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Rule 412 Customer Account Transfer Contracts

This rule interpretation is no longer applicable effective November 11, 2008.

(a) RESPONSIBILITY TO EXPEDITE AND COORDINATE TRANSFER OF ACCOUNT UPON CUSTOMER'S REQUEST
/01 Applicability of Rule and Interpretation

Unless otherwise indicated, Rule 412 and this Interpretation are applicable when a customer utilizes the Automated Customer Account Transfer Service (ACATS) to transfer securities account assets, either in whole or in specifically designated part, from one member organization to another. If a customer desires to transfer a portion of his or her account assets outside the ACATS System, authorized alternate instructions should be transmitted to the carrying organization indicating such intent and specifying the designated assets to be transferred. Although such transfers are not subject to Rule 412, member organizations are expected to expedite all authorized account asset transfers, whether through the ACATS System or via other means permissible under Rule 412 and this Interpretation, and coordinate their activities with respect thereto.
/02 Written Procedures Required

Member organizations must develop written procedures for customer securities account asset transfers that ensure implementation of and compliance with the requirements of Rule 412.
(b) TRANSFER PROCEDURES
(1) TRANSFER INSTRUCTIONS
/01 Conditions of Transfer

Security account asset transfers accomplished pursuant to Rule 412 are subject to certain conditions. The customer must be informed of, affirm, or authorize (as the case may be) the following conditions through their inclusion in the transfer instruction form the customer is required to authorize in order to initiate the account asset transfer:
1. The customer must be informed that to the extent any account assets are not readily transferable, with or without penalties, such assets may not be transferred within the time frames required by Rule 412.
2. If securities account assets are being transferred in whole, the customer must authorize the liquidation of any nontransferable proprietary money market fund assets in the account and the transfer of any resulting credit balance to the receiving organization, or specifically indicate another method of disposition of such assets.

With respect to the transfer of retirement plan securities account assets in whole, the customer must be informed that the choice of method of disposition of such assets other than liquidation and transfer may result in liability for the payment of taxes and penalties with respect to such assets.
3. The customer must be informed that he or she will be notified in writing by the carrying organization, and/or by the receiving organization, to determine what disposition he or she wishes to make with respect to nontransferable assets, other than proprietary money market fund assets (if any), indicated in an instruction to transfer specifically designated account assets. See /06 of this Interpretation for customer notification requirements pertaining to transfers of securities account assets in whole.
4. If securities account assets in whole (other than retirement plan account assets) are being transferred, the customer must affirm that he or she has destroyed or returned to the carrying organization any credit/debit cards and/or unused checks issued in connection with the account.
5. The customer must authorize the custodian/trustee for a retirement plan securities account:
a. to deduct any outstanding fees due the custodian/trustee from the credit balance in the account, or
b. to liquidate assets in the account to the extent necessary to satisfy any outstanding fees due the custodian/trustee, if the account does not contain a credit balance or if the credit balance in the account is insufficient to satisfy any outstanding fees due the custodian/trustee.
/02 Exceptions to Transfer Instruction

A carrying organization may not take exception to a transfer instruction, and therefore deny validation of the transfer instruction, because of a dispute over securities positions or money balance to be transferred. Such alleged discrepancies notwithstanding, the carrying organization must transfer the securities positions and/or money balance reflected on its books for the account.

An organization may take exception to a transfer instruction only if:
1. additional documentation is required (additional legal documents such as death or marriage certificates needed);
2. account is flat;
3. account number is invalid (account number is not on delivering organization's books);
4. request is a duplicate;
5. violates organization's credit policy;
6. unrecognized residual credit asset (receiving organization cannot identify correct client);
7. client rescinds instruction (client submitted written request to cancel transfer);
8. SS number/tax ID mismatch (number does not correspond to carrying organization's);
9. account title mismatch (receiving organization's account title does not correspond to carrying organization's);
10. Missing or improper authorization (TIF requires an additional client authorization or successor custodian's acceptance authorization or custodial approval); or
11. client takes possession (account assets in question are in transfer to deliver direct to customer).
Note: Responsibility for tracking account number changes due to internal reassignment of an account to another broker or account executive lies with the delivering organization. Any account so reassigned and rejected by the delivering organization shall not be considered a legitimate exception under Rule 412.
/03 Validation of Transfer Instruction — Freeze of Account (Carrying Organization)

Upon validation of an instruction to transfer securities account assets in whole, the carrying organization should "freeze" the account to be transferred, i.e., all open orders should be cancelled and no new orders should be accepted; except for transactions closing options positions which expire within seven (7) days.
/04 Validation of Transfer Instructions — Validation of Assets

Upon validation of an instruction to transfer securities account assets in whole or in specifically designated part, the carrying organization must return the transfer instruction to the receiving organization with an attachment indicating all securities positions, safekeeping positions, and money balances to be transferred as shown on the books of the carrying organization. Except as hereinafter provided, the attachment must include a then current market value for all assets so indicated. If a then current market value for an asset cannot be determined, e.g., a limited partnership interest, the asset must be valued at original cost. However, delayed delivery assets (see (f)/04 below), nontransferable assets, and assets in transfer to the customer, i.e., in possession of the transfer agent at the time of receipt of the transfer instruction by the carrying organization for shipment, physically and directly, to the customer, need not be valued, although the "delayed delivery", "nontransferable", or "in transfer" status, respectively, of such assets must be indicated on the attachment.

For purposes of this rule, a "safekeeping position" shall mean any security held by a carrying organization in the name of the customer, including securities that are unendorsed or have a stock/bond power attached.

For purposes of this rule, a "nontransferable asset" shall mean an asset that is incapable of being transferred from the carrying organization to the receiving organization because it is:
1. an asset that is a proprietary product of the carrying organization, or
2. an asset that is a product of a third party (e.g., mutual fund/money market fund) with which the receiving organization does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account.
A proprietary product of the carrying organization shall be deemed nontransferable unless the receiving organization has agreed to accept transfer of the product.

The receiving organization, upon receipt of the asset validation report that indicates all positions and money balances in the account, shall designate any assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving organization does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account. The carrying organization, upon receipt of such designation, shall treat such designated assets as nontransferable and refrain from transferring the designated assets.
/05 Validation of Transfer Instruction — Regulation T Calls (Carrying Organization)

Upon validation of an instruction to transfer securities account assets in whole or in specifically designated part, the carrying organization must indicate on the instruction or by attachment any Regulation T calls outstanding as of the date of validation with respect to the account assets to be transferred.
/06 Validation of Transfer Instruction — Non-Transferable Assets
A. If securities account assets to be transferred in whole include any nontransferable assets (as defined in (b)(1)/04 above) that are proprietary products of the carrying organization, the carrying organization must provide the customer with a list of the specific assets and request, in writing, prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. In particular, such request must provide the customer with the following alternative methods of disposition for nontransferable assets:
1. Liquidation, with a specific indication of any redemption or other liquidation-related fees that may result from such liquidation and that those fees may be deducted from the money balance due the customer.
2. Retention by the carrying organization for the customer's benefit.
3. Shipment, physically and directly, in the customer's name to the customer.
B. If securities account assets to be transferred in whole include any nontransferable assets that the receiving organization has designated as assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving organization does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account, the receiving organization must provide the customer with a list of the specific assets and request, in writing, at or prior to the time it makes such designation, further instructions from the customer with respect to the disposition of such assets. In particular, such request must provide the customer with the following alternative methods of disposition for such nontransferable assets:
1. Liquidation, with a specific indication of any redemption, sales charge, or other liquidation-related fees that may result from such liquidation and that those fees may be deducted from the money balance due the customer. The indication must also refer the customer to the fund prospectus or to their registered representative at the carrying firm for specific details regarding any such fees.
2. Retention by the carrying organization for the customer's benefit.
3. Shipment, physically and directly, in the customer's name to the customer.
4. Transfer to the third party that is the original source of the product, for credit to an account opened by the customer with that third party.
/07 Asset Input — Municipal Securities (Carrying Organization)

A carrying organization must provide the following description, at a minimum, as asset data with respect to any municipal securities positions to be transferred that have not been assigned a CUSIP number:
1. name of the issuer;
2. interest rate;
3. maturity date and if the securities are limited tax, subject to redemption prior to maturity (callable), or revenue bonds, an indication to such effect, including in the case of revenue bonds the type of revenue, if necessary for a materially complete description of the securities; and
4. if necessary for a materially complete description of the securities, the name of any company or other person in addition to the issuer obligated, directly or indirectly, with respect to debt service, or if there is more than one such obligor, the statement "multiple obligors" may be shown.
/08 Rejection of Account Transfer (Receiving Organization)

After validation of the transfer instruction by the carrying organization, a receiving organization may reject a transfer of account assets in whole only if the account is not in compliance with the receiving organization's credit policies or minimum asset requirements. (A receiving organization may deem an account that is not in compliance with Regulation T requirements as not being in compliance with its credit policies.) However, a receiving organization may only reject the entire account for such reasons; it may not reject only a portion of the account assets (e.g., the particular assets not in compliance with the organization's credit policies or minimum asset requirements) while accepting the remainder.
(2) COMPLETION OF TRANSFER
/01 Rejection of Fail Contracts

A carrying organization may not reject ("DK") a fail contract, including a deliver or receive order generated by an automated customer account transfer system, in connection with assets in an account transferred that have not been delivered to the receiving organization.
/02 Fail Contracts — Marked as "412 Fails"

All fail contracts established pursuant to the requirements of Rule 412 should be clearly marked or captioned as such.
/03 Fail Contracts — Capital Charges

The staff of the Securities and Exchange Commission Division of Market Regulation has advised the Exchange that it would not recommend enforcement action if member organizations interpret SEA Rule 15c3-1(c)(2)(ix), which requires deductions from net capital for fail to deliver contracts outstanding five or more business days (twenty-one or more business days with respect to municipal securities), as not applying to fail to deliver contracts established pursuant to the requirements of Rule 412, including the interpretations thereunder.
/04 Fail Contracts — Safekeeping Positions

All fail contracts required to be established on safekeeping positions, as defined in (b)(1)/04 above, must indicate that they relate to a safekeeping position. Member organizations should adopt additional procedures to ensure appropriate recordkeeping with respect to such safekeeping position related fail contracts and thereby avoid erroneous deliveries and dividend adjustments.
/05 Fail Contracts — Mark-to-Market

Open fail contracts established pursuant to the requirements of Rule 412 should be marked-to-market regularly.
/06 Retirement Plan Securities Accounts — Custodian/Trustee Fees

If, with respect to the transfer of retirement plan securities account assets, outstanding fees are due the custodian/trustee for the account, such fees must be deducted from the credit balance in the account or, if the account does not contain a credit balance or if the credit balance is insufficient to satisfy such fees, assets in the account must be liquidated to the extent necessary to satisfy such fees. If liquidation of assets in the account is not practicable, such fees must then be transferred to and accepted by the receiving organization as a debit item with the account.
(c) CLOSING OUT FAIL CONTRACTS
/01 Close Out Procedures

All fail contracts required to be established pursuant to Rule 412, except for fail contracts on those assets specified in (f)/05 below, must be closed out within ten business days of their establishment. If a receiving organization has not received an asset on which a fail contract was established by the seventh business day after the contract was established, the receiving organization must at that time provide the carrying organization with written notice of its intent to buy-in the asset on the tenth business day after the contract was established, in accordance with the standard buy-in procedures of the principal marketplace where the security is traded or of the self-regulatory organization whose rules would be applicable unless the carrying organization delivers the asset to the receiving organization before 2 PM on such tenth business day, and the receiving organization must proceed in such manner.
/02 Acceptability of Comparable Securities

Member organizations may agree to close out fail contracts established pursuant to the requirements of Rule 412 through the delivery of securities that are substantially comparable to those owed.
/03 Safekeeping Positions

A receiving organization should reject a delivery of a security that cannot be deemed a safekeeping position, as defined in (b)(1)/04 above, against a fail contract indicated as established on a safekeeping position in accordance with (b)(2)/04 above.
(e) AUTOMATED CUSTOMER SECURITIES ACCOUNT TRANSFER SYSTEMS
/01 "Participant in a Registered Clearing Agency"

For purposes of paragraph (e) of this rule, the term "participant in a registered clearing agency" shall mean a member of a registered clearing agency that would be eligible to make use of the agency's automated customer securities account transfer capabilities.
(f) EXEMPTIONS
/01 Retirement Plan Securities Accounts

It is the responsibility of the receiving organization to obtain the approval of its custodian/trustee accepting a customer's retirement plan securities account before submitting a transfer instruction for such account assets to the carrying organization or a registered clearing agency. Such approval should be transmitted to the carrying organization or its custodian/trustee to facilitate transfer of the account assets.
/02 Nontransferable Assets — Disposition

Nontransferable assets (as defined in (b)(1)/04 above) must be, pursuant to the customer's instructions, either liquidated, retained by the carrying organization for the customer's benefit, or shipped, physically and directly, in the customer's name to the customer. If the customer has authorized liquidation or shipment of such assets, the carrying organization must distribute the resulting money balance to the customer or initiate the shipment, respectively, within five business days following receipt of the customer's disposition instructions.
/03 Nontransferable Assets and In Transfer Assets — Fail Contracts

Nontransferable assets (as defined in (b)(1)/04 above) and assets in transfer to the customer, i.e., in possession of the transfer agent at the time of receipt of the transfer instruction by the carrying organization for shipment, physically and directly, to the customer, are exempt from the requirement in sub-paragraph (b)(3) of the rule that fail to receive and fail to deliver contracts must be established for positions in a customer's securities account that have not been physically delivered.
/04 Delayed Delivery Assets — Fail Contracts

The following assets are deemed subject to delayed delivery for purposes of Rule 412 and are thereby exempt from the requirement in sub-paragraph (b)(3) of the rule that fail to receive and fail to deliver contracts must be established for positions in a customer's securities account that have not been physically delivered:
1. bankrupt issues
2. insurance policies (annuities)
3. stripped coupons
4. when-issued or when-distributed securities.
However, zero value fail to receive and fail to deliver instructions must be generated for such assets. Such fail instructions should be reflected on member organizations' books and records, although they need not be so reflected by a receiving organization for bankrupt issues that are nondeliverable. A bankrupt issue shall be deemed nondeliverable only if the carrying organization does not possess (which shall be deemed to include possession at a securities depository for the carrying organization's account) the quantity of shares necessary to effect delivery and no transfer agent is available to re-register the shares to be delivered.
/05 Delayed Close Out Assets — Fail Contracts

Fail contracts established on the following assets pursuant to Rule 412 must be closed out within thirty business days, rather than ten business days, after their establishment:
1. bankers' acceptances
2. bond anticipation notes
3. certificates of deposit
4. commerical paper
5. FMAC certificates
6. FNMA certificates
7. foreign securities
8. GNMA certificates
9. limited partnership interests in retirement plan accounts (such interests held in retail accounts are classified as nontransferable assets)
10. municipal bonds
11. mutual fund shares (transferable)
12. revenue anticipation notes
13. SBA certificates
14. tax anticipation notes
15. Certificates of Accrual on Treasury Securities (CATS)
16. Treasury Investment Growth Receipts (TIGRs).
If a receiving organization has not received such an asset by the twenty-fifth business day after the fail contract on the asset was established, the receiving organization must at that time provide the carrying organization with written notice of its intent to buy-in the asset on the thirtieth business day after the contract was established, in accordance with the standard buy-in procedures of the principal market place where the security is traded or of the self-regulatory organization whose rules would be applicable, unless the carrying organization delivers the asset to the receiving organization before 2 PM on such thirtieth business day, and the receiving organization must proceed in such manner.

If the aforementioned buy-in procedures of the principal market place where the security is traded or of the self-regulatory organization whose rules would be applicable are followed, the thirty business day time frame for closing out fail contracts referred to in (f)/05 above shall not be applicable.

A receiving organization must deem receipt of a duly executed limited partnership change of trustee form with respect to limited partnership interests as adequate delivery for purposes of transferring such assets pursuant to the rule.

With respect to mutual fund shares, a receiving organization must deem receipt of a mutual fund re-registration form evidencing book shares in an account as adequate delivery for purposes of transferring such shares, provided the re-registration form contains the customer's new account number at the fund. The carrying organization shall be responsible for obtaining this number and entering it on the form prior to submission to the receiving organization. This interpretation is applicable to book shares and is not intended to preclude the delivery of physical certificates.

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