FINRA Manual: Contents
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83-70 Automatic Money Market Fund Redemptions
TO: All NASD Members
There appears to be a growing practice among member firms to offer their retail customers a service whereby debit balances created by the purchase of securities in the customer's cash account with the member will be automatically satisfied by the redemption of shares of a money market fund. This practice is distinguishable from what have been called "account management plans" under which a customer, upon application, by maintaining a specified account balance and paying certain fees, is entitled to a defined "package" of services including both credit and debit "sweeps" of the customer's securities and money fund accounts. The practice which is the subject of this Notice involves debit "sweeps" only and applies to any customer having both a securities and money fund account.
The structure of the automatic redemption plans generally involves automatic sale or redemption of the money market fund shares unless the customer specifically notifies the member of his intention to make payment by another method,, Even though this service tends to be viewed as an optional method of payment for securities purchased, it does involve the processing of an order to sell securities, i.e. money market fund shares, for which a member should have proper authorization. Such authorization is necessary in light of the Policy of the Board of Governors relating to Fair Dealing with Customers, which is found under Article III, Section 2 of the Rules of Fair Practice. This policy prohibits the execution of transactions by member firms which are unauthorized by the customer.
The Association recognizes the fact that when a member wishes to make an automatic money market fund liquidation service available to large numbers of existing clients, it may become extremely difficult and impractical to obtain specific written agreement from each client prior to initiating the procedure. The Association's Board of Governors has reviewed this question in light of existing practices of members and has concluded that, in situations where a member institutes an automatic redemption program of which adequate notice is given to account holders, no disciplinary action against the firm for executing unauthorized transactions by virtue of redemption of money market fund shares would be warranted. To be considered adequate notice in the context of potential review by a District Business Conduct Committee, the notification process should include a letter or other written notice specifically calling the program to the attention of the customer and outlining the procedures to be followed by the customer to utilize the automatic redemption or to elect not to do so. The notice should also outline the specific procedures followed by the member in effecting the automatic redemption policy, including the steps the client must take to override the automatic procedure as to a specific purchase transaction. Of course, where written discretionary authority over the account has been obtained, pursuant to Article III, Section 15 of the Association's Rules of Fair Practice, no separate notice of the automatic money market fund redemption procedure would be required.
Members should recognize that this notice relates solely to the application and administration of NASD Rules and policies and does not purport to define the contractual obligation of the member and customer under the laws of any state. Neither should the policy outlined herein be deemed to permit members to execute transactions in securities of other than money market funds without specific authorization. The policy reflects the unique use of money market fund shares as a cash management vehicle. In addition, members undertaking and administering any automatic redemption program must, as in all dealings with customers, act in a manner consistent with Article III, Section 1 of the Rules of Fair Practice and the Association's requirements for fair dealing with customers.
Questions regarding this Notice to Members should be addressed to T. Grant Callery at (202) 728-8285.
Frank J. Wilson
Executive Vice President
and General Counsel