Interpretive Letter to Michael D. Wolk, Esq., Foley and Lardner (Use of Negative Response Letters)
May 1, 2003
Michael D. Wolk, Esq.
Foley and Lardner
3000 K Street, NW - Suite 500
Washington, DC 20007-5143
Re: Use of Negative Response Letters
Dear Mr. Wolk:
I am responding to your letters of March 10, 2003 and April 10, 2003, in which you seek interpretive guidance on the use of negative response letters to transfer customer accounts from a member to its affiliate broker-dealer.
Based on your letters, I understand the facts to be as follows. A member currently maintains a global clearance trading room that provides transaction execution services for institutional customers. The global clearance trading room takes orders from institutional correspondent customers to take advantage of its trading expertise connectivity to ECNs and exchanges, and relies on the trading room personnel to make those routing decisions. The global clearance trading room has electronic connectivity to multiple ECNs for OTC orders. For listed securities, the global clearance trading room has access to a “DOT” line as well as agreements with a group of independent brokers on the floor to execute order flow from the member.
The member is closing its global clearance trading room and will no longer provide transaction execution services to institutional customers. Approximately 17,000 accounts currently use and receive services from the global clearance trading room. Personnel, supervisors, supervisors, mid level support, equipment and existing connectivity to customers will be moved from the member’s global clearance trading room to an affiliate of the member, which will be a registered broker-dealer. The affiliate will provide the services previously performed by the member’s global clearance trading room through the affiliate’s active trading desk.
Request For Interpretation
Your March 10, 2003 and April 10, 2003 letters asks that the staff provide interpretive guidance concerning the use of negative response letters by the member to accomplish the bulk transfer of customer accounts using the global clearance trading room from the member to its affiliate.
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 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 termination of the member’s global clearance trading room in accordance with the representations contained in your letters is analogous to a member that is going out of business for purposes of NtM 02-57. Because the member’s accounts will be unable to receive from the member the services provided by its global clearance trading room after this function is transferred to the member’s affiliate, the staff believes it is appropriate to use negative response letters to transfer accounts utilizing those services away from the member, provided the disclosures recommended in NtM 02-57 are made.
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
Associate General Counsel
Senior Vice President and Director
New York District Office