NASD Rule 2110 - Standards of Commercial Honor and Principles of Trade
Member ceasing to offer retail brokerage services may use negative response letters to accomplish the bulk transfer of its retail brokerage accounts to an affiliated broker-dealer.
February 3, 2005
Michael R. Trocchio, Esq.
Bingham McCutchen LLP
1120 20th St., N.W.
Washington, D.C. 20036
Re: Use of Negative Response Letters
Dear Mr. Trocchio:
I am responding to your letters of November 24, 2004 and January 12, 2005, as supplemented by conversations with the staff, in which you seek interpretive guidance on the use of negative response letters by a broker-dealer to transfer its retail customer accounts to an affiliated broker-dealer, where the transferring broker-dealer is ceasing to operate its separate retail division.
Based on your letters and oral representations, I understand the facts to be as follows. SunTrust Capital Markets, Inc. ("STCM") and SunTrust Securities, Inc. ("STS") are affiliated broker-dealers owned by SunTrust Banks, Inc ("SunTrust").1 STCM is primarily an institutional broker-dealer, and STS is a retail broker-dealer. STCM has two divisions that STCM considers to be, and operates as, separate business lines: the SunTrust Robinson Humphrey Equity Capital Markets Division ("Humphrey Division"), through which STCM provides institutional equity brokerage services, and the Alexander Key Division ("Key Division"), through which STCM provides retail brokerage services to certain high net worth individuals.2
According to your November 2004 letter, the Humphrey Division and the Key Division do not share common customers, personnel, or office space. The Key Division customers are wealthy individuals to whom STCM offers execution and custody services. In contrast, the Humphrey Division customers are institutions such as businesses, mutual funds, and money managers to whom STCM offers execution services, but not custody services because the institutional customers clear transactions on a receipt-versus-payment and delivery-versus-payment ("RVP/DVP") basis. The Key Division registered persons do not service institutional accounts, and the Humphrey Division registered persons do not service accounts of individuals. Finally, the Key Division branch offices have separate entrances, signage, and pass-card security systems (i.e., a Key Division pass-card cannot be used to enter the Humphrey Division office space or vice versa).
Although the two divisions have the same clearing broker, National Financial Services, LLC ("NFS"), NFS views and treats the two sides as separate businesses. Accordingly, NFS has designated each business, in NFS terminology, as a separate "super office" and applies a separate pricing schedule and trading platform to each Division with exclusive logons and passwords that prevent a Key Division registered representative from being able to access the Humphrey Division platform using his or her Key Division identifier and password.
According to your letter, the services provided by the Key Division more closely resemble the retail brokerage business conducted at STCM's affiliated broker-dealer, STS, which also focuses on execution and custody services for retail customer accounts. Moreover, STS has recently developed a regulatory compliance system that provides enhanced automated supervisory surveillance and exception reports for retail accounts. SunTrust has determined that the costs associated with maintaining separate infrastructures to support retail brokerage services at both STCM (through the Key Division) and STS have become excessive and unnecessarily duplicative. Such duplicative costs would include costs associated with establishing and maintaining an enhanced regulatory compliance system at the Key Division similar to that already in existence at STS. Rather than continuing to incur these duplicative costs, SunTrust has decided to cease offering retail brokerage services at STCM and to offer such services exclusively through STS. Accordingly, STCM wishes to transfer to STS the entire Key Division, including each of the six branch offices, approximately 40 registered persons, and approximately 13,000 accounts of the Key Division's approximately 7,500 retail customers. Following such transfer, STCM will provide only institutional brokerage services.
Request For Interpretation
You seek interpretive guidance regarding the use of negative response letters to accomplish the bulk transfer of the Key Division accounts at STCM to its affiliated broker-dealer, STS.
In September 2002, NASD issued Notice to Members 02-57 ("NtM 02-57" or "Notice") 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 its account to another firm. The staff acknowledged, however, that there are situations, as outlined in the Notice, where a negative response letter may be appropriate to provide for the efficient transfer of those accounts. One of the situations identified in the Notice is an introducing firm no longer in business.
The staff believes that the transfer of the Key Division and termination of retail services at STCM in accordance with the representations in your letters and conversations with the staff is analogous to a member that is going out of business for purposes of NtM 02-57. Because the customers at the Key Division will no longer be able to receive retail brokerage services from STCM after this function is transferred to STS, the staff believes it is appropriate to use negative response letters to transfer accounts from the Key Division to STS, provided the disclosures recommended in NtM 02-57 are made.
Notwithstanding the availability of the negative consent process under these circumstances, this guidance should not be interpreted as a comment on the propriety of the reasons SunTrust has decided to cease offering retail brokerage services at STCM.
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.
1 According to your November 2004 letter, SunTrust Banks, Inc. owns STS indirectly through SunTrust Bank Holding Company, Inc.
2 According to your November 2004 letter, STCM has a third division, the SunTrust Robinson Humphrey Debt Capital Markets Division ("Debt Capital Division"). Your letter indicates that the Debt Capital Division's operations are limited to offering fixed income services to institutions through an omnibus clearing arrangement with the Bank of New York. Your letter further indicates that the Debt Capital Division is not relevant to your request for interpretive guidance. Accordingly, the guidance provided in this letter does not extend to any proposed bulk account transfers to, from, or involving the Debt Capital Division.