Document ID: SEC-2018-1935-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-12-17T05:00Z

[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Notices]
[Pages 64609-64611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27205]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84788; File No. SR-FINRA-2018-040]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
FINRA Rule 4512 (Customer Account Information)

December 11, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``SEA,'' ``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ notice is hereby given that on November 28, 2018, 
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 amend paragraph (a)(3) of FINRA Rule 4512 
(Customer Account Information) to permit the use of electronic 
signatures and to clarify the scope of the rule.
    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
    With respect to a discretionary customer account maintained by a 
member, FINRA Rule 4512(a)(3) requires the firm to obtain the manual 
dated signature of each named, natural person authorized to exercise 
discretion in the account. Because the rule only applies to 
discretionary accounts maintained by a member, the named natural person 
would inevitably be an associated person of the firm.\3\ Currently, to 
comply with the rule, members must obtain the associated person's 
``wet'' signature or a copy of his or her wet signature, such as a 
scanned or faxed copy of the wet signature.\4\ The rule also requires 
members to maintain and preserve a record of the signature for at least 
six years after the date the account is closed.\5\ The purpose of the 
signature is to validate that the authorized associated person is who 
he or she purports to be. In light of the industry's shift towards 
automated and electronic processes, members have requested that FINRA 
reevaluate the need for wet signatures under the rule.
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    \3\ There is a corresponding requirement under NASD Rule 2510 
(Discretionary Accounts) prohibiting members and their registered 
representatives from exercising any discretionary power in a 
customer's account unless the customer has given prior written 
authorization to a stated individual or individuals, and the account 
has been accepted by the firm as evidenced in writing by the firm or 
a designated partner, officer or manager of the firm. These 
signatures need not be manual. In addition, SEA Rule 17a-
3(a)(17)(ii) requires that, for discretionary accounts with a 
natural person, broker-dealers maintain a record containing the 
dated signature of each natural person to whom discretionary 
authority was granted. This signature also need not be manual.
    \4\ The terms ``manual'' and ``wet'' are used interchangeably in 
this proposed rule change.
    \5\ For retention purposes, members may choose to maintain and 
preserve the signature record on any of the acceptable media 
specified in SEA Rule 17a-4, including electronic storage media 
consistent with SEA Rule 17a-4(f).
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    In general, members have stated that the requirement to obtain wet 
signatures raises operational and cost concerns without providing 
meaningful investor protection benefits. In addition, some members have 
noted that the requirement puts them at a competitive disadvantage over 
investment advisers because investment advisers are allowed to obtain 
electronic signatures. Finally, members that have adopted automated and 
electronic processes have stated that the current requirement results 
in significant administrative inefficiencies, particularly because all 
other account documentation, including the customer authorization form, 
and related recordkeeping may be completed electronically through a 
streamlined process.\6\
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    \6\ To comply with FINRA Rule 4512(a)(3), most of these firms 
currently print a paper copy of the account record and require that 
the authorized associated person physically sign it. They then 
convert the paper record to an electronic record for retention on 
electronic storage media. These firms have stated that this two-step 
process creates unnecessary inefficiencies and administrative 
burdens.
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    Given technological advances relating to electronic signatures, 
including with respect to authentication and security, FINRA believes 
that the requirement under Rule 4512(a)(3) that members obtain an 
associated person's wet signature has become obsolete. Therefore, FINRA 
is proposing to amend the rule to permit the use of electronic 
signatures. The proposed rule change is consistent with the Electronic 
Signatures in Global and National Commerce Act (``E-Sign Act''), which 
facilitates the use of electronic signatures. The proposed rule change 
is also consistent with the requirements of SEA Rule 17a-
3(a)(17)(ii),\7\ which does not prescribe the type of signature that 
must be obtained from an authorized individual. While FINRA Rule 
4512(a)(3) would continue to require members to obtain the signature of 
an associated person, it would provide

[[Page 64610]]

firms the option of obtaining either a manual or an electronic 
signature.
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    \7\ 17 CFR 240.17a-3(a)(17)(ii).
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    For purposes of compliance with FINRA Rule 4512(a)(3), a valid 
electronic signature would be any electronic mark that clearly 
identifies the signatory and is otherwise in compliance with the E-Sign 
Act, the guidance issued by the Securities and Exchange Commission 
relating to the E-Sign Act,\8\ and the guidance provided by FINRA staff 
through interpretive letters.\9\
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    \8\ See Securities Exchange Act Release No. 44238 (May 1, 2001), 
66 FR 22916 (May 7, 2001) (Commission Guidance to Broker-Dealers on 
the Use of Electronic Storage Media Under the Electronic Signatures 
in Global and National Commerce Act of 2000 with Respect to Rule 
17a-4(f)).
    \9\ See, e.g., Letter from Nancy Libin, NASD, to Jeffrey W. 
Kilduff, O'Melveny & Myers, LLP, dated July 5, 2001, http://www.finra.org/industry/interpretive-letters/july-5-2001-1200am.
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    In addition, FINRA is proposing to amend Rule 4512(a)(3) to clarify 
that the rule is limited to discretionary customer accounts maintained 
by a member for which associated persons of the member are authorized 
to exercise discretion. Specifically, FINRA is proposing to amend the 
rule to state that for a discretionary customer account maintained by a 
member, the member must obtain the dated signature of each named, 
associated person of the member authorized to exercise discretion in 
the account. This proposed change would eliminate any potential 
confusion regarding the scope of the rule and aid members' compliance 
efforts.
    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 60 days following Commission 
approval. The effective date will be no later than 30 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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. The proposed rule change would provide members the 
option of obtaining either manual or electronic signatures for purposes 
of compliance with FINRA Rule 4512(a)(3). FINRA believes that 
permitting the use of electronic signatures will provide flexibility in 
compliance without diminishing investor protection. The proposed rule 
change would also clarify that the signature requirement for 
discretionary accounts is limited to customer accounts maintained by a 
member for which associated persons of the member are authorized to 
exercise discretion, which would eliminate any potential confusion 
regarding the scope of the rule and assist members in their compliance 
efforts.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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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 further analyze the regulatory need for the proposed rule 
change, its potential economic impacts, including anticipated costs, 
benefits, and distributional and competitive effects, relative to the 
current baseline, and the alternatives FINRA considered in assessing 
how best to meet its regulatory objective.
Regulatory Need
    FINRA Rule 4512(a)(3) requires a member to validate the identity of 
associated persons who are authorized to exercise discretion in 
customer accounts maintained by the member. However, the current rule 
only allows members to validate the identity of such individuals by 
obtaining their manual signatures. This requirement may present 
operational and administrative burdens for members that have adopted 
automated and electronic processes for account documentation and 
related recordkeeping. In light of technological advances and the 
widespread use of electronic signatures in the financial services 
industry, FINRA believes that it is appropriate to provide members the 
option of obtaining electronic signatures to satisfy the signature 
requirement under FINRA Rule 4512(a)(3). FINRA believes that the 
clarifying amendment regarding the scope of the rule will eliminate 
potential confusion and assist members in their compliance efforts.
Economic Baseline
    Current FINRA Rule 4512(a)(3) requires that a member validate the 
identity of an associated person authorized to exercise discretion in a 
customer's account by obtaining the associated person's wet signature. 
This typically requires that the customer authorization form be 
printed, manually signed by the associated person, and--if the member 
keeps electronic records--scanned for retention purposes.
    Assets in discretionary accounts grew from 10% to 15% of total 
retail assets between 2014 and 2017.\11\ Further, there are more than 
100 million brokerage accounts and 14 million fee-based accounts,\12\ 
and approximately 60% of U.S. households own one or more investment 
accounts.\13\ However, FINRA does not know what percentage of these 
accounts are discretionary accounts maintained by members.
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    \11\ See PriceMetrix, The State of Wealth Management, 7th ed., 
https://www.mckinsey.com/~/media/mckinsey/industries/
financial%20services/our%20insights/
the%20state%20of%20retail%20wealth%20management%20in%20north%20americ
a/the-state-of-retail-wealth-management.ashx.
    \12\ See Wall Street Journal, Is It Time to Adopt a Uniform Fee-
Only Standard for Financial Advice? (March 18, 2018) (stating that 
U.S. investors hold more than 100 million brokerage accounts and 14 
million fee-based accounts), https://www.wsj.com/articles/is-it-time-to-adopt-a-uniform-fee-only-standard-for-financial-advice-1521424980.
    \13\ See FINRA Investor Education Foundation, A Snapshot of 
Investor Households in America (September 2015), https://www.finrafoundation.org/files/snapshot-investor-households-america.
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Economic Impact
    The proposed rule change to permit the use of electronic signatures 
provides an additional avenue for complying with an existing 
requirement. The primary benefit of the proposed rule change is that it 
may yield a net cost savings to members because they will no longer be 
required to conduct a manual process. Members may experience cost 
savings in the form of time and physical supplies as a result of the 
proposed rule change. This benefit will accrue to those members that 
maintain discretionary accounts and that wish to validate the identity 
of their associated persons via electronic signature as well as to the 
associated persons of such firms.
    The proposed rule change will benefit those members willing to 
leverage electronic signatures more than those that will maintain their 
manual (wet signature) process. Further, greater benefit will accrue to 
members that frequently accept discretionary authority over customer 
accounts than those that do so infrequently. However, the proposed rule 
change will apply to all members equally. Even if a member does not 
experience cost savings, the proposed rule change would not result in a 
greater cost burden to any firm because the proposed rule change 
provides an additional option for

[[Page 64611]]

compliance and does not impose a new requirement. Further, it should 
not interfere with or impede the forces of competition among members.
    An additional benefit may be increased regulatory consistency 
insofar as similar requirements by other regulators allow for 
electronic signatures. For example, the SEC allows investment advisers 
to utilize electronic signatures for documentation of discretionary 
authority.\14\ The proposed rule change should facilitate compliance 
for all members, but especially for dually-registered firms. Further, 
because investment advisers are already allowed to use electronic 
signatures for discretionary accounts, allowing members to use them 
will create a more level playing field between investment advisers and 
broker-dealers.
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    \14\ Moreover, as noted above, SEA Rule 17a-3(a)(17)(ii) does 
not impose a manual signature requirement on broker-dealers. See 
supra note 3.
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    Finally, the proposed rule change should not undermine investor 
protection because the primary investor protection features relating to 
the exercise of discretion in a customer account, including the 
customer's prior written authorization permitting the exercise of 
discretion, remain intact under NASD Rule 2510.\15\ In addition, 
associated persons with discretionary authority will continue to be 
required to acknowledge their discretionary authority over accounts, 
and firms will have documented evidence of that authority.
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    \15\ See supra note 3.
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Alternatives Considered
    FINRA considered whether members could authenticate the identity of 
an authorized associated person other than by obtaining the 
individual's signature. FINRA determined that requiring members to use 
different means, other than signatures, to validate the identity of 
authorized associated persons could create confusion and potential 
compliance issues, particularly in light of the signature requirement 
under SEA Rule 17a-3(a)(17)(ii).\16\
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    \16\ 17 CFR 240.17a-3(a)(17)(ii).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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
    (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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2018-040 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-2018-040. 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-2018-040 and should be submitted on or before January 7, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27205 Filed 12-14-18; 8:45 am]
 BILLING CODE 8011-01-P