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01-66 SEC Approves NASD Rule Proposal Relating to Operations
Effective Date: September 12, 2001
On September 12, 2001, the Securities and Exchange Commission (SEC) approved amendments to National Association of Securities Dealers, Inc. (NASD®) Rule 11870(c) and Rule 11870(d)1 that are designed to expedite the transfer of customer accounts that contain proprietary or third-party products (e.g., mutual funds or money market funds) that the receiving member cannot receive or carry.
The text of the amendments as provided in Attachment A became effective on September 12, 2001.
Questions concerning this Notice may be directed to Susan DeMando, Director, Financial Operations, Member Regulation, NASD Regulation, at (202) 728-8411, or Shirley H. Weiss, Associate General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-8844.
NASD Regulation has amended Uniform Practice Code Rules 11870(c) and 11870(d) to conform to recent modifications to the Automated Account Transfer Service (ACATS).2 The new procedures will expedite the transfer of accounts containing third-party and/or proprietary products.3 The account transfer process starts when a customer whose account is carried by a member firm ("carrying member") wishes to transfer the account to another member (the "receiving member") and submits a signed broker-to-broker transfer instruction to the receiving member. The receiving member submits the instruction to the carrying member, and the carrying member has three business days either to validate and return the transfer instruction to the receiving member (with an attachment reflecting all positions and money balances as shown on its books) or to take exception to the instruction. Specifically, the carrying member: (1) identifies any assets in the account that it knows are nontransferable, including any asset that is a proprietary product of the carrying member, (2) identifies these assets to the customer in writing, and (3) requests instructions from the customer with respect to the disposition of such assets. The customer may ask the carrying member to liquidate the asset, continue to retain the asset, or transfer the asset in the customer's name to the customer.
A customer's account may also contain third-party products (e.g., mutual fund/money market fund) that the receiving firm can neither receive nor carry because it does not maintain the necessary relationship or arrangement with appropriate third parties. The carrying member would not have identified those assets as nontransferable because it would not know whether the receiving member could receive/carry the asset.
Under the prior rules, the carrying member attempted to transfer all third-party assets with the rest of the account within three business days following the validation of a transfer instruction. When the receiving member could not receive or carry the asset, it would reverse the transfer of those assets and send them back to the carrying member. In turn, customers received statements with multiple entries for assets that were unsuccessfully transferred and returned.
Under the amendments to Rule 11870(c) and 11870(d), the receiving member will review the asset validation report, designate those proprietary and/or third-party assets it is unable to receive/carry, provide the customer with a list of those assets, and request instructions from the customer regarding their disposition. The customer may instruct the receiving member to liquidate the asset, continue to retain the asset, transfer the asset in the customer's name to the customer, or transfer the asset to the third party that is the original source of the product. Most importantly, the transfer of the other assets in the account will occur simultaneously with the receiving member's designation of nontransferable assets.
These procedures should eliminate the need for reversing the transfer of third-party and/or proprietary products, thereby reducing delay and the cost of customer transfers incurred by members under the current system. These procedures also will substantially reduce customer confusion in that customers will no longer receive multiple account statements from the carrying and receiving firms as they transfer and then reverse transactions.
Under Rule 11870(d)(3)(C), a member may take exception to a transfer instruction if the account number was invalid, i.e., the account number was not on the carrying member's books. Rule 11870(d)(3)(C), as amended, makes clear that the carrying member is responsible for tracking account number changes. An account number that has been changed due to internal reassignment of an account to another broker or account executive with the carrying member will not be considered invalid for purposes of taking exception to a transfer instruction.
Effective Date of Amendments
These amendments became effective on September 12, 2001.
1 See SEC Release No. 34-44787 (Sept. 12, 2001), 66 FR 48301 (Sept. 19, 2001) (File No. SR-NASD-2001-53) ("SEC Approval Order").
2 ACATS is administered by the National Securities Clearing Corporation (NSCC).
3 These changes also conform to a recent amendment to the Interpretation of New York Stock Exchange (NYSE) Rule 412. See SEC Release No. 34-44596 (July 26, 2001), 66 FR 40306 (Aug. 2, 2001).
New language is underlined; deletions are in brackets.
Uniform Practice Code
11870. Customer Account Transfer Contracts