Spotlight

The Cornell Securities Law Clinic has filed a Comment Letter supporting in part and opposing in part a rule proposal by the Financial Industry Regulatory Authority to modify rules governing network arrangements between financial institutions and broker-dealers.

The Rule Proposal sought to incorporate the greater part of NASD Rule 2350, which aimed to reduce the potential confusion that may arise when retail banking customers encounter broker-dealer services on the premises of financial institutions. Additional amendments to Rule 2350 also were proposed: (1) amending Rule 2350, which applies only to on-site broker-dealers, to include all broker-dealers that enter into networking agreements with financial institutions, regardless of whether they operate on or off the institution’s premises; (2) changing the language regarding “setting” to reflect Securities and Exchange Commission (“SEC”) Regulation R; (3) implementing the requirements of Rule 701 of Regulation R, which imposes certain obligations on broker-dealers that are parties to networking agreements, (4) removing Rule 2350’s requirement that customers sign a written acknowledgment of the risks associated with securities, and (5) expanding the application of the disclosure requirements for advertising materials.

The clinic supported the Rule Proposal, except as to the elimination of the requirement that customers sign a written acknowledgement of the risks of investing in securities.

The Clinic argued that when dealing with customers over the telephone or via the internet, broker-dealers should have no problem obtaining some form of adequate ‘written’ acknowledgement. For example, if dealing over the internet, broker-dealers could employ “clickwrap” technology that allows consumers to click an “I Accept” button after reading the terms and conditions of an agreement, or in this case after reading a disclosure. If broker-dealers interact with customers over the phone, facsimile or email confirmations could easily be used. Any administrative burden imposed on broker-dealers by a written acknowledgment requirement is greatly outweighed by the benefit of reducing customer confusion.

The clinic further argued that while oral and written disclosure requirements help to ensure that there is no customer confusion arising from a networking agreement, written acknowledgment of the acceptance of such disclosures also reduces confusion. While it is true that some customers may sign an acknowledgment without reading it, others will consider the oral and written disclosures more carefully if they are required to sign a document stating that they received them.

In conclusion, the Clinic opposed the removal of the written acknowledgment requirement because it posed no significant burden on broker-dealers and would, in some if not all cases, reduce potential customer confusion.

Securities Law Clinic student Eric D. Johnson ('11) was responsible for researching and drafting the Comment Letter.