On September 16, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a revised proposal to adopt a consolidated rule regarding delivery of customer account statements. FINRA Rule 2231 would bring NASD Rule 2340 (Customer Account Statements) and NYSE Rule 409 (Statements of Accounts of Customers) into the consolidated FINRA rulebook.1 The text of the rule is copied, almost verbatim, from existing NASD Rule 2340. Its most significant change is, as described below, the proposal to add new Supplementary Material regarding delivery of account statements to persons other than the accountholder. The proposal, however, steps back from earlier versions that would have required member firms to send account statements to customers in every calendar month with account activity.2
New Supplementary Material
The proposal includes Supplementary Material .02, carried over from the initial proposal, that will not allow duplicate statements to be sent to a third party unless (a) the customer has consented, in writing, to the transmission of statements to other persons, or entities, or to persons holding power of attorney over the account; and (b) electronic or paper duplicates of the statements and other communications are also sent to the customer.3 Existing NYSE guidance allowed a customer to instruct a member firm to direct account statements and confirmations to a third party holding a power of attorney over the account where the accountholder either gave the member firm written instructions or continued to receive duplicate copies of the statements.4 In spite of prior objections, FINRA continues to propose an obligation for firms to, despite a customer’s authorization to send statements or other documents to a designated third-party, send customers duplicates of any statements or correspondence that is sent to designated third-party.5
In the face of universal objection, the current proposal drops FINRA’s effort to require firms to send monthly statements. Commenters argued that requiring a monthly statement would create an increased layer of compliance that would drive up costs for firms without providing a noticeable benefit to the clients.6 The proposed rule would have also, according to the commenters, interfered with firms’ obligations concerning confirmation of transactions pursuant to Securities Exchange Act (SEA) Rule 10b-10 (Confirmation of Transactions) and with quarterly reporting standards in the retirement plan industry.7 FINRA’s intermediate proposal would have allowed firms to send quarterly statements, but only in particular instances, such as where the account activity was passive or where the firm could cite an applicable exemption issued by the SEC or its staff.8 Comments on the amendment opposed the qualifications placed on quarterly statements, arguing that there should be no limitations, and FINRA ultimately relented. The proposal continues the existing requirement that firms send quarterly statements.9
Requirements Imported from NASD Rule 2340 and NYSE Rule 409
The text of the rule itself incorporates in its entirety the text of the NASD Rule 2340 (with a handful of technical edits). To that text, the proposal adds Supplementary Material that currently applies only under NYSE Rule 409:
Additional New Supplementary Material:
The proposed rule also includes new supplementary material:
FINRA Requests Comments
FINRA has requested comment on costs and burdens the proposal could pose to firms and on the following specific subjects:
Should the revised definition mean any firm that carries customer accounts, clears customer transactions, or otherwise holds customer funds or securities?19
FINRA hopes to cover firms administering DVP/RVP accounts under the rule. Should the definition explicitly include them?20
Is clarification necessary with respect to firms that operate commission rebate or recapture programs and that hold those balances for customers?21
FINRA also specifically requests comments on the potential economic impact and expected beneficial results with respect to:
Interested parties should submit comments no later than the comment period expiration date, October 31, 2014.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Weissmann-Michael
1 Customer Account Statements, FINRA Requests Comment on a Revised Proposal to Adopt Consolidated FINRA Rule 2231 (Customer Account Statements), Regulatory Notice 14-35 (“Notice”) at 1 (September 16, 2014), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p600772.pdf.
2 Id. at 3.
3 Id. at 5.
6 Id. at 3.
9 Id. at 4.
10 Id. at 6. If the identity of the clearing firm and its contact information appear on the back of the account statement, it must be in bold or highlighted letters. Id.
16 Id. The rule “allows a member to hold a customer’s mail for a specific time period in accordance with the customer’s written instructions if the member meets specified conditions.” 78 FR 79542-01, 79544. The rule becomes effective on December 1, 2015. Notice at 6.
17 Id. at 7.
25 Id. at 8.
This article was originally published by Bingham McCutchen LLP.