NASD Notice to Members 07-06 - February 2007

Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products

Executive Summary

Registered representatives with an established customer base may, from time to time, change their association from one firm to another and may wish to bring with them customer assets, including mutual funds and variable products. In some cases these mutual funds or variable products may be held directly with the product issuer or they may be proprietary to the representative’s prior firm and the sponsor may not permit them to be transferred into the customer’s account at the new firm. Even nonproprietary products may not be freely transferable if the sponsor does not have a dealer or servicing agreement with the new firm.

In cases such as these, the new firm may not sell or in some cases even service the investment or receive trail commissions from the distributor. In these situations, the representative may be inclined to recommend the liquidation and replacement of the customer’s investments with other, similar investments. Although the ability to provide the customer with service in connection with an investment can be a relevant factor to consider in connection with the decision whether to retain the investment, any recommendation by the firm or its associated persons to sell a product and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer and determining that the transaction is in the customer’s best interests in view of all considerations. Member firms and their associated persons may not reach any suitability determination or make any recommendation on the basis that the purchase of a security or sale and replacement of a security will yield greater remuneration for them. Moreover, the representative should disclose to the customer all of the relevant facts and bases for the recommendation. See, e.g., Notice to Members 99-35 (May 1999).

Questions concerning this Notice should be directed to Kosha K. Dalal, Associate General Counsel, Office of General Counsel, at (202) 728-6903.