NOTICE OF APPROVAL
| Supervisory Procedures
for the Review of Correspondence with the Public: Rules G-8, G-9 and G-27
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Amendments ApprovedThe Securities and Exchange Commission has approved amendments that allow dealers to develop flexible supervisory procedures for the review of correspondence with the public.
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Questions about this notice may be directed to Carolyn Walsh, Assistant General Counsel.
On March 16, 2000, the Securities and Exchange Commission approved amendments to rules G-8, on books and records, G-9, on preservation of records, and G-27, on supervision.[1] The amendments will become effective on September 19, 2000. The amendments will allow brokers, dealers and municipal securities dealers (“dealers”) to develop flexible supervisory procedures for the review of correspondence with the public. This notice is being issued to provide guidance to dealers on how to implement these rules.
BACKGROUND
Technology has greatly expanded how communications between dealers and their customers take place. These new means of communication (e.g., e-mail, Internet) will continue to significantly affect the manner in which dealers and their associated persons conduct their business. While these changes allow timely and efficient communication with customers, prospective customers, and others, the significant changes in communications media and capacity raise questions regarding supervision, review, and retention of correspondence with the public.
In May 1996, the SEC issued an Interpretive Release on the use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisors for Delivery of Information.[2] That release expressed the views of the SEC with respect to the delivery of information through electronic media in satisfaction of requirements in the federal securities laws, but did not address the applicability of any self-regulatory organization (“SRO”) rules. In its release the SEC did, however, strongly encourage the SROs to work with broker/dealer firms to adapt SRO supervisory review requirements governing communications with customers to accommodate the use of electronic communications.[3]
On December 31, 1997, the SEC approved proposed rule changes filed by the National Association of Securities Dealers (“NASD”)[4] and the New York Stock Exchange (“NYSE”)[5] to update rules governing supervision of communication with the public. NASD Notice to Members 98-11 announced approval of the proposed rule change, provided guidance to firms on how to implement these rules and stated that the amendments to NASD Rules 3010 and 3110 would be effective on February 15, 1998. Over the next year, further amendments were made to NASD Rules 3010 and 3110. NASD Regulation received final SEC approval of amendments to Rule 3010 on November 30, 1998.[6] The rule amendments were effective on March 15, 1999.[7]
As amended, NASD Rule 3010(d)(1) provides that procedures for review of correspondence with the public relating to a member’s investment banking or securities business be designed to provide reasonable supervision for each registered representative, be described in an organization’s written supervisory procedures, and be evidenced in an appropriate manner. NASD Rule 3010(d)(2) requires each member to develop written policies and procedures for review of correspondence with the public relating to its investment banking or securities business tailored to its structure and the nature and size of its business and customers. These procedures must also include the review of incoming, written correspondence directed to registered representatives and related to the member’s investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures.
The Board has determined to adopt substantially similar rule changes. The Board believes that conforming its rule language to the language in the NASD rules will help ensure a coordinated regulatory approach to the supervision of correspondence.
AMENDED RULES
Rule G-27(d)(i), as revised, provides that procedures for review of correspondence with the public relating to a dealer’s municipal securities activities be designed to provide reasonable supervision for each municipal securities representative, be described in the dealer’s written supervisory procedures, and be evidenced in an appropriate manner.
Rule G-27(d)(ii) requires each dealer to develop written policies and procedures for review of correspondence with the public relating to its municipal securities activities, tailored to its structure and the nature and size of its business and customers. The rule requires that any dealer that does not conduct either an electronic or manual pre-use review will be required to:
• develop appropriate supervisory procedures;
• monitor and test to ensure these policies and procedures are being implemented and complied with;
• provide education and training to all appropriate employees concerning the dealer’s current policies and procedures governing correspondence, and update this training as policies and procedures are changed; and
• maintain records documenting how and when employees are educated and trained.
The rule change states that these procedures must also include the review of incoming, written correspondence directed to municipal securities representatives and related to the dealer’s municipal securities activities to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with the dealer’s procedures.
It is the understanding and view of the Board that dealers possess the legal capacity to insist that mail addressed to their offices be deemed to be related to their businesses, even if marked to the attention of a particular associated person, if they advise associated persons that personal correspondence should not be received at their firms. Dealers, other than non-NASD member bank dealers, are reminded that SEC Rule 17a-4(b)(4) requires that “originals of all communications received . . . by such member, broker or dealer, relating to its business as such . . .” must be preserved for not less than three years.
The retention requirements of the amendments to rule G-27 cross reference rules G-8(a)(xx) and G-9(b)(viii) and (xiv) and state that the names of persons who prepared, reviewed and approved correspondence must be readily ascertainable from the retained records. The records must be made available, upon request, to the appropriate enforcement agency (i.e., NASD or federal bank regulatory agency).
GUIDELINES FOR SUPERVISION AND REVIEW
In adopting review procedures pursuant to rule G-27(d)(i), dealers must:
• specify, in writing, the dealer’s policies and procedures for reviewing different types of correspondence;
• identify how supervisory reviews will be conducted and documented;
• identify what types of correspondence will be pre- or post-reviewed;
• identify the organizational position(s) responsible for conducting review of the different types of correspondence;
• specify the minimum frequency of the reviews for each type of correspondence;
• monitor the implementation of and compliance with the dealer’s procedures for reviewing public correspondence; and
• periodically re-evaluate the effectiveness of the dealer’s procedures for reviewing public correspondence and consider any necessary revisions.
In conducting reviews, dealers may use reasonable sampling techniques. As an example of appropriate evidence of review, e-mail related to the dealer’s municipal securities activities may be reviewed electronically and the evidence of review may be recorded electronically.
In developing supervisory procedures for the review of correspondence with the public pursuant to rule G-27(d)(ii), each dealer must consider its structure, the nature and size of its business, other pertinent characteristics, and the appropriateness of implementing uniform firm-wide procedures or tailored procedures (i.e., by specific function, office/location, individual, or group of persons).
In adopting review procedures pursuant to rule G-27(d)(ii), dealers must, at a minimum:
• specify procedures for reviewing municipal securities representatives’ recommendations to customers;
• require supervisory review of some of each municipal securities representative’s public correspondence, including recommendations to customers;
• consider the complaint and overall disciplinary history, if any, of municipal securities representatives and other employees (with particular emphasis on complaints regarding written or oral communications with clients); and
• consider the nature and extent of training provided municipal securities representatives and other employees, as well as their experience in using communications media (although a dealer’s procedures may not eliminate or provide for minimal supervisory reviews based on an employee’s training or level of experience in using communications media).
Although dealers may consider the number, size, and location of offices, as well as the volume of correspondence overall or in specific areas of the organization, dealers must nonetheless develop appropriate supervisory policies and procedures in light of their duty to supervise their associated persons. The factors listed above are not exclusive and dealers must consider all appropriate factors when developing their supervisory procedures and implementing their supervisory reviews.
Supervisory policy and procedures must also:
• provide that all customer complaints, whether received via e-mail or in written form from the customer, are kept and maintained;
• describe any dealer standards for the content of different types of correspondence; and
• prohibit municipal securities representatives’ and other employees’ use of electronic correspondence to the public unless such communications are subject to supervisory and review procedures developed by the dealer. For example, the Board would expect dealers to prohibit correspondence with customers from employees’ home computers or through third party systems unless the dealer is capable of monitoring such communications.
The method used for conducting reviews of incoming, written correspondence to identify customer complaints and funds may vary depending on the dealer’s office structure. Where the office structure permits review of all correspondence, dealers should designate a municipal securities representative or other appropriate person to open and review correspondence prior to use or distribution to identify customer complaints and funds. The designated person must not be supervised or under the control of the municipal securities representative whose correspondence is opened and reviewed. Unregistered persons who have received sufficient training to enable them to identify complaints and funds would be permitted to review correspondence.
Where the office structure does not permit the review of correspondence prior to use or distribution, appropriate procedures that could be adopted include the following:
• forwarding opened incoming written correspondence related to the dealer’s municipal securities activities to a designated office, or supervising branch office, for review on a weekly basis;
• maintenance of a separate log for all checks received and securities products sold, which is forwarded to the supervising branch office on a weekly basis;
• communication to clients that they can contact the dealer directly for any matter, including the filing of a complaint, and providing them with an address and telephone number of a central office of the dealer for this purpose; and
• branch examination verification that the procedures are being followed.
Regardless of the method used for initial review of incoming, written correspondence, as with other types of correspondence, rule G-27 would still require review by a designated principal of some of each municipal securities representative’s correspondence with the public relating to the dealer’s municipal securities activities. Given the complexity and cost of establishing appropriate systems for effectively reviewing electronic communications, some dealers may determine to conduct a pre-use or distribution review of all incoming and outgoing correspondence (written or electronic).
Dealers must continually assess the effectiveness of these supervisory systems. Education and training must be timely (prior to or concurrent with implementation of the policies and procedures) and must include all appropriate employees. Dealers may incorporate the required education and training on correspondence into their Continuing Education Firm Element Training Program (see rule G-3(h) on continuing education requirements). The requirement for training regarding correspondence may also apply to employees who are not included under the Continuing Education requirements.
March 24, 2000
TEXT OF AMENDMENTS[8]
Rule G-8. Books and Records to be made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) - (xix) No change
(xx) Records Concerning Compliance with Rule G-27. Each broker, dealer and municipal securities dealer shall maintain the records required under G-27(c) and G-27(d).
(b) - (f) No change
Rule G-9. Preservation of Records
(a) No change
(b) Records to be Preserved for Three Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than three years:
(i) - (vii) No change
(viii) the following records, to the extent made or received by such broker, dealer or municipal securities dealer in connection with its business as such broker, dealer or municipal securities dealer and not otherwise described in this rule:
(A) - (B) no change;
(C) all written and electroniccommunications received and sent, including inter-office memoranda, relating to the conduct of the activities of such broker, dealer or municipal securities dealer with respect to municipal securities;
(D) - (E) no change.
(ix) - (xiii) no change.
(xiv) the records to be maintained pursuant to rule G-8(a)(xx).
Rule G-27. Supervision
(a) - (b) No change
(c) Written supervisory procedures. Each dealer shall adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that the conduct of the municipal securities activities of the dealer and its associated persons are in compliance as required in section (a) of this rule. Such procedures shall codify the dealer’s supervisory system for ensuring compliance and, at a minimum, shall establish procedures
(i) - (vi) No change
(vii) for the prompt review and written approval by a designated principal of:
(A) the opening of
each customer account introduced or carried by the dealer in which transactions
in municipal securities may be effected; and
(B)
each transaction in municipal securities on a daily basis, including each
transaction in municipal securities effected with or for a discretionary
account introduced or carried by the dealer ; and
(C) all correspondence
pertaining to the solicitation or execution of transactions in municipal
securities.
(d) Review of Correspondence
(i) Supervision of Municipal Securities Representatives. Each dealer shall establish procedures for the review by a designated principal of incoming and outgoing written (i.e., non-electronic) and electronic correspondence of its municipal securities representatives with the public relating to the municipal securities activities of such dealer. Such procedures must be in writing and be designed to reasonably supervise each municipal securities representative. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available, upon request, to a registered securities association or the appropriate regulatory agency as defined in section 3(a)(34) of the Act.
(ii) Review of correspondence. Each dealer shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its municipal securities activities. Procedures shall include the review of incoming, written correspondence directed to municipal securities representatives and related to the dealer’s municipal securities activities to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with the dealer’s procedures. Where such procedures for the review of correspondence do not require review of all correspondence prior to use or distribution, they must include provisions for the education and training of associated persons as to the dealer's procedures governing correspondence; documentation of such education and training; and surveillance and follow-up to ensure that such procedures are implemented and adhered to.
(iii) Retention of correspondence. Each dealer shall retain correspondence of municipal securities representatives relating to its municipal securities activities in accordance with rules G-8(a)(xx) and G-9(b)(viii) and (xiv). The names of the persons who prepared outgoing correspondence and who reviewed the correspondence shall be ascertainable from the retained records and the retained records shall be readily available, upon request, to a registered securities association or the appropriate regulatory agency as defined in Section 3(a)(34) of the Act.
(d)(e) Duty
to update and review written procedures. Each dealer shall revise and
update its written supervisory procedures as necessary to respond to changes in
Board or other applicable rules and as other circumstances require. In
addition, each dealer shall review, at least on an annual basis, its
supervisory system and written supervisory procedures adopted under sections
(c) and (d) of this rule to determine whether they are adequate and
up-to-date and shall ensure that the dealer is in compliance with this rule.