Permissibility of electronic approval of accounts under NASD Rule 3110(c)(1)(C). (Note: Underlining indicates redactions from original letter).


June 4, 2002

 

Mr. Selwyn Notelovitz
Senior Vice President
Global Compliance
Charles Schwab & Co. Inc.
101 Montgomery Street
San Francisco, CA 94104

 

Re: Automatic Review and Approval of New Customer Accounts

 

Dear Mr. Notelovitz:

 

I am responding to your letters of March 21, 2002 and _________________________October 30, 2001 to NASD Regulation, Inc. about the use by Charles Schwab & Co. Inc. ("Schwab") of an automated system that will review new customer account applications, the Systematic Technological Application Review ("STAR"). Schwab representatives have provided us with additional information during phone conversations and an in-person meeting on August 28, 2001. You have asked for interpretive guidance as to whether STAR would satisfy the NASD requirement that a firm maintain, for each customer account, the signature of the registered principal who approved the application.

 

Background

 

Schwab plans to store all new account information on optical disks. STAR will determine if the applicant is an existing Schwab customer by reviewing names and social security or tax identification numbers. STAR will review the applicants' financial profile, employment status, and other relevant information using a comprehensive set of criteria that have been approved by a registered principal. These criteria will include the same type of considerations used by Schwab in manual account reviews.1

 

If STAR determines that a particular account meets the specified criteria, STAR will automatically approve the application. STAR will note the date, time, and identity of the registered principal who has approved the criteria used by STAR. Schwab believes that it is unnecessary to require a registered principal to conduct a separate manual review of these account applications.

 

All account applications that do not meet the specified criteria for automatic approval (including account applications that contain illogical responses) will be flagged for manual review by a registered principal. If STAR determines that an account should be rejected, it will be so marked. If STAR determines that additional information is required, a Schwab representative will contact the client. Those manually reviewed account applications that are accepted will be electronically updated to note the date, time and identity of the Schwab registered principal who has reviewed and accepted the account.

 

Schwab plans to conduct, on a temporary basis, a random review ______________ of the account applications approved by STAR. This review will allow Schwab to evaluate the types of accounts approved by STAR. In addition, a registered principal will be able to override an accepted application if he or she believes the application to be deficient.

 

Response

 

NASD Rule 3110(c)(1)(C) requires members to maintain, for each customer account opened after January 1, 1991, a signature of the registered representative introducing the account and signature of the member or partner, officer, or manager who accepts the account._ Although the NASD rules do not expressly provide for electronic approval, the staff believes that STAR could be used to satisfy the principal approval requirements under NASD Rule 3110(c)(1)(C) so long as Schwab complies with the following safeguards and conditions:

 

Schwab will store all electronic account application information on technology consistent with NASD Rule 3110 and SEC Rules 17a-3 and 17a-4;


 

  • STAR will permit examining staff immediate access to required books and records;
  • STAR will permit the examining staff to download and print hard copies of required books and records;
  • STAR will provide an audit trail of principals who approved the criteria used by STAR;
  • Schwab's policies and procedures provide for a company-wide general security system and define which individuals will have access and what functions each individual will be authorized to undertake through STAR; and
  • STAR will be accessible only by authorized principals through password security, and the password will be changed periodically, and safeguarded against unauthorized use

The conclusion above is limited to the issue of whether STAR could be used to satisfy the principal approval requirements under NASD Rule 3110(c)(1)(C), and is not intended to address the appropriateness of: (1) the specific account categories; (2) the minimum account approval criteria for each category; (3) the standards used to determine the criteria; or (4) the effectiveness of the review and approval process. Further, this letter does not address whether STAR could be used to satisfy the books and records requirements prescribed in SEC Rules 17a-3 and 17a-4, or the application of other NASD rules or federal or state laws applicable to broker/dealers, including but not limited to the USA PATRIOT Act.

 

I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.

 

Very truly yours,

 

 

 

Eric Moss
Associate General Counsel


 

1 Schwab's existing new account opening software currently screens account information for issues prior to opening the account. Such issues include invalid addresses, international jurisdictional considerations, age of majority and other non-discretionary matters. ________________________
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