Applicability of Rule 2510(d) to the use of negative response letters to transfer customer funds from money market mutual funds to interest bearing bank accounts.
February 3, 2003
Marc A. Cohn
Assistant Vice President
Metropolitan Life Insurance Company
One Madison Avenue, Area 7H
New York, NY 10010-3690
Re: Exemptive Relief From Rule 2510(d)
Dear Mr. Cohn:
I am responding to your letter of August 21, 2002 in which you requested exemptive relief from NASD Rule 2510(d) concerning discretionary accounts.
Based on your letter, I understand the facts to be as follows. MetLife Securities, Inc. and three of its affiliated broker-dealers (collectively referred to herein as “MetLife Broker-Dealers”) are registered broker-dealers and NASD member firms. The MetLife Broker-Dealers have a bank affiliate, the MetLife Bank N.A. (“MetLife Bank”).
The MetLife Broker-Dealers are considering eliminating the money market mutual fund currently offered as the “sweep” account into which all uninvested cash in customer brokerage accounts is “swept.” The MetLife Broker-Dealers are considering replacing the money market mutual fund currently offered with a MetLife Bank interest bearing bank account for all new brokerage account customers. For existing brokerage account clients, the MetLife Broker-Dealers would like to transfer in bulk all monies in the current money market mutual fund sweep accounts to the MetLife Bank interest bearing account utilizing negative response letters.
The MetLife Bank interest bearing account will be a negotiable order of withdrawal account, which pays an unregulated rate of interest as established by agreement between the bank and its depositor. The account will be designed to have an interest rate that is competitive with the currently offered money market mutual fund sweep accounts and other similar money market mutual funds. MetLife Bank has made it an objective to offer a competitive rate of interest as compared to the average money market mutual funds used in sweep accounts, but there is no guarantee that future interest rates of the MetLife Bank account always will be equal to or greater than that of the average sweep account money market mutual fund.
The MetLife Bank interest bearing account will permit a daily sweep of all uninvested cash to and from each individual brokerage account at each broker-dealer into the broker-dealer’s omnibus account at the bank. The MetLife Bank’s omnibus accounts (one for each broker-dealer) will be titled in the name of the broker-dealer as custodian for all of its brokerage account clients. In addition, the broker-dealers’ clearing firm will keep records of the individual client information and will track on a daily basis the name of each client and the amount swept into the MetLife Bank’s omnibus account. Counsel for the bank has advised that this arrangement will permit the flow-through of FDIC $100,000 deposit insurance to the individual brokerage account clients at the broker-dealers. Additionally, it is anticipated that MetLife Bank will not impose fees or charges on the individual clients.
To effect the transfer of customer funds from the money market mutual fund to the MetLife Bank interest bearing account, the MetLife Broker-Dealers propose to send each brokerage account client a detailed notification letter that satisfies the conditions required for bulk exchanges of money market mutual funds made under Rule 2510(d). The letter would be sent to the customer 30 days prior to the transfer providing information regarding the new sweep account, including a descriptive brochure for the MetLife Bank interest bearing account and a tabular comparison and comparative description of the current money market mutual fund and the Metlife Bank account. The descriptive bank account brochure would include a discussion of interest rates and other features.
Additionally, the notification letter would inform clients that their monies will be transferred to the MetLife Bank account on a specified date and that the MetLife Bank is an affiliate of their broker-dealer. The letter would then instruct clients that if they have any questions or do not want their monies so transferred, they must call a specified toll-free number by a certain date. The letter also would instruct clients that they are free at any time in the future to use their monies in the sweep account to purchase shares of any other money market mutual fund currently available through their broker-dealer.
Request For Interpretation
Your letter seeks exemptive relief from NASD Rule 2510(d) to permit the MetLife Broker-Dealers to transfer client monies currently invested in one or more money market mutual funds to an FDIC insured interest bearing account earning a competitive rate of interest, utilizing negative response letters. Your letter states that the MetLife Broker-Dealers believe this would be in the best interest of their clients as the monies in the bank sweep account: (1) would receive an interest rate competitive with, or slightly better than, the currently offered money market mutual fund (although you note that there is no guarantee that future rates of interest of the MetLife Bank account always will be equal to or greater than that of the average sweep account money market mutual fund); (2) would not have the potential to fluctuate in value; (3) would not be subject to annual fees or charges; and (4) would be FDIC insured up to $100,000 per customer. Your letter further states that clients would be free anytime after the bulk transfers were completed to use their sweep monies to purchase shares in another money market mutual fund.
Your letter states that clients are now seeking products and investments that will preserve their principal and have protections, and the MetLife Broker-Dealers believe many clients would prefer the bank account to a traditional money market mutual fund because the principal amount is invested in a bank account and is not subject to market fluctuations and has FDIC insurance protection. Your letter further notes that NASD Rule 2510(d) was written at time when bundled banking and securities products did not exist. Your letter also states that it seems counterintuitive that a broker-dealer can give customers the bank product as the sweep account in connection with opening an account, but not be permitted to do bulk exchanges from a money market mutual fund sweep account to a bank sweep account. Your letter indicates that the proposal you describe meets the spirit of Rule 2510(d) as clients are affected similarly as if their funds were transferred into another money market mutual fund.
Your letter seek an exemption from Rule 2510 on behalf of the MetLife Broker-Dealers so that they may transfer client monies currently invested in one or more money market mutual funds to an FDIC insured interest bearing bank account utilizing negative response letters. The staff notes that it does not have general exemptive authority with respect to Rule 2510. Rule 2510(d) does, however, provide narrow exceptions from the provisions of the rule. Because the staff lacks general exemptive authority under Rule 2510, the staff considers your request as one seeking interpretive guidance on the applicability of the exception set forth in Rule 2510(d)(2) to the facts described in your letter.
Rule 2510(d)(2) provides an exception from Rule 2510 for the bulk exchange at net asset value of money market mutual funds utilizing negative response letters. The staff believes the proposed transfer of customer funds from a money market mutual fund to a bank account, as described in your letter, does not fall within the scope of the exception provided by Rule 2510(d)(2), nor is the staff willing to interpret an exchange of money market mutual funds at net asset value to include the transfer of funds from a money market mutual fund to a bank account.1 For these reasons, the staff is unable to interpret the exception provided in Rule 2510(d)(2) to apply to the facts described in your letter.
In response to the statements in your letter suggesting that clients would prefer the bank account to a traditional money market mutual fund, NASD staff notes that the inapplicability of Rule 2510(d)(2) to the situation described in your letter does not preclude the MetLife Broker-Dealers from soliciting affirmative consent from their customers to transfer their funds from the money market mutual fund currently offered to the bank account described above.
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.
Sarah J. Williams
Assistant General Counsel
Cathleen Shine, Senior Vice President and Director,
1 The staff notes that there are various reasons for distinguishing money market mutual funds from bank accounts, including but not limited to the fact that former enjoys $500,000 of Securities Investor Protection Corporation (“SIPC”) insurance and the protections afforded by the Investment Company Act of 1940. Presumably these distinctions are material and would be noted in any solicitation of affirmative consent to transfers between the two products.