Notice2022-12169
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA Rule 2231 (Customer Account Statements), as Modified by Amendment No. 1
Primary source
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Published
June 7, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 109 (Tuesday, June 7, 2022)</title>
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[Federal Register Volume 87, Number 109 (Tuesday, June 7, 2022)]
[Notices]
[Pages 34728-34736]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95018; File No. SR-FINRA-2021-02]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA
Rule 2231 (Customer Account Statements), as Modified by Amendment No. 1
June 1, 2022.
I. Introduction
On September 29, 2021, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change SR-FINRA-2021-024 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 \2\ thereunder to amend FINRA Rule 2231
(Customer Account Statements) to add new supplementary materials,
incorporate specified provisions from dual FINRA-NYSE temporary rules,
and delete those temporary rules.\3\ The proposed rule change was
published for public comment in the Federal Register on September 30,
2021.\4\ On November 9, 2021, FINRA consented to an extension of the
time period to January 4, 2022, in which the Commission must approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change.\5\ On January 4, 2022, FINRA responded to the
comment letters received in response to the Notice and filed an
amendment to modify the proposed rule change (``Amendment No. 1'').\6\
On January 4, 2022, the Commission published notice of Amendment No. 1
and instituted proceedings pursuant to Section 19(b)(2)(B) of the Act
\7\ to determine whether to approve or disapprove the proposed rule
change.\8\ This order approves the proposed rule change, as modified by
Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Exchange Act Release No. 93215 (September 30, 2021), 86 FR
55641 (October 6, 2021) (File No. SR-FINRA-2021-024) (``Notice'').
\4\ Id.
\5\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Office of Chief Counsel, Division of Trading and Markets,
Commission, dated November 9, 2021.
\6\ See letter from Sarah Kwak, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated January 4, 2022 (``FINRA Response Letter''); see
also Exchange Act Release No. 93897, 87 FR 1201 (January 10, 2022)
(``OIP and Amendment No. 1'').
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See OIP and Amendment No. 1.
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II. Description of the Proposed Rule Change
A. Background
As discussed in the Notice, Rule 2231 and NYSE Rule 409T govern the
obligation of FINRA members and member organizations to deliver
customer account statements to customers. Specifically, Rule 2231 and
NYSE Rule 409T generally require a general securities member \9\ to, at
least once each calendar quarter, send account statements to customers
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 Delivery Versus Payment/Receive
Versus Payment basis.\10\ Rule 2231 does not currently contain any
supplementary materials.
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\9\ FINRA Rule 2231(d)(2) defines a ``general securities
member'' as any FINRA member ``that conducts a general securities
business and is required to calculate its net capital pursuant to
the provisions of [Exchange Act] Rule 15c3-1(a)'' except members
that do not carry customer accounts or hold customer funds or
securities.
\10\ See Notice, 86 FR at 55649.
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FINRA stated that at the time it adopted Rule 2231, along with NYSE
Rule 409T and NYSE Rule Interpretation 409T (together, ``NYSE
Provisions''), into the consolidated FINRA rulebook, 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.\11\ As a result of that review, FINRA proposed amending
Rule 2231 to incorporate several existing provisions from the NYSE
Provisions into the FINRA rulebook and proposed deleting the NYSE
Provisions in their entirety.\12\
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\11\ 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 NYSE Rules and 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 FINRA members that are also members of the NYSE. 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. 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
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. See Notice, 86 FR at note 3.
\12\ See Notice, 86 FR at 55646.
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Specifically, FINRA's proposed rule change would: (1) amend Rule
2231 to (a) add 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 changes, 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); (2) delete Temporary Dual FINRA-NYSE
Rule 409T (Statements of Accounts to Customers) and Temporary Dual
FINRA-NYSE Rule Interpretation 409T; and (3) make other non-substantive
and technical changes in Rule 2231 and to other FINRA rules due to this
proposed rule change. As a result of these changes, FINRA members that
are not NYSE members would be required to comply with provisions that
previously only applied to NYSE members. In addition to the specific
points below, as a general matter, FINRA stated that harmonizing the
NYSE provisions into Rule 2231 would provide greater clarity and
regulatory efficiency to all FINRA member firms.\13\ Further, FINRA
stated that with respect to proposed Supplementary Materials .01 and
.03 through .08, the proposed rule change would not impose additional
material burdens on firms as it is substantially
[[Page 34729]]
similar to existing rules or otherwise consistent with current
guidance.\14\
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\13\ See Notice, 86 FR at 55643.
\14\ See Notice, 86 FR at 55648.
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B. Proposed Supplementary Materials as Modified by Amendment No. 1
1. New Supplementary Material .01 (Compliance With Rule 4311)
FINRA's proposed rule change would amend Rule 2231 by adding new
Supplementary Material .01, which would remind firms of their
obligations under FINRA Rule 4311 (Carrying Agreements), including
specifically the rights and obligations of carrying firms under Rule
4311(c)(2).\15\ Rule 4311 generally governs the requirements applicable
to FINRA members when entering into agreements for the carrying of any
customer accounts in which securities transactions can be effected. In
general, Rule 4311(c) requires each carrying agreement pursuant to
which accounts are to be carried on a fully disclosed basis to specify
the responsibilities of each party to the agreement, including at a
minimum the allocation of the responsibilities set forth in paragraphs
4311(c)(1)(A) through (I) and (c)(2). Among those responsibilities,
Rule 4311(c)(2) requires each carrying agreement pursuant to which
accounts are to be carried on a fully disclosed basis to expressly
allocate to the carrying firm responsibility for safeguarding funds and
securities under Exchange Act Rule 15c3-3 (Customer protection--
reserves and custody of securities) \16\ and for preparing and
transmitting account statements to customers.
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\15\ See Proposed Supplementary Material .01.
\16\ 17 CFR 240.15c3-3.
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FINRA stated that reminding firms of their obligations under Rule
4311 in proposed Supplementary Material .01 would emphasize the
importance of ensuring the accuracy and integrity of customer account
statements.\17\
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\17\ See Notice, 86 FR at 55643.
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2. New Supplementary Material .02 (Transmission of Customer Account
Statements to Other Persons or Entities)
Rule 2231 does not currently address the transmission of customer
account statements to third parties. In contrast, NYSE Rule 409T(b)
prohibits, without NYSE's consent, the delivery of confirmations,
statements, or other communications to a nonmember customer: (1) in
care of a person holding power of attorney (``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 other 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\ See NYSE Rule 409T(b); see also Notice, 86 FR at 55643.
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Proposed Supplementary Material .02 would address the transmission
of customer account statements to third parties in a manner similar,
but not identical to, NYSE Rule 409T.\19\ Specifically, proposed
Supplementary Material .02 to Rule 2231 would prohibit member firms
from sending customer account statements to third parties unless: (1)
the customer provided written instructions to the member to send
statements to such third parties; and (2) the member sends duplicate
account statements directly to the customer either in paper format or
electronically.\20\ Proposed Supplementary Material .02 would add that
a FINRA member may cease sending duplicate account statements to a
customer where a court of competent jurisdiction has appointed a
guardian, conservator, trustee, personal representative or other person
with legal authority to act on a customer's behalf, and such court-
appointed fiduciary provides written instructions to the member and
furnishes to the member an official copy of the court appointment that
establishes authority over the customer's accounts.\21\ Under proposed
Supplementary Material .02, a member would continue to be able to
provide duplicate customer account statement(s) to third parties as
required for compliance with FINRA Rules 2070 (Transactions Involving
FINRA Employees) and 3210 (Accounts at Other Broker-Dealers and
Financial Institutions) or other similar applicable federal securities
laws, rules and regulations.\22\
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\19\ See Notice, 86 FR at 55643.
\20\ See Proposed Supplementary Material .02(a).
\21\ See Proposed Supplementary Material .02(b).
\22\ See Proposed Supplementary Material .02(c).
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FINRA stated it believes proposed Supplementary Material .02
achieves the appropriate balance between ensuring customers receive
their account statements so that they may monitor their account
activity and recognizing there are special circumstances where firms
may stop delivery of account statements to customers.\23\
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\23\ See Notice, 86 FR at 55644.
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3. New Supplementary Material .03 (Use of Electronic Media To Satisfy
Delivery Obligations)
FINRA's proposed rule change would add new Supplementary Material
.03 to FINRA Rule 2231, which would allow FINRA members to satisfy
their Rule 2231 delivery obligations using electronic media, subject to
compliance with standards established by the Commission on the use of
electronic media for delivery purposes.\24\ FINRA stated this provision
would be consistent with prior FINRA guidance on the use of electronic
media to satisfy delivery obligations.\25\
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\24\ See Proposed Supplementary Material .03; see also Notice,
86 FR at 55644 (citing 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); Securities Act
Release No. 7856 (April 28, 2000); 65 FR 25843, 25854 (May 4,
2000)).
\25\ See Notice, 86 FR at 55644 (citing Notice to Members 98-3
(January 1998)).
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4. New Supplementary Material .04 (Compliance With Rule 3150)
FINRA's proposed rule change would add new Supplementary Material
.04 to Rule 2231, which would permit FINRA members to hold customer
mail, including customer account statements or other communications
relating to a customer's account, subject to the requirements of FINRA
Rule 3150 (Holding of Customer Mail).\26\ In general, Rule 3150 allows
FINRA members to hold customer mail for a specific time period in
accordance with the customer's written instructions if the member meets
specified conditions.\27\
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\26\ See Proposed Supplementary Material .04.
\27\ See Notice, 86 FR at 55644.
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5. New Supplementary Material .05 (Information To Be Disclosed on
Statement)
NYSE Rule Interpretation 409T(a)/02 requires the front of a
customer account statement to disclose: (1) the identity of introducing
and carrying organizations, and their respective phone numbers for
service; (2) that the carrying organization is a member of the
Securities Investor Protection Corporation (``SIPC''); \28\ and (3) the
opening and closing account balances.\29\ Note 1 to NYSE Rule
Interpretation 409T(a)/02 provides that the Commission ``has stated
that under the
[[Page 34730]]
[Exchange Act] Rule 15c3-1(a)(2)(iv),\30\ 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. 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.''
\31\
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\28\ Subject to limitations, SIPC protects against the loss of
cash and securities--such as stocks and bonds--held by a customer at
a financially-troubled SIPC-member brokerage firm. See SIPC's
website, available at <a href="https://www.sipc.org/for-investors/what-sipc-protects">https://www.sipc.org/for-investors/what-sipc-protects</a>.
\29\ See NYSE Rule Interpretation 409T(a)/02.
\30\ 17 CFR 240.15c3-1(a)(2)(iv).
\31\ See NYSE Rule Interpretation 409T(a)/02 at note 1 (citing
Exchange Act Release No. 31511 (November 24, 1992)).
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FINRA's proposed rule change would incorporate NYSE Rule
Interpretation 409T(a)/02, including note 1, without substantive
changes, as Supplementary Material .05 to FINRA Rule 2231. Proposed
Supplementary Material .05 would require the following information to
be clearly and prominently disclosed on the front of customer account
statements: (1) the identity of the introducing firm and carrying firm,
if different, and their respective contact information for customer
service; however, the identity of the carrying firm and its contact
information for customer service may appear on the back of the
statement provided such information is in ``bold'' or ``highlighted''
letters; (2) that the carrying firm is a SIPC member; and (3) the
opening and closing balances for the account.\32\
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\32\ See Proposed Supplementary Material .05.
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FINRA stated that proposed Supplementary Material .05 would
incorporate NYSE Rule Interpretation 409T(a)/02 without substantive
changes. FINRA also stated that proposed Supplementary Material .05
would give member firms adequate guidance and flexibility in providing
the specified information while also ensuring that SIPC status of the
clearing firm is disclosed on the front of the statement.\33\
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\33\ See Notice, 86 FR at 55644 and 55655.
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6. New Supplementary Material .06 (Assets Externally Held)
Rule 2231 does not currently address how FINRA members should
disclose assets they do not carry on behalf of customers and that are
not included on the firms' books and records. In contrast, NYSE Rule
Interpretation 409T(a)/04 provides that where a statement of account
includes assets as to 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 and distinguishably separated on the statement.\34\ In
addition, the statement must clearly indicate that: (1) such externally
held assets are included on the statement solely as a courtesy to the
customer; (2) that information (including valuation) is derived from
the customer or other external source for which the member organization
is not responsible; and (3) such externally held assets are not covered
by SIPC.\35\
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\34\ See NYSE Rule Interpretation 409T(a)/04.
\35\ Id.
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FINRA's proposed rule change would incorporate the requirements of
NYSE Rule Interpretation 409T(a)/04, without substantive changes, as
Supplementary Material .06 to Rule 2231. Proposed Supplementary
Material .06 would require that where a customer account statement
includes assets that the member firm does not carry on behalf of the
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.\36\ In such cases, proposed Supplementary Material .06
would require FINRA members to: (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 included on the statement is
derived from the customer or other external source for which the member
is not responsible; and (3) identify that such externally held assets
may not be covered by SIPC.\37\
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\36\ See Proposed Supplementary Material .06.
\37\ See Proposed Supplementary Material .06(a)-(c).
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7. New Supplementary Material .07 (Use of Logos, Trademarks, etc.)
Rule 2231 does not currently address how logos, trademarks, or the
identification of persons other than introducing or carrying firms
should appear on customer account statements. In contrast, NYSE Rule
Interpretation 409T(a)/05 requires that where a logo, trademark, or
other identification of a person other than the introducing firm or
carrying firm appears on an account statement, 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.\38\
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\38\ See NYSE Rule Interpretation 409T(a)/05.
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FINRA's proposed rule change would incorporate, without substantive
changes, NYSE Rule Interpretation 409T(a)/05 as proposed Supplementary
Material .07 to Rule 2231.\39\ Proposed Supplementary Material .07
would require that where the logo, trademark or other similar
identification of a person (other than the introducing firm or carrying
firm) appears on a customer account statement, the identity of such
person(s) and the relationship to the introducing, carrying or other
firm included on the statement must be provided and may not be used in
a manner that is misleading or causes customer confusion. FINRA stated
that proposed Supplementary Material .07 would be consistent with the
general requirements of FINRA Rule 2210 (Communications with the
Public), which, among other things, prohibits FINRA members from
publishing, circulating, or distributing communications that they know
or have reason to know contain any untrue statement of material fact or
are otherwise false or misleading.\40\
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\39\ See Proposed Supplementary Material .07; see also Notice,
86 FR at 55645.
\40\ Id.; see also FINRA Rule 2210(d)(1)(B).
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8. New Supplementary Material .08 (Use of Summary Statements)
Rule 2231 does not currently address FINRA member obligations where
the member holds a customer's account and another person, who
separately offers related financial products or services to the same
customer, jointly provide their respective customer account statements
together with a statement summarizing or combining assets held in
different accounts (``summary statements'').\41\ In contrast, NYSE Rule
Interpretation 409T(a)/06 states that where a member organization
carrying a customer's account and another person(s) who separately
offers financial related products/services to the same customer seek to
jointly formulate and/or distribute their respective customer account
statements together with a summary statement, the summary statement
must: (1) indicate that it is provided for informational purposes and
includes assets held at different entities; (2) identify 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) clearly
distinguish between assets held by each entity by use of columns,
coloring or
[[Page 34731]]
other distinct form of demarcation; (4) identify the customer's account
number at each entity; (5) provide a telephone number for customer
service at each entity; (6) disclose which entity carries each of the
different assets or categories of assets included on the summary
statement; and (7) identify each entity that is a SIPC member.\42\
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\41\ See Notice, 86 FR at 55645. FINRA stated that, in general,
a summary statement reflects information from entities that are 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. FINRA stated that a summary statement provides an
overview of a customer's accounts at separate entities and is
supported by and derived from the detail on the separate underlying
respective account statements. Id.
\42\ See NYSE Rule Interpretation 409T(a)/06.
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FINRA's proposed rule change would incorporate the requirements of
NYSE Rule Interpretation 409T(a)/06, with some revisions, as proposed
Supplementary Material .08 to Rule 2231.\43\ Proposed Supplementary
Material .08 would state that where a member holds a customer's account
and another person(s) who separately offers financial related products
or services to the same customer (e.g., mutual fund sales and custodial
services, banking products and services, insurance products and
services, securities products and services, etc.) seek to jointly
provide their respective customer account statements together with a
summary statement the member is required to: (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 with
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 contact information for customer
service at each entity (if the customer's account number and customer
service contact 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 SIPC member.\44\ Proposed Supplementary Material .08 would also
require FINRA members to: (1) ensure that when summary statements
aggregate the values of the accounts summarized or portions thereof,
such aggregation is recognizable as having been arithmetically derived
from the separately stated totals or their components; \45\ (2)
distinguish the beginning and end of each separate statement by color,
pagination or other distinct form of demarcation; \46\ (3) ensure that
there is a written agreement between the clearing firm and each other
person jointly providing its respective customer account statements
attesting that each such person has developed procedures and controls
for reviewing and testing the accuracy of the information included on
its respective statements; \47\ and (4) ensure the summary statement
complies with Rule 2231.\48\
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\43\ See Notice, 86 FR at 55645.
\44\ See Proposed Supplementary Material .08(a)(1)-(6).
\45\ See Proposed Supplementary Material .08(b).
\46\ See Proposed Supplementary Material .08(c).
\47\ See Proposed Supplementary Material .08(d).
\48\ See Proposed Supplementary Material .08(e).
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FINRA stated these requirements would help ensure customer account
statements clearly identify the respective entities involved in a
summary statement and distinguish brokerage assets from non-brokerage
assets on such statements.\49\
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\49\ See Notice, 86 FR at 55645.
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C. NYSE Provisions To Be Deleted and Not Harmonized With Rule 2231
The proposed rule change would delete NYSE Rule 409T and NYSE Rule
Interpretation 409T in their entirety on the basis that the underlying
concepts in these provisions will have been included in Rule 2231, are
duplicative of other rules, or are outdated.\50\ The following
describes portions of the NYSE Provisions that would not be
incorporated into Rule 2231.
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\50\ See Notice, 86 FR at 55646.
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1. NYSE Rule 409T(b) (Confirmations or Other Communications)
As stated 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.\51\ Proposed Supplementary
Material .02 would address the transmission of customer account
statements to third parties in a manner similar, but not identical, to
NYSE Rule 409T.\52\ FINRA stated that the scope of proposed
Supplementary Material .02 would be limited to customer account
statements, and would not apply to confirmations or other
communications.\53\ FINRA stated that the delivery requirements of
confirmations are already governed by Exchange Act Rule 10b-10
(Confirmation of transactions) \54\ and FINRA Rule 2232 (Customer
Confirmations).\55\ Further, FINRA stated that including the term
``other communications'' would inappropriately capture unintended
operational communications with third parties (e.g., custodians,
transfer agents, and counterparties) where firms need to send
``communications'' about a customer's account in order to provide a
service requested for the customer.\56\
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\51\ See NYSE Rule 409T(b); see also Notice, 86 FR at 55653.
\52\ See Notice, 86 FR at 55643.
\53\ See Notice, 86 FR at 55646.
\54\ 17 CFR 240.10b-10.
\55\ See Notice, 86 FR at 55646.
\56\ See Notice, 86 FR at 55651.
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2. Supplementary Material .10(1)-(6) to NYSE Rule 409T (Exceptions to
NYSE Rule 409T(b))
Supplementary Material .10 to NYSE Rule 409T establishes exceptions
to NYSE Rule 409T(b). Specifically, Supplementary Material .10 to NYSE
Rule 409T states that notwithstanding NYSE Rule 409T(b), a NYSE member
organization may address confirmations, statements or other
communications to certain nonmember customers (e.g., trust accounts,
when a partner, stockholder or employee of a member organization is a
trustee and has been duly authorized by all other trustees to receive
communications covering the account).\57\ In light of the proposed
elimination of NYSE Rule 409T, the proposed rule change would also
eliminate the exceptions found in Supplementary Material .10(1)-(6) of
NYSE Rule 409T.
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\57\ See Supplementary Material .10 to NYSE Rule 409T.
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3. NYSE Rule 409T(e)(1) (Legend on Account Statements Pertaining to
Firm's Financial Statements)
NYSE Rule 409T(e)(1) currently requires the inclusion of a legend
on all account statements that: (1) notifies customers that a financial
statement of the organization is available for inspection at its
offices or a copy can be mailed upon request; (2) advises customers (a)
to report promptly any inaccuracy or discrepancy in that person's
account to their brokerage firm and (b) if a customer's account is
subject to a clearing agreement pursuant to Exchange Rule 382, that
such notification be sent to both the introducing firm and the clearing
firm; and (3) advises the customer that any oral communications with
either the introducing firm or the clearing firm should be reconfirmed
in writing in
[[Page 34732]]
order to further protect the customer's rights under the Securities
Investor Protection Act (SIPA).\58\ FINRA stated the proposed rule
change would eliminate this requirement in light of existing
requirements under: (1) Exchange Act Rule 17a-5(c) (Reports to be Made
by Certain Brokers and Dealers),\59\ which generally requires broker-
dealers that carry customer accounts to provide statements of the
broker-dealer's financial condition to their customers; (2) FINRA Rule
2261 (Disclosure of Financial Condition), which requires a member to
make information relative to a FINRA member's financial condition
available for inspection by customers, upon request; \60\ and (3) Rule
2231(a), which 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.\61\
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\58\ See NYSE Rule 409T(e).
\59\ See 17 CFR 240.17a-5(c) (Customer Statements).
\60\ See Notice, 86 FR at 55646.
\61\ See Notice, 86 FR at 55649.
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4. NYSE Rule 409T(g) (Duplicate Copies of Monthly Statements to
Guarantors)
NYSE Rule 409T(g) provides that member organizations carrying
margin accounts for customers should send duplicate copies of monthly
statements of guaranteed accounts to the respective guarantors unless
the guarantors have specifically provided in writing that they do not
want such statements sent to them. FINRA stated the substance of NYSE
Rule 409T(g) is consistent with the general requirement in proposed
Supplementary Material .02 to obtain written instructions from
customers to send account statements to third parties.\62\ Accordingly,
the proposed rule change would eliminate NYSE Rule 409T(g).
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\62\ See Notice, 86 FR at 55646.
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5. Supplementary Material .10(7) to NYSE Rule 409T (Holding Customer
Mail)
Supplementary Material .10(7) to NYSE Rule 409T states that under
certain circumstances, a member organization may hold mail for
customers who will not be at their usual address for the period of
their absence.\63\ FINRA stated the proposed rule change would
eliminate the concept of holding customer mail set forth in
Supplementary Material .10(7) to NYSE Rule 409T. FINRA also stated that
FINRA members' obligations concerning this activity are addressed in
FINRA Rule 3150 (Holding of Customer Mail), and that proposed
Supplementary Material .04 to Rule 2231 would expressly permit members
to hold customer mail consistent with Rule 3150.\64\
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\63\ See Supplementary Material .10(7) to NYSE Rule 409T.
\64\ See Notice, 86 FR at 55646.
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6. NYSE Rule Interpretation 409T(a)/03 (Use of Third Party Agents)
NYSE Rule Interpretation 409T(a)/03 states that prior to utilizing
a third party agent to prepare and/or transmit statements of accounts
to customers, an NYSE member organization must represent/undertake in
writing to NYSE that: (1) the third party is acting as an agent for the
member organization; (2) the member organization retains responsibility
for compliance with NYSE Rule 409T(a); (3) the member organization has
developed procedures/controls for reviewing and testing the accuracy of
account statements prepared and/or transmitted by the third party
agent; and (4) the member organization will retain copies of all such
account statements in accordance with applicable books and records
requirements.\65\ In addition, NYSE Rule Interpretation 409T(a)/03
states that the allocation of responsibilities for the preparation and/
or transmission of statements to any person other than a carrying
organization pursuant to an agreement approved by the NYSE in
accordance with Exchange Rule 382 (Carrying Agreements) is deemed to be
utilization of a third party agent; 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 and/or transmit such statements.\66\
FINRA stated the proposed rule change would eliminate NYSE Rule
Interpretation 409T(a)/03 because such arrangements are addressed in
FINRA Rule 4311 (Carrying Agreements) and other relevant guidance.\67\
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\65\ See NYSE Rule Interpretation 409T(a)/03.
\66\ Id.
\67\ See Notice, 86 FR at note 29 (citing Notice to Members 05-
48 (July 2005) (describing a member's responsibilities when
outsourcing activities to third party service providers)), and
accompanying text.
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7. NYSE Rule Interpretation 409T(b)/01 (Standards for Holding Mail for
Foreign Customers--NYSE Rule 409T(b)(2) Waivers)
NYSE Rule Interpretation 409T(b)/01 currently provides detailed
requirements for a member organization requesting that NYSE agree to
let it hold a foreign customer's confirmations, statements, and broker-
dealer financial statements.\68\ FINRA stated the proposed rule change
would eliminate this interpretation because FINRA member obligations
with respect to holding customer mail are already addressed by FINRA
Rule 3150 (Holding of Customer Mail), which is referenced in proposed
Supplementary Material .04 to Rule 2231.\69\
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\68\ See NYSE Rule Interpretation 409T(b)/01.
\69\ See Notice, 86 FR at 55646.
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D. Technical Changes and Amendment No. 1
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) describe a waive-in membership application
process for some member organizations of the NYSE and NYSE American
LLC.\70\ FINRA stated that, subject to specified terms set forth in
these interpretative materials, firms admitted to FINRA membership
through either of these provisions (i.e., ``waived-in firms'') are 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.\71\ Currently, these
rules are Rule 2231 and the NYSE Provisions. The proposed rule change
would 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.\72\
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\70\ See Notice, 86 FR at 55646-7.
\71\ See Notice, 86 FR at 55647.
\72\ Id.
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FINRA also proposed Amendment No. 1 to make technical changes to
the proposed rule change by changing the term ``clearing firm'' to
``carrying firm'' in the following places: (1) proposed Rule 2231(a);
(2) proposed Supplementary Material .05(a)-(b) to Rule 2231; (3)
proposed Supplementary Material .07 to Rule 2231; and (4) proposed
Supplementary Material .08(d) to Rule 2231.\73\ FINRA stated that
changing the term ``clearing firm'' to ``carrying firm'' would maintain
[[Page 34733]]
consistency given the proposed supplementary materials are derived
largely from their corresponding NYSE provisions, which use the term
``carrying organization.'' \74\
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\73\ See OIP and Amendment No. 1, 87 FR at 1202.
\74\ Id.
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E. Effective Date
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a regulatory
notice to be published no later than 365 days following Commission
approval.\75\ FINRA also stated that the proposed rule change would
apply prospectively.\76\ For example, FINRA stated that a member firm
with a customer having a preexisting arrangement to deliver account
statements to a third party that was established before the effective
date of the proposed rule change would not be subject to the
requirements of proposed Supplementary Material .02 to Rule 2231 solely
with respect to such account until that pre-existing third party
delivery arrangement is modified in any manner; further, where any
existing or new customer of the firm seeks to establish a third party
delivery arrangement on or after the effective date of the proposed
rule change, the firm would be subject to the terms of the new
rule.\77\
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\75\ See Notice, 86 FR at 55647.
\76\ See Notice, 86 FR at 55654.
\77\ See Notice, 86 FR at note 73 (stating that 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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III. Discussion and Commission Findings
After careful review of the proposed rule change, the comment
letters,\78\ and FINRA's response to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder that are
applicable to national securities associations.\79\ Specifically, the
Commission finds the proposed rule change is consistent with Section
15A(b)(6) of the Exchange Act, which requires, among other things, that
FINRA rules be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, and protect
investors and the public interest.\80\
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\78\ See letters from Bernard V. Canepa, Vice President and
Assistant General Counsel, Securities Industry and Financial Markets
Association (``SIFMA'') to Vanessa A. Countryman, Secretary,
Commission, dated October 27, 2021 (``SIFMA Letter'') (stating that
``SIFMA understands and fully supports FINRA in its effort to
protect sensitive customer information from unauthorized persons'');
Clifford Kirsch and Eric Arnold, Eversheds Sutherland LLP, on behalf
of Committee of Annuity Insurers (``CAI'') to Secretary, Commission,
dated October 27, 2021 (``CAI Letter'') (stating that CAI is
``generally supportive of the proposed changes''); and letter from
Emily Micale, Director, Federal Regulatory Affairs, Insured
Retirement Institute, Inc. (``IRI'') to Vanessa A. Countryman,
Secretary, Commission, dated October 27, 2021 (``IRI Letter'')
(stating that it ``supports SIFMA's comments with respect to its
requests and recommendations regarding FINRA's Customer Account
Statement Proposal''); see also letter from Anonymous, dated October
28, 2021. Anonymous stated that FINRA should also consider amending
FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial
Institutions) to consider whether the Commission's Consolidated
Audit Trail could be leveraged to eliminate the operational burden
associated with complying with Rule 3210. In response, FINRA stated
that while it appreciates Anonymous' comments, it considers them to
be outside the scope of the proposed rule change. See FINRA Response
Letter, at 5.
\79\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\80\ 15 U.S.C. 78o-3(b)(6).
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A. Proposed Supplementary Materials .01 (Compliance With Rule 4311)
As stated above, proposed Supplementary Material .01 would remind
firms of their obligations under Rule 4311, which 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. FINRA stated that proposed Supplementary
Material .01 would emphasize the importance of ensuring the accuracy
and integrity of customer account statements.\81\ We received no
comments on this provision.
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\81\ See Notice, 86 FR at 55643.
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Reminding firms of their obligations under Rule 4311 in
Supplementary Material .01 to Rule 2231 would help firms comply with
their regulatory obligations under Rule 4311, which were designed to
protect their customers. Accordingly, the Commission finds that
proposed Supplementary Material .01 to Rule 2231 is designed to protect
investors and is in the public interest.
B. Proposed Supplementary Material .02 (Transmission of Customer
Account Statements to Other Persons or Entities)
As stated above, proposed Supplementary Material .02 would prohibit
FINRA members from sending customer account statements to third parties
unless the customer provides a member written instructions to do so,
and the member sends duplicate account statements directly to the
customer either in paper format or electronically. Proposed
Supplementary Material .02 would allow FINRA members to cease sending
duplicate account statements to the customer when a court appoints a
guardian, conservator, trustee, personal representative or other person
with legal authority to act on a customer's behalf, and such court-
appointed fiduciary provides the member written instructions to cease
sending duplicate statements to the customer and an official copy of
the court appointment that establishes authority over the customer's
accounts.
Multiple commenters stated that the proposed Supplementary Material
.02 would improperly balance investor protection against investor
preferences.\82\ In particular, commenters stated the requirement to
send duplicate account statements to customers even when customers
request otherwise through an agent or attorney-in-fact appointed under
a valid POA would undermine the customer's intent for naming the
POA.\83\ Commenters stated also that having the proposed exception only
available to court-appointed fiduciaries and the proposed electronic
delivery option are insufficient.\84\ The commenters, therefore,
recommended that the proposed exception to the continuous delivery
requirement should be expanded to include agents or attorneys-in-fact
appointed under a valid durable or springing POA who provide written
instructions to cease sending statements to customers.\85\
---------------------------------------------------------------------------
\82\ See SIFMA Letter, at 1 (``Of greatest concern to SIFMA is
Supplemental Material .02's proposed requirement to continue to send
duplicate account statements to customers in contravention to their
express wishes''); see SIFMA Letter, at 2-3 (``the inability to stop
delivery of account statements to incapacitated or vulnerable
customers, particularly those living in assisted-living facilities,
nursing homes, or at home where non-family, paid caregivers
regularly have access to sensitive customer information and are as
likely [to] perpetuate fraud against the customer should be just as
concerning''); see also IRI Letter, at 1 (``IRI expresses its
support for SIFMA's specific comments presenting recommendations,
clarifications, and proposals as detailed in [SIFMA's] comment
letter'').
\83\ See SIFMA Letter and IRI Letter.
\84\ See SIFMA Letter and IRI Letter (both stating that
requiring the delivery of duplicate account statements to vulnerable
customers is just as likely to result in fraud as allowing POA
holders to cease delivery because those living in assisted-living
facilities, nursing homes, or at home, where non-family, paid
caregivers regularly have access to sensitive customer information
are just as likely perpetuate fraud as POA holders. Moreover, these
commenters stated customers often cannot provide the consent
required to establish electronic delivery of account statements
because their agents or attorneys-in-fact do not contact the member
firm until the customer becomes incapacitated.).
\85\ See SIFMA Letter and IRI Letter (both stating that POAs are
an integral part of modern estate plans and provide the benefit of
not having to go to court to have a fiduciary appointed, which can
be costly, time-consuming, and public).
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[[Page 34734]]
In response, FINRA stated that it appreciated the concerns
commenters raised about customers for whom their agent or attorney-in-
fact may have a protective reason to instruct a firm to stop the
delivery of account statements, particularly for customers who still
receive account statements in paper format.\86\ Nonetheless, FINRA
stated also that the ability to review account statements, in paper
format or electronically, is a way that customers may discover
inaccuracies or discrepancies in their accounts, and, potentially,
unauthorized transactions or financially exploitative activities that
have occurred in their accounts. FINRA stated that this ability must be
preserved in all but compelling circumstances.\87\ FINRA also stated
that fraud or financially exploitative or abusive activity may manifest
in a variety of ways, including misuse of a POA.\88\ Further, FINRA
stated that courts appoint fiduciaries based on their objective review
of the facts and circumstances of a case. Thus, limiting the exception
to where a court-appointed fiduciary seeks the cessation of the
delivery of account statements to a customer would appropriately
balance the investor protection functions of ensuring customers'
ability to monitor and verify transactions occurring in their accounts,
by limiting a firm's ability to cease delivery of unwanted duplicate
account statements only in the kinds of exigent circumstances requiring
a court-appointed fiduciary.\89\ For these reasons, FINRA declined to
amend the proposed rule change in response to the commenters'
concerns.\90\
---------------------------------------------------------------------------
\86\ See FINRA Response Letter, at 3. FINRA also stated that the
proposed rule change would establish other protections such as
proposed Supplementary Material .03, which would allow a customer
that is concerned about the delivery of account statements in paper
format to elect to receive such statements electronically. See
Notice, 86 FR at 55648.
\87\ See FINRA Response Letter, at 3
\88\ Id.
\89\ Id.
\90\ See FINRA Response Letter, at 9.
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Rule 2231's statement delivery requirement provides customers with
the ability to monitor and verify the transactions occurring in their
accounts. The ability to review information regarding one's own
securities account is a critical tool for customers to identify
inaccuracies, and to detect and report potential fraud and financial
exploitation involving their accounts on a timely basis. In some
instances, however, the risk of receiving an account statement,
particularly in physical form, may be higher than the risks associated
with being unable to review them. Accordingly, while we acknowledge the
general importance of customers receiving their account statements,
there is also a potential risk, in certain cases, of having them
delivered.
Permitting a court-appointed fiduciary to request the suppression
of duplicate account statement delivery to a customer whom the
fiduciary serves is a reasonable exception to Rule 2231's general
requirements.\91\ This exception to the requirement to continuously
provide a customer account statement strikes a reasonable balance
between the investor protection goals served by a customer's receipt of
the statement on a continuous basis and the ability to suppress
delivery in exigent circumstances where a court-appointed fiduciary
requests the customer's broker-dealer to cease delivery. Further,
proposed Supplementary Material .02 would not change the ability of
firms to send account statements to customers electronically,
consistent with prior Commission guidance.\92\
---------------------------------------------------------------------------
\91\ The Commission reminds broker-dealers that nothing in Rule
2231 affects a broker-dealer's obligations with respect to delivery
of trade confirmations, which remain governed by Exchange Act Rule
10b-10 and FINRA Rule 2232.
\92\ See supra note 24 and accompanying text.
---------------------------------------------------------------------------
Accordingly, for the reasons set forth above, the Commission finds
that proposed Supplementary Material .02 to Rule 2231 is designed to
protect investors and is in the public interest.
C. Proposed Supplementary Material .03 (Use of Electronic Media To
Satisfy Delivery Obligations)
As stated above, proposed Supplementary Material .03 would allow
member firms to satisfy their delivery obligations under Rule 2231 by
using electronic media subject to compliance with standards established
by the Commission on the use of electronic media for delivery
purposes.\93\ FINRA stated that this proposed supplementary material
would be consistent with prior guidance FINRA has issued on the use of
electronic media to satisfy delivery obligations.\94\ FINRA also stated
that proposed Supplementary Material .03 would not impose any new
delivery obligations beyond existing requirements.\95\ We received no
comments on this provision.
---------------------------------------------------------------------------
\93\ Id.
\94\ See supra note 25.
\95\ See Notice, 86 FR at 55655.
---------------------------------------------------------------------------
Allowing member firms to satisfy their delivery obligations under
Rule 2231 by using electronic media subject to compliance with
standards established by the Commission on the use of electronic media
for delivery purposes would help firms comply with Rule 2231 by
providing an alternative to mail for delivering customer account
statements. In addition, proposed Supplementary Material would help
ensure that customers continue to receive their account statements
using their expressed desired delivery method. Accordingly, the
Commission finds that proposed Supplementary Material .03 to Rule 2231
is designed to protect investors and is in the public interest.
D. Proposed Supplementary Material .04 (Compliance With Rule 3150)
As stated above, proposed Supplementary Material .04 would
emphasize that member firms are permitted to hold customer mail,
including customer account statements or other communications relating
to a customer's account, subject to the requirements of Rule 3150,
which sets forth the requirements applicable to member firms when they
agree to hold a customer's mail. FINRA stated that proposed
Supplementary Material .04 reminds firms of existing obligations and
would not impose any additional burden.\96\ We received no comments on
this provision.
---------------------------------------------------------------------------
\96\ See Notice, 86 FR at 55648.
---------------------------------------------------------------------------
Reminding firms of their obligations under Rule 3150 when they
agree to hold a customer's mail would help firms comply with their
regulatory obligations under Rule 3150. Accordingly, for the reasons
set forth above, the Commission finds that proposed Supplementary
Material .04 to Rule 2231 is designed to protect investors and is in
the public interest.
E. Proposed Supplementary Material .05 (Information To Be Disclosed on
Statement)
As stated above, proposed Supplementary Material .05 would specify
the information that must be clearly and prominently disclosed on the
front of a customer account statement, such as, 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. FINRA stated that proposed Supplementary
Material .05 would incorporate without substantive changes NYSE Rule
Interpretation 409T(a)/02.\97\ Deleting the NYSE rule in favor of a
global FINRA rule would expand the coverage of these requirements to
all FINRA members rather than just NYSE members. Proposed Supplementary
Material .05
[[Page 34735]]
would provide customers with important information about their
financial professionals and investments to help them evaluate their
customer account statements. Accordingly, for the reasons set forth
above, the Commission finds that proposed Supplementary Material .05 to
Rule 2231 is designed to protect investors and is in the public
interest.
---------------------------------------------------------------------------
\97\ Id.
---------------------------------------------------------------------------
F. Proposed Supplementary Material .06 (Assets Externally Held)
As stated above, proposed Supplementary Material .06 to Rule 2231
would incorporate without substantive changes NYSE Rule Interpretation
409T(a)/04, which provides that where a customer account statement
includes assets the member organization does not have access to and
which are not included on the member organization's books and records,
such assets must be clearly and distinguishably separated on the
account statement. Proposed Supplementary Material .06 would also
require customer account statements to: (1) clearly indicate that
externally held assets are included on the statement solely as a
courtesy to the customer; (2) disclose that information (including
valuation) for externally held assets included on a statement is
derived from the customer or other external sources for which the FINRA
member is not responsible; and (3) identify that such externally held
assets may not be covered by SIPC.
One commenter requested that FINRA clarify whether variable annuity
or other registered annuity contracts would be deemed ``externally
held'' under proposed Supplementary Material .06 when such contracts
are held by the issuing insurance company.\98\ The commenter stated
that it would be most appropriate for these contracts to be deemed
``externally held'' and subject to proposed Supplementary Material
.06.\99\
---------------------------------------------------------------------------
\98\ See CAI Letter.
\99\ Id.
---------------------------------------------------------------------------
In response, FINRA stated proposed Supplementary Material .06 is
not intended to alter the substantive terms or existing guidance
pertaining to the NYSE's current interpretation for the required
disclosures on account statements for externally held assets as
promulgated in NYSE Rule Interpretation 409T(a). Accordingly, proposed
Supplementary Material .06 should not impact how firms currently treat
variable annuity or other registered annuity contracts when such
contracts are held by the issuing insurance company for purposes of
interpreting ``externally held.'' \100\ Nevertheless, FINRA stated that
it would address scenarios regarding the application of the new
supplementary materials, including new Supplementary Material .06,
through its interpretive process on a case-by-case basis or through
future rulemaking, as appropriate.\101\ Accordingly, FINRA declined to
amend the proposed rule change in response to the comment.\102\
---------------------------------------------------------------------------
\100\ See FINRA Response Letter, at 5-6.
\101\ See FINRA Response Letter, at 5.
\102\ See FINRA Response Letter, at 9.
---------------------------------------------------------------------------
Requiring all FINRA members' (and not just NYSE members') customer
account statements to disclose how information, including valuation,
for externally held assets is derived and identifying that such assets
may not be covered by SIPC would provide useful information to a firm's
customers when reviewing their investments. Supplementary Material .06
is reasonably designed to distinguish, on the customer account
statement, assets the member firm does not carry on behalf of a
customer, and are not included on the member's books and records, from
those that are. Accordingly, for the foregoing reasons, the Commission
finds that proposed Supplementary Material .06 to Rule 2231 is designed
to protect investors and is in the public interest. The Commission also
acknowledges FINRA's commitment to provide interpretations about the
applicability of the rule, including about its applicability to
specific products, as appropriate.
G. Proposed Supplementary Material .07 (Use of Logos, Trademarks, etc.)
As stated above, proposed Supplementary Material .07 would address
a firm's use of logos, trademarks and other similar identification of a
person on a customer account statement.
FINRA stated that proposed Supplementary Material .07 would
incorporate without substantive changes NYSE Rule Interpretation
409T(a)/05.\103\ FINRA also stated that the proposed Supplementary
Material .07 would be consistent with the general requirements of Rule
2210 (Communications with the Public).\104\ We received no comments on
this provision.
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\103\ See Notice, 86 FR at 55645.
\104\ Id.
---------------------------------------------------------------------------
Proposed Supplementary Material .07 is substantively similar to
rules the statutory basis for which the Commission has already
considered,\105\ and is consistent with FINRA Rule 2210. Further,
proposed Supplementary Material .07 would provide greater clarity and
regulatory efficiency to all FINRA member firms. Accordingly, for the
reasons set forth above, the Commission finds that proposed
Supplementary Material .07 to Rule 2231 is designed to protect
investors and is in the public interest.
---------------------------------------------------------------------------
\105\ See supra note 11.
---------------------------------------------------------------------------
H. Proposed Supplementary Material .08 (Use of Summary Statements)
As stated above, proposed Supplementary Material .08 to Rule 2231
would incorporate without substantive changes NYSE Rule Interpretation
409T(a)/06, establishing obligations where a FINRA member holding a
customer's account and another person who separately offers related
financial products or services to the same customer jointly provide
their respective account statements together with a statement
summarizing or combining assets held in different accounts.
Commenters stated that FINRA's description of proposed
Supplementary Material .08(d) in the Notice differs from the text of
proposed Supplementary Material .08 and expressed concern that this
wording difference between the proposed rule text and FINRA's
description would create confusion for firms determining with whom to
enter an agreement when preparing a joint statement and requested
clarification.\106\
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\106\ See SIFMA Letter and IRI Letter. Specifically, commenters
stated that proposed Supplementary Material .08 states that where a
member firm holds a customer's account and another person(s) who
separately offers financial related products or services to the same
customer seek to jointly provide their respective customer account
statements together with a summary statement, the firm must, among
other things ``ensure that there is a written agreement between the
clearing firm and each other person jointly providing its respective
customer account statements attesting that each such person has
developed procedures and controls for reviewing and testing the
accuracy of the information included on its respective statements''
(emphasis added). In the Notice, however, FINRA describes proposed
Supplementary Material .08 as requiring ``a written agreement
between the parties jointly formulating or distributing 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'' (emphasis added). Id.
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[[Page 34736]]
FINRA stated that proposed Supplementary Material .08 is not
intended to alter the substantive terms or existing guidance pertaining
to the current NYSE requirements governing the use of summary
statements.\107\ Accordingly, proposed Supplementary Material .08 would
not impact how firms currently comply with the supplemental
obligations.\108\ FINRA also stated that its description of proposed
Supplementary Material .08 in the Notice does not change the proposed
requirements of that supplementary material.\109\ Accordingly, FINRA
stated that similar to NYSE Rule Interpretation 409T(a)/06, under
proposed Supplementary Material .08, a ``clearing firm'' must be a
party to a written agreement with each other person jointly providing
its respective customer account statements.\110\
---------------------------------------------------------------------------
\107\ See FINRA Response Letter, at 6.
\108\ Id.; see also Paragraph 4 of NYSE Rule Interpretation
409T(a)/06.
\109\ See FINRA Response Letter, at 7.
\110\ Id.
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Proposed Supplementary Material .08 would establish summary
statement disclosure requirements for all FINRA members (rather than
just NYSE members). These summary statement disclosure requirements
(e.g., that the summary statement is provided for the customer's
convenience, does not replace other statements, identifies where assets
are held, and which entities are SIPC members) would protect investors
by clarifying key information about the investors' assets to help them
evaluate their investments. Accordingly, for the reasons set forth
above, the Commission finds that proposed Supplementary Material .08 is
designed to protect investors and is in the public interest.
I. Proposed Deletion of NYSE Rule 409T and NYSE Rule Interpretation
409T
FINRA stated that the proposed rule change would delete the NYSE
Provisions in their entirety on the basis that they are duplicative of
other existing rules,\111\ are outdated,\112\ or the underlying
concepts in these provisions will have been included in the proposed
Supplementary Materials to Rule 2231.\113\ As discussed more fully
above, the Commission finds that maintaining two versions of
substantially similar rules could cause confusion and undermine firm
compliance with their obligations regarding providing account
statements to their customers, which could erode investor protections.
For the reasons set forth above, the Commission finds that the proposed
deletion of the NYSE Provisions is designed to protect investors and is
in the public interest.
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\111\ For example, NYSE Rule 409T(b) and Supplementary Material
.10 to NYSE Rule 409T allow for the suppression of trade
confirmations, and NYSE Rule 409T(g) provides that members
organizations carrying margin accounts for customers should send
duplicate copies of monthly statements of guaranteed accounts to the
respective guarantors unless the guarantors have specifically
declared in writing that they do not want such statements sent to
them. Because the delivery requirements of confirmations are
governed by Exchange Act Rule 10b-10 (Confirmation of Transactions)
and FINRA Rule 2232 (Customer Confirmations), and the general
requirements of proposed Supplementary Material .02 cover duplicate
delivery issues, FINRA is not incorporating these provisions into
Supplementary Material .02. Moreover, NYSE Rule 409T(e)(1) requires
a legend on account statements notifying customers that this member
organization's financial statements are available for inspection
upon request. Because Exchange Act Rule 17a-5(c) (Reports to be Made
by Certain Brokers and Dealers) and FINRA Rule 2261 (Disclosure of
Financial Condition) contain similar provisions, FINRA is not
incorporating these provisions. Additionally, Supplementary Material
.01(7) to NYSE Rule 409T states that upon the written instructions
of a customer and with the written approval of a member or
supervisor of a member organization, a member organization may,
under certain circumstances, hold mail for a customer who will not
be at his usual address for the period of his absence, and NYSE Rule
Interpretation 409T(b)/01 provides guidelines for holding
confirmations, statements, and broker-dealer financial statements
for foreign customers. FINRA members' obligations concerning these
activities are addressed in FINRA Rule 3150 (Holding of Customer
Mail) and, thus, FINRA would not incorporate these provisions. NYSE
Rule Interpretation 409T(a)/03 addresses the allocation of
responsibilities when using third parties to prepare and transmit
account to customers statements. These arrangements are addressed in
FINRA Rule 4311 (Carrying Agreements) and other FINRA guidance, and,
thus, would also not be incorporated. See Notice, 86 FR at 55646.
\112\ For example, NYSE Rule 409T.10(1) through (6) provide
exceptions to the requirements of NYSE Rule 409T(b) for persons
having powers of attorney. As described above, proposed
Supplementary Material .02 would provide a narrower exception for
court-appointed fiduciaries. FINRA is therefore not incorporating
these NYSE terms into Supplementary Material .02. See Notice, 86 FR
at 55646.
\113\ See Notice, 86 FR at 55646.
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IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \114\ that the proposed rule change (SR-FINRA-2021-024),
as modified by Amendment No. 1, be, and hereby is, approved.
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\114\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\115\
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\115\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12169 Filed 6-6-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on June 7, 2022.
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