Interpretive Letter to Michael R. Trocchio, Esq., Bingham McCutchen LLP
Member whose firm will cease to exist upon merger with an acquiring member that does not generally offer retail brokerage services may use negative response letters to accomplish the bulk transfer of its retail accounts to a broker-dealer affiliate of the acquiring member.
November 10, 2004
Michael R. Trocchio, Esq.
Bingham McCutchen LLP
1120 20th St., NW
Washington, DC 20036
Re: Use of Negative Response Letters In Connection With a Merger
Dear Mr. Trocchio:
I am responding to your letter of November 8, 2004, in which you seek interpretive guidance on the use of negative response letters to transfer certain retail customer accounts from a member to another broker-dealer in connection with a merger transaction, as further described herein.
Based on your letter, 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.1 STCM is an institutional broker-dealer, and STS is a retail broker-dealer. In the near future, STCM will merge with NBC Capital Markets Groups, Inc. ("NBCCMG"). As a result of the merger, only STCM will continue to exist. NBCCMG has both institutional customer accounts and approximately 3,500 retail customer accounts. Because STCM does not conduct retail brokerage operations except with respect to its high net worth customers, STCM and NBCCMG would like to transfer the 3,500 NBCCMG retail accounts to STS.
Request For Interpretation
Your November 8, 2004 letter asks that the staff provide interpretive guidance concerning the use of negative response letters by NBCCMG in connection with its merger with STCM to accomplish the bulk transfer of the 3,500 NBCCMG retail accounts to STCM's 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 acquisition or merger of a member firm. Specifically, the Notice provides that when a firm is acquired by or merges with another firm, the firm originating the accounts may seek the transfer of all of its accounts to the new firm using negative response letters.
The staff believes that, based on the facts and representations set forth in your letter, the proposed use of negative response letters to transfer NBCCMG's retail customer accounts to STCM's affiliated retail broker-dealer, STS, during the merger of NBCCMG and STCM is substantially similar to the exception outlined above.2 Accordingly, the staff believes it is would be permissible to use negative response letters to transfer the 3,500 NBCCMG retail customer accounts to STS, provided the disclosures discussed 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.
Assistant General Counsel
1 According to your letter, SunTrust Banks, Inc. owns STS indirectly through SunTrust Bank Holding Company, Inc.
2 The staff also notes that your letter indicates that STCM is an institutional broker-dealer that does not generally provide retail brokerage services and does so only for its high net worth customers.