[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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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 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.
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\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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The text of the proposed rule change is available on FINRA's
website 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 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.
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\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.''
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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.
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\5\ See supra note 3.
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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.
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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).
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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.
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\12\ See supra note 3.
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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.
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\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).
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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).
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\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\
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\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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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\
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\19\ See supra note 8.
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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\
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\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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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.
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\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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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 http://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 http://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.
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\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.
---------------------------------------------------------------------------
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\
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\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.
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\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\
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\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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\69\ See Edward Jones, FSI, NASAA, SIFMA, WFA, and Wulff.
\70\ See Edward Jones and FSI.
\71\ See FSI, PIRC, and Wulff.
---------------------------------------------------------------------------
(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 (http://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 (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 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