Information Memo  06-87  is available for viewing or printing with Adobe Acrobat
Number 06-87 12/22/2006

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.

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.

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.

Grace B. Vogel
Executive Vice President
Member Firm Regulation


1 See Exchange Act Release No. 54904 (December 8, 2006), 71 FR 75600 (December 15, 2006)
2 See Exchange Act Release No. 54411 (September 7, 2006), 71 FR 54105 (September 13, 2006), as corrected by Exchange Act Release No. 54411A (October 6, 2006), 71 FR 61115 (October 17, 2006)
SR-NASD-2004-171. As to timing, see Exchange Act Release No. 54872 (December 5, 2006), 71 FR 75285 (December 14, 2006)
3 See Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors (GAO-01-653).
4 As noted above, such contact information should not be that of the account executive handling the account.
5 In its November 24, 1992 release announcing “Final Rule Amendments” to its net capital rule, the SEC’s Division of Market Regulation stated that it has interpreted the net capital rule and SEC Rule 15c3-3 to require that, among other things, clearing firms must issue account statements directly to customers, and that each statement must contain 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 Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992) (S7-28-89).