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84-45 Request for Comments on a Proposed New Section to the Uniform Practice Code Concerning Customer Account Transfers

IMPORTANT

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members and Other Interested Persons

COMMENTS MUST BE RECEIVED BY OCTOBER 1, 1984

The National Association of Securities Dealers, Inc. (the "Association" or "NASD") is publishing for comment a proposed new Section 65 to the Association's Uniform Practice Code which would establish procedures for customer account transfers between member firms. Comments on the proposed new section are invited from members and other interested persons. After the comment period has expired, the Association's Uniform Practice Committee and the Board of Governors will review the proposal taking into consideration the comments received. The proposal will thereafter be filed with the Securities and Exchange Commission for approval. The text of proposed new Section 65 is attached to this notice. A discussion of the background and explanation of the rule appear below.

BACKGROUND AND EXPLANATION OF NEW SECTION 65

In September 1982, the New York Stock Exchange proposed amendments to NYSE Rule 412, Customer Account Transfer Contract. The amendments were recommended to the Exchange by the Ad Hoc Rule 412 Industry Committee which consisted of individuals responsible for processing transfers of customer accounts at member firms and representatives from the various regulatory agencies. The purpose of the amendments was to strengthen existing Rule 412 by specifying the procedures to be used in transferring customer accounts, by establishing a specified timeframe for completing the transfer and by requiring that fails to receive/deliver be established at the end of that period. Additionally, the amendments provided a procedure for processing the transfer of financial service accounts which support checking account and/or credit card privileges.

The Association's Uniform Practice Committee reviewed the proposed Rule 412 amendments and in November 1982, the NASD sent a comment letter to the Exchange generally supporting the proposal. The proposed amendments to NYSE Rule 412 have not as yet been declared effective.

Also, on the basis of its review of the NYSE proposal, the Uniform Practice Committee recommended to the NASD Board that the Association adopt a comparison rule comparable to the proposed NYSE Rule 412 to cover the more than 4,000 NASD members that do not belong to the Exchange. In formulating its proposal, the Committee determined to parallel closely the New York Stock Exchange's proposal to promote uniform industry standards and to minimize conflicts wherever possible.

The following is a brief description of major provisions of proposed new Uniform Practice Code Section 65.

  • Paragraph (b) would require the carrying broker, upon receipt of transfer instructions to validate or reject said instructions within five (5) business days of receipt. Further, Section 65 would require the actual transfer of all security and money balances to take place within ten (10) business days after validation, with no subsequent extension of time. If the transfer of the account(s) has not been accomplished by the tenth business day, both members would be required to establish fail contracts at current market value.
  • Paragraph (d) would give the Association the authority to exempt from the provisions of this rule any member where special circumstances exist.
  • Paragraph (f) would allow the carrying member, where Financial Service Account(s) which support check writing privileges and/or charge card(s) are involved, to delay the account transfer until such checks and/or cards are returned or destroyed.
  • Paragraph (g) would provide that if one or both of the members involved in an account transfer is not a member of a registered clearing agency, fails must be established on an "ex-clearing house" basis.

Proposed Section 65 closely parallels the proposed amendments to NYSE Rule 412 with one exception. In subsection (b), ten (10) business days are provided for completion of the transfer of security or money balances with no extension of time permitted (the NYSE proposal would allow an additional five (5) days via an extension of time.)

COMMENT PROCEDURE

All comments relating to proposed Section 65 should be sent to James M. Cangiano, Secretary, NASD, 1735 K Street, N.W., Washington, D.C. 20006, and received by October 1, 1984. Any questions concerning this notice should be directed to Donald Catapano, Uniform Practice Department, at (212) 839-6255.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachment

PROPOSED NEW SECTION TO THE UNIFORM PRACTICE CODE

Customer Account Transfer Contracts

SECTION 65

(a) When a customer whose securities account(s) are carried by a member (the "carrying member") wishes to transfer the entire account(s) to another member (the "receiving member") and gives written notice of that fact to the receiving member, both members must expedite the transfer.
(b) Upon receipt from the customer of a signed broker-to-broker transfer instruction to receive such customer's securities account(s) from the carrying member, the receiving member must immediately submit such instruction to the carrying member. The carrying member must, within five (5) business days following receipt of such instruction (1) validate and return the transfer instruction to the receiving member (adjusted if necessary to reflect the carrying member's record) or (2) take exception to the transfer instruction for reasons other than securities positions or money balance differences and advise the receiving member of the exception taken.
Within ten (10) business days following the validation of a transfer instruction, the carrying member must complete the transfer of the account(s) to the receiving member. At the termination of the ten (10) business day period, the receiving member and the carrying member must immediately establish fail-to-receive and fail-to-deliver contracts at then current market values upon their respective books of account against the long security positions in the customer's account(s) and the receiving member must charge the related money amount (after properly considering the debit or credit balance in the customer's account(s) to the carrying member through a registered clearing agency. Simultaneously, short security positions in the customer's account(s), including options, must be delivered by the receiving member to the carrying member and the customer's account(s) shall thereupon be deemed transferred.
(c) Both the receiving and the carrying members must coordinate activities with respect to the transfer of the customer's account(s) in order to avoid any loss to the customer during the transfer process, including any loss resulting from an improper trade, a failure to execute open orders, or from dividends of cash and securities, and other similar distributions (rights, warrants, stock splits, etc.), interest payments, bond or preferred stock calls for redemption or tender offers affecting the customer's account(s) and to which the customer is entitled.
(d) The Association may exempt from the provisions of this rule, either unconditionally or on specified terms and conditions, any member if the Association determines that such exemption is consistent with the public interest, the protection of investors or the maintenance of fair and orderly markets.
(e) For the purposes of this rule, the term "securities account(s)" shall be deemed to include any and all of the account's(s') money market fund positions or the redemption value thereof.
(f) Where the account being transferred is a Financial Service Account (an account that supports check writing privileges and/or charge card(s)) it is recognized that the carrying member may be unable to validate the transfer instruction until the customer has returned or destroyed the charge card(s) and all unused checks. When a receipt signed by the carrying member attesting to the return of the charge card(s) and all unused cheeks or a notarized affidavit signed by the customer attesting to the loss or destruction of the charge card(s) and all unused checks is attached to the original transfer of account instruction, the carrying member must validate or take exception within the five (5) business day period as specified in paragraph (b) herein. The provisions of paragraph (b) relating to the procedures to be followed commencing upon such validation, shall then be fully applicable to the carrying member.
(g) If one or both of the members processing a customer account transfer pursuant to this Section is not a member of a registered clearing agency, the fail-to-receive and fail-to-deliver contracts required to be established in paragraph (b), must be established outside a clearing corporation on an "ex-clearing house" basis. Similarly, settlement of the fail contracts and any close-out executions must be made "ex-clearing house."

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