The Securities and Exchange Commission (“SEC”) has
approved1 amendments to NYSE Rule 409 (“Statements of
Accounts to Customers”) which require member organizations to add a
legend to customer statements of account advising customers to
report promptly any inaccuracy or discrepancy in that person’s
account to his or her brokerage firm, and a new Rule 409A requiring
that member organizations advise customers, in writing, of the
availability of information regarding the Securities Investor
Protection Corporation (“SIPC”). The SEC recently approved
comparable amendments to NASD Rule 2340 (“Customer Account
Statements”).2
The NYSE
will grant a six month grace period for the effective date of this
rule change to allow member organizations to utilize already printed
stock of account statements and place orders for new statement
forms. Thus, the amendments to Rule 409 and new Rule 409A will be
effective as of May 31, 2007. The amended and new rule texts are
attached as Exhibit A.
Background
NYSE Rule 409 requires member organizations to send
statements of account to customers showing security and money
positions and entries at least quarterly to all accounts having an
entry, money or security position during the preceding quarter,
absent Exchange permission to the
contrary.
In May 2001,
the U.S. Government Accountability Office (“GAO”) issued a report
which made certain recommendations to the SEC and SIPC regarding
ways to improve the information available to the public about SIPC
and the Securities Investor Protection Act (“SIPA”).3 One
of the recommendations included in the report suggested that
self-regulatory organizations explore actions to include information
on periodic statements to inform investors that they should
document, in writing, any unauthorized trading activity. The GAO
expressed that these disclosures are of utmost importance because,
in the event a brokerage firm goes into a liquidation administered
by SIPC, SIPC and the SIPC trustee generally will assume that the
brokerage firm’s records are accurate, unless the customer is able
to prove otherwise. The SIPC Brochure states that if customers
discover an error in a confirmation or account statement, they
should immediately bring the error to the attention of the brokerage
firm, in writing, and keep a copy of the writing because, if there
is a problem with the account records kept by the brokerage firm,
the customer will have to prove that the records are inaccurate, or
the SIPC trustee will assume that the brokerage firm's records are
correct.
Amendments
Rule 409
In
response to the GAO recommendations, the Exchange has amended NYSE
Rule 409 to add new section (e)(2) which requires member
organizations to include a legend on customer account statements
advising customers to promptly report any inaccuracy or discrepancy
in their account statement to their brokerage firm. Given that the
purpose of this information is to advise the member organization of
possible unauthorized transactions, customers must not be referred back
to their account executive for such notification, and accordingly
customers should be given a different address and telephone number
for such communications. Where the account is subject to a clearing
agreement under NYSE Rule 382, the legend must advise the customer
to send the notification to both the introducing
and the
clearing firm. The legend must further advise the customer that any
oral communications with either the introducing firm or the clearing
firm should be re-confirmed, in writing, in order to protect the
customer’s rights, including rights under the SIPA.
Where account statements are
delivered electronically, this legend may also be delivered
electronically, provided it is on the same screen as the account
statement, and the customer is not required to use a “click-through”
process to bring it up on the screen. The legend on the account
statement will encourage customers to submit a written record of any
possible unauthorized trading activity, unrecorded dividend
payments, and unaccounted cash positions in their accounts.4
In addition, it is expected to generally heighten customer
awareness regarding information reflected on their statements and
emphasize the importance of creating written documentation that
could prove helpful in the event of a SIPC liquidation to further
evidence an assertion that the broker-dealer’s records are
incorrect.
In proposing the
amendments to NYSE Rule 409, the Exchange noted that the 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 any
inaccuracy or discrepancy in his or her account during any SIPC
liquidation of his or her brokerage or clearing
firm.
Rule
409A
New Rule 409A requires
member organizations to advise each customer, in writing, upon the
opening of an account and at least annually thereafter, that they
may obtain information about SIPC, including the SIPC Brochure, by
contacting SIPC. Such notifications must provide the website address
and telephone number of SIPC. If a clearing agreement pursuant to
NYSE Rule 382 exists, the requirements of the new rule may be
delegated to either the introducing firm or the clearing
firm.
The Exchange reminds its
member organizations that an SEC interpretation requires the name
and telephone number of a responsible individual at the clearing
firm whom a customer can contact with inquiries regarding his or her
account to be included in each account statement.5 In
addition, it would be beneficial for member organizations 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
brokerage firms (if the brokerage firms are
different).
Questions regarding
this Information Memo may be directed to Gregory Taylor at (212)
656-2920.
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