Proposed Amendment to Rules of Fair Practice to Require Members to Send Periodic Statements of Account to Customers; Last Voting Date: July 22, 1992
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MAIL VOTE
EXECUTIVE SUMMARY
The NASD invites members to vote on a proposed amendment to the Rules of Fair Practice to require member firms to send periodic account statements to customers. The last voting date is July 22, 1992. The text of the amendment follows this Notice.
BACKGROUND AND DESCRIPTION OF PROPOSAL
The NASD does not currently require members to send periodic account statements to customers. SEC Rule 15c3-2 requires broker/dealers to send statements to customers at least every three months notifying them that their free credit balances may be used by broker/dealers or paid on demand to the customers. The requirement of Rule 15c3-2, however, only applies if a customer has a free credit balance.
The NASD is aware that some broker/dealers send only the required Rule 15c3-2 notice to those customers with free credit balances and do not send account statements. As a result, these customers are not advised of the current status of their accounts, regardless of whether the status of the accounts may have changed.
The Board of Governors (Board) believes that, in the interest of customer protection, customers should be more fully informed of the status of their accounts. The Board is proposing to require that members send periodic account statements at least once every quarter to customers having securities positions, funds, or any change in their account during the period since the previous statement was sent. The proposed rule would require that the statement include a description of all securities positions, money balances, and account activity in the account during the period.
Subsection (a) of the proposed rule would require each general securities member to send a statement of account containing a description of all account activity to each customer not less than once every quarter. The requirement may be met by any account statements showing all account activity that are sent more frequently than quarterly.
Subsection (b) of the proposed rule defines the term "account activity" to include all types of activity that may occur in a securities account with respect to "securities or funds in the possession or control of the member." Thus, this limitation exempts account activity relating to funds or securities not in the control of the member, such as direct participation program (DPP) securities where the general partner communicates directly with investors after the initial purchase through the distributing broker/dealer.
Subsection (c) defines the term "general securities members" as a member that calculates its net capital under Subsection (a) of SEC Rule 15c3-1 [excluding paragraphs (a)(2) and (3)], or, in other words, a broker/dealer subject to a minimum net capital requirement of at least $25,000. Subsection (c) further defines the term general securities member to exclude members who do not carry customer accounts or hold customer funds or securities. Thus, members whose business is limited to the sale of variable contract insurance products, mutual funds, and unit investment trusts, among other products, or who do not carry accounts or hold customer funds or securities are exempt from the provisions of the rule. The member carrying the account or holding the funds or securities for such members will be responsible for complying with the rule.
The Board believes that customers of members with such limited business are adequately informed and protected under various statutory and regulatory mechanisms. The Investment Company Act of 1940 currently requires issuers of variable contracts, mutual funds, and unit investment trusts to send semi-annual statements of portfolio and financial condition to contractholders and shareholders. Also, activity such as a purchase, distribution, or redemption in connection with variable contracts, mutual funds, or unit trusts usually triggers a statement to the customer from the issuer, its agent, or a member firm.
Both subsections (b) and (c) exempt members from the periodic account statement requirements if the member does not carry customer accounts or hold customer funds or securities. The Board does not believe members, whether limited or general broker/dealers, should bear the burden of reporting information on securities or funds not in their possession and for which they may not be able to obtain or independently confirm. In the case of DPP and similar products, when a customer purchases DPP units through a member, the funds received from the customers are forwarded to the general partner (through an escrow account), admission to the partnership is confirmed directly to the purchaser by the general partner, and all subsequent communications are usually between the general partner and the investor. The selling member normally has neither possession of the security nor information to report to the investor.
Subsection (d) of the proposed rule permits the NASD's Operations Committee to exempt any member from the provisions of the rule on a showing of good cause. This would permit the NASD under unusual circumstances to exempt a member if application of the rule would be unnecessarily burdensome given the type of business it conducts and the nature of the accounts, securities, or funds involved, and if the goal of customer protection and information could be met under alternative arrangements.
REQUEST FOR VOTE
The Board believes that the proposed new rule will provide customers with more timely information regarding the status of their securities positions and account balances and will be an additional safeguard against errors and misunderstandings between members and customers, a benefit to both customers and members. The Board considers the proposed rule change necessary and appropriate and recommends that members vote their approval. Please mark the attached ballot according to your convictions and mail in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked by no later than July 22, 1992. Questions concerning this Notice should be directed to Elliott R. Curzon, Office of General Counsel, at (202) 728-8451.
TEXT OF PROPOSED RULE
Rules of Fair Practice
(Note: All language is new.)
Customer Account Statements