Uniform Practice Code Rule 11870 requires a member to adopt specific measures to facilitate the portability of all transferable securities, including mutual fund shares.


February 21, 1997

 

Re: NASD Requirements Governing the Portability of Mutual Fund Shares

 

I am writing in response to your letter of December 18, 1996, in which you inquired about the ability of investors to move their mutual fund holdings between brokerage accounts. According to your letter, investors have complained that when they transferred their brokerage account between firms, they were unable to move certain mutual fund shares to their new accounts. Your letter indicates that business rather than legal considerations may serve as the principal impediments to the "portability" of their mutual fund shares.

 

NASD Regulation recognizes that investors attach a great deal of importance to the portability of their transferable securities, and we believe that any unreasonable delay in transferring customer securities is unacceptable. For that reason, the NASD's Uniform Practice Code requires that NASD members, whenever practicable, adopt specific measures to facilitate the portability of all transferable securities, including mutual fund shares. Rule 11870 of the Code thus requires that members expedite the transfer of brokerage accounts and the transferable securities in those accounts. Rule 11870 also requires that members generally use clearing facilities for the electronic transfer of mutual fund shares. I have enclosed a copy of Rule 11870 for your information.

 

1. Provisions for the Expedited Transfer of Securities

 

Rule 11870 provides that when a brokerage customer wishes to transfer his account to another broker-dealer and gives written notice of that fact to the receiving broker-dealer, both broker-dealers must expedite the transfer.* Upon receiving a customer transfer instruction, the receiving broker-dealer must submit the instruction to the carrying broker-dealer, which must respond within three business days. Both broker-dealers must promptly resolve any exception that the carrying broker-dealer makes to the transfer instructions. The transfer must occur within four business days of validation of the transfer instructions.

 

Rule 11870 does recognize that some securities may not always be portable, due to practical considerations. Rule 11870(c) thus provides an exception to the expedited transfer requirements for "nontransferable assets," defined to include any asset that is incapable of being transferred because it is (1) a proprietary product of the carrying broker-dealer or (2) a mutual fund or other asset with which the receiving broker-dealer does not maintain the arrangement necessary to carry the asset for the customer's account. Rule 11870(c) generally requires the carrying broker-dealer to provide three alternatives to a customer holding any nontransferable asset: to liquidate the asset; to retain the asset with the carrying broker-dealer; or to take physical delivery of the asset.

 

2. Provisions for the Automated Clearance of Mutual Fund Shares

 

The efficient transfer of securities can best be achieved through automated clearance systems. Rule 11870(m) requires that when both the carrying broker-dealer and the receiving broker-dealer participate in a registered clearing agency having automated customer securities account transfer capabilities with an automated facility for transferring mutual fund positions, those facilities must be used for transferring those positions. The Automated Customer Account Transfer Service system of the National Securities Clearing Corporation (the "ACATS system") allows the transfer of mutual fund shares between broker-dealers. We understand that most transfers of mutual fund shares occur on the ACATS system in an efficient and expeditious manner.

 

While Rule 11870(m) generally requires use of the ACATS system when both the carrying and the receiving broker-dealer participate in the system, NASD Regulation does recognize that in some circumstance use of the system may be impractical. If the ACATS system cannot easily accommodate a transfer (for example, because the transfer concerns certain proprietary shares or because the receiving broker-dealer does not have a selling group agreement with the mutual fund's principal underwriter) then Rule 11870(m) would not require that the transfer occur through the ACATS system. We understand, however, that broker-dealer firms have begun to resolve most of these remaining business impediments to the automated transfer of mutual fund shares.

 

* * *

NASD Regulation will continue to monitor member compliance with Rule 11870 and encourage NASD members to resolve the practical impediments to automated transfer.

 

I hope that this letter has been helpful. If you have any questions or need additional information, please call me at 202/728-8068.

 

Sincerely,

 

 

 

Thomas M. Selman
Director
Advertising/Investment Companies Regulation

 

* If a customer desires to transfer a portion of the account, a letter of authorization should be transmitted to the carrying broker-dealer and both broker-dealers must expedite the partial transfer.