Interpretive Letter to George T. Simon, Foley & Lardner, LLP
A member may use the negative response process under Rule 2510(d)(2)(A) to effectuate the transfer to another money market fund of customer free credit balances that have been returned to the member by a fund that has been terminated.
January 26, 2005
Mr. George T. Simon
Foley & Lardner, LLP
321 North Clark Street
Chicago, IL 60610-4764
Re: Interpretive Guidance Regarding Rule 2510(d)
Dear Mr. Simon:
I am responding to your letter of January 20, 2005, in which you request interpretive guidance under NASD Rule 2510(d) regarding the use of negative response letters to effectuate the transfer of certain customer funds used in sweep accounts to a money market mutual fund, as further described below.
Based on your letter, I understand the relevant facts to be as follows. Mesirow Financial, Inc. ("Mesirow") is a registered broker-dealer and NASD member. For many years, Mesirow has "swept" certain uninvested client funds into AllianceBernstein Institutional Trust Portfolio (the "Alliance Fund"), a money market mutual fund affiliated with Alliance Capital Management, L.P. ("Alliance"). In February 2004, Alliance notified Mesirow that it was terminating the Alliance Fund and that all Mesirow customer funds invested in that fund would be returned to Mesirow on April 30, 2004. According to your letter, this termination, which affected 4,000 customer accounts, was unexpected and beyond Mesirow's control.
Also according to your letter, the short time frame between the termination and return of customer funds did not provide Mesirow with enough time to conduct the due diligence, negotiations, and technical modifications necessary to establish a new relationship for a transfer of this magnitude; therefore, Mesirow did not have another money market fund readily available in which to deposit directly the returned customer funds. Instead, from April 30, 2004, Mesirow placed the customer free credit balances that resulted from the liquidation of the Alliance Fund in a Special Reserve Account at U.S. Bank, N.A. and paid customers interest earned on their cash balances since April 30, 2004. Mesirow informed its customers of this treatment of their free credit balances.
Request for Interpretation
Mesirow requests that it be allowed to use a negative consent process to effectuate the transfer of money from the free credit balances previously swept into the Alliance Fund into an institutional money market mutual fund affiliated with Federated Investors, Inc. ("Federated"). Currently, Mesirow plans on investing these funds into the Federated Prime Obligations Fund (the "Federated Fund").
Rule 2510(b) generally requires members to obtain written authorization from a customer prior to exercising discretionary power in the customer's account. However, Rule 2510(d)(2) provides an exception to this general requirement, which allows a member to effectuate a bulk exchange of money market mutual funds using negative response letters, provided the exchange is at net asset value and certain enumerated conditions are met. Under Rule 2510(d)(2)(A), the negative response and bulk exchange process is "limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts."
Mesirow asks that NASD staff concur with its position that it may rely on Rule 2510(d)(2)(A) under the facts described in its letter because Mesirow is, in effect, changing the fund that it uses for its sweep accounts from the Alliance Fund to the Federated Fund. Your letter notes that although the bulk transfer of accounts from the Alliance Fund to the Federated Fund would not be a direct transfer, the situation requiring the funds to be temporarily held at the U.S. Bank Account was unique and beyond Mesirow's control.
Your letter also states that Mesirow's negative response letters will comply with the requirements of Rule 2510(d)(2)(B) through (D), namely: (1) the negative response letter sent by Mesirow will compare the nature and amount of fees charged by the Alliance Fund and the Federated Fund in the form of a chart or table, (2) the negative response letter sent by Mesirow will contain a comparison of the investment objectives of the Alliance Fund and the Federated Fund, as well as a prospectus of the Federated Fund, and (3) Mesirow will not transfer the funds from the U.S. Bank Account to the Federated Fund until 30 days after it mails the negative response letter to the customers affected by the transfer.
Based on the facts and representations set forth in your letter, it is the staff's opinion that Mesirow may use the negative response process under Rule 2510(d)(2)(A) to complete the transfer of customer funds from the Alliance Fund to the Federated Fund despite the fact that proceeds from the Alliance Fund will have been held as free credit balances for an intervening period between redemption and reinvestment. Notwithstanding the availability of the negative consent process under these circumstances, however, this guidance should not be interpreted as a comment on the propriety of the intervening time period between the termination of the Alliance Fund and the proposed exchange to another money market mutual fund. The staff also notes that the requirements set forth in Rule 2510(d)(2)(B) through (D) continue to apply.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the NASD Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them and does not address any other rule or interpretation of NASD, or all the possible regulatory and legal issues involved.