The holding of customer mail is generally frowned upon by regulators in the securities industry. This is because there have been many instances in which fraud and theft of customer funds has occurred and the perpetrator was able to prevent (or delay) the client’s discovery of the situation. In many instances where a theft of client funds has occurred, the perpetrator found a way to suppress the client’s statements of account. These statements are generally sent by a separate clearing broker or by the clearing unit of a brokerage firm. Having this statement redirected to the perpetrator’s office is one way to suppress it, and potentially alter it.
FINRA has a Rule which governs this activity – FINRA Rule 3150. This rule specifies the limited conditions in which a FINRA member may hold mail (i. e. customer statements and confirmations) for customers. The first circumstance is when the member receives written instructions from the customer requesting that mail be held for a specific time period. Any request for a hold mail time period over three (3) months must include an acceptable reason. FINRA has stated that “convenience” cannot be a reason for holding mail beyond three (3) months.
The reality is that some customers, particularly those who live in certain countries where security is a concern, have very legitimate reasons to request that their broker-dealer hold mail rather than send it to an address in their country.
If a FINRA member accepts such a request, it must contact the customer in writing and let them know of alternative methods of statement and confirmation delivery (e.g. email, online, etc.) so that the customer can monitor activity. The FINRA member must also obtain the customer’s confirmation that it has received this notice, and then must verify at what FINRA calls “reasonable intervals” that the hold mail instruction still is valid. Of course, the member holding the mail must have supervisory procedures designed to ensure that the mail is securely held and not used inappropriately.
If you have questions about how FINRA rules may impact your broker-dealer’s operations, Mitch Atkins, FINRA’s former South Region Director is now Principal at FirstMark Regulatory Solutions and can be reached by calling 561-948-6511.