On April 13, 2016, the U.S. Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority’s (“FINRA”) Rule 3210 – Accounts at Other Broker-Dealers and Financial Institutions. FINRA Rule 3120 (the “Rule”) was adopted as part of FINRA’s ongoing consolidation of its rulebook and replaces NASD Rule 3050 (Transactions for Associated Persons). The Rule becomes effective on April 3, 2017.
Obligations of Associated Persons
The Rule provides that each Associated Person (“AP”) of a Member broker-dealer is required to obtain prior written consent of his or her employer when opening an account in which securities transactions can be effected and in which the AP has a beneficial interest, at another member or other financial institution. There is a difference from the prior NASD Rule 3050 as it had required reporting of accounts in which an AP had a financial interest, or with respect to which such AP had discretionary authority.
Presumption pf Beneficial Interest; Rebutting the Presumption
The Rule specifies accounts in which an AP is presumed to have a beneficial interest. Specifically, Supplemental Material .02 provides that the AP shall be presumed to have a beneficial interest in, and to have established, any account that is held by the following:
- The spouse of the AP;
- A child of the AP or of the AP’s spouse, provided that the child resides in the same household as or is financially dependent upon the AP;
- Any other related individual over whose account the AP has control; and
- Any other individual over whose account the AP has control and to whose financial support the AP materially contributes.
Supplemental Material .02 provides that, for purposes of spouse and child accounts in items 1 and 2 above, an AP need not be presumed to have a beneficial interest in, or to have established, an account if the AP demonstrates, to the reasonable satisfaction of the employer member, that the AP derives no economic benefit from, and exercises no control over, the account.
Items 3 and 4 exude control; therefore, there would be no meaningful purpose in attempting to rebut the presumption of the AP’s beneficial interest in such accounts although the Rules requirements would apply to these accounts.
Actions Required by AP’s Regarding Accounts Opened Prior to Association with an Employer Member
The Rule makes allowances for accounts that were opened by an AP prior to his or her employment with a new employing member. For those accounts the AP must disclose such accounts to his or her new employer member and obtain written consent from the employer member within 30 days of becoming associated. Additionally, the AP must notify in writing the executing member or other financial institution of his or association with the employer member.
Accounts at Non-Member Financial Institutions
Under legacy NASD Rule 3050 and the new Rule, an AP must notify his or her employer member of their intent to open an account or place an order at a non-member firm prior to executing any initial transactions. Supplementary Material .04 – Accounts at a Financial Institution Other Than a Member – provides that with respect to an account subject to the Rule the employer member shall consider the extent to which it will be able to obtain upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an AP to open or maintain such account.
This is an interesting caveat to the rule which puts the burden on the member to determine if opening such account would be a recordkeeping burden. The path of least resistance may be to deny such request. We will leave that up to our trusty Compliance Professionals to make that decision.
Obligations of Executing Members
Executing Members also have specified obligations under the Rule. Paragraph (c) of the Rule provides that an executing member must, upon written request by the employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to the rule.
Other Financial Institutions
This begs the question: How does FINRA define “Other Financial Institution.” With baited breath, I give you Supplementary Material .05 – Other Financial Institution has been added and include but are not limited to:
- Any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act;
- Domestic or foreign non-member broker-dealers;
- Investment Advisers;
- Trust Companies;
- Insurance Companies;
- Credit Unions; and
- Investment Companies
The interesting part of Supplementary Material .05 is that it does not specifically include Hedge Funds or Private Equity Funds. The omission of Hedge Funds and Private Equity Funds does not alleviate, in our view, the employer member’s obligations to provide consent to opening an account or establishing an investment with such an investment vehicle.
Accounts and Transactions Not Subject to the Rule
Supplementary Material .03 – Transactions and Accounts Not Subject To This Rule provides that the Rule’s requirements do not apply to the following types of transactions:
- Variable Contracts;
- Redeemable securities of companies registered under the Investment Company Act of 1940 (i.e. Mutual Funds) or accounts limited to transactions is such securities;
- Unit Investment Trusts;
- Municipal Fund Securities as defined under MSRB Rule D-12;
- Qualified Tuition Programs pursuant to Section 529 of the Internal Revenue Code; and
- Accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts
There are specific changes related to the personal accounts of an AP. Traditionally, most compliance officers did their job in implementing a mechanism for personal account disclosure, requesting duplicate statements and confirmations, and then conducting the associated review. The expanded and revised Rule requires a Member Firm to look outside the traditional brokerage account environment and look towards other means of personal investment. Tough decisions will need to be made as to whether an AP can continue to maintain an account at “Other Financial Institutions” due to the recordkeeping requirements brought on by these new requirements. We suggest that each of you review your policies and procedures, take inventory of the personal account universe at your respective firm, and determine how best to comply with the new requirements of the Rule.
As always, contact Asgard with any questions.