Document ID: SEC-2019-0287-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-03-15T04:00Z

[Federal Register Volume 84, Number 51 (Friday, March 15, 2019)]
[Notices]
[Pages 9573-9575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04808]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85282; File No. SR-FINRA-2018-040]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to FINRA 
Rule 4512 (Customer Account Information)

March 11, 2019.

I. Introduction

    On November 28, 2018, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise FINRA Rule 4512 
(Customer Account Information) to permit the use of electronic 
signatures and to also clarify the scope of the rule.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 U.S.C. 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on December 17, 2018.\3\ The Commission received two comment 
letters regarding the proposed rule change, both supporting the 
proposed rule change.\4\ On January 30, 2019 the Commission extended 
the time to approve the proposed rule change, disapprove the proposed 
rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change to March 17, 2019.\5\ For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \3\ See Securities Exchange Act Release No. 84788 (Dec. 11, 
2018), 83 FR 64609 (Dec. 17, 2018) (File No. SR-FINRA-2018-040) 
(``Notice'').
    \4\ See Letters from Paul J. Tolley, Senior Vice President, 
Chief Compliance Officer, Commonwealth Financial Network, dated 
December 31, 2018 (``Commonwealth Letter''); and Kevin Zambrowicz, 
Associate General Counsel & Managing Director, SIFMA, dated January 
7, 2019 (``SIFMA Letter'').
    \5\ See Securities Exchange Act Release No. 85003 (Jan. 30, 
2019), 84 FR 1809 (Feb. 5, 2019) (File No. SR-FINRA-2018-040) 
(``Extension'').
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II. Description of the Proposed Rule Change 6
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    \6\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 83 FR 64609-10.
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    FINRA proposed 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.
    With respect to a discretionary customer account maintained by a 
member, FINRA Rule 4512(a)(3) currently requires a member to obtain a 
manual dated signature of each named, natural person authorized to 
exercise discretion in the account. FINRA stated that 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.\7\ Consequently, to

[[Page 9574]]

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.\8\ Additionally, 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.\9\
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    \7\ 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.
    \8\ The terms ``manual'' and ``wet'' are used interchangeably in 
this proposed rule change.
    \9\ 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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    According to FINRA, the purpose of the signature is to validate 
that the authorized associated person is who he or she purports to be. 
FINRA stated that, in light of the industry's shift towards automated 
and electronic processes, member firms have requested that FINRA 
reevaluate the need for wet signatures under the rule. FINRA noted that 
its members have stated that the requirement to obtain wet signatures 
raises operational and cost concerns without providing meaningful 
investor protection benefits. In addition, according to FINRA, 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, FINRA noted that 
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.\10\
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    \10\ 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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    In light of technological advances relating to electronic 
signatures, including with respect to authentication and security, 
FINRA stated that it believes that the requirement under Rule 
4512(a)(3) that members obtain an associated person's wet signature has 
become obsolete. As a result, FINRA proposed to amend the rule to 
permit the use of electronic signatures. While FINRA Rule 4512(a)(3) 
would continue to require members to obtain the signature of an 
associated person, it would provide firms the option of obtaining 
either a manual or an electronic signature.
    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 
Electronic Signatures in Global and National Commerce Act (``E-Sign 
Act''), the guidance issued by the Commission relating to the E-Sign 
Act,\11\ and the guidance provided by FINRA staff through interpretive 
letters.\12\
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    \11\ 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)).
    \12\ 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 to the proposed changes described above, 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.
    FINRA has stated that it will announce the effective date of the 
rule change in a Regulatory Notice to be published no later than 60 
days following a Commission approval, and the effective date will be no 
later than 30 days following publication of that Regulatory Notice.\13\
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    \13\ See Notice, 83 FR at 64610.
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III. Comment Summary

    As noted above, the Commission received two comment letters on the 
proposed rule change,\14\ both supporting the proposal. Both commenters 
noted that the requirement to obtain a manual or ``wet'' signature is 
outdated or generally inconsistent with the move toward an increase in 
the use of technology, including the use of electronic signatures.\15\ 
One commenter indicated that it already executes essentially all client 
account and transactional paperwork with the use of electronic 
signatures, and that the requirement to obtain a manual signature slows 
down its processes for opening discretionary accounts.\16\
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    \14\ See supra note 6.
    \15\ See Commonwealth Letter at 1-2; see also SIFMA Letter at 1.
    \16\ See Commonwealth Letter at 2.
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    Both commenters noted that the administrative and operational 
inefficiencies and burdens resulting from the requirement to obtain 
manual signatures place member firms at a competitive disadvantage 
against investment advisers that are not subject to such a requirement 
without providing additional investor protections.\17\ The commenters 
support the proposed rule change, and one commenter urged the 
Commission and FINRA to consider other opportunities to eliminate 
manual signature requirements in favor of electronic methods.\18\
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    \17\ See Commonwealth Letter at 1; see also SIFMA Letter at 2.
    \18\ See Commonwealth Letter at 2; see also SIFMA Letter at 3.
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IV. Discussion and Commission Findings

    After careful consideration of the proposed rule change and the 
comment letters, the Commission finds that the proposal is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities 
association.\19\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\20\ which 
requires, among other things, that FINRA rules 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 Commission believes that the proposal will 
simplify the process by which member firms validate the identity of an 
authorized associated person, and thereby lower costs to member firms 
by reducing operational inefficiencies. Moreover, the Commission 
believes the proposed rule change is reasonably designed to prevent 
fraudulent practices in connection with the use of electronic 
signatures because it provides that 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 proposed rule change 
is also consistent with Commission guidance relating to the E-Sign Act, 
and prior FINRA staff guidance regarding electronic signatures.\21\
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    \19\ 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).
    \20\ 15 U.S.C. 78o-3(b)(6).
    \21\ See supra notes 11-12 and accompanying text.

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    For these reasons, the Commission believes the proposed rule change 
is consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-FINRA-2018-040) is approved.
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    \22\ 15 U.S. C. 78s(b)(2).
    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04808 Filed 3-14-19; 8:45 am]
BILLING CODE 8011-01-P