(B) duplicate copies are sent to the customer at some other address
designated in writing by the customer; or (2) at the address of any
member, member organization, or in care of a partner, stockholder who
is actively engaged in the member corporation's business or employee of
any member organization.\18\
---------------------------------------------------------------------------
\18\ NYSE Rule 409T(b) also provides that NYSE may, upon written
request, waive the requirements therein. NYSE Rule 409T(b)(2)
waivers are addressed in NYSE Rule Interpretation 409T(b)/01
(Standards for Holding Mail for Foreign Customers--Rule 409T(b)(2)
Waivers), discussed below.
---------------------------------------------------------------------------
In the Notice, FINRA had proposed that, except as required to
comply with Rule 3210 (the successor rule to NASD Rule 3050 and NYSE
Rule 407), a member may not address or send account statements or other
communications relating to a customer's account to other persons or
entities or in care of a person holding POA over the customer's account
unless (1) the customer provided written instructions to the firm to
send such statements or other communications to such person or entity
or in care of a person holding POA over the customer's account; and (2)
the firm sent duplicates of such statements or other communications, in
accordance with Rule 2231, directly to the customer either in paper
format or electronically as provided in proposed Supplementary Material
.03. FINRA notes that unlike NYSE Rule 409T(b), which provides a firm
the option (using the disjunctive ``or'') to continue delivering
account statements to the customer that has an arrangement with the
firm to deliver account statements to a third party, proposed
Supplementary Material .02 as described in the Notice 14-35 Proposal
did not. Omitting this
[[Page 55644]]
option limited a customer's ability to decline receiving statements.
Commenters to the Notice 14-35 Proposal expressed concerns with
this limitation, particularly where the customer's health or capacity
was in question. In consideration of comments received to that
proposal, FINRA is proposing to adjust the proposed supplementary
material in several ways. The term ``or other communications'' would be
deleted from the proposed rule text to clarify that proposed
Supplementary Material .02 would be confined to only customer account
statements. The specific reference to ``or in care of a person holding
power of attorney over the customer's account'' would also be deleted
from the proposed rule text, leaving the general reference to ``other
persons or entities'' that could include any third party the customer
may designate to receive the account statements.
In addition, while proposed Supplementary Material .02 would retain
the continuous statement delivery requirement to the customer as
described in the Notice 14-35 Proposal, the proposed supplementary
material would be adjusted to create a limited exception to the general
requirement to continue to deliver account statements to a customer in
cases where there is a court-appointed fiduciary. Specifically,
proposed Supplementary Material .02(b) would provide that where a court
of competent jurisdiction has appointed a guardian, conservator,
trustee, personal representative or other person with legal authority
to act on behalf of a customer, a member may cease sending account
statements to the customer upon written instructions from such court-
appointed fiduciary provided that the court-appointed fiduciary
furnishes to the member an official copy of the court appointment that
establishes authority over the customer's account(s). As adjusted,
proposed Supplementary Material .02(a) would state that, except as
provided for in proposed paragraph (b) relating to the existence of a
court-appointed fiduciary, a member may not send account statements
relating to a customer's account(s) to other persons or entities
unless: (1) The customer has provided written instructions to the
member to send the statements to such person or entity; and (2) the
member continues to send accounts statements directly to the customer
either in paper format or electronically as provided in Supplementary
Material. 03 (Use of Electronic Media to Satisfy Delivery Obligations)
of Rule 2231.
Finally, proposed Supplementary Material .02(c) would maintain, in
similar fashion to the Notice 14-35 Proposal, that notwithstanding
proposed Supplementary Material .02(a), a member may provide duplicate
customer account statements under Rule 2070 (Transactions Involving
FINRA Employees), Rule 3210, or other similar applicable federal
securities laws, rules, and regulations in accordance with the
requirements of such rule.\19\
---------------------------------------------------------------------------
\19\ See supra note 8.
---------------------------------------------------------------------------
FINRA believes that the proposed supplementary material, as
adjusted herein, achieves the appropriate balance between ensuring that
customers continue to receive their account statements in accordance
with Rule 2231(a) to retain the ability to readily monitor their
account activity while recognizing that there are special circumstances
where a firm may stop the delivery of account statements to customers.
3. Use of Electronic Media To Satisfy Delivery Obligations (Proposed
Supplementary Material .03)
FINRA is proposing to add new Supplementary Material .03 to Rule
2231 that would expressly allow a member firm to satisfy its delivery
obligations under the rule by using electronic media, subject to
compliance with standards established by the SEC on the use of
electronic media for delivery purposes.\20\ This provision would be
consistent with prior guidance FINRA has issued on the use of
electronic media to satisfy delivery obligations.\21\
---------------------------------------------------------------------------
\20\ SEC guidance to date on the use of electronic media
generally requires the affirmative consent of the investor or
customer. See Securities Act Release No. 7233 (October 6, 1995); 60
FR 53458 (October 13, 1995); Securities Act Release No. 7288 (May 9,
1996); 61 FR 24644 (May 15, 1996); and Securities Act Release No.
7856 (April 28, 2000); 65 FR 25843, 25854 (May 4, 2000).
\21\ See Notice to Members 98-3 (January 1998) (stating in part
that members are permitted to electronically transmit documents that
they are required or permitted to furnish to customers under FINRA
rules, provided they comply with all aspects of the SEC's electronic
delivery requirements).
---------------------------------------------------------------------------
4. Compliance With Rule 3150 (Holding of Customer Mail) (Proposed
Supplementary Material .04)
In general, Rule 3150 allows a firm to hold a customer's mail for a
specific time period in accordance with the customer's written
instructions if the firm meets specified conditions. FINRA is proposing
to add new Supplementary Material .04 to Rule 2231 that would permit
member firms to hold customer mail, including customer account
statements, subject to the requirements of Rule 3150.
5. Information To Be Disclosed on Statement (Proposed Supplementary
Material .05)
NYSE Rule Interpretation 409T(a)/02 describes the information that
must be disclosed on the front of a customer account statement: The
identity of the introducing and carrying organizations, and their
respective phone numbers for service; that the carrying organization is
a member of Securities Investor Protection Corporation (``SIPC''); and
the opening and closing account balances. Note 1 to NYSE Rule
Interpretation 409T(a)/02 provides that ``[t]he SEC has stated that
under the SEA Rule 15c3-1(a)(2)(iv), certain carrying firms must issue
customer account statements, and the account statements must contain
the name and telephone number of a person at the carrying firm who the
customer can contact with inquiries regarding the account (See SEA
Release No. 34-31511, dated November 24, 1992). The phone number of the
carrying organization may appear on the back of the statement. If it
does, it must be in `bold' or `highlighted' letters.'' Unlike NYSE Rule
Interpretation 409T(a)/02, Rule 2231 does not detail the information
that must be clearly and prominently disclosed on the front of an
account statement. FINRA is proposing to transfer NYSE Rule
Interpretation 409T(a)/02, inclusive of note 1, without substantive
changes, as Supplementary Material .05 to Rule 2231. Proposed
Supplementary Material .05 to Rule 2231 would specify the following
information to be clearly and prominently disclosed on the front of the
account statement: (1) The identity of the introducing and clearing
firm, if different, and their respective contact information for
customer service, permitting the identity of the clearing firm and its
contact information to appear on the back of the statement provided
such information is in ``bold'' or ``highlighted'' letters; (2) that
the clearing firm is a member of SIPC; and (3) the opening and closing
balances for the account.
6. Assets Externally Held (Proposed Supplementary Material .06)
NYSE Rule Interpretation 409T(a)/04 provides that where the account
statement includes assets for which a member organization does not have
fiduciary responsibility, does not have access to and which are not
included on the member organization's books and records, such assets
must be clearly separated on the statement. In addition, the statement
must indicate that such externally held assets are included on
[[Page 55645]]
the statement solely as a service to the customer and are not covered
by SIPC, and that information is derived from the customer or other
external source for which the member organization is not
responsible.\22\ Rule 2231 does not contain a similar provision.
---------------------------------------------------------------------------
\22\ See NYSE Information Memo 97-56 (December 1997) (stating,
``[t]his provision is not intended to cover assets (e.g., stocks or
mutual funds) to which the member organization has access that may
be held at a depository or mutual fund.'').
---------------------------------------------------------------------------
FINRA is proposing to transfer the requirements of NYSE Rule
Interpretation 409T(a)/04, without substantive changes, as proposed
Supplementary Material .06 to Rule 2231. Under proposed Supplementary
Material .06, where the account statement includes assets that the
member firm does not carry on behalf of a customer and that are not
included on the member firm's books and records, such assets must be
clearly and distinguishably separated on the statement. In addition, in
such cases, the statement must: (1) Clearly indicate that such
externally held assets are included on the statement solely as a
courtesy to the customer; (2) disclose that information, including
valuation, for such externally held assets is derived from the customer
or other external source for which the member firm is not responsible;
and (3) identify that such externally held assets may not be covered by
SIPC.
7. Use of Logos, Trademarks, Etc. (Proposed Supplementary Material .07)
NYSE Rule Interpretation 409T(a)/05 provides that where the logo,
trademark or other identification of a person (other than the
introducing firm or clearing firm) appears on an account statement,
then the identity of such person and the relationship to the
introducing, carrying or other organization included on the statement
must be provided and may not be misleading or confusing to customers.
Rule 2231 does not contain a similar provision. FINRA is proposing to
transfer, without substantive change, NYSE Rule Interpretation 409T(a)/
05 as proposed Supplementary Material .07. FINRA notes that proposed
Supplementary Material .07 would be consistent with the general
requirements of Rule 2210 (Communications with the Public).
8. Use of Summary Statements (Proposed Supplementary Material .08)
NYSE Rule Interpretation 409T(a)/06 addresses the responsibilities
associated with the practice of firms, with other related financial
institutions, to jointly formulate and distribute to their common
customers their respective customer account statements, together with
``summary statements.'' \23\ In general, a summary statement reflects
information from entities that is part of a financial services
``group'' or ``family'' or where a firm carries accounts for another
broker-dealer that is part of such group or family. A summary statement
provides an overview of the customer's accounts at the separate
entities and is supported by and derived from the detail on the
separate underlying respective account statements. NYSE Rule
Interpretation 409T(a)/06 sets forth several requirements for the use
of summary statements that include: (1) An indication that such summary
statement is provided for informational purposes and includes assets
held at different entities; (2) the summary statement identifies each
entity from which information is provided or assets are being held are
included, their relationship to each other, and their respective
functions (e.g., introducing or carrying brokerage firms, fund
distributor, banking or insurance product providers, etc.); (3)
relative to services provided for assets included on the summary, the
summary statement must clearly distinguish between assets held by each
entity, identify the customer's account numbers at each entity, and
provide a customer service telephone number at each entity (if the
account number and customer service numbers are not included on the
underlying statements); and (4) identify each entity that is a member
of SIPC. These requirements help ensure that customer account
statements clearly identify the respective entities involved and
distinguish brokerage assets from non-brokerage assets.\24\ Rule 2231
does not have a counterpart provision.\25\ In the Notice, FINRA had
proposed transferring the requirements of NYSE Rule Interpretation
409T(a)/06, without substantive changes, as proposed Supplementary
Material .08 to Rule 2231.
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\23\ See generally NYSE Information Memo 97-56 (December 1997).
\24\ NYSE Rule Interpretation 409T(a)/06 also provides that to
the extent that the summary statement aggregates the values of the
various accounts summarized or portions thereof, such aggregation
must be recognizable as having been arithmetically derived from the
separately stated totals or their components. In addition, the
summary statement, and the beginning and end of each underlying
account statement, must be clearly distinguishable from each other
by using some distinct form of demarcation (e.g., color, pagination
or columns). Further, there must be a written agreement between the
parties that are jointly distributing the combined statements with
the summary, that each entity has developed procedures and controls
for testing the accuracy of its own information included on the
customer statement. Finally, NYSE Rule Interpretation 409T(a)/06
requires that summary statements must comply with NYSE Rule 409T and
all interpretations thereof.
\25\ While Rule 2231 does not have a counterpart provision to
NYSE Rule Interpretation 409T(a)/06, FINRA has issued guidance
reminding firms of their responsibilities when providing customers
with consolidated financial account reports or ``consolidated
reports,'' which offer a broad view of customers' investments, may
include assets held away from the firm, and may provide not only
account balances and valuations, but performance data as well. In
that guidance, FINRA noted that these types of communications ``may
supplement, but do not replace, the customer account statement
required pursuant to [Rule 2231] and [NYSE Rule 409T], which is
prepared and disseminated to the customer through a separate
process. Consolidated reports may not be represented as a substitute
for, and must be distinguished from, account statements that are
required by rule.'' See Regulatory Notice 10-19 (April 2010).
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FINRA is proposing to retain this approach, but with some
clarifying revisions to proposed Supplementary Material .08 to
expressly state that the summary statement is for a customer's
convenience and includes assets that may not be held by the broker-
dealer, and does not replace any other statement the customer may
receive from other financial institutions that may hold the customer's
assets. Under proposed Supplementary Material .08, as revised, if a
multi-entity summary statement is sent to customers, it must: (1)
Indicate that the summary statement is provided for the customer's
convenience and includes assets that may not be held by the broker-
dealer; (2) indicate that the summary statement does not replace any
other statement(s) the customer may receive from other financial
institutions that hold the customer's assets; (3) identify each entity
from which information is provided or assets being held are included,
their relationship to each other (e.g., parent, subsidiary or
affiliated organization), and their respective functions (introducing
firm, carrying firm, fund distributor, banking or insurance product
provider, etc.); (4) clearly distinguish between assets held or
categories of assets held by each entity included in the summary; (5)
identify the customer's account number at each entity and provide a
customer service contact information at each entity (if the account
number and customer service information at each entity are included on
their respective account statements, then such information need not be
included on the summary statement); and (6) identify each entity that
is a member of SIPC. Proposed Supplementary Material .08 would also
require a member firm to ensure that to the extent that the summary
statement aggregates the values of the various accounts summarized or
portions thereof, such
[[Page 55646]]
aggregation is recognizable as having been arithmetically derived from
the separately stated totals or their components. In addition, proposed
Supplementary Material .08 would require that a member firm also must
distinguish the beginning and end of each separate statement by a
distinct form of demarcation. Finally, the proposed supplementary
material would require a member firm to ensure that there is a written
agreement between the parties jointly formulating or distributing the
combined statements with the summary attesting that each entity has
developed procedures and controls for testing the accuracy of its own
information included on the statements, and that the summary statement
complies with Rule 2231.
C. NYSE Provisions To Be Eliminated and Not Harmonized With Rule 2231
FINRA is proposing to delete NYSE Rule 409T and NYSE Rule
Interpretation 409T in their entirety on the basis that the underlying
concepts in these provisions have been included in Rule 2231, are
duplicative of other rules, or are outdated. The following describes
concepts found in the NYSE provisions that would not be incorporated
into Rule 2231.
1. NYSE Rule 409T Provisions
a. Confirmations or Other Communications (NYSE Rule 409T(b))
As described above, the proposed rule change would confine proposed
Supplementary Material .02 to customer account statements to lend
clarity to the scope of the provision. FINRA notes that the delivery
requirements of confirmations are governed by SEA Rule 10b-10
(Confirmation of transactions) and FINRA Rule 2232 (Customer
Confirmations).
b. Person Holding Power of Attorney (or Attorney-in-Fact) (NYSE Rule
409T(b) and Paragraphs (1) Through (6) Under NYSE Rule 409T.10
(Exceptions to Rule 409T(b))
In addition to eliminating NYSE Rule 409T(b), the proposed rule
change would eliminate NYSE Rule 409T.10(1) through (6), which provides
exceptions to the requirements of NYSE Rule 409T(b) for certain
identified persons or entities, such as persons having powers of
attorney.\26\ As described above, FINRA is proposing to adopt proposed
Supplementary Material .02 relating to the transmission of customer
account statements to other persons or entities, which would provide an
exception for court-appointed fiduciaries.
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\26\ See NYSE Rule 409T.10(4): ``Corporations of which partners,
stockholders or employees are officers or directors, and corporation
accounts over which such persons have powers of attorney, provided,
in each such case, the partner, stockholder or employee is duly
authorized by the corporation to receive communications covering the
account.''
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c. Legend on Account Statements Pertaining to Firm's Financial
Statements (NYSE Rule 409T(e)(1))
In general, NYSE Rule 409T(e)(1) requires the inclusion of a legend
on all account statements that notifies a customer that the firm's
financial statements are available for inspection at its offices or a
copy can be mailed upon request. The proposed rule change would
eliminate this requirement in light of existing requirements under
paragraph (c) (Customer Statements) of SEA Rule 17a-5 (Reports to be
Made by Certain Brokers and Dealers),\27\ which generally requires
broker-dealers that carry customer accounts to provide statements of
the broker-dealer's financial condition to their customers, and FINRA
Rule 2261 (Disclosure of Financial Condition), which requires a member
to make information relative to a member's financial condition
available to inspection by customers, upon request.
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\27\ 17 CFR 240.17a-5.
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d. Duplicate Copies of Monthly Statements to Guarantors (NYSE Rule
409T(g))
NYSE Rule 409T(g) provides that member firms carrying margin
accounts for customers should send duplicate copies of monthly
statements of guaranteed accounts to the respective guarantors unless
such guarantors have specifically provided in writing that they do not
want such statements sent to them. The proposed rule change would
eliminate NYSE Rule 409T(g) because this provision, which provides that
members should send duplicate account statements to guarantors, would
be addressed by the general requirement in proposed Supplementary
Material .02 to obtain written instructions from the customer to send
account statements to a third party.
e. Holding Customer Mail (NYSE Rule 409T.10(7))
As noted above, the proposed rule change would eliminate the
concept of holding customer mail set forth in paragraph (7) under NYSE
Rule 409T.10, as a member's obligations with respect to this activity
are addressed in Rule 3150, and proposed Supplementary Material .04
would expressly permit a member to hold customer mail consistent with
Rule 3150.
2. NYSE Rule Interpretation 409T
a. Use of Third Party Agents (NYSE Rule Interpretation 409T(a)/03)
In general, NYSE Rule Interpretation 409T(a)/03 requires a written
representation or undertaking from the member organization to the NYSE,
representing that certain conditions are satisfied when using third
party agents (e.g., service bureaus or other independent entities) to
prepare and transmit customer account statements.\28\ The proposed rule
change would eliminate NYSE Rule Interpretation 409T(a)/03 because such
arrangements are addressed under Rule 4311 and other relevant
guidance.\29\
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\28\ Under NYSE Rule Interpretation 409T(a)/03, a member
organization must represent that the third party is acting as agent
for the member organization, that the member organization retains
responsibility for compliance with NYSE Rule 409T(a), and that the
member organization has developed procedures and controls for
reviewing and testing the accuracy of statements, and will retain
copies of all such statements in accordance with applicable books
and records requirements. In addition, NYSE Rule Interpretation
409T(a)/03 addresses the allocation of responsibilities for
preparation and transmissions of statements under a carrying
agreement and provides that an introducing organization that is a
provider of services included in a member organization's statements
of accounts may not function as a third party agent and may not
itself prepare or transmit such statements.
\29\ See Notice to Members 05-48 (July 2005) (describing a
member's responsibilities when outsourcing activities to third party
service providers).
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b. Standards for Holding Mail for Foreign Customers--Rule 409T(b)(2)
Waivers (NYSE Rule Interpretation 409T(b)/01)
The proposed rule change would eliminate NYSE Rule Interpretation
409T(b)/01, which provides guidelines for holding confirmations,
statements, and broker-dealer financial statements for foreign
customers. A member's obligations with respect to holding customer mail
are addressed in Rule 3150, which is referenced in proposed
Supplementary Material .04.
D. Technical Changes to Other FINRA Rules
The proposed harmonization of the NYSE provisions with Rule 2231
would require technical amendments to Interpretative Material (``IM'')-
1013-1 (Membership Waive-In Process for Certain New York Stock Exchange
Member Organizations) and IM-1013-2 (Membership Waive-In Process for
Certain NYSE American LLC Member Organizations), which describe a
waive-in membership application process for some member organizations
of the
[[Page 55647]]
NYSE and NYSE American LLC. In general, subject to specified terms set
forth in these interpretative materials, a firm admitted to FINRA
membership through either of these provisions (i.e., ``waived-in
firm'') is not subject to the remaining FINRA rules that have yet to be
harmonized with their corresponding NYSE rules or interpretations under
the Temporary Dual FINRA-NYSE Member Rule Series. Currently, these
rules are Rule 2231 and the NYSE provisions. FINRA is proposing to
amend IM-1013-1 and IM-1013-2 to remove the reference to Rule 2231 as
all waived-in firms will become subject to Rule 2231, as amended
herein.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice. The effective date will be no later than 365 days following
publication of the Regulatory Notice announcing Commission approval of
the proposed rule change.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\30\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change will
further the purposes of the Act because the proposed rule change will
help protect investors and the public interest by largely retaining the
existing requirements under Rule 2231 that promotes effective
regulation of account statements. FINRA believes that by proposing
several new supplementary materials that provide clarity in areas such
as compliance with other FINRA rules, the use of electronic delivery,
transmission of account statements to other persons or entities,
information to be disclosed on statements, assets externally held, the
use of logos and trademarks, and the use of summary statements, the
proposed rule change will establish consistent industry standards
pertaining to the substance and the presentation of customer account
statements.
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\30\ 15 U.S.C. 78o-3(b)(6).
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In addition, FINRA believes proposed Supplementary Material .02, as
revised in light of comments received in response to the Notice,
strikes an appropriate balance to protect investors by ensuring that
customers continue to receive their account statements while reducing
the proposed rule change's impact on member firms. As discussed
previously, these revisions include: (1) Confining the scope only to
customer account statements; (2) adding a limited exception from the
general requirement to continue providing account statements to
customers who have authorized third party delivery by permitting member
firms to cease sending such statements to customers upon written
instructions from a court-appointed fiduciary acting on behalf of the
customer; and (3) clarifying that, notwithstanding the general
requirement to obtain written instructions from a customer to establish
third party delivery of account statements, firms may provide duplicate
customer account statements under Rule 2070, Rule 3210 or other similar
applicable federal securities laws, rules and regulations in accordance
with the requirements of such rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the regulatory need for the proposed rule change and
its potential economic impacts, including anticipated costs and
benefits, and the alternatives FINRA considered in assessing how to
meet its regulatory objectives.
1. Regulatory Need
Rule 2231 and the NYSE provisions have remained substantively
unchanged since their adoption into the consolidated FINRA rulebook.
Having two sets of rules with differing application or scope may
prevent firms from consistently applying the rules and thus create
uncertainties in compliance and lead to unnecessary costs. In an effort
to harmonize these rules, FINRA is proposing to amend Rule 2231 to
incorporate guidance and several provisions that exist under the NYSE
provisions and in other FINRA rules as supplementary materials.
Notably, FINRA is proposing to adopt new Supplementary Material .02,
derived in large part from NYSE Rule 409T(b), but with some adjustments
from the terms set forth in the Notice that would address a situation
in which a customer may want to transmit account statements to other
persons or entities, and stop receiving statements due to particular
circumstances. As a result of the proposed harmonization, FINRA is
proposing to eliminate the NYSE provisions in their entirety as they
are, to some degree, duplicative of Rule 2231 or would become obsolete
by the proposed rule change.
2. Economic Baseline
The current provisions governing customer account statements under
Rule 2231 and the NYSE provisions, and other related rules and current
industry practices serve as an economic baseline for the proposed rule
change. While all FINRA members are subject to Rule 2231, dual members
are also subject to several additional requirements existing only in
the NYSE provisions. As of December 31, 2020, there are 3,435 FINRA
members, of which 134 are dual members.
3. Economic Impacts
The substantive changes to Rule 2231 described in this proposed
rule change relate to the supplementary materials, most of which are
derived from the NYSE provisions and for that reason, the economic
impacts herein focus primarily on the proposed supplementary materials,
particularly proposed Supplementary Material .02.
Proposed Supplementary Material .02
In general, proposed Supplementary Material .02 addresses a
situation where a customer instructs the firm, in writing, to send his
or her account statements to another person or entity and limits the
customer's ability to stop receiving them, except where there is a
court-appointed fiduciary.\31\ One issue some commenters raised was the
requirement for firms to continue delivering account statements to the
customer even where the customer directs the firm, in writing, to send
the customer's account statements to a third party, and does not wish
to continue receiving them due to health concerns, among other reasons.
For example, SIFMA expressed the belief that the requirement to
continue delivering account statements to the customer may result in
the fraud that will likely arise from identity theft where account
statements are sent to a customer against his or her request or against
the request of a person with the legal authority to act on behalf of
the customer. SIFMA added that proposed Supplementary Material .02 may
have a
[[Page 55648]]
material negative impact on the client experience and serve to drive
clients to advocacy models without this requirement.
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\31\ Proposed Supplementary Material .02 also provides that
members are not required to obtain prior written consent to send
customer account statements in compliance with Rule 2070, Rule 3210,
or other similar applicable federal securities laws, rules, and
regulations in accordance with the requirements of such rule.
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FINRA believes that the customer's ability to stop receiving his or
her own account statements when there is a court-appointed fiduciary
strikes the appropriate balance between the investor protection
functions of Rule 2231 to ensure that the customer is able to monitor
and verify the transactions occurring in the customer's account and the
concerns raised by some commenters about ceasing the delivery of
account statements to a customer under compelling circumstances. FINRA
recognizes that some customers may incur supplemental costs to conform
to the continuous delivery requirement in proposed Supplementary
Material .02. Customers who do not wish to receive their account
statements may bear some burden in controlling and destroying them.
Alternatively, customers may incur costs associated with seeking the
exception through a court-appointed fiduciary. Customers may incur the
direct cost of seeking a court-appointed fiduciary as well as the
indirect cost of giving away other rights not associated with account
statements when a fiduciary is appointed by the court. To alleviate the
potential compliance costs associated with continuous statement
delivery to customers and the concern over possible identity theft and
fraud, members could encourage, if appropriate, their customers to
choose to receive their statements electronically in a manner
consistent with proposed Supplementary Material .03, a further
discussion of which follows below.
In addition, firms may also incur costs to conform to proposed
Supplementary Material .02 including the tracking and retention of each
customer's written instructions and official documents related to the
court appointment of a fiduciary, and where statements are delivered in
paper format, the costs of additional postage, printing, and other
attendant expenses.\32\ However, FINRA understands that in practice,
some firms already provide continuous account statement delivery to
their customers even with third party delivery arrangements in place
except in special circumstances (e.g., validated medical excuse), and
that concerns related third party delivery arrangements rarely arise.
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\32\ In the Notice, FINRA asked specific questions concerning,
among other things, the direct and indirect costs that may result
from proposed Supplementary Material .02. See generally Notice,
Section C (Request for Comment). SIFMA commented that a firm with
approximately 7.4 million accounts provided a cost estimate of over
14 million dollars just for the postage and mailings associated with
the nearly 2.2 million accounts potentially impacted by the
prospective application of proposed Supplementary Material .02,
excluding substantial staffing and technology costs.
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Other Proposed Supplementary Materials
Proposed Supplementary Materials .01, .03, and .04, respectively,
would remind firms of existing requirements under Rule 4311, SEC
guidance on using electronic media to satisfy delivery obligations, and
Rule 3150. The NYSE provisions that FINRA is proposing to incorporate
into Rule 2231 as Supplementary Materials .05, .06, .07, and .08 would
address, respectively, the information to be disclosed on statements,
externally held assets, the use of logos and trademarks, etc., and the
use of summary statements. FINRA does not expect these proposed
harmonizing amendments to Rule 2231 to impose material burdens on
member firms as these proposed supplementary materials are
substantially similar to existing rules or otherwise consistent with
current guidance.
4. Alternatives Considered
FINRA considered various suggestions in developing the proposed
rule change. The proposed rule change reflects the changes that FINRA
believes at this time to be the most appropriate for the reasons
discussed herein.
a. Frequency of Delivery of Account Statements to Customer
In the Initial Rule Filing and Amended Rule Filing, FINRA had
considered amending then NASD Rule 2340 to change the frequency of the
delivery of account statements to customers from quarterly to monthly.
The comments FINRA received in response to these prior filings
suggested that such a proposed change would result in significant
compliance costs for the industry without commensurate benefits for
customers, and could create conflicts with some securities laws and
regulations, among other things. Based on these comments, FINRA has
determined to retain the quarterly delivery requirement for customer
accounts statements currently set forth in Rule 2231(a).\33\
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\33\ The account delivery frequency aligns with NYSE Rule
409T(a).
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b. Definition of ``General Securities Member''
Currently, under Rule 2231(d)(2) a ``general securities member''
refers to ``any member that conducts a general securities business and
is required to calculate its net capital pursuant to the provisions of
SEA Rule 15c3-1(a). Notwithstanding the foregoing definition, a member
that does not carry customer accounts and does not hold customer funds
or securities is exempt from the provisions of this section.'' \34\ In
the Notice, FINRA specifically requested comment on potential
clarifications to the definition of ``general securities member.'' \35\
At this time, FINRA is not proposing to amend Rule 2231(d)(2).
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\34\ The NYSE provisions do not have a corresponding definition.
\35\ FINRA did not receive comments in this area, but FAF noted
that registered investment advisors (``RIAs'') do not fall under the
definition.
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c. Exception From the General Requirement To Send Account Statements to
Customers
Proposed Supplementary Material .02 as presented in the Notice did
not contemplate an exception from the firm's general requirement to
continue sending account statements to customers. In the Notice, FINRA
specifically requested comment on whether the proposal should include
specific exclusions that would allow members not to send account
statements to customers under identified situations. FINRA also
specifically sought comment on current industry practices, safeguards,
or best practices with respect to sending account statements to a
customer who is disabled or incapacitated, resides in a nursing home,
has a trusted person to review statements, or where there is a valid
POA or guardianship established.
In consideration of the comments to the Notice, FINRA has modified
proposed Supplementary Material .02 from the terms outlined in the
Notice. In addition to limiting the scope of the proposed supplementary
material to only customer account statements and omitting the specific
reference to POA, the proposed provision would create a limited
exception from the general requirement for firms to continue to deliver
account statements to a customer in cases where there is a court-
appointed fiduciary acting on behalf of the customer. The other aspects
of the proposed supplementary material would remain substantively
unchanged from the terms set forth in the Notice, including the option
to send account statements to the customer either in paper format or
electronically as provided in proposed Supplementary Material. 03.
FINRA notes that members could request customers that provide
written instructions to the member to send account statements to other
persons or entities to authorize the member to
[[Page 55649]]
satisfy the requirement to continue delivering statements to the
customer through electronic delivery consistent with proposed
Supplementary Material .03. In this manner, FINRA believes that member
firms could both mitigate the concerns relating to the costs of
postage, printing and mailing account statements, and address concerns
relating to possible identity theft and fraud in circumstances where
account statements are sent. With respect to the general requirement
for firms to continue to deliver account statements to the customer
even when the customer has directed the firm, in writing, to send
account statements to other persons or entities, FINRA understands that
even where there is a third party delivery arrangement in place, in
general, firms continue to send account statements to their customers
except under extenuating circumstances (e.g., validated medical
excuse). This industry practice accords with Rule 2231(a), which
reflects the core principle that customers should be fully informed of
the status of their accounts.
FINRA believes that proposed Supplementary Material .02, as
modified, lends the appropriate balance between ensuring that customers
continue to receive their account statements in accordance with Rule
2231(a) to ensure that they have the ability to monitor their account
activity while recognizing that there may be special circumstances
where a firm may stop the delivery of account statements to customers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in the Notice
14-35 Proposal. FINRA received 14 comment letters in response to the
Notice 14-35 Proposal. A copy of the Notice 14-35 Proposal is available
on FINRA's website at https://www.finra.org. A list of the comment
letters received in response to the Notice 14-35 Proposal is available
on FINRA's website.\36\ Copies of the comment letters received in
response to the Notice 14-35 Proposal are also available on FINRA's
website.
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\36\ See SR-FINRA-2021-024 (Form 19b-4, Exhibit 2e) for a list
of abbreviations assigned to commenters (available on FINRA's
website at https://www.finra.org).
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Several commenters expressed general support for the purpose and
intent of the Notice 14-35 Proposal.\37\ In addition, several
commenters noted that the proposed rule change includes meaningful
changes in response to comments on the Initial Rule Filing.\38\
However, as discussed below, commenters to the Notice 14-35 Proposal
objected to limiting a customer's ability to decline receiving
statements, particularly where the customer's health or capacity was in
question. In addition, the commenters raised concerns regarding
existing customer account relationships with third party delivery
arrangements in place. FINRA considered the commenters' concerns,
including the attendant operational aspects of sending account
statements to customers and third parties. The comments and FINRA's
responses are set forth below.
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\37\ See GSU, PIRC, SIFMA, WFA, and Wulff.
\38\ See Edward Jones, FSI, PIRC, SIFMA, WFA, and Wulff.
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1. General (Rule 2231(a))
A. Quarterly Customer Account Statement Delivery Requirement
Currently, Rule 2231(a) generally requires a general securities
member to send account statements to customers at least once each
calendar quarter containing a description of any securities positions,
money balances or account activity in the accounts since the prior
account statements were sent, except if carried on a DVP/RVP basis.
NYSE Rule 409T(a) similarly establishes a quarterly account statement
delivery requirement.
Several commenters expressed support for retaining the delivery
frequency in the current rule, noting that the quarterly delivery
requirement is consistent with industry practices.\39\ NASAA, however,
urged FINRA to revert to the monthly delivery frequency as originally
proposed in the prior rule filings, stating that monthly delivery would
allow customers to better monitor their accounts and identify any
potential unauthorized fraudulent activity. PIRC recommended that
customers should have the option of receiving quarterly or monthly
statements based on their own individual needs, and also recommended
that customers be provided with the option to receive account
statements electronically and to make available to customers a status
of their accounts via telephone or online at the customer's request.
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\39\ See Edward Jones, FSI, SIFMA, and WFA.
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FINRA notes that nothing in the rule, in its current form,
precludes a firm from sending account statements to a customer on a
more frequent schedule in a particular medium to meet the needs of the
customer. Consistent with the Notice 14-35 Proposal, FINRA is proposing
to retain the existing requirement in Rule 2231(a) for members to send
customer account statements at least once each quarter.
B. Securities Investor Protection Act (``SIPA'') Disclosure Requirement
Rule 2231(a) requires a general securities member to include in the
account statement a statement advising a customer to report promptly
any inaccuracy or discrepancy in that person's account to the member
firm, and that any oral communication to the member firm should be
reconfirmed in writing to further protect the customer's rights,
including rights under SIPA. NYSE Rule 409T(e)(2) similarly requires a
member organization to include a legend in the account statement with
the same advice.
PIRC expressed concerns with the SIPA disclosure requirement in
Rule 2231(a). PIRC stated that it has encountered firms that have used
the disclosure as a defense to claims in arbitration, suggesting that
the disclosure only appears to be intended to protect investors. PIRC
recommended that FINRA amend this portion of the rule to ensure that
such disclosure cannot be used against a customer in a dispute.
In 2001, the then U.S. General Accounting Office, now known as the
Government Accountability Office (``GAO''), issued a report in which it
made recommendations to the SEC and SIPC about ways to improve the
information available to the public about SIPC and SIPA.\40\ Among
other things, the GAO recommended that self-regulatory organizations,
such as FINRA, consider requiring firms to include information on
periodic statements or trade confirmations to advise investors that
they should document account discrepancies in writing. In response to
that recommendation, Rule 2231(a) was amended in 2006 to require that
account statements include a statement advising each customer to report
promptly any inaccuracy or discrepancy in that person's account to his
or her brokerage firm and clearing firm (where these are different
firms), and such statement also must advise the customer that any oral
communication should be re-confirmed in writing to further protect the
customer's rights, including rights under SIPA.\41\ Written
documentation is
[[Page 55650]]
important because in the event a firm goes into SIPC liquidation, SIPC
and the trustee generally will assume that the firm's records are
accurate unless the customer is able to prove otherwise.\42\ As FINRA
noted in the 2006 rule filing to amend Rule 2231(a), the disclosure
requirement does not impose any limitation whatsoever 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.\43\ Further, a
customer's failure to promptly raise such concerns, either in writing
or orally, does 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.\44\ FINRA believes that the provision
continues to enhance customer protection in accordance with GAO's
recommendation and has determined to maintain Rule 2231(a) pertaining
to SIPA disclosure in its current form.
---------------------------------------------------------------------------
\40\ See Securities Investor Protection: Steps Needed to Better
Disclose SIPC Policies to Investors, GAO-01-653 (May 25, 2001),
https://www.gao.gov/products/gao-01-653.
\41\ See Securities Exchange Act Release No. 54411 (September 7,
2006), 71 FR 54105 (September 13, 2006) (Order Approving File No.
SR-NASD-2004-171), as corrected by Securities Exchange Act Release
No. 54411A (October 6, 2006), 71 FR 61115 (October 17, 2006). See
also Notice to Members 06-72 (December 2006).
\42\ See supra note 41. 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, How SIPC Protects You:
Understanding the Securities Investor Protection Corporation (2015),
https://www.sipc.org/media/brochures/HowSIPCProtectsYou-English-Web.pdf. More recently, FINRA, NASAA, and SIPC jointly issued an
investor alert discussing the importance of regularly reviewing
brokerage account statements, and the steps a customer should take
to document concerns with an error on a brokerage statement or trade
confirmation. See FINRA Investor Alert, It Pays to Pay Attention to
Your Brokerage Account Statements (December 18, 2019), https://www.finra.org/investors/alerts/pay-attention-brokerage-account-statements. See also NASAA Investor Advisory, It Pays to Pay
Attention to Your Brokerage Account Statements'' (December 2019),
https://www.nasaa.org/53392/53392/?qoid=investor-advisories and SIPC
News Release, It Pays to Pay Attention to Your Brokerage Account
Statements, https://www.sipc.org/news-and-media/news-releases/20191218).
\43\ See supra note 42.
\44\ See supra note 42.
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2. DVP/RVP Accounts (Rule 2231(b))
Currently, Rule 2231(b) and NYSE Rule 409T(a) provide that
quarterly account statements do not need to be sent to a customer if
the customer's account is carried solely for execution on a DVP/RVP
basis, subject to specified conditions.\45\
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\45\ These rules do not qualify or condition the obligations of
members under SEA Rule 15c3-3(j)(1) concerning quarterly notices of
free credit balances on statements.
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Auerbach recommended that Rule 2231 provide an exemption from the
requirement to issue periodic account statements in the case of DVP/RVP
customers of a member firm that use a third party custodian selected by
the customer that is required to issue periodic account statements to
the customer. Auerbach stated that in such cases, periodically issued
brokerage firm account statements are duplicative, unnecessary and
increase costs for the broker, the customer, and the third party
custodian, and such accounts statements will compel the customer and
its custodian to reconcile their records with the statement from the
broker and require all three parties to expend additional time, energy,
and cost on a matter that is already handled through the normal
clearance and settlement process. SIFMA requested confirmation that
members may treat an institutional customer trading pursuant to
discretionary authority in the DVP/RVP account or the authorized person
or institution that opened the account as the ``customer'' for these
purposes and collect and maintain the consents from such institutions,
instead of the underlying customers.
FINRA believes that the issues raised by the commenters are better
addressed through FINRA's interpretative guidance process so that FINRA
has the opportunity to fully consider the relevant facts and
circumstances. In addition, FINRA emphasizes that the rule in its
current form allows a DVP/RVP customer to affirmatively elect not to
receive account statements. By requiring the customer's affirmative
consent, the customer's ability to receive quarterly statements is
preserved, and the member is precluded from unilaterally terminating
delivery of customer statements. Moreover, the customer is able to
promptly receive particular account statements upon request, and
promptly reinstate the delivery of account statements upon request.\46\
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\46\ See Notice to Members 06-68 (November 2006).
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3. Definitions (Rule 2231(d))
Rule 2231(d)(2) provides that a ```general securities member'
refers to any member that conducts a general securities business and is
required to calculate its net capital pursuant to the provisions of SEA
Rule 15c3-1(a). Notwithstanding the foregoing definition, a member that
does not carry customer accounts and does not hold customer funds or
securities is exempt from the provisions of [Rule 2231].'' FAF noted
that RIAs need to have access to customer information in order to
perform their duties to their customers or clients. FAF expressed
concern that RIAs are not covered by the definition of ``general
securities member'' in Rule 2231(d) and consequently, RIAs would not be
entitled to receive customer or client information.
The term ``general securities member'' identifies which FINRA
member firms are required to deliver account statements, not which
firms are entitled to receive such statements. Moreover, FINRA notes
that nothing in proposed Supplementary Material .02 would preclude a
customer from providing written consent to his or her member firm to
send account statements to an RIA, subject to the conditions set forth
in the proposed rule.\47\
---------------------------------------------------------------------------
\47\ RIAs also should consider their obligations under the
Investment Advisors Act of 1940, including Rule 206(4)-2 (Custody of
Funds or Securities of Clients by Investment Advisors).
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4. Compliance With Rule 4311 (Carrying Agreements) (Proposed
Supplementary Material .01)
Proposed Supplementary Material .01 to Rule 2231 would remind firms
that Rule 4311(c)(2) generally requires each carrying agreement, in
which accounts are carried on a fully disclosed basis, to expressly
allocate to the carrying firm the responsibility for the safeguarding
of funds and securities for the purposes of SEA Rule 15c3-3 and for
preparing and transmitting statements of account to customers.\48\ Rule
4311(c)(2) provides that the carrying firm may authorize the
introducing firm to prepare and transmit such statements on the
carrying firm's behalf with the prior written approval of FINRA.
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\48\ See Regulatory Notice 11-26 (May 2011).
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SIFMA requested clarification from FINRA regarding the obligation
to obtain written authorization from a customer regarding the mailing
of statements to a third party, and the ability of a clearing firm to
rely on introducing brokers in asserting the authenticity of a written
approval. SIFMA stated that introducing firms are in the best position
to know the customer and, as long recognized through contract and in
practice, and as permitted under Rule 4311, introducing firms are
typically allocated the responsibility for opening accounts as well as
maintaining and updating customer addresses, which ultimately drives
the delivery of account statements.
FINRA agrees that consistent with guidance on the allocation of
responsibilities between carrying firms and introducing firms and as
permitted under Rule 4311, clearing firms may reasonably rely on
introducing firms with respect to updating and keeping track of
required consents and addresses for third parties that may receive
account statements under this rule.
[[Page 55651]]
However, both carrying firms and introducing firms must have policies
and procedures in place to ensure that their respective
responsibilities are met.\49\
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\49\ See Regulatory Notice 09-64 (November 2009) (stating that
while firms may allocate responsibility for complying with
particular requirements between the clearing and the introducing
firms, both firms must have policies and procedures in place to
ensure that their respective responsibilities are met).
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5. Transmission of Customer Account Statements to Other Persons or
Entities (Proposed Supplementary Material .02)
Many commenters, while supportive of the Notice 14-35 Proposal
overall, expressed views on proposed Supplementary Material .02.\50\
NAELA expressed doubt that the proposed provision would protect
vulnerable persons (e.g., persons with disabilities or who are
incapacitated) in any meaningful way. The views of many other
commenters generally related to the scope of the proposed provision,
customer instructions to establish delivery of the customer's account
statements to a third party, the circumstances that may warrant an
exception to the general requirement for a firm to continue delivering
account statements to the customer even where there is a third party
delivery arrangement in place, operational concerns, and
implementation.
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\50\ See Edward Jones, FAF, Feaver, FSI, GSU, Malecki, NAELA,
NASAA, PIRC, SIFMA, WFA, and Wulff.
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A. Scope
In the Notice 14-35 Proposal, proposed Supplementary Material .02
pertained to account statements ``or other communications'' relating to
the customer's account. Commenters expressed concerns and sought
clarification relating to the scope of the proposed provision.
SIFMA raised concerns with the inclusion of ``other
communications,'' stating that the proposed supplementary material
could include a host of operational communications with third parties
(e.g., custodians, issue and transfer agents, counterparties to trades,
banks in connection with disbursements and deposits and a member firm's
own vendors) where firms need to send ``communications'' about a
customer's account in order to provide a service requested for the
customer. SIFMA requested clarity regarding the scope of ``other
communications'' in the context of the proposed rule. FINRA agrees with
the concerns raised by SIFMA in this regard and for clarity, has
adjusted the language by deleting the references to ``or other
communications'' from proposed Supplementary Material .02 so that the
scope of the propose provision is limited solely to customer account
statements.
SIFMA also sought clarification pertaining to the implications of
Supplementary Material .02 on a firm's existing obligations under SEA
Rule 17a-3(a)(17)(B)(2) and FINRA Rule 3110(c)(2) to confirm a
customer's address change. FINRA notes that proposed Supplementary
Material .02 is not intended to impose additional requirements that
would impact a firm's current obligations to validate a change in
address for a customer under the applicable SEA and FINRA rules.
B. Customer Instructions To Deliver Account Statements to Third Party
Proposed Supplementary Material .02 provides that in general, a
member may not send account statements relating to a customer's account
to other persons or entities unless the customer has provided written
instructions to the member to send such statements to a designated
third party. However, in order to comply with Rule 2070, Rule 3210 or
other similar applicable federal securities laws, rules and
regulations, proposed Supplementary Material .02 would provide that a
firm is not required to obtain written instructions from the customer
to meet the requirements of such applicable rules or regulations.
Several commenters expressed views on the general requirement for
firms to obtain written instructions from customers.\51\ PIRC expressed
its support for the general requirement. NAELA noted that persons with
disabilities or who are incapacitated are unlikely able to send written
direction to their financial institution to send account statements to
a third party. Two commenters questioned the need for written
instructions, suggesting that oral instructions should suffice.\52\
Other commenters recommended imposing additional methods to validate
customer instructions and the nature of the relationship between the
customer and third party.\53\
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\51\ See Edward Jones, FAF, NASAA, and SIFMA.
\52\ See Edward Jones and SIFMA.
\53\ See Malecki and NASAA.
---------------------------------------------------------------------------
a. Oral Instructions
Two commenters recommended that oral consent of the customer,
combined with prominent disclosure on the customer's account
statements, identifying the third party or interested party that is
also receiving statements or other appropriate documentation of such
instruction, would lend more flexibility to firms and customers to
establish third party delivery of account statements.\54\ Edward Jones
explained that there was a regulatory distinction between adding a
third party to an account to receive account statements and directing
all account statements to a third party instead of to the customer,
noting that when a third party is being added to an account, a more
effective approach would be to require the oral consent of the
customer. SIFMA added that oral instructions would prevent the
operational challenge of obtaining written consent in instances where
written consent is impracticable. These commenters stated that oral
consent and disclosure would be consistent with current industry
practice.
---------------------------------------------------------------------------
\54\ See Edward Jones and SIFMA.
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FINRA notes that similar views were expressed by commenters to the
prior rule filing,\55\ and FINRA continues to maintain the view that
instructions from customers with respect to the delivery of account
statements should be in writing to ensure proper consent is received
and can be evidenced. FINRA believes that oral instructions are
insufficient in this context due to several concerns such as identify
theft and privacy concerns, among others, and that firms must be able
to document and record a customer's consent to send account statements
to a third party. FINRA has permitted firms to act on oral instructions
from customers in other circumstances (e.g., trading instructions)
largely to allow customer and firms to act expeditiously to execute
securities transactions that are time sensitive in nature. However, the
delivery of customer account statements to a third party presents no
such concerns and therefore must require written customer consent for
this delivery arrangement.
---------------------------------------------------------------------------
\55\ See supra note 6.
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b. Written Instructions From Third Party or Account Holder of Joint
Account
Two commenters raised practical concerns with procuring written
instructions from customers.\56\ FAF noted that some third parties such
as RIAs or retirement custodians have a need to receive customer
account statements in order to perform their duties for customers, and
these third parties that commonly receive customer account statements
may have their own paperwork or form that a customer completes to
authorize a designated third party to receive account statements. FAF
recommended adjusting the language in the proposed supplementary
material to permit a firm
[[Page 55652]]
to treat a customer's completion of the third party's own paperwork or
form as the written instructions from the customer, suggesting that
this adjustment would represent a more practical approach to the
process by permitting a firm to accept written instructions to
authorize the transmission of account statements to a third party
directly from such third party rather than from the customer directly.
In the alternative, FAF recommended allowing firms to send account
statements to third parties without customer consent ``by simply
relying on the nature of the third party[,]'' reasoning that third
parties such as RIAs or custodians of individual retirement accounts
``have a need to receive a duplicate statement of the client for the
client's benefit.'' FINRA believes that FAF's recommendation does not
assure the goal of limiting provision of customer account information
to situations where the customer affirmatively instructed or consented
to delivery of account statements to third parties. Moreover, FINRA
believes that proposed Supplementary Material .02 in its current form
would not preclude a customer from using a thirty party's form or other
template to help a customer convey the written instructions directly to
the firm to establish the delivery account statements to a third party
such as an RIA or other custodian of customer assets.
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\56\ See FAF and SIFMA.
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With respect to accounts that have more than one owner, SIFMA noted
that there could be significant operational challenges in requiring all
joint account holders to consent to a third party delivery arrangement
requested by one of the account holders. SIFMA expressed the belief
that in such cases, a firm should be able to accept instructions from
one accountholder to send statements to a third party, provided the
accountholder making the request would not be seeking to suppress the
delivery of customer account statements to the other joint
accountholder(s) in accordance with the rule. FINRA believes that the
proposed provision would contemplate the situation SIFMA described to
require a customer, irrespective of the type of account--joint or
individual--to provide written instructions to the firm to send account
statements to a third party without affecting the delivery of account
statements to the other joint accountholders.
c. Validation of Customer Instructions
Proposed Supplementary Material .02 does not specify the manner in
which firms must validate a customer's written instructions or the
nature of the relationship between the customer and third party
receiving the account statements. Two commenters recommended ways to
verify a customer's instructions and the nature of the customer's
relationship to the third party.\57\
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\57\ See Malecki and NASAA.
---------------------------------------------------------------------------
NASAA recommended rigorous verification of a customer's
instructions by requiring a firm to obtain a medallion signature
guarantee or notarization to help ensure that a customer in fact wishes
to have the account statements delivered to a third party. NASAA also
recommend requiring the firm to provide the customer with notices,
delivered on the same frequency as account statements, indicating that
the account statements have been delivered to the third party pursuant
to the customer's instructions, and directing the customer to contact
the firm to inform the firm if he or she no longer desires to have the
account statements delivered to the designated third party. Feaver
seemed to express support for a customer's ability to send account
statements to a third party, but also seemed to suggest that some
verification or confirmation practices as to the identity of the third
party be imposed. Malecki expressed its support for the ability for a
customer to elect to have account statement delivered to a third party,
noting that the ability for a family member, tax professional, estate
lawyer or trusted friend to be able to obtain copies of statements may
be important to quickly identify and prevent fraud. However, Malecki
suggested that the proposed provision go further and require a firm to
identify the relationship between the customer and the third party
receiving the account statements in order to clearly delineate the
roles of the respective parties, noting that a firm should clearly
understand the third party's relationship to the customer.
FINRA believes that a firm's obligation to conduct the requisite
validation pertaining to servicing a customer's account are addressed
under Rule 2090 (Know Your Customer). Rule 2090 requires a firm to use
reasonable diligence in regard to the opening and maintenance of every
account, to know the essential facts concerning every customer and
concerning the authority of each person acting on behalf of such
customer. The ``essential facts'' to ``knowing the customer'' include,
among other things, those facts required to act in accordance with any
special handling instructions for the account and understand the
authority of each person acting on behalf of the customer. Thus, under
Rule 2090, member firms are generally required to know the names of any
persons authorized to act on behalf of a customer and any limits on
their authority that the customer establishes and communicates to the
member firm.
d. Exception to the Requirement To Obtain Instructions From Customer
As noted above, proposed Supplementary Material .02 would clarify
that notwithstanding the general requirement for a firm to obtain
written instructions from the customer to transmit accounts statements
to a third party, a firm may provide such statements under Rule 2070,
Rule 3210, or other similar applicable federal securities laws, rules
and regulations in accordance with the requirements of such rules or
regulations.
SIFMA expressed its appreciation for this clarification, but stated
that the exception should be broadened to permit firms to send customer
account statements to an employer that is a registered investment
company or RIA, both of which are also required to obtain this
information about their associated person's personal securities
dealings under Rule 17j-1 under the Investment Company Act of 1940 \58\
and the provisions of an investment advisor's code of ethics as
required by Rule 204A-1 under the Investment Advisors Act of 1940,\59\
respectively. In response to this comment, FINRA has adjusted the
language in proposed Supplementary Material .02 to refer, in general
terms, to other similar applicable federal securities laws, rules and
regulations in accordance with the requirements of such rule.
---------------------------------------------------------------------------
\58\ 17 CFR 270.17j-1.
\59\ 17 CFR 275.204A-1.
---------------------------------------------------------------------------
C. The Requirement To Continue Delivery of Account Statements to
Customer Even With Third Party Delivery Arrangement in Place
Consistent with the Notice 14-35 Proposal, the proposed rule change
would limit a customer's ability to decline receiving account
statements by requiring a firm to continue sending account statements
to the customer even where the customer directs the firm, in writing,
to send the customer's account statements to a third party. This
general requirement is intended to serve investor protection functions
by ensuring that the customer is able to monitor and verify the
transactions occurring in the customer's account. The proposed
provision accords with
[[Page 55653]]
the Commission's policy view in the context of the delivery of
transaction confirmations to a third party (e.g., a fiduciary); that
is, where a customer has duly waived receipt of confirmations, the
customer may not waive the receipt of periodic account statements.\60\
---------------------------------------------------------------------------
\60\ In adopting amendments to SEA Rule 10b-10 in 1994, the
Commission acknowledged that a customer may waive the personal
receipt of an immediate confirmation in the context of where a
fiduciary has discretion over the customer's account under the
following conditions: ``the broker-dealer must (1) obtain from the
customer a written agreement that the fiduciary receive the
immediate confirmation; and (2) send to the customer a periodic
report, not less frequently than quarterly, containing the same
information that would have been contained in an immediate
confirmation. [Citation omitted]. The customer may not waive this
periodic report. [Citation omitted].'' See Securities Exchange Act
Release No. 34962 (November 10, 1994), 59 FR 59612, 59614 (November
17, 1994) (``SEA Rule 10b-10 Release''). As indicated in the Amended
Rule Filing, FINRA reiterates the reminder to members that they
remain subject to any conditions or requirements specified in any
release, interpretation, ``no-action'' position or exemption issued
by the SEC or its staff in the context of SEA Rule 10b-10 that
members may rely on for relief from certain delivery obligations of
trade confirmations as specified in such rule (e.g., the manner and
frequency of delivering periodic account statements in lieu of
immediate trade confirmations) and Rule 2231, as proposed herein, is
not intended to alter any such conditions or requirements.
---------------------------------------------------------------------------
With the exception of GSU favoring the continuous statement
delivery requirement, several other commenters expressed concerns with
it, asserting, in general, that the proposed provision would undermine
a customer's express wishes to decline receiving account statements and
would not further customer protections by increasing the risk for
fraudulent activity, particularly for investors who are elderly,
disabled or incapacitated, or who rely on a caregiver in an assisted
living facility or at home.\61\ SIFMA offered several suggestions for
FINRA to consider, including to delete the proposed general continuous
delivery requirement or in the alternative, follow the existing
approach under NYSE Rule 409T(b). Other suggestions included creating
exceptions to the general delivery requirement under specified
circumstances (e.g., incapacitation) \62\ or permitting a customer to
opt-out of receiving statements.\63\ The comments to proposed
Supplementary Material .02 as presented in the Notice 14-35 Proposal
are set forth below.
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\61\ See Edward Jones, FSI, NAELA, NASAA, SIFMA, WFA, and Wulff.
\62\ See SIFMA and Wulff.
\63\ See PIRC.
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a. The Existing Approach Set Forth Under NYSE Rule 409T(b)
As described above, NYSE Rule 409T(b) currently allows a customer
to instruct a firm to direct account statements, confirmations or other
communications to a third party holding a POA over the account where
the customer either provided the firm written instructions or the firm
continued to send the customer duplicate copies of the statements,
confirmations or other communications. Thus, under NYSE Rule 409T(b), a
customer who has declined or waived the receipt of account statements
may then effectively forego the opportunity to directly monitor account
activities.
SIFMA noted that in the SEA Rule 10b-10 Release, the Commission did
not invalidate NYSE Rule 409T(b). However, when discussing the
application of the Commission's policy and its relationship with NYSE
Rule 409T, the Commission suggested that NYSE Rule 409T was less
restrictive than the Commission's policy view by noting that under NYSE
Rule 409T, a customer ``who waived receipt of the immediate
confirmation would receive more information with his quarterly account
statement than that currently required under NYSE Rule [409T]. To the
extent the rule of the NYSE, or any self-regulatory organization,
conflict with the Commission's stated policy, the more restrictive
requirement would govern. Thus, an NYSE member wishing to take
advantage of a waiver would be required to adhere to these Commission
requirements in addition to any obligations imposed by Rule [409T]''
\64\
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\64\ See SEA Rule 10b-10 Release, supra note 60, at 59 FR 59614
n.36.
---------------------------------------------------------------------------
SIFMA observed that proposed Supplementary Material .02 would be
more restrictive than NYSE Rule 409T(b), particularly as applied to the
delivery of account statements in connection with the custody of
advisory accounts, noting that duplicate account statements are not
required to be sent to customers when a designee has been appointed
under Rule 206(4)-2 of the Investment Advisers Act of 1940 (``Advisers
Act'').\65\ SIFMA expressed the belief that NYSE Rule 409T(b) has
served both the investing public and the industry well, and that FINRA
has not established widespread complaints or problems in this area that
would justify such a substantial, potentially risky, and costly
expansion of account statement delivery obligations. SIFMA urged FINRA
to delete the general requirement or alternatively, retain the more
flexible approach in NYSE Rule 409T(b). By taking the approach in NYSE
Rule 409T(b), SIFMA expressed the view that firms would then be able to
honor the requests of customers, and those with appropriate legal
standing on behalf of their customers, to direct account statements to
a designated third party and avoid the additional costs and potential
account security concerns associated with sending account statements to
the customer's address of record. SIFMA recommended that FINRA amend
proposed Supplementary Material .02 to model the requirements of NYSE
Rule 409T(b) by replacing ``and'' with ``or'' in the proposed rule text
to provide firms with greater flexibility to comply with the proposed
rule and defining the term ``customer,'' for purposes of proposed
Supplementary Material .02 to mean a person with the legal authority to
act on behalf of an accountholder, including an attorney-in-fact, a
court-appointed fiduciary or person with similar legal authority.
---------------------------------------------------------------------------
\65\ 17 CFR 275.206(4)-2.
---------------------------------------------------------------------------
SIFMA also noted that firms are currently subject to rules that
mitigate concerns that a customer might be financially exploited by an
individual who has authority over the customer's financial affairs. For
example, SIFMA stated that Rule 2090 requires a firm to use reasonable
diligence in regard to the opening and maintenance of every account, to
know the essential facts concerning every customer, and essential facts
would include those about anyone who has authority over a customer's
account. In addition, SIFMA noted that a firm is required to have
reasonable procedures in place to identify and react to ``red flags''
that might indicate the occurrence of potential fraud.
b. Create Exceptions to the General Requirement To Continue Delivery of
Account Statements to Customer
In the Notice 14-35 Proposal, FINRA requested comment on the
situations that would merit an exception from the general requirement
to continue delivery of account statements to a customer. Several
commenters expressed views on the general requirement for a firm to
continue delivering account statements to the customer even where there
is a third party delivery arrangement in place, stating that imposing
such a requirement as a matter of course would increase a customer's
risk of exposure to fraud or other misconduct.\66\ FINRA recognizes
that in some cases, it may not be in the customer's interest to
continue receiving account statements when there is an arrangement to
deliver the statements to a third party. In response to comments, FINRA
has adjusted
[[Page 55654]]
proposed Supplementary Material .02 as presented in the Notice 14-35
Proposal by creating an exception that would permit a ``court-appointed
fiduciary'' (as that term is described in the proposed provision) to
stop sending account statements to the customer upon written
instructions from the court-appointed fiduciary, and other specified
conditions. Absent a court-appointed fiduciary, a firm cannot cease
delivering account statements to a customer. Further, FINRA believes
that a customer may authorize the firm to satisfy the requirement to
continue delivering account statements through electronic delivery
consistent with proposed Supplementary Material .03, which would
eliminate the need for delivery of physical statements to the
customer's home, while still providing the customer the opportunity to
review their account statements in a timely manner. FINRA believes that
proposed Supplementary Material .02, as adjusted, creates an
appropriate balance between investor protection and the concerns raised
by the commenters. As set forth below, some commenters described a
variety of circumstances that should warrant an exception to the
general requirement. These circumstances relate to customers with legal
representatives and other trusted contacts; customers who are elderly,
disabled or incapacitated; and foreign and high net worth customers.
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\66\ See Edward Jones, FSI, NASAA, SIFMA, WFA, and Wulff.
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(I) Legal Representative and Other Trusted Contacts
SIFMA expressed concern that proposed Supplementary Material .02
could potentially erode the legal authority of the person granted a POA
and may potentially create a conflict with state laws governing POAs.
SIFMA noted that 17 states have laws that outline penalties for
financial institutions that refuse to respect the legal standing of a
person acting with the authority of a POA. Two commenters expressed
concern that the proposed provision would also prevent the operability
of a springing POA or limit its usefulness because a springing POA only
becomes effective under certain circumstances outlined by the
customer.\67\ SIFMA added that the proposed provision would create a
situation where a person with the power to stand in the shoes of the
incapacitated person, and perform many other aspects of his or her
legal rights, would not be able to redirect mail away from an address
at which the incapacitated person once resided. Two commenters
indicated that an exception should also be made for legal executors of
a decedent's estate or for a person with legal authority to act on
behalf of a customer.\68\ FAF expressed concern that the proposed
provision does not create an exception for certain third parties, such
as investment advisers, trust departments, custodians and pension plan
trustees. FAF indicated that these entities need to receive customer
accounts statements to perform their duties for the customer.
---------------------------------------------------------------------------
\67\ See SIFMA and WFA.
\68\ See FSI and Wulff.
---------------------------------------------------------------------------
(II) Elderly, Disabled or Incapacitated Customers
Several commenters contended that mandating the delivery of account
statements to a customer who is deemed incapacitated or impaired,
living in a nursing facility or receives in-home care, or an elderly
customer who has expressly designated another person or entity to
receive the statements would increase the risk of unintended or
involuntary exposure of financially sensitive information to third
parties.\69\ Wulff noted that these persons would involuntarily have
their financial affairs and personally identifiable information exposed
to unvetted third parties. PIRC recommended that a customer be
permitted to opt-out, in writing, of receiving account statements,
particularly where the customer is disabled or incapacitated, or a
customer resides in a nursing home facility. Two commenters stated that
this class of investors should be able to decline delivery of their
statements and instead have them delivered to an authorized third
party.\70\ Edward Jones recommended that FINRA consider an exemption to
the general requirement where a firm has received written documentation
from a medical professional verifying the disability or incapacity of
the customer. Several commenters expressed the view that the preference
of the customer, as to his or her own best interests, should
govern.\71\
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\69\ See Edward Jones, FSI, NASAA, SIFMA, WFA, and Wulff.
\70\ See Edward Jones and FSI.
\71\ See FSI, PIRC, and Wulff.
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(III) Foreign and High Net Worth Customers
SIFMA raised similar concerns with respect to foreign or high net
worth customers who would also be at risk of exposure of their
financial information since in some foreign jurisdictions, mail
delivery may not be secure, and a display of wealth may put such
customers at risk of harm (e.g., kidnapping for ransom). SIFMA noted
that high net worth customers do not want sensitive information
contained within statements to be delivered to their homes because of
unique challenges such as frequent travel or multiple homes and, as
such, often delegate the handling and review of statements to a trusted
agent or third party, who may not be a legal representative of the
customer. While Rule 3150, incorporated under proposed Supplementary
Material .04, cites safety or security concerns as examples of
acceptable reasons for a customer's written instruction to ``hold
mail,'' SIFMA noted that the circumstances described above are not
``hold mail'' arrangements under Rule 3150. SIFMA indicated that
arrangements to deliver statements to a third party for similar reasons
should be permitted with written customer instruction.
D. Operational Concerns and Implementation of Proposed Supplementary
Material .02
Two commenters requested prospective application of the
provision.\72\ Edward Jones stated that requiring remediation of
existing accounts would impose significant costs and would not provide
meaningful additional protection to investors. SIFMA emphasized the
need for prospective application due to material operational
challenges, which include persons who have become incapacitated since
providing the original instruction to direct mail to a third party, as
well as the significant costs associated with remediating hundreds of
thousands of account relationships. The proposed rule change would
apply prospectively, and FINRA intends to give member firms sufficient
time to comply with the proposed rule change.\73\
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\72\ Edward Jones and SIFMA.
\73\ A member firm with a customer having a pre-existing
arrangement to deliver account statements to a third party that was
established before the effective date of proposed Rule 2231.02 would
not be subject to the requirements of the proposed new rule solely
with respect to such account until that pre-existing third party
delivery arrangement is modified in any manner. Where any existing
or new customer of the firm seeks to establish a third party
delivery arrangement on or after the effective date of proposed Rule
2231.02, the firm would be subject to the terms of the new rule.
Relatedly, in connection with its support for the proposed rule
change to eliminate NYSE Rule Interpretation 409T(a)/03, SIFMA
requested that FINRA confirm in a rule release commentary or an
adopting Regulatory Notice that though the conditions in NYSE Rule
Interpretation 409T(a)/03 would no longer apply, firms may continue
to rely on this NYSE interpretation for preexisting agreements that
use third party agents. The proposed rule change is not intended to
impact preexisting agreements that use third party agents if they
comport with applicable FINRA rules and guidance.
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[[Page 55655]]
6. Proposed Supplementary Material .03 (Use of Electronic Media To
Satisfy Delivery Obligations)
Proposed Supplementary Material .03 would allow a firm to satisfy
its account statement delivery obligations under Rule 2231 by using
electronic media, subject to compliance with standards established by
the SEC on the use of electronic media for delivery purposes. As stated
above, this provision is consistent with prior guidance FINRA has
issued on the use of electronic media to satisfy delivery
obligations.\74\
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\74\ See supra note 20.
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SIFMA asserted that the cost burden associated with this new
requirement would be particularly severe for members where customers
have not elected to receive electronic account communications. GSU
supported the use of electronic delivery of account statements only if
the customer affirmatively elects that option on the basis that a
customer who is not technologically savvy might not know how to
electronically opt-out of an electronic statement policy, creating
confusion as well as the possibility of a customer not being able to
access his or her statements. The Center for Copyright Integrity urged
that customer account statements should be delivered in paper form only
on the belief that paper format will keep customers better informed on
the contents of their files.
Proposed Supplementary Material .03 does not mandate the use of
electronic media to deliver account statements, but permits a firm to
do so subject to the standards established by the SEC. A firm may be
able to evidence satisfaction of delivery obligations, for example, by
obtaining the intended recipient's informed consent to deliver through
a specified electronic medium and ensuring that the recipient has
appropriate notice and access. SEC guidance describes ``informed
consent'' as one that specifies the electronic medium or source through
which the information will be delivered and the period during which the
consent will be effective, and describes the information that will be
delivered using such means.\75\ FINRA notes that proposed Supplementary
Material .03 is not intended to impose any new delivery obligations
beyond existing requirements.
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\75\ See supra note 20.
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7. Proposed Supplementary Material .05 (Information To Be Disclosed on
Statement)
Proposed Supplementary Material .05, derived largely from NYSE Rule
Interpretation 409T(a)/02, including note 1, would specify the
information that must be clearly and prominently disclosed on the front
of a customer account statement, i.e., the identity of the introducing
and carrying organizations, that the carrying organization is a member
of SIPC, and the opening and closing account balances for the
customer's account.
Two commenters expressed views on the appearance of SIPA
disclosures on account statements.\76\ GSU indicated its support for
the requirement to provide the SIPA disclosure on the front of an
account statement because doing so would aid smaller investors to seek
the help they might need in order to better understand their statements
and monitor their accounts. PIRC recommended that FINRA provide
guidelines with respect to how the SIPA disclosure should appear on an
account statement, citing as an example, that FINRA should consider
requiring firms clearly highlight the SIPA disclosure to prevent firms
from ``burying SIPA disclosures in the back of accounts statements or
in the fine print, which customers may not be able to locate easily.''
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\76\ See GSU and PIRC.
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FINRA believes that proposed Supplementary Material .05 gives
member firms adequate guidance and allows flexibility in providing this
information while also ensuring that the SIPC status of the clearing
firm is disclosed on the front of the statement.\77\
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\77\ Rule 2266 (SIPC Information) requires all member firms,
unless they are excluded from SIPC membership and are not SIPC
members, or whose business consists exclusively of the sale of
investments that are ineligible for SIPC protection, to advise all
new customers, in writing, at the opening of an account, that they
may obtain information about SIPC, including the SIPC brochure, by
contacting SIPC. Such member firms also must provide SIPC's website
address and telephone number, and provide all customers with the
same information, in writing, at least once each year.
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8. Use of Logos, Trademarks, etc. (Proposed Supplementary Material .07)
Proposed Supplementary Material. 07 incorporates, without
substantive change, NYSE Rule Interpretation 409(a)/05, which governs
the use of trademarks and logos of other persons on account statements
by requiring that firms not use the logo, trademark or other similar
identification of a person (other than the introducing firm or clearing
firm) on a customer account statement in a manner that is misleading or
causes customer confusion. SIFMA requested clarification as to what
logos, trademarks, and other similar identification would be
``misleading'' to customers or cause ``customer confusion.'' To the
extent commenters have questions about the application of the proposed
rule to particular facts and circumstances, FINRA will work with the
industry to address interpretive issues as needed.
9. Other Comments
SIFMA requested confirmation that unless a customer requests
otherwise, a firm may combine account statements for accounts of two or
more customers sharing the same address in the same envelope addressed
to one member of the household. In the SEC Householding Release, the
SEC stated that it was adopting the ``householding'' rules because
``the distribution of multiple copies of the same document to security
holders who share the same address often inundates security holders
with unwanted mail and causes the company to incur higher than
necessary printing and mailing costs.'' \78\ To avoid duplication, the
SEC rule allows funds to deliver a single copy of the same document to
investors who share the same address.\79\ FINRA has not formally
provided guidance on the issue of ``householding'' customer account
statements and believes that the commenter raises an issue that is
outside the scope of this proposed rule change. As such, FINRA believes
that the questions raised by SIFMA requires further discussion with the
industry and investors to better understand the relevant facts and
circumstances.
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\78\ See Securities Act Release No. 7912 (October 27, 2000), 65
FR 65736 (November 2, 2000) (``SEC Householding Release'').
\79\ See Rule 154 (Delivery of prospectuses to investors at the
same address) under the Securities Act of 1933. 17 CFR 230.154. See
also SEA Rule 14a-3 (Information to be furnished to security
holders). 17 CFR 240.14a-3. Rules 154 and 14a-3 permit the
``householding'' of prospectuses, annual reports, investment company
semi-annual reports, and proxy statements or information statements
to investors who share an address. Firms must obtain affirmative
consent from investors or may rely on a finding of implied consent,
subject to the conditions outlined in the Rule.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
[[Page 55656]]
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2021-024 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2021-024. This
file number should be included on the subject line if email 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 website (https://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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2021-024 and should be submitted on or before October 27, 2021.
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\80\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21767 Filed 10-5-21; 8:45 am]
BILLING CODE 8011-01-P
