[Federal Register Volume 76, Number 148 (Tuesday, August 2, 2011)]
[Notices]
[Pages 46340-46346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19420]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64969; File No. SR-FINRA-2009-028]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 to Proposed Rule
Change To Adopt FINRA Rule 2231 (Customer Account Statements) in the
Consolidated FINRA Rulebook
July 26, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on April 22, 2009, Financial Industry Regulatory Authority,
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers,
Inc. (``NASD'')) filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change. The proposed rule
change was published for comment in the Federal Register on May 21,
2009.\3\ On July 12, 2011, FINRA filed Amendment No. 1 to the proposed
rule change, which addresses the comments and proposes responsive
amendments. Amendment No. 1 is 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 Amendment No. 1 to the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 to SR-FINRA-2009-028 responds to comments
received on the original proposed rule change and proposes
amendments to the original rule change pursuant to the comments. See
Securities Exchange Act Release No. 59921 (May 14, 2009), 74 FR
23912 (May 21, 2009) (``Notice'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing this Amendment No. 1 to SR-FINRA-2009-028, a
proposed rule change to adopt NASD Rule 2340 (Customer Account
Statements) as FINRA Rule 2231 in the consolidated FINRA rulebook with
moderate changes. The proposed rule change would delete Incorporated
NYSE Rule 409 (Statements of Accounts of Customers), except for
paragraph (f),\4\ and certain of its related interpretations. FINRA
filed SR-FINRA-2009-028 with the Commission on April 22, 2009. On May
21, 2009, the Commission published the proposed rule change for comment
in the Federal Register \5\ and received 12 comment letters.\6\ Based
on the comments received, FINRA is filing this Amendment No. 1 to
respond to the comments received and to propose amendments, where
appropriate. FINRA requests that the Commission publish Amendment No. 1
in the Federal Register to allow interested parties the ability to
comment on changes made to the proposal in light of comments.
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\4\ The SEC approved the deletion of Incorporated NYSE Rule
409(f) in connection with the adoption of FINRA Rule 2232 (Customer
Confirmations). See Securities Exchange Act Release No. 63150
(October 21, 2010); 75 FR 66173 (October 27, 2010) (Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt FINRA Rule 2232 (Customer Confirmations)
in the Consolidated FINRA Rulebook and To Delete NASD Rule 2230,
NASD IM-2110-6 and Incorporated NYSE Rule 409(f)). The rule change
became effective on June 17, 2011. See Regulatory Notice 10-62
(December 2010).
\5\ See Securities Exchange Act Release No. 59921 (May 19,
2009), 75 FR 23912 (May 21, 2009) (``Proposing Release''). The
comment period closed on June 11, 2009.
\6\ Letter from Gene Woodham, Chief Operating Officer, Sterne
Agee Group, Inc., dated June 9, 2009 (``Sterne Agee Letter'');
letter from Tamara K. Salmon, Senior Associate Counsel, Investment
Company Institute, dated June 10, 2009 (``ICI Letter''); letter from
Jesse Hill, Director of Regulatory Services, Edward Jones, dated
June 10, 2009 (``Edward Jones Letter''); letter from Dale E. Brown,
President & CEO, Financial Services Institute, Inc., dated June 11,
2009 (``FSI Letter''); letter from Sean C. Davy, Managing Director,
Corporate Credit Markets Division, Securities Industry and Financial
Markets Association (SIFMA), New York, New York, dated June 11, 2009
(``SIFMA Letter''); letter from David J. Pearlman, Chair, Regulatory
Affairs Committee, College Savings Foundation, dated June 11, 2009
(``College Savings Foundation Letter''); letter from John S. Markle,
Deputy General Counsel, Regulatory Operations, TD AMERITRADE Holding
Corporation, dated June 11, 2009 (``TD Ameritrade Letter''); letter
from Bari Havlik, Chief Compliance Officer, Senior Vice President,
Charles Schwab & Co., Inc., dated June 11, 2009 (``Schwab Letter);
letter from John Muschalek, Managing Director, Clearing Services
Division, First Southwest Company, dated June 11, 2009 (``First
Southwest Company Letter''); letter from Jonathan Feigelson, SVP,
General Counsel, TIAA-CREF, New York, New York, dated June 11, 2009
(``TIAA-CREF June Letter''); letter from Sutherland Asbill & Brennan
LLP on behalf of the Committee of Annuity Insurers, dated June 11,
2009 (``Sutherland Asbill & Brennan Letter''); and letter from
Jonathan Feigelson, SVP, General Counsel, TIAA-CREF, New York, New
York, dated June 13, 2009 (``TIAA-CREF July Letter'').
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The text of the proposed rule change is available on FINRA's Web
site at http://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
[[Page 46341]]
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
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\7\ FINRA is proposing to adopt NASD
Rule 2340 (Customer Account Statements) as FINRA Rule 2231 in the
Consolidated FINRA Rulebook with moderate changes. The proposed rule
change would delete: (1) Incorporated NYSE Rule 409 (Statements of
Accounts of Customers), except for paragraph (f); \8\ and (2)
Incorporated NYSE Rule Interpretations 409(a) and 409(b), except for
paragraphs 409(a)/01 and 409(a)/03, as such rule and its related
interpretations are, in main part, duplicative of NASD Rule 2340.
However, as further described herein, the proposed rule change would
incorporate certain provisions of Incorporated NYSE Rule 409 and its
interpretations into new FINRA Rule 2231.
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\7\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules 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. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
\8\ See supra note 4.
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Rule Filing History
On April 22, 2009, FINRA filed with the Commission SR-FINRA-2009-
028, a proposed rule change to adopt FINRA Rule 2231 (Customer Account
Statements) in the Consolidated FINRA Rulebook. The proposed rule
change would require each general securities member to send account
statements at least once each calendar month to each customer whose
account had account activity during the period since the last statement
was sent to the customer, subject to certain new exceptions proposed in
this Amendment No. 1; and at least once every calendar quarter to each
customer whose account had a security position or money balance during
the period since the last statement was sent to the customer. The
proposed rule change would also continue the exception (subject to
specified conditions) for customer accounts carried solely for the
purpose of execution on a delivery versus payment/receive versus
payment (DVP/RVP) basis.
On May 21, 2009, the SEC published the proposed rule change for
comment in the Federal Register \9\ and received 12 comment
letters.\10\ Based on the comments received, FINRA is filing this
Amendment No. 1 to respond to the comments received and to propose
amendments, where appropriate.
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\9\ See supra note 5.
\10\ See supra note 6.
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FINRA requests that the Commission publish Amendment No. 1 in the
Federal Register to allow interested parties the ability to comment on
changes made to the proposal in light of comments.
Proposed Changes in Amendment No. 1
In light of the comments, FINRA is proposing to exclude certain
account activities from the proposed monthly account statement delivery
requirement by adding new paragraph (c) to proposed FINRA Rule 2231.
Proposed paragraph (c) of FINRA Rule 2231 would expressly exclude
certain account activities from the monthly account statement delivery
requirement. These activities would continue to require delivery of
quarterly account statements, subject to new proposed Supplementary
Material .01 (Compliance with SEA Rule 10b-10) that provides a general
reminder that members 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 (Confirmation of Transactions) that a member 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 FINRA Rule 2231 is not intended to alter any such conditions or
requirements. FINRA also is proposing to amend proposed Supplementary
Material .02 (Transmission of Customer Account Statements to Other
Persons or Entities) \11\ to: (1) Clarify that members are not required
to obtain prior written consent to send duplicate account statements or
other communications for accounts of associated persons of another
member to such other member in complying with NASD Rule 3050 and
Incorporated NYSE Rule 407; \12\ (2) clarify (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 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) that members must continue to
deliver customer account statements to customers as provided in the
proposed rule even when directed by the customer in writing to send
duplicates to a third party; \13\ and (3) delete the term
``confirmation,'' from the proposed rule text as delivery requirements
for confirmations are governed by SEA Rule 10b-10 and FINRA Rule
2232.\14\
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\11\ FINRA is proposing to add new Supplementary Material .01
(Compliance with SEA Rule 10b-10) as part of this Amendment No. 1
and has therefore renumbered the other proposed Supplementary
Material items.
\12\ FINRA is proposing to adopt FINRA Rule 3210 (Personal
Securities Transactions for or by Associated Persons), which
combines and streamlines certain provisions of NASD Rule 3050 and
Incorporated NYSE Rule 407. See Regulatory Notice 09-22 (April
2009).
\13\ See Securities Exchange Act Release No. 34962 (November 10,
1994); 59 FR 59612 (November 17, 1994) (Confirmation of
Transactions).
\14\ See supra note 4.
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Comments to the Proposed Rule Change
The commenters express general support for the proposed rule
change, but have concerns with certain aspects of the proposed rule.
Most commenters believe the proposal is too broad. Specifically, most
of the comments focus on the following two issues: (1) The proposal to
change the delivery requirement for customer account statements from
quarterly to monthly; and (2) the proposal's potential conflict with
SEA Rule 10b-10 and related guidance. Commenters also raised concerns
regarding the general utility of customer account statements, potential
environmental impact, availability of alternatives, need for written
customer consent to transmit customer account statements to third
parties, clarification of provisions requiring display of the identity
of clearing firms and other issues. In addition, several commenters
requested sufficient time to comply with the proposal if it is
approved. FINRA discusses its responses to these comments below.
a. General
Three commenters questioned the value of customer account
statements generally and stated that the significance of customer
account statements has diminished in recent
[[Page 46342]]
years.\15\ Several commenters argue that customer account statements
are outdated the day after they are generated and customers now
routinely use other up-to-date mediums to review current account
activities such as on-line account access, automated phone systems and
call centers.\16\ In addition, several commenters expressed concern
that customer account statements are less effective at helping
customers' spot errors, identify theft or other potential problems than
these more timely alternatives.\17\ One commenter urged FINRA to
encourage firms to include disclosure on customer account statements
apprising customers of available alternatives for obtaining the most
current information.\18\ FINRA, however, disagrees with the notion that
customer account statements have little or limited utility. FINRA
believes that customer account statements continue to serve a
significant regulatory purpose and that customers benefit from the
receipt of periodic customer account statements.
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\15\ See SIFMA Letter, TIAA-CREF June Letter and Schwab Letter.
\16\ See TD Ameritrade Letter, TIAA-CREF June Letter and First
Southwest Company Letter.
\17\ See FSI Letter, TIAA-CREF June Letter and First Southwest
Company Letter.
\18\ See TIAA-CREF June Letter.
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Several commenters also raised concerns regarding the environmental
impact of the proposal.\19\ One commenter estimates the proposal will
generate 60 million additional pages each year. The commenter estimates
that this would be the equivalent of 7,200 trees or 300 tons of paper
annually--almost a half of it destined for landfills.\20\ While FINRA
is mindful of the potential impact of its rulemaking on the environment
and related burdens on its members, FINRA believes customer account
statements serve a significant purpose in protecting customers and
enhancing the overall integrity of the securities market. Moreover,
consistent with current guidance, FINRA is proposing to adopt
Supplementary Material .03 (Use of Electronic Media to Satisfy Delivery
Obligations) which allows a firm to provide electronic delivery of
customer statements upon affirmative consent of the customer.\21\
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\19\ See TIAA-CREF June Letter and First Southwest Company
Letter.
\20\ See TIAA-CREF June Letter.
\21\ SEC guidance to date on the use of electronic media
continues to require the affirmative consent of the investor/
customer, and FINRA believes such consent should be required for
electronic delivery of customer account statements. See Notice to
Members 98-3 (January 1998). See also Securities Exchange Act
Release No. 42728 (April 28, 2000); 65 FR 25843 (May 4, 2000).
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b. Proposed Monthly Account Statement Delivery Requirement
1. Monthly Delivery Is Not Industry Standard
As set forth in the Proposing Release, paragraph (a) of the
proposed rule would impose a new requirement that each general
securities member firm send a customer account statement not less than
once every calendar month to each customer whose account had account
activity during the period since the last statement, and continue to
require that such firms send customer account statements 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
statement. All 12 commenters objected to the scope of the proposed
monthly delivery requirement.\22\
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\22\ See supra note 6.
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Several commenters state that current industry practice continues
to be providing customers with account statements on a quarterly-basis,
not monthly.\23\ They contend that FINRA offers little support for the
statement that requiring monthly account statements for customer
accounts with account activity ``better reflects current industry
practice.'' \24\ Another commenter notes that quarterly reporting is
the retirement plan industry legal standard and monthly reporting would
be at odds with other rules governing the retirement plan industry,
including laws enacted by Congress.\25\
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\23\ See TIAA-CREF July Letter, SIFMA Letter, TD Ameritrade
Letter, FSI Letter and Schwab Letter and Sutherland Asbill & Brennan
Letter.
\24\ Id.
\25\ See TIAA-CREF June Letter.
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Another commenter notes that although a majority of its customers
already receive monthly account statements, some customers have
expressed a desire to receive them quarterly and mandatory monthly
delivery would be costly.\26\ Several commenters project that the cost
to comply with the new requirement, e.g., to produce, print, stuff and
mail additional statements, plus train personnel, would be in the
millions.\27\ One commenter argues that ``[s]caling up the member's
compliance systems, training programs, personnel, policies and
procedures, and acquiring the resources necessary for such an
undertaking, would impose immense administrative costs and burdens on
these firms, and ultimately result in the imposition of increased costs
on customers.'' \28\ Commenters state that the practical benefits
received by investors from monthly statements versus quarterly
statements are substantially disproportionate to the inherent cost
under a cost benefit analysis.\29\
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\26\ See Schwab Letter.
\27\ TD Ameritrade estimates the new requirement will increase
costs by $4-$7 million annually and by tens of millions or more
across the industry. TIAA-CREF estimates that the move to monthly
statements will cost an additional $16 million in printing and
postage expenses per year, which would be passed on to customers.
Edward Jones estimates the cost of monthly account statements in
2009 would have been $1.5 million.
\28\ See Sutherland Asbill & Brennan LLP Letter.
\29\ See Sterne Agee Letter, ICI Letter, Edward Jones Letter,
FSI Letter, SIFMA Letter, TD Ameritrade Letter, Schwab Letter, First
Southwest Company Letter, TIAA-CREF June Letter, Sutherland Asbill &
Brennan Letter and TIAA-CREF July Letter.
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One commenter further contends that the proposed move to monthly
account statement delivery requirements contradicts the 2008 Rand Study
and recent efforts by the SEC to streamline disclosures to investors to
make them more user-friendly and readable.\30\ Another commenter
suggests that customers should be permitted to affirmatively elect
quarterly delivery of customer account statements with the right to
revert to monthly delivery anytime they choose.\31\ Another commenter
recommends that firms be able to condition the customer's right to
receive monthly statements upon consent to electronic delivery.\32\
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\30\ See FSI Letter.
\31\ See Schwab Letter.
\32\ See TIAA-CREF June Letter.
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In light of the comments, FINRA is proposing to exclude certain
account activities from the proposed monthly account statement delivery
requirement. FINRA believes the proposed exclusions (outlined in detail
below) strike the correct balance between investor protection and the
concerns raised by the commenters.
2. Monthly Delivery Is Inconsistent With SEA Section 15A
One commenter asserts that the monthly statement requirement is
inconsistent with the statutory requirements of Sections 6 and 15A of
the SEA and therefore the proposal should not be approved by the
SEC.\33\ The commenter contends that FINRA's statement on burden on
competition in the rule filing is cursory and falls short of satisfying
the instructions in Form 19b-4 to provide detailed and specific
statements.
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\33\ See TIAA-CREF July Letter. FINRA notes that is not a
``national securities exchange'' and therefore is not subject to the
requirements of Section 6 of the SEA.
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FINRA has complied with all rulemaking obligations imposed by the
SEA. As required under Section 19(b)(1)
[[Page 46343]]
of the SEA, FINRA submitted to the SEC a concise general statement of
the basis and purpose of the proposed rule. As stated in its rule
filing, FINRA believes that the proposed rule change will provide
customers with critical information regarding their accounts and will
allow them to review their statements in a timely manner, while also
clarifying and streamlining the customer account rules for adoption as
FINRA rules in the Consolidated FINRA Rulebook. In addition, as also
stated in the rule filing, the proposed rule change does not create ``a
burden on competition not necessary or appropriate in furtherance of
the purposes of [the SEA].'' \34\ Further, FINRA tailors its proposed
rule changes as narrowly as possible to achieve the intended and
necessary regulatory benefit. In this regard, FINRA notes that, as
further detailed below, in response to commenters' concerns, it is
proposing to exclude certain account activities from the proposed
monthly account statement delivery requirement.
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\34\ See 15 U.S.C. 78o-3(b)(9).
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3. Monthly Delivery Creates Potential Conflict With SEA Rule 10b-10
All commenters contend that the adoption of a monthly delivery
requirement for customer account statements would cause the proposed
rule change to conflict with SEA Rule 10b-10 (Confirmation of
Transactions) and its related interpretations and guidance.\35\
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\35\ See supra note 6.
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Several commenters note that SEA Rule 10b-10 generally requires
that at, or before, the completion of a securities transaction for a
customer, a broker-dealer must deliver to the customer written
notification (a ``confirmation'') that contains certain prescribed
information about the transaction.\36\ Commenters assert that the more
immediate nature of transaction confirmations makes them a very
effective tool for customers for identifying discrepancies in a
customer's account related to erroneous transactions, identity theft,
or other potential problems.\37\
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\36\ See Schwab Letter and SIFMA Letter.
\37\ See Sutherland Asbill & Brennan Letter.
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All commenters also emphasize that the Commission, through SEA Rule
10b-10(b), rule interpretations, no-action guidance and exemptive
relief, has considered the disclosures appropriate for certain types of
transactions, balanced risks to investor protection against cost
savings for broker-dealers, and determined that it is unnecessary for
broker-dealers to send confirmations of certain transactions if certain
information regarding the transactions is disclosed in a quarterly
statement.\38\ The commenters state that these transactions include,
but are not limited to, transactions effected pursuant to a ``periodic
plan'' or ``investment company plan,'' the automatic reinvestment of
dividends in the shares of money market funds, other open-end
investment companies and unit investment trusts and transactions in
certain sorts of ``wrap fee'' or ``payroll deduction''
arrangements.\39\
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\38\ See supra note 6.
\39\ See SIFMA Letter.
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In light of the comments, as further detailed below, FINRA is
proposing to add new paragraph (c) to exclude certain account
activities from the proposed monthly account statement delivery
requirement.\40\
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\40\ In proposing the exceptions in new paragraph (c), FINRA
reminds firms 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 a firm 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 proposed
FINRA Rule 2231 is not intended to alter any such conditions or
requirements. See proposed FINRA Rule 2231.01.
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4. Monthly Delivery Creates Potential Conflict With ERISA and Rules
Relating to Retirement Plans and MSRB Rules Relating to 529 College
Savings Plans
Two commenters are concerned that the proposed monthly delivery
requirement for customer account statements will conflict with current
quarterly reporting standards in the retirement plan industry.\41\ The
commenters note that multiple service providers, including broker-
dealers, banks and trust companies, offer services to retirement plan
participants. These parties are subject to SEA Rule 10b-10, Section 105
of the Employee Retirement Income Securities Act of 1974, as amended
(``ERISA''), and applicable banking regulations. The commenters state
that these various regulations recognize quarterly statements and
changing the requirement for broker-dealers would add confusion and
place broker-dealers at a competitive disadvantage with few, if any,
benefits.
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\41\ See TIAA-CREF June Letter and ICI Letter.
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Similarly, another commenter is concerned that the proposed monthly
delivery requirement is at odds with Rule G-15 of the Municipal
Securities Rulemaking Board (``MSRB''), which permits that confirmation
of transaction in college savings plan transactions may be done on a
quarterly basis provided that they are part of a regular investment
program meeting the definition of ``periodic municipal fund security
plan'' under the applicable MSRB Rules.\42\ The commenter states the
proposed rule would create an anomaly because a broker-dealer would be
required to provide a monthly statement under FINRA Rules, but would be
permitted under MSRB Rules to provide a quarterly statement. Moreover,
they argue that such periodic activity does not seem to be the sort
that would lend itself to account security issues and/or identity theft
concerns. FINRA notes that nothing in this rule proposal is intended to
alter the balance of jurisdiction between FINRA and the MSRB and the
continued application of MSRB Rules to municipal fund securities.
Further, FINRA believes that proposed paragraph (c) that establishes
exceptions from the proposed monthly delivery requirement would
generally make the proposed rule consistent with the frequency of
delivery requirements in MSRB Rule G-15.\43\
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\42\ See College Savings Foundation Letter.
\43\ See MSRB Rule G-15(a) (Confirmation, Clearance, Settlement
and Other Uniform Practice Requirements with Respect to Transactions
with Customers), which provides in relevant part that ``such broker,
dealer or municipal securities dealer gives or sends to such
customer within five business days after the end of each quarterly
period, in the case of a customer participating in a periodic
municipal fund security plan, or each monthly period, in the case of
a customer participating in a non-periodic municipal fund security
program, a written statement disclosing * * *.''
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5. Carve-Outs From Monthly Delivery Recommended by Commenters
Several commenters recommend that FINRA should permit quarterly
account reporting where the only activity in the customer's account
consists of (A) certain types of routine activity that does not involve
the active participation of the customer (``Passive Activity''); (B)
activity that the Commission has determined need only be reported on
quarterly account statements rather than in Rule 10b-10 transaction
confirmations (``10b-10 Exempt Activity''); and (C) occasional
transactions in retirement accounts for which an immediate confirmation
is sent to the customer when the predominant activities in such account
are either Passive Activity or 10b-10 Exempt Activity.\44\ In addition,
one commenter notes that similar activity with respect to ERISA plans
should be exempted as well from the monthly delivery requirements.\45\
The commenters note that the activities described above are generally
routine
[[Page 46344]]
and recurring activities in a customer's account that are better suited
to quarterly reporting. In addition, they state that these routine and
regular activities in a customer's account are of the type that
typically do not raise fraud and/or identity theft concerns.\46\
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\44\ See SIFMA Letter, FSI Letter, Sutherland Asbill & Brennan
Letter and TIAA-CREF June Letter.
\45\ See TIAA-CREF June Letter.
\46\ See supra note 44.
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6. FINRA Response to Monthly Delivery Comments
In response to the comments raised, FINRA is proposing to add new
paragraph (c) to proposed FINRA Rule 2231. Proposed paragraph (c) would
expressly exclude certain account activities from the monthly account
statement delivery requirement. These activities would continue to
require delivery of quarterly account statements, subject to new
proposed Supplementary Material .01 (Compliance with SEA Rule 10b-10)
that provides a general reminder that members 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 (Confirmation of Transactions) that a
member 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 FINRA Rule 2231 is not intended to
alter any such conditions or requirements.
Specifically, subject to proposed Supplementary Material .01, a
member could send quarterly account statements to customers instead of
monthly account statements pursuant to paragraph (a) of the proposed
rule if:
(1) The member relies on an appropriate rule, regulation, release,
interpretation, ``no-action'' position or exemption issued by the SEC
or its staff that (A) specifically applies to the fact situation of the
activity; (B) provides relief from the immediate transaction
confirmation delivery requirements of SEA Rule 10b-10; and (C) permits
quarterly delivery of customer account statements; or
(2) The activity to the account consists only of the kind listed
below:
(A) the receipt of funds in the account that are not directly from
a purchase or sale transaction, including the receipt of interest and
dividends;
(B) the automatic reinvestment of funds in the account pursuant to
and in accordance with a customer's standing instructions (e.g., a
dividend reinvestment plan);
(C) the transfer of uninvested customer credit balances into or out
of money market mutual funds or bank deposits pursuant to a ``sweep
program'' pursuant to consent of the customer and implemented
consistent with applicable regulatory guidance, except where the
customer's balance in the bank deposit ``sweep program'' during the
period exceeds the amount insured by the FDIC coverage;
(D) all fees and charges to the account that have been fully
disclosed to the customer and comply with all disclosure and applicable
regulatory requirements (e.g., account fees, short position charges,
interest on debit balances or charges for dividends on securities held
short in the account).
(3) A member may rely on an exclusion under this paragraph (c) only
if customers are provided access to current information on their
accounts via the Internet and by telephone.
FINRA believes the proposed exclusions for these types of account
activities are appropriate as they strike the correct balance between
investor protection and the concerns raised by the commenters.
c. Proposed Supplementary Material .02 (Transmission of Customer
Account Statements to Other Persons or Entities)
Proposed Supplementary Material .02 would require written
instructions from the customer to address and/or send customer
statements or other communications relating to the customer's account
to other persons or entities. One commenter contends that this
requirement would conflict with Incorporated NYSE Rule 407 and NASD
Rule 3050.\47\ As further detailed therein, these rules generally
address the obligation of a member carrying an account in which an
associated person of another member has an interest to send duplicate
confirmations and accounts statements to such other member. The
commenter seeks clarification that members are not required to obtain
the written consent of the customer before sending duplicate
statements, confirmations or other communications pursuant to NYSE Rule
407 or NASD Rule 3050. FINRA agrees that compliance with such rules
should not be deemed a violation of this provision and is proposing to
revise the proposed rule text to make this clear.
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\47\ See SIFMA Letter. See also supra note 12.
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Two commenters assert that the proposed rule should allow a
customer's oral consent to be sufficient to send a duplicate account
statement, confirmation, or other communication, provided that the
customer also receives such account statement, confirmation or other
communication and the member relying on such oral consent lists on the
customer's (quarterly or monthly) account statement the names of any
other persons to whom duplicate communications are being sent.\48\ One
of these commenters notes that firms are permitted to accept oral
instructions for a variety of customer transactions and contends that
customers should be afforded the same level of convenience in this
regard so long as the firm has adequate controls in place.\49\ FINRA
does not believe that oral instructions are sufficient in this context.
Due to several concerns (e.g., identify theft, privacy concerns, etc.),
FINRA believes firms must be able to document and record customer
consent to send customer account statements to third-parties. FINRA has
permitted firms to act on oral instructions from customers in other
contexts (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 presents no such concerns and therefore should require
written customer consent.
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\48\ See SIFMA Letter and Schwab Letter.
\49\ See Schwab Letter.
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Accordingly, in response to comments, FINRA is proposing to amend
proposed Supplementary Material .02 to: (1) Clarify that members are
not required to obtain prior written consent to send duplicate account
statements or other communications for accounts of associated persons
of another member to such other member in complying with NASD Rule 3050
and Incorporated NYSE Rule 407; (2) clarify (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 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) that members must continue to
deliver customer account statements to customers as provided in the
proposed Rule even when directed by the customer in writing to send
duplicates to a third party;\50\ and (3) delete the term
``confirmation,'' from the proposed rule text as delivery requirements
for confirmations are governed by SEA Rule 10b-10 and FINRA Rule
2232.\51\
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\50\ See supra note 13.
\51\ See supra note 4.
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[[Page 46345]]
d. Proposed Supplementary Material .03 (Use of Electronic Media To
Satisfy Delivery Obligations)
One commenter urges FINRA to adopt electronic delivery of customer
account statements as the default delivery mechanism.\52\ The commenter
argues that electronic delivery provides more timely information to
customers and a cost savings to firms. However, another commenter is
concerned that requiring individual customers to affirmatively opt for
electronic delivery will act to negate these benefits, but notes that
further use of electronic delivery methods raises larger issues that
FINRA should consider on a more global basis, rather than solely in the
context of periodic customer account statements.\53\ FINRA believes
that proposed Supplementary Material .03 is consistent with current SEC
guidance on the use of electronic media which, among other things,
requires affirmative consent of the customer for electronic delivery of
certain documents.\54\
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\52\ See TIAA-CREF June Letter.
\53\ See Sutherland Asbill & Brennan Letter.
\54\ See supra note 21.
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e. Proposed Supplementary Material .04 (Information To Be Disclosed on
Statement)
One commenter seeks clarification of the requirements in paragraphs
(a) and (b) and contends that the requirements are in conflict.\55\
Proposed paragraph (a) requires disclosure of the identity of the
introducing firm and the clearing firm, if different, and their
respective contact information on the front of the statement, but
allows the identity and contact information of the clearing firm to be
appear on the back of the statement so long as it is bold and
prominent. Proposed paragraph (b) requires that the front of the
statement must clearly disclose that the clearing firm is a member of
SIPC. FINRA believes the two provisions are not inconsistent. Proposed
paragraph (a) gives firms the option to provide the identity and
contact information of the clearing firm on the back of the statement
if the firm chooses; it does not require such placement. Proposed
paragraph (b) simply requires SIPC disclosure, which can be
accomplished either by a general statement or by identifying the
clearing firm by name. FINRA believes these provisions allow firms some
flexibility in providing this information, while also ensuring that the
SIPC status of the clearing firm is disclosed on the front of the
statement.
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\55\ See SIFMA Letter.
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f. Proposed Supplementary Material .07 (Use of Summary Statements)
One commenter objects to proposed Supplementary Material .07 (as
renumbered in this Amendment No. 1) on the Use of Summary
Statements.\56\ The supplementary material would require, among other
things, that the ``beginning and end of each separate statement (e.g.,
summary, brokerage, mutual fund, banking, insurance, etc.) be clearly
distinguishable by color, pagination or other distinct form of
demarcation.'' The commenter asks FINRA to ``clarify that the use of
prominent disclosure within summary statements that aggregate accounts
held or serviced by multiple parties is adequate to satisfy, or may be
used in lieu of, [the above set forth requirement].'' FINRA believes
the term ``other distinct form of demarcation,'' provides firms the
flexibility to format summary statements. Firms are not required to
place separate statements on separate pages, but are required to format
the statements in such a manner as to make them distinguishable on
their face. The use of prominent disclosure with footnotes or other
distinct forms of demarcation can be sufficient so long as accounts
held or serviced by multiple parties are clearly distinguishable. FINRA
believes these guidelines are beneficial because they establish
standards to provide clarity and reduce confusion to customers when
receiving summary statements.
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\56\ See TIAA-CREF June Letter.
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g. Miscellaneous Comments
One commenter seeks clarification on what constitutes a ``general
securities business'' for purposes of triggering the customer account
statement delivery requirement.\57\ They argue that a firm that has
multiple business lines which include varied brokerage and securities
products and services may carry customer accounts or receive or hold
customer funds or securities in connection with one business line or
product or service but not another. They seek clarification that the
rule will apply only to those portions of a firm's business which
triggers the classification--not all lines or services. Another
commenter requests clarification that a ``general securities member''
does not include members that are relying on an SEC Exemptive Order
relating to FINRA Rule 2330 (formerly NASD Rule 2821), which
established sales practice standards regarding recommended purchases
and exchanges of deferred variable annuities.\58\
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\57\ Id.
\58\ See Sutherland Asbill & Brennan Letter. See also Securities
Exchange Act Release No. 56376 (September 7, 2007) (``Exemptive
Order''). The Exemptive Order issued in conjunction with the
approval of FINRA Rule 2330 provides that a broker-dealer will not
be ``deemed'' to hold customer funds for purposes of SEA Rule 15c3-1
and SEA Rule 15c3-3 if, among other things, the transaction to which
the check relates is subject to the registered principal requirement
of the Rule and the broker-dealer promptly transmits the check after
the principal's review has been completed.
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In defining the term ``general securities member,'' current NASD
Rule 2340 and proposed FINRA Rule 2231 provide that a member that does
not carry customer accounts and does not hold customer funds or
securities is exempt from the provisions of this rule. FINRA notes that
the proposed rule change does not amend the current definition of
``general securities member'' as set forth in NASD Rule 2340 and
nothing in this proposal is intended to alter the obligations between
clearing firms and introducing firms. If the commenter or others have
concerns about the application of the rule in particular situations
based on the structure of the firm, FINRA believes that such questions
can be best resolved through its interpretative letter process.
One commenter seeks confirmation that the proposal is not intended
to require members to send account statements to other broker-
dealers.\59\ The commenter notes that NASD Rule 0120(g) defines the
term ``customer'' to exclude a broker or dealer. The commenter seeks
clarification because NASD Rule 0120(g) has not been adopted into the
Consolidated FINRA Rulebook at this time. NASD Rule 2340 and NYSE 409
have not required firms to send account statements to other broker-
dealers, and FINRA does not intend to broaden the scope of the
rules.\60\
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\59\ See SIFMA Letter.
\60\ See SR-FINRA-2008-021 (Proposed Rule Change Relating to the
Adoption of NASD Rules 4000 through 10000 Series and the 12000
through 14000 Series as FINRA Rules in the New Consolidated FINRA
Rulebook) (discussing ``Rules of General Applicability,'' including
NASD Rule 0120); Securities Exchange Act Release No. 58176 (July 16,
2008); 73 FR 42844 (July 23, 2008).
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Another commenter expressed support of proposed Supplementary
Material .05 (as renumbered in this Amendment No. 1) (Assets Externally
Held and Included on Statements Solely as a Service to Customers),
which adopts Incorporated NYSE Rule Interpretation 409(a)/04, as
appropriately recognizing the responsibilities of member firms.\61\
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\61\ See Sutherland Asbill & Brennan Letter.
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[[Page 46346]]
h. Implementation Timeframe
Assuming the SEC approves the proposal, several commenters
requested additional time to comply with the proposed requirements,
particularly if the monthly delivery obligations remain as originally
proposed.\62\ FINRA appreciates these factors and notes that in
response to commenters' concerns, it is proposing to exclude certain
activities from the monthly account statement requirement. Such change
should significantly reduce the potential costs and burdens on firms.
Nonetheless, FINRA intends to give firms sufficient time to comply with
new FINRA Rule 2231.
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\62\ See Sutherland Asbill & Brennan Letter, TIAA-CREF June
Letter and SIFMA Letter.
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As noted above, FINRA will announce the implementation date of the
proposed rule change in a Regulatory Notice to be published no later
than 90 days following Commission approval. The implementation date
will be no later than 365 days following Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\63\ 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
provide customers with critical information regarding their accounts
and will allow them to review their statements in a timely manner,
while also clarifying and streamlining the customer account rules for
adoption as FINRA Rules in the Consolidated FINRA Rulebook.
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\63\ 15 U.S.C. 78o-3(b)(6).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were solicited by the
Commission in response to the publication of SR-FINRA-2009-028.\64\ The
SEC received 12 comment letters. The comments are summarized above.
FINRA is submitting its response to comments on the original filing
contemporaneously with this Amendment No. 1.
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\64\ See Proposing Release.
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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 up to 90 days (i) as the
Commission may designate 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
(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 Amendment No. 1, 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 (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2009-028 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2009-028. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
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; 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-FINRA-2009-028
and should be submitted on or before August 23, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
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\65\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19420 Filed 8-1-11; 8:45 am]
BILLING CODE 8011-01-P