Document ID: SEC-2006-1177-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-09-13T04:00Z

[Federal Register: September 13, 2006 (Volume 71, Number 177)]
[Notices]               
[Page 54105-54107]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se06-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54411; File No. SR-NASD-2004-171]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to Rule 
2340 Concerning Customer Account Statements

September 7, 2006.

I. Introduction

    On November 2, 2004, the National Association of Securities 
Dealers, Inc. (``NASD''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) 
\1\ of the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to amend NASD Rule 2340, which 
relates to customer account statements. On February 2, 2005, NASD filed 
Amendment No. 1 to the proposed rule change.\4\ The proposed rule 
change, as amended, was published for comment in the Federal Register 
on February 16, 2005.\5\ The Commission received fifteen comment 
letters in response to the proposed rule change.\6\ This order

[[Page 54106]]

approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, NASD changed the proposed effective date 
from 30 days following Commission approval to 180 days following 
Commission approval, and changed the reference to ``each customer'' 
to ``the customer'' in the sentence proposed to be added as the 
second sentence to paragraph (a) of Rule 2340.
    \5\ Securities Exchange Act Release No. 51181 (Feb. 10, 2005), 
70 FR 7990 (Feb. 16, 2005) (``Notice'').
    \6\ See letter dated February 17, 2005 from Christopher Charles, 
President, Wulff, Hansen & Co. (``Wulff, Hansen''); email dated 
April 21, 2005 from Geraldine Genco (``Genco''); eight letters 
(dated February 28, 2005 from Lisa Roth, President, ComplianceMax 
Financial, LLC, dated March 2, 2005 from Candy J. Lee, NCM, CFP, 
President, Financial Services International Corp., dated March 7, 
2005 from Rod P. Michel, World Trade Financial Corporation, dated 
March 4, 2005 from Robert L. Savage, President, Leonard Securities, 
Inc., dated March 7, 2005 from Robert J. Schoen, President, Quest 
Securities, Inc., dated March 2, 2005 from Matthew S. Merwin, CFP, 
President, FMN Capital Corporation, dated March 7, 2005 from Warner 
Griswold, Chief Operating Officer, Green Street Advisors, Inc., and 
dated March 11, 2005 from Craig Biddick, President, Mission 
Securities Corporation) that were versions of a form letter that the 
National Association of Independent Broker Dealers posted on its 
website and encouraged its members to submit (``NAIBD''); letter 
dated March 2, 2005 from John Miller (``Miller''); letter dated 
March 9, 2005 from Rosemary J. Shockman, President, Public Investors 
Arbitration Bar Association (``PIABA''); letter dated March 8, 2005 
from Andrew C. Small, General Counsel, Scottrade, Inc. 
(``Scottrade''); letter dated March 9, 2005 from John Polanin, Jr., 
Chairman, Self Regulation and Supervisory Practices Committee, 
Securities Industry Association (``SIA''); and letter dated April 4, 
2005 from Josephine Wang, General Counsel, Securities Investor 
Protection Corporation (``SIPC'').
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II. Description of the Proposal and Comment Summary

A. Description

    Currently, clearing firms may include language in customer account 
statements advising customers to immediately report to the firm any 
discrepancies in balances or positions. However, these advisories may 
not necessarily direct customers to report discrepancies in writing, 
nor are the advisories required to be included on customer account 
statements. In 2001, the U.S. General Accounting Office (``GAO'') 
recommended, among other things, that self-regulatory organizations 
(``SROs''), such as NASD, seek to inform investors that they should 
document any unauthorized trading in their accounts in writing.\7\ 
Written documentation is important because, in the event a firm goes 
into liquidation, SIPC and the trustee generally will assume that the 
firm's records are accurate unless the customer can prove otherwise.\8\
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    \7\ See GAO, Securities Investor Protection: Steps Needed to 
Better Disclose SIPC Policies to Investors, GAO-01-653 (May 25, 
2001). See also GAO-03-811 (July 11, 2003); GAO-04-848R Follow-Up on 
SIPC (July 9, 2004). GAO has since been renamed the Government 
Accountability Office.
    \8\ SIPC advises investors who discover an error in a 
confirmation or statement to immediately bring the error to the 
attention of their brokerage firm in writing and to keep a copy of 
any such writing. See SIPC, ``Documenting Unauthorized Trading'' 
(available at http://www.sipc.org/how/unauthorized.cfm); SIPC, ``How SIPC Protects You'' (available at http://www.sipc.org/how/

brochure.cfm).
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    Consistent with GAO's recommendation, the proposed rule change 
would amend NASD Rule 2340 to require general securities firms to 
include in monthly account statements an advisory indicating that a 
customer should report promptly any inaccuracy or discrepancy in its 
account to its clearing firm and (if it is a different firm) its 
introducing firm. The advisory statement also would inform customers 
that any oral communications should be re-confirmed in writing to 
further protect customers' rights, including rights under SIPA. The 
proposed disclosure requirement would not impose any limitation on a 
customer's right to raise concerns regarding inaccuracies or 
discrepancies in his or her account at any time, either in writing or 
orally. Further, a customer's failure to promptly raise such concerns, 
either in writing or orally, would not preclude a customer from 
reporting an inaccuracy or discrepancy in his or her account during any 
SIPC liquidation of his or her brokerage or clearing firm.\9\
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    \9\ See Notice at 70 FR 7991. The NYSE has proposed a similar 
rule change. See initial proposed rule change and Amendment No. 1 
thereto in File No. SR-NYSE-2005-09 (available on the NYSE's Web 
site).
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    The 180-day delay in the rule's effectiveness requested in 
Amendment No. 1 to the proposal is intended to give NASD member firms 
time to make necessary changes to their customer documentation and 
systems.

B. Comment Summary

    The Commission received fifteen comments in response to the 
proposed rule change.\10\ Four commenters generally supported the 
proposal.\11\ Eleven generally opposed it.\12\
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    \10\ See footnote 6, supra.
    \11\ Genco; Scottrade; SIA; and SIPC.
    \12\ Miller, NAIBD (eight commenters submitted letters based on 
the NAIBD form letter), PIABA, and Wulff, Hansen. Wulff, Hansen 
suggested abandoning the proposal or, in the alternative, modifying 
it to require the new advisory statement only at account opening and 
annually thereafter, to reduce printing costs and other burdens.
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Impact on Investors
    Three commenters argued that the proposal could lead to claims that 
customers who do not promptly report errors or document them in writing 
would give up rights to assert claims against brokerage firms, or that 
brokerage firms could misuse the proposed advisory statement by arguing 
that customers who fail to follow it are barred from bringing 
claims.\13\
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    \13\ Miller, PIABA, and Wulff, Hansen. Miller recommended 
clarifying that a customer's failure to make a report does not limit 
the customer's right to raise concerns regarding account 
inaccuracies or discrepancies at any time, including during a SIPC 
liquidation. PIABA also recommended clarifying that the proposed 
additional statement shall not be used to defend against a customer 
claim.
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Contact Information
    Four commenters suggested that the advisory statement direct 
customers to address reports to a specific area within a firm where 
responses could be managed and supervised, rather than to an address or 
phone number that might cause a report to be received initially by the 
registered representative handling the account of the customer making 
the report.\14\
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    \14\ Genco, Miller, PIABA, and SIPC. Miller also recommended 
that the statement identify a person at a clearing firm to whom 
errors should be reported, if the clearing and introducing firms for 
the account are different.
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Including Advisory Statement on Confirmations
    Three commenters suggested requiring that the proposed advisory 
statement be included not only in account statements, but also in trade 
confirmations.\15\
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    \15\ Miller, PIABA, and SIPC. Miller and PIABA also suggested 
requiring that the statement be presented in bold type. PIABA 
recommended requiring that the statement be presented in plain 
language on the first page of account statements.
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Scope of Statement
    Two commenters believed that the proposed statement is overbroad 
and suggested narrowing it to apply only to unauthorized trades.\16\
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    \16\ Miller and PIABA.
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Role of Clearing Firms
    Two commenters sought clarification as to the role clearing firms 
would have in connection with disputed transactions.\17\
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    \17\ Genco and NAIBD. For example, Genco asked whether the 
proposal is intended to require clearing firms to escalate a 
complaint to the proper party in the executing firm.
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Method of Delivering Notice
    One commenter recommended amending the proposal to allow brokers to 
deliver the proposed advisory statement ``with'' (rather than ``in'') 
account statements, which the commenter believes would better 
accommodate certain click-through processes for delivering regulatory 
disclosures to customers.\18\
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    \18\ Scottrade.
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Time for Reporting Discrepancies
    Two commenters recommended setting a specified period within which 
investors should report discrepancies to avoid customer abuses, such as 
using post-settlement market information to undo transactions.\19\
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    \19\ NAIBD and SIPC.
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Level Playing Field
    One commenter maintained that the proposal would subject brokerage 
firms to a standard not applicable to commercial banks.\20\
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    \20\ Wulff, Hansen.
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Similar NYSE Proposal
    One commenter \21\ recommended that, in the interest of regulatory 
consistency, the proposal be conformed to a similar proposed NYSE rule 
change.\22\
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    \21\ SIA.
    \22\ See footnote 9, supra.
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III. Discussion and Findings

    The Commission finds that the proposed rule change is consistent 
with the Act, and in particular, with section 15A(b)(6) of the Act,\23\ 
which requires, among other things, that NASD rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of

[[Page 54107]]

trade, and, in general, to protect investors and the public interest. 
The Commission believes that the proposed rule change is consistent 
with the provision of the Act noted above because it will help 
investors understand procedures for preserving their rights in the 
event of erroneous or unauthorized transactions in their accounts.
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    \23\ 15 U.S.C. 78o-3(b)(6).
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    While the Commission believes that the proposal would improve 
NASD's current customer account disclosure requirements, we believe 
that the disclosure would be more beneficial to investors if it 
required NASD members to include on account statements both introducing 
and clearing firm contact information sufficient to allow investors to 
timely report unauthorized transactions or other account discrepancies 
to both firms (if the firms are different). We believe such disclosure 
would be consistent with current Commission guidance on this issue.\24\ 
We also believe that such disclosure would address the concerns of some 
commenters that the current proposal could be enhanced to ensure that a 
customer's concern is delivered to the most appropriate person at the 
firm.\25\ The Commission therefore encourages NASD to issue a Notice to 
Members regarding the proposed change to Rule 2340 that reminds member 
firms of their current obligations with respect to customer account 
statements.\26\
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    \24\ See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973 (Dec. 2, 1992) (amending the SEC's net capital 
rule and explaining the staff's interpretation that to avoid more 
stringent capital requirements under the rule, an introducing firm 
must have in place a clearing agreement with a registered broker-
dealer that, among other things, contains ``the name and telephone 
number of a responsible individual at the clearing firm whom a 
customer can contact with inquiries regarding the customer's 
account.''). See also NYSE Interpretation Handbook at 4105 (carrying 
organization phone number may appear on the back of the customer 
account statement, but, if so, it must be in ``bold'' or 
``highlighted'' text).
    \25\ See footnote 14, supra.
    \26\ See footnote 24, supra.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\27\ that the proposed rule change (SR-NASD-2004-171), as amended, be, 
and hereby is, approved,\28\ effective 180 days from the date of this 
order. NASD has committed to announce the effective date of the 
proposed rule change in a Notice to Members to be published no later 
than 30 days following approval of the proposal.
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    \27\ 15 U.S.C. 78s(b)(2).
    \28\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f). In 
particular, the Commission considered and granted NASD's request to 
delay effectiveness of the proposal by 180 days to allow NASD member 
firms sufficient time to implement the change required by the 
proposal.
    \29\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-15186 Filed 9-12-06; 8:45 am]

BILLING CODE 8010-01-P