[Federal Register Volume 84, Number 51 (Friday, March 15, 2019)]
[Notices]
[Pages 9573-9575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04808]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85282; File No. SR-FINRA-2018-040]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change Relating to FINRA
Rule 4512 (Customer Account Information)
March 11, 2019.
I. Introduction
On November 28, 2018, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to revise FINRA Rule 4512
(Customer Account Information) to permit the use of electronic
signatures and to also clarify the scope of the rule.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 U.S.C. 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on December 17, 2018.\3\ The Commission received two comment
letters regarding the proposed rule change, both supporting the
proposed rule change.\4\ On January 30, 2019 the Commission extended
the time to approve the proposed rule change, disapprove the proposed
rule change, or institute proceedings to determine whether to
disapprove the proposed rule change to March 17, 2019.\5\ For the
reasons discussed below, the Commission is approving the proposed rule
change.
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\3\ See Securities Exchange Act Release No. 84788 (Dec. 11,
2018), 83 FR 64609 (Dec. 17, 2018) (File No. SR-FINRA-2018-040)
(``Notice'').
\4\ See Letters from Paul J. Tolley, Senior Vice President,
Chief Compliance Officer, Commonwealth Financial Network, dated
December 31, 2018 (``Commonwealth Letter''); and Kevin Zambrowicz,
Associate General Counsel & Managing Director, SIFMA, dated January
7, 2019 (``SIFMA Letter'').
\5\ See Securities Exchange Act Release No. 85003 (Jan. 30,
2019), 84 FR 1809 (Feb. 5, 2019) (File No. SR-FINRA-2018-040)
(``Extension'').
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II. Description of the Proposed Rule Change 6
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\6\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 83 FR 64609-10.
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FINRA proposed to amend paragraph (a)(3) of FINRA Rule 4512
(Customer Account Information) to permit the use of electronic
signatures and to clarify the scope of the rule.
With respect to a discretionary customer account maintained by a
member, FINRA Rule 4512(a)(3) currently requires a member to obtain a
manual dated signature of each named, natural person authorized to
exercise discretion in the account. FINRA stated that because the rule
only applies to discretionary accounts maintained by a member, the
named natural person would inevitably be an associated person of the
firm.\7\ Consequently, to
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comply with the rule, members must obtain the associated person's
``wet'' signature or a copy of his or her wet signature, such as a
scanned or faxed copy of the wet signature.\8\ Additionally, the rule
also requires members to maintain and preserve a record of the
signature for at least six years after the date the account is
closed.\9\
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\7\ There is a corresponding requirement under NASD Rule 2510
(Discretionary Accounts) prohibiting members and their registered
representatives from exercising any discretionary power in a
customer's account unless the customer has given prior written
authorization to a stated individual or individuals, and the account
has been accepted by the firm as evidenced in writing by the firm or
a designated partner, officer or manager of the firm. These
signatures need not be manual. In addition, SEA Rule 17a-
3(a)(17)(ii) requires that, for discretionary accounts with a
natural person, broker-dealers maintain a record containing the
dated signature of each natural person to whom discretionary
authority was granted. This signature also need not be manual.
\8\ The terms ``manual'' and ``wet'' are used interchangeably in
this proposed rule change.
\9\ For retention purposes, members may choose to maintain and
preserve the signature record on any of the acceptable media
specified in SEA Rule 17a-4, including electronic storage media
consistent with SEA Rule 17a-4(f).
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According to FINRA, the purpose of the signature is to validate
that the authorized associated person is who he or she purports to be.
FINRA stated that, in light of the industry's shift towards automated
and electronic processes, member firms have requested that FINRA
reevaluate the need for wet signatures under the rule. FINRA noted that
its members have stated that the requirement to obtain wet signatures
raises operational and cost concerns without providing meaningful
investor protection benefits. In addition, according to FINRA, some
members have noted that the requirement puts them at a competitive
disadvantage over investment advisers because investment advisers are
allowed to obtain electronic signatures. Finally, FINRA noted that
members that have adopted automated and electronic processes have
stated that the current requirement results in significant
administrative inefficiencies, particularly because all other account
documentation, including the customer authorization form, and related
recordkeeping may be completed electronically through a streamlined
process.\10\
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\10\ To comply with FINRA Rule 4512(a)(3), most of these firms
currently print a paper copy of the account record and require that
the authorized associated person physically sign it. They then
convert the paper record to an electronic record for retention on
electronic storage media. These firms have stated that this two-step
process creates unnecessary inefficiencies and administrative
burdens.
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In light of technological advances relating to electronic
signatures, including with respect to authentication and security,
FINRA stated that it believes that the requirement under Rule
4512(a)(3) that members obtain an associated person's wet signature has
become obsolete. As a result, FINRA proposed to amend the rule to
permit the use of electronic signatures. While FINRA Rule 4512(a)(3)
would continue to require members to obtain the signature of an
associated person, it would provide firms the option of obtaining
either a manual or an electronic signature.
For purposes of compliance with FINRA Rule 4512(a)(3), a valid
electronic signature would be any electronic mark that clearly
identifies the signatory and is otherwise in compliance with the
Electronic Signatures in Global and National Commerce Act (``E-Sign
Act''), the guidance issued by the Commission relating to the E-Sign
Act,\11\ and the guidance provided by FINRA staff through interpretive
letters.\12\
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\11\ See Securities Exchange Act Release No. 44238 (May 1,
2001), 66 FR 22916 (May 7, 2001) (Commission Guidance to Broker-
Dealers on the Use of Electronic Storage Media Under the Electronic
Signatures in Global and National Commerce Act of 2000 with Respect
to Rule 17a-4(f)).
\12\ See, e.g., Letter from Nancy Libin, NASD, to Jeffrey W.
Kilduff, O'Melveny & Myers, LLP, dated July 5, 2001, http://www.finra.org/industry/interpretive-letters/july-5-2001-1200am.
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In addition to the proposed changes described above, FINRA is
proposing to amend Rule 4512(a)(3) to clarify that the rule is limited
to discretionary customer accounts maintained by a member for which
associated persons of the member are authorized to exercise discretion.
Specifically, FINRA is proposing to amend the rule to state that for a
discretionary customer account maintained by a member, the member must
obtain the dated signature of each named, associated person of the
member authorized to exercise discretion in the account.
FINRA has stated that it will announce the effective date of the
rule change in a Regulatory Notice to be published no later than 60
days following a Commission approval, and the effective date will be no
later than 30 days following publication of that Regulatory Notice.\13\
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\13\ See Notice, 83 FR at 64610.
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III. Comment Summary
As noted above, the Commission received two comment letters on the
proposed rule change,\14\ both supporting the proposal. Both commenters
noted that the requirement to obtain a manual or ``wet'' signature is
outdated or generally inconsistent with the move toward an increase in
the use of technology, including the use of electronic signatures.\15\
One commenter indicated that it already executes essentially all client
account and transactional paperwork with the use of electronic
signatures, and that the requirement to obtain a manual signature slows
down its processes for opening discretionary accounts.\16\
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\14\ See supra note 6.
\15\ See Commonwealth Letter at 1-2; see also SIFMA Letter at 1.
\16\ See Commonwealth Letter at 2.
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Both commenters noted that the administrative and operational
inefficiencies and burdens resulting from the requirement to obtain
manual signatures place member firms at a competitive disadvantage
against investment advisers that are not subject to such a requirement
without providing additional investor protections.\17\ The commenters
support the proposed rule change, and one commenter urged the
Commission and FINRA to consider other opportunities to eliminate
manual signature requirements in favor of electronic methods.\18\
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\17\ See Commonwealth Letter at 1; see also SIFMA Letter at 2.
\18\ See Commonwealth Letter at 2; see also SIFMA Letter at 3.
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IV. Discussion and Commission Findings
After careful consideration of the proposed rule change and the
comment letters, the Commission finds that the proposal is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities
association.\19\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\20\ which
requires, among other things, that FINRA rules 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. The Commission believes that the proposal will
simplify the process by which member firms validate the identity of an
authorized associated person, and thereby lower costs to member firms
by reducing operational inefficiencies. Moreover, the Commission
believes the proposed rule change is reasonably designed to prevent
fraudulent practices in connection with the use of electronic
signatures because it provides that a valid electronic signature would
be any electronic mark that clearly identifies the signatory and is
otherwise in compliance with the E-Sign Act. The proposed rule change
is also consistent with Commission guidance relating to the E-Sign Act,
and prior FINRA staff guidance regarding electronic signatures.\21\
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\19\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78o-3(b)(6).
\21\ See supra notes 11-12 and accompanying text.
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For these reasons, the Commission believes the proposed rule change
is consistent with the Act.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-FINRA-2018-040) is approved.
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\22\ 15 U.S. C. 78s(b)(2).
\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04808 Filed 3-14-19; 8:45 am]
BILLING CODE 8011-01-P