[Federal Register Volume 70, Number 31 (Wednesday, February 16, 2005)]
[Notices]
[Pages 7990-7991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-649]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51181; File No. SR-NASD-2004-171]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to Rule 2340 (Customer Account Statements)

February 10, 2005.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on November 2, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), 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 NASD. On February 2, 2005 NASD filed Amendment No. 1 to the proposed 
rule change.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, NASD filed a partial amendment to change 
the proposed effective date from 30 days following Commission 
approval to 180 days following Commission approval. NASD also 
changed the reference to ``each customer'' to ``the customer'' in 
the sentence proposed to be added as the second sentence to 
paragraph (a) of Rule 2340.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Rule 2340 to require that account 
statements include a statement that advises each customer to promptly 
report any inaccuracy or discrepancy in that person's account to his or 
her introducing firm and clearing firm (where these are different 
firms) and to re-confirm any oral communications in writing to further 
protect the customer's rights, including rights under the Securities 
Investor Protection Act (``SIPA''). Below is the text of the proposed 
rule change. Proposed new language is in italics.
* * * * *

2340. Customer Account Statements

(a) General
    Each general securities member shall, with a frequency of not less 
than once every calendar quarter, send a statement of account 
(``account statement'') containing a description of any securities 
positions, money balances, or account activity to each customer whose 
account had a security position, money balance, or account activity 
during the period since the last such statement was sent to the 
customer. In addition, each general securities member shall include in 
the account statement a statement that advises the customer to report 
promptly any inaccuracy or discrepancy in that person's account to his 
or her brokerage firm. (In cases where the customer's account is 
serviced by both an introducing and clearing firm, each general 
securities member must include in the advisory a reference that such 
reports be made to both firms.) Such statement also shall advise the 
customer that any oral communications should be re-confirmed in writing 
to further protect the customer's rights, including rights under the 
Securities Investor Protection Act (SIPA).
(b) through (d) No change
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD 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. NASD 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

(a) Purpose
    On May 25, 2001, the U.S. General Accounting Office (``GAO'') 
issued Securities Investor Protection: Steps Needed to Better Disclose 
SIPC Policies to Investors (GAO-01-653). In that report, the GAO made 
recommendations to SEC and the Securities Investor

[[Page 7991]]

Protection Corporation (``SIPC'') about ways to improve the information 
available to the public about SIPC and the Securities Investor 
Protection Act.\5\ Among other things, the GAO recommended that self-
regulatory organizations (``SROs'') explore actions to include 
information on periodic statements or trade confirmations to inform 
investors that they should document any unauthorized trading in 
writing. This is 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.\6\ 
Currently, clearing firms may include language in customer account 
statements advising customers to immediately report to the firm any 
discrepancies in balances or positions, but these advisories may not 
necessarily direct customers to do so in writing, nor are they required 
to be included on the statements.
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    \5\ In July 2003, the GAO issued Securities Investor Protection: 
Update on Matters Related to the Securities Investor Protection 
Corporation, in which the GAO noted that the Commission was working 
with self-regulatory organizations to explore ways in which the 
GAO's recommendations could be implemented.
    \6\ The SIPC Brochure advises customers that if they ever 
discover an error in a confirmation or statement, they should 
immediately bring the error to the attention of the brokerage firm 
in writing and keep a copy of this writing. SIPC advises that if 
there is something wrong with the brokerage firm's records, the 
customer will have to prove that the records are inaccurate, or SIPC 
and the trustee will assume that the firm's records are correct.
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    Therefore, NASD is proposing to amend Rule 2340, which specifies 
disclosures required to be made on customer account statements. The 
proposed amendment to Rule 2340 would require general securities firms 
to include in monthly account statements a statement advising customers 
to report promptly any inaccuracy or discrepancy in their account to 
their clearing firm and the introducing firm (where these are different 
firms). Such statement also would need to advise customers that any 
oral communications should be re-confirmed in writing to further 
protect customers' rights, including rights under SIPA. The proposed 
disclosure requirement would not impose any limitation 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. Further, a customer's failure to promptly raise such concerns, 
either in writing or orally, does not act to estop 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.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 30 days following 
Commission approval. NASD is proposing an effective date of 180 days 
following Commission approval. This will give members time to make 
necessary changes to their customer documentation and systems.
(b) Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that NASD rules must be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change is 
consistent with the provisions of the Act noted above because each 
customer will be advised to promptly report any discrepancies or 
inaccuracies in his or her account to his or her brokerage firm (both 
the clearing firm and introducing firm, where the customer's account is 
serviced by both) and to re-confirm any oral communications in writing, 
thereby further protecting the customer's rights, including rights 
under SIPA.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 such proposed rule change, or
    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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-171 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File No. SR-NASD-2004-171. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to file number 
SR-NASD-2004-171 and should be submitted on or before March 9, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-649 Filed 2-15-05; 8:45 am]
BILLING CODE 8010-01-P