VIA E-MAIL TO firstname.lastname@example.org
SUSAN S. KRAWCZYK
DIRECT LINE: 202.383.0197
September 6, 2002
Financial Crimes Enforcement Network ("FinCEN")
United States Department of the Treasury
Section 326 Broker-Dealer Rule Comments
P.O. Box 39
Vienna, VA 22183
Attention: Section 326 Broker-Dealer Rule Comments
31 C.F.R. Part 103
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: File No. S7-25-02
Release No. 34-46192
17 C.F.R. Part 240
Comments on Section 326 Broker-Dealer Rule
(SEC File No. S7-25-02);
Joint Notice of Proposed Rulemaking
Dear Sir or Madam:
Thank you for the opportunity to comment on the proposed regulation on Customer Identification Programs for Broker-Dealers issued jointly by the Department of Treasury and the Securities and Exchange Commission on July 17, 2002 (Release No. 34-46192, File No. S7-25-02). We would like to comment on the provisions of the proposed regulation requiring a broker-dealer to maintain copies of any documents relied upon by the broker-dealer using a documentary method of verification, particularly as it would apply to the documentary use of a driver's license or other form of government issued photo identification. In this regard, the supplementary information to the proposed rule states, "if a customer produces a driver's license, the broker-dealer must make a copy of the driver's license that clearly indicates it is a driver's license and legibly depicts any identification number on the license." (Emphasis added). For the reasons discussed below, we believe that this proposed record-keeping requirement is both burdensome and impractical.
We are submitting this letter on behalf of several broker-dealer firms ("Firms"). All of the Firms are affiliated with insurance companies and share a sales force with their insurance company affiliates; in other words, their registered representatives ("Registered Reps") are also insurance agents for the affiliated insurance company. Their Registered Reps conduct business on a face-to-face basis, in many cases meeting the customer in the customer's home or worksite, for the convenience of the customer. Generally, such meetings occur in two contexts: where the Registered Rep meets with the customer in the customer's home (or business office), an approach that has been referred to as "kitchen table" sales1; and where the Registered Rep meets with the customer at the customer's worksite, usually at enrollment meetings at which employees may select investment products offered in conjunction with an employee benefit plan or other employer-sponsored arrangement.
The Firms are subject to requirements under NASD rules, and where variable insurance products are involved, also state insurance laws, to collect certain information about their customers in connection with opening an account or effecting a securities transaction. For example, NASD rules require broker-dealers and their registered representatives to collect certain minimal information about every customer, as well as certain specified additional information when a securities transaction is recommended to the customer.2 State insurance laws effectively require insurance companies and their agents to collect sufficient information about those persons proposed to be insured to enable the insurance companies to appropriately assess their insurance risks. These requirements do not differentiate based on the location of the sales meeting; the same information-gathering requirements apply to broker-dealers regardless of where the sales meeting is held - the kitchen table, worksite or a registered representative's business office.
To satisfy existing information-gathering requirements, the Firms require every customer to complete an application to open an account or purchase an investment product. While the specific information required to be collected varies from Firm to Firm, generally, Registered Reps currently collect information from customers that would be mandated by the proposed regulation (namely, customer's name, address, social security number and date of birth), along with other information such as a customer's net worth, sources of income, tax status, investment risk profile and purpose for investing. When variable life insurance is being considered, additional information ordinarily is collected about the person whose life will be insured by the contract. (This person may or may not be the same person as the owner.) In many cases, the insured must undergo a medical examination to assist with the life insurance underwriting evaluation.
Particularly in the case of variable life insurance, some Firms currently require their Registered Reps to view the applicant's driver's license identification card (or other government issued picture identification card) and note the identifying information on the application form. Other Firms anticipate that driver's license identification or some other form of government issued photo identification may become a preferred source of information for validation purposes.
Currently, the Firms, on their own or in conjunction with their affiliated insurance companies, conduct some verification of the information collected by their Registered Reps for purposes of suitability and anti-fraud review. In some but not all cases, this review includes validating the driver's license identification information (or similar identification) noted by the Registered Rep on the application form. The Firms that use the process have been utilizing it for some time, and have found this process to be effective for their purposes.
None of the Firms currently require their Registered Reps to obtain and submit or otherwise maintain a copy of a customer's driver's license or other form of identification. While it would not be a great inconvenience for Registered Reps to make and retain a copy of a customer's driver's license (or similar identification) when the customer meets with the Registered Rep in the Registered Rep's office, it would be a great inconvenience for the Registered Rep to do so when meeting with a customer in the customer's home or worksite. In both cases, the Registered Rep must collect the information using the materials and supplies that he/she carries to the location. It is not feasible for a Registered Rep to carry a photocopy machine to the location of a "kitchen table" or a "worksite" sale, and often a photocopy machine is not otherwise available, making it impossible for a Registered Rep to obtain a copy of the form of identification at the time the sale is made.
The Firms have considered what methods could be employed to obtain copies of driver's licenses, if they choose to use government photo identification as a means of validating customer provided information, in the case of kitchen table and worksite sales. For example, the Firms considered the feasibility of requiring the customer to bring his or her driver's license into the Registered Rep's business office so that a copy can be made at a later date. However, the Firms believe that this would be very difficult to satisfy in every case and without question a burden to the Firm's customers.
The Firms believe it would be sufficient to have the Registered Rep note the information on the application form, but not copy the driver's license card or other similar form of identification. As noted above, those Firms that currently require their Registered Reps to note the driver's license or other government issued photo identification information during the application process have found their validation and verification methods to be adequate. Maintaining a copy of the driver's license or similar identification, in addition to maintaining records of the information contained on the government identification card, does not appear to serve any additional regulatory purpose and the burden and inability to obtain copies in certain sales situations will discourage broker-dealers from using a valid and important method of verification.
On behalf of the Firms, we urge reconsideration of the requirement to retain copies of drivers' licenses or similar forms of government issued photo identification. We believe that this record-keeping should be optional, or should be limited to situations in which it is practicable or feasible.
We appreciate this opportunity to comment on an important issue. If you have any questions regarding our comments, please do not hesitate to contact me at (202) 383-0197.
Susan S. Krawczyk
1 See remarks of Lori Richards, "Good Compliance: A Small Price to Pay for the Enormous Growth in Variable Annuities," as published in NAVA Outlook, July 1997 Special Edition.
2 See NASD Conduct Rules 3110 and 2310.