FINRA Rule 2231 Explained: Customer Accounts Statements
Types of Customers:
Security Types:
Curious about how FINRA Rule 2231 impacts your compliance obligations? This guide offers a detailed breakdown of the rule. It explains how firms must handle customer account statements, what information to include, and the exceptions for certain types of accounts.
By reading this page, you'll understand the rule's key requirements, exceptions for Delivery Versus Payment (DVP) accounts, and guidelines for Direct Participation Programs (DPPs) and unlisted Real Estate Investment Trust (REIT) securities.
Whether you're a compliance officer or work with client accounts, this guide will help you understand FINRA Rule 2231.
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
What Is FINRA Rule 2231?
FINRA Rule 2231 governs how financial firms must handle customer account statements. It requires member firms to send customers accurate, regular updates about their accounts, including details on securities positions, money balances, and account activity.
These updates help customers stay informed and monitor their investments, which is essential for both retail and institutional clients.
Here’s a breakdown of FINRA Rule 2231’s key components:
General Requirements for Account Statements
Under FINRA Rule 2231, all financial firms must send a statement of account to customers at least once every calendar quarter if the account has any securities, money balance, or account activity during that period.
These statements must include:
Securities Positions: A detailed listing of the securities the customer holds.
Money Balances: The cash held in the account or any outstanding balances owed.
Account Activity: A summary of any transactions or movements in the account, such as purchases, sales, dividend payments, interest credits, and debits.
Additionally, the statement must include a notice advising the customer to promptly report any discrepancies or inaccuracies in their account to both the introducing and carrying firm (if applicable).
It also recommends that verbal concerns be confirmed in writing to protect the customer’s rights, especially under the Securities Investor Protection Act (SIPA).
Requirements for DPP and Unlisted REIT Securities
FINRA Rule 2231 also covers specific types of securities, including Direct Participation Programs (DPPs) and unlisted Real Estate Investment Trusts (REITs).
These investments are often illiquid and may be difficult to value. As such, the rule requires that firms provide a per-share estimated value for DPP and unlisted REIT securities on customer account statements.
The estimated value must be derived from either the Net Investment or the Appraised Value. The value when using the Net Investment method must be based on the “amount available for investment” percentage in the “Estimated Use of Proceeds” section of the offering document.
When the “amount available for investment” is not provided, firms must include a disclosure reflecting the estimated percentage deduction from the aggregate dollar amount of securities registered for sale to the public of sales commissions, dealer manager fees, and estimated issuer offering and organization expenses. If the issuer provides a range of amounts available for investment, the firm may use the maximum offering percentage unless the firm has reason to believe said percentage is unreliable. In that case, the firm should use the minimum offering percentage.
On the other hand, when using the Appraised Value, the value must be a per share estimated value reflecting the appraised valuation disclosed in the Issuer Report and based on valuations of the program’s assets and liabilities (analyzed at least annually by or confirmed by a third-party valuation expert or service). Furthermore, the value must be derived from a methodology conforming to industry standards.
Required disclosures for DPP and REIT Securities
In addition to the per share estimated value, firms must clearly disclose the illiquid nature of these securities, that they are not listed on a national securities exchange, and that even if they are sold, the price received may be lower than the estimated value shown on the account statement.
If using the Net Investment per share method, firms must include the following disclaimer when applicable, in proximity to disclosures of distributions and the per share estimated value:
“IMPORTANT - Part of your distribution includes a return of capital. Any distribution that represents a return of capital reduces the estimated per share value shown on your account statement.”
Exceptions for DVP/RVP Accounts
Delivery Versus Payment and Receive Versus Payment accounts operate differently from standard accounts because they are designed for institutional transactions, where payment for securities is made only upon delivery (and vice versa).
Under Rule 2231, these accounts are exempt from the quarterly statement requirement if they meet the following conditions:
Execution Basis: The account is solely for executing trades on a DVP/RVP basis and all trades have been effected on a DVP/RVP basis in conformity with rule 11860.
No Security or Money Positions: The account holds no security or money balances at the end of the quarter with temporary positions excluded (i.e., positions arising from transaction errors, failure to receive or deliver, questioned trades, or dividends or bond interest entries).
Customer Consent: The customer must consent in writing to waive the receipt of regular account statements.
Reinstatement of Statements: If the customer requests, the firm must promptly reinstate the delivery of account statements.
Customer Protection and Rights
A key aspect of FINRA Rule 2231 is its emphasis on protecting customer rights.
The rule ensures that customers are promptly informed of their financial positions and are advised to report any errors or inconsistencies in their accounts.
To further protect customers, especially in the event of an issue like firm insolvency, the rule highlights protections under the Securities Investor Protection Act, which safeguards customer accounts up to certain limits.
When both introducing and carrying firms are involved, the rule reinforces the importance of notifying both parties about any discrepancies. Such notification ensures greater accountability and quicker resolution of potential issues.
Electronic Delivery of Statements
The rule allows firms to use electronic media to deliver customer account statements, provided they comply with SEC standards for electronic delivery.
This option gives firms flexibility and allows customers to receive statements more quickly and conveniently while still meeting regulatory requirements.
Firms must also ensure that statements prominently disclose important information, such as the identity of the introducing and carrying firms, and provide contact details for customer service.
If the account statement includes assets that are not held by the firm or are held externally (such as in a custodial arrangement), these assets must be clearly distinguished from those managed by the firm.
The statement must clarify that externally held assets are included as a courtesy, and the firm is not responsible for their valuation or inclusion in SIPC protections.
Insight from the Experts
"FINRA Rule 2231 is vital for fostering trust between firms and clients. Ensuring regular, accurate account statements helps customers track their investments and address issues quickly. Compliance with this rule strengthens transparency and builds long-term client relationships."
What Is the Purpose of FINRA Rule 2231?
FINRA Rule 2231 is designed to promote transparency and protect customers and plays a crucial role in maintaining trust between financial firms and their clients.
The primary purposes of Rule 2231 include:
Enhancing Transparency:
By requiring quarterly account statements, the rule ensures that customers are always informed about their account holdings, balances, and recent activities. This transparency helps customers stay on top of their investments and make informed decisions.
Encouraging Accountability:
The rule holds firms accountable for providing up-to-date and accurate information to their clients. It also encourages customers to report any discrepancies in their statements immediately, helping to resolve issues before they escalate. When customers identify errors, firms are expected to take swift action, fostering a more responsible and compliant environment.
Protecting Investors' Rights:
The rule advises customers to re-confirm any verbal communication in writing, to protect the customers' rights. In particular, the rule reinforces the importance of customer protection under the Securities Investor Protection Act, which provides additional safeguards in case of firm failure or discrepancies.
Facilitating Compliance:
For firms, Rule 2231 helps streamline compliance efforts by setting clear guidelines for account statement delivery, disclosures, and recordkeeping. It reduces the risk of errors and non-compliance, which can lead to regulatory penalties or customer disputes.
Ultimately, the primary purpose of FINRA Rule 2231 is to strengthen the relationship between financial firms and their clients through clear communication, transparent reporting, and enhanced protection of customer assets.
Example 1
Addressing an Account Discrepancy
Sarah, an individual investor, recently purchased shares in a tech company through her brokerage account. At the end of the quarter, her brokerage sends her an account statement, which includes details about her securities, balances, and recent trades. Sarah noticed an error—the number of shares for her tech investment is incorrect. Following FINRA Rule 2231, she promptly contacts the brokerage to report the issue and confirms it in writing. The firm investigates and corrects the mistake, ensuring Sarah’s records are accurate.
Example 2
DVP/RVP Account Exemption
An investment firm manages an institutional client’s Delivery Versus Payment account, which is solely used for settling large, institutional securities trades. Since no securities or cash balances are held at the end of the quarter, and the client has provided written consent, the firm is exempt from sending quarterly statements under Rule 2231. However, when the client later requests a statement for a specific period, the firm promptly complies, providing the requested documentation. This ensures adherence to the rule’s guidelines for delivering statements upon request, even for exempt accounts.
Note: The practical examples are fictional and created solely to enhance understanding of FINRA Rule 1210. They are not based on actual events or individuals and should not be interpreted as real-life scenarios.
FINRA Rule 2231 Violations and Cases
Understanding how FINRA Rule 2231 is applied to real-world situations provides valuable insights into compliance and the consequences of failing to meet the rule’s requirements. Here are a couple of examples where firms faced penalties for non-compliance:
01
Improper Personnel Registration and Branch Office Management
A brokerage firm failed to send account statements to several of its clients for two consecutive quarters. The firm argued that a technical issue with its system delayed the statements. However, FINRA’s investigation found that the firm did not take adequate measures to resolve the issue in a timely manner. As a result, clients could not monitor their securities positions and account balances. FINRA fined the firm $50,000 and required it to implement stronger internal controls to ensure that account statements were delivered on time in the future.
02
Non-Disclosure of DPP and REIT Valuations
In 2020, a financial services firm was fined $300,000 by FINRA for sending inaccurate valuations of Direct Participation Programs (DPPs) and Real Estate Investment Trusts (REITs) on client account statements. Over seven months, the firm provided incorrect valuations to around 2,390 customers, showing outdated values due to a failure by their third-party vendor. This violation relates directly to FINRA Rule 2231, which mandates accurate reporting in customer account statements, including for illiquid securities like DPPs and REITs.
Insight from the Experts
"FINRA Rule 2231 isn't just about sending routine account statements—it's about fostering proactive communication between firms and their clients. By mandating accurate and timely statements, firms empower their clients to monitor their investments and quickly address discrepancies. This ongoing transparency is essential for building trust and safeguarding investor interests in a fast-moving financial environment."
Frequently Asked Questions About FINRA's Customer Accounts Statements Rule
Understanding how FINRA Rule 2231 is applied in real-world situations can provide valuable insights into compliance and regulatory expectations. Below are examples of violations and cases that illustrate the consequences of non-compliance and the importance of adhering to the rule's requirements.
Need Help With Rule 2231?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
