The use of negative response letters to transfer customers from one introducing broker/dealer to another may conflict with a member's obligation to observe high standards of commercial honor and just and equitable principles of trade.


February 3, 2003

 

Marion A. Kashan
Compliance Officer
London Pacific Securities, Inc.
2880 Gateway Oaks Drive
Sacramento, CA 95833

 

Re: Use of Negative Response Letters

 

Dear Ms. Kashan:

 

I am responding to your letter of August 5, 2002 in which you requested interpretive guidance on the applicability of NASD rules to the use of negative response letters to transfer customer accounts.

 

Background

 

Based on your letter and our subsequent conversations, I understand the facts to be as follows. Your firm, London Pacific Securities (“LPS”), will be employing approximately 25 representatives who are resigning from Vestax Securities Corporation (“VSC”). These representatives currently service approximately 7,000 accounts. Both LPS and VSC, which use the same clearing firm, are willing to transfer these accounts electronically without obtaining the affirmative consent of each customer holding an account. Your letter states that VSC would like to send letters to the customers of the representatives moving to LPS notifying the customers that their accounts will be moved to LPS unless the customer contacts VSC and indicates he or she does not want the account to be transferred.

 

Request For Interpretation

 

Your letter sought advice as to whether the use of negative response letters to transfer the customer accounts from VSC to LPS would be consistent with NASD rules. Your letter states that LPS seeks to transfer these accounts electronically to provide a smooth transition for investors. During our conversation of August 25, 2002, you indicated that using negative response letters also would facilitate the paperwork associated with the transfers.

 

Response

 

In September 2002, NASD issued Notice to Members 02-57 concerning the use of negative response letters for the bulk transfer of customer accounts. In the Notice, the staff expressed its general view that a customer should affirmatively consent to the transfer of his or her account to another firm. The staff acknowledged, however, that there are situations where a negative response letter may be appropriate to provide for the efficient transfer of those accounts. In identifying those situations, the staff considered the need to effect a timely transfer of the account and the interests of the customers affected by the transfer.

 

The staff does not believe that the facts described in your letter constitute a situation in which the use of negative response letters would be appropriate. Transferring accounts under these circumstances could raise concerns as to whether the member effecting the transfer is acting in a manner that is consistent with the high standards of commercial honor and just and equitable principles of trade required by Rule 2110.

 

I hope that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Governors of NASD. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not address any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved.

 

Sincerely,

 

Sarah J. Williams
Assistant General Counsel

cc: Elisabeth P. Owens, Vice President and Director
District 1 Office