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

FINRA’s Retreat

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:

  • Account statements are required to clearly and prominently disclose, on the front of the statement, that the firm is a member of the Securities Investor Protection Corporation (SIPC), the identity of the introducing firm and the clearing firm (where different), and the contact information for the customer service department of those firms.10
  • When a statement includes assets that the firm does not hold on the customer’s behalf and are not on the firm’s books, the statement must include prominent separation.11 
  • Firms are prohibited from using the logo, trademark, or any other identification of a person (other than the introducing or clearing firms) that might mislead or confuse a customer.12
  • Firms may jointly formulate and distribute summary statements that summarize or combine assets held in different accounts, subject to several requirements designed to make clear the sources of the information and the limitations in the summary information.13 

Additional New Supplementary Material:

The proposed rule also includes new supplementary material:

  • Where accounts are carried on a fully disclosed basis, Rule 4311 requires each carrying agreement to expressly delegate, generally to the carrying firm, the responsibility for (1) the safeguarding of funds and securities for the purposes of SEA Rule 15c3-3 (Customer Protection — Reserves and Custody of Securities); and (2) preparing and transmitting customer account statements.14
  • Electronic media is a permissible medium to satisfy delivery obligations, subject to SEC standards.15
  • Firms are allowed to hold customer mail subject to the requirements of Rule 3150.16

FINRA Requests Comments

FINRA has requested comment on costs and burdens the proposal could pose to firms and on the following specific subjects:

  • Quarterly delivery: Are the operational and cost concerns created by the initial proposed Rule 2231 shift to monthly statements addressed by the proposal to retain quarterly statements?17
  • Definition of “general securities member”: Where the definition of the term in NASD Rule 2340(d) excludes firms that do not carry customer accounts and do not hold customer funds or securities, should the definition be amended or clarified in order to better align with the obligations of clearing or carrying members?18
    • 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

  • Duplicate statements: What effect will the revision to the Supplementary Material requiring duplicate statements have on existing practices concerning the transmission of customer account statements and related documents to third parties?22
  • Customers with designated third-party statement recipients: What is the current industry practice for transmitting customer account statements to customers who have designated third parties to receive their account statements due to a disability, incapacitation, residence in an assisted living facility, or having a designated power of attorney over the account or a trusted person to review statements?23
  • Exemptions: Are exemptions allowing firms not to send statements to customers in specific identified situations necessary?24

FINRA also specifically requests comments on the potential economic impact and expected beneficial results with respect to:

  • The direct and indirect costs associated with requiring duplicate statements sent to customers despite the customer’s written designation of a third-party recipient;25
  • Whether the costs imposed by the duplicate statements are acceptable when balanced with the potential protection the duplicate statements would provide to customers;26
  • What benefits and burdens the duplicate statements would provide to customers;27 and
  • What impact, if any, duplicate statements would have on established business practices and competition in the financial industry.28

Conclusion

Interested parties should submit comments no later than the comment period expiration date, October 31, 2014.