As part of an ongoing effort to reduce unnecessary burdens for its members, the Financial Industry Regulatory Authority said it will discontinue its current practice of reviewing firms’ draft customer letters that use “negative consent” to effect bulk transfers.
The decision was detailed in Regulatory Notice 26-03, issued recently. FINRA explained that currently, firms must obtain a customer’s affirmative consent or instruction to transfer or assign the customer’s account to another member. But this may be unworkable for large bulk transfers of customer accounts. So, in some situations, members seek to transfer customer accounts by sending letters to their customers that their accounts will be transferred unless a customer expressly objects to the transfer of his or her account (negative consent). FINRA has stated that this negative consent to transfer or assign customers’ accounts may be appropriate in some bulk transfer circumstances.
According to the new regulatory notice, “In furtherance of the FINRA Forward initiative to support member compliance, this Notice reduces unnecessary burdens by eliminating the current practice of submitting draft letters for the use of negative consent to FINRA staff for review and obtaining FINRA staff’s “no objection” prior to sending the letter. In addition, the Notice consolidates guidance FINRA previously issued regarding the use of negative consent and provides members with effective practices to help guide their use of negative consent in future bulk transfers or assignments.”
FINRA emphasized that in general, member firms must obtain a customer’s affirmative consent or instruction and that transfers without consent could conflict with FINRA Rule 2010, which requires member firms to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business. But the authority believes that using negative consent can enhance efficiency and minimize disruptions to customer account access, especially in situations where obtaining affirmative customer consent is unworkable due to immediate circumstances beyond a member’s control.
FINRA said the new regulatory notice does not create new legal or regulatory requirements or new interpretations, and does not relieve firms of existing obligations, and it stated that FINRA staff will continue to provide interpretive guidance on request for new or novel situations and will continue to review firms’ use of negative consent in examinations.
Last year, FINRA requested comment on modernizing its rules, guidance and processes, including specifically requesting comment regarding members’ use of negative consent to transfer or assign customers’ accounts.
In light of the comments, FINRA issued the new notice to provide guidance regarding the use of negative consent to transfer or assign accounts. “FINRA believes this Notice will help members whose business models and practices are rapidly evolving, and customers who need improved transparency and awareness of potential changes to their accounts and the opportunity to experience as seamless a transition as possible,” the authority stated.
FINRA’s stated effective practices for members using negative consent include emphasizing prior written customer authorization (which FINRA said firms may consider obtaining during onboarding), compliance with applicable requirements including, as relevant, FINRA Rule 1017 (Continuing Membership Application), FINRA Rule 2210 (retail communications content standards), Regulation S-P (customer privacy) and Exchange Act Rule 15c3-3(j) (including issues involving free credit balances and sweep programs).
FINRA reiterated that providing customers with the opportunity to opt out of a change to their account is fundamental to the use of negative consent. The letter should include a statement that the customer has the right to object to the proposed transfer or assignment. In connection with this option, customers can best decide whether to opt out if the letter informs them of:
-the date by which they need to respond if opting out;
-how to opt out (e.g., by telephone, email or another method); and
-the alternatives available to the customer if opting out, including information about how the customer can effectuate a transfer to a different firm and the consequences of opting out without effectuating a transfer to a different firm.
Some customers who receive a letter may decide to opt out of the transfer or assignment via negative consent and instead affirmatively transfer their accounts to another member, other than the receiving firm, either before or after the opt-out deadline. In these cases, the delivering firm should waive any Automated Customer Account Transfer Service fees related to such transfers by customers, regardless of whether the transfer occurs before or after the opt-out deadline.
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