The use of negative response letters to transfer customers from one introducing broker to another may conflict with a member's obligation to observe high standards of commercial honor and just and equitable principles of trade.


October 16, 2000

 

Ms. Justine Rusin
Principal
Merit Capital Associates, Inc.
7377 E. Doubletree Ranch Rd.
Suite 290
Scottsdale, AZ 85258

 

Re: Use of Negative Response Letters

 

Dear Ms. Rusin:

 

I am responding to your letter of September 8, 2000 regarding the use of negative response letters. Based on your letter and our subsequent conversations, I understand the facts to be as follows.

 

A registered representative at Merit Capital Associates Inc. ("Merit Capital") wishes to move to another broker-dealer that uses the same clearing firm as Merit Capital. Both Merit Capital and the registered representative want to transfer the customer accounts serviced by the registered representative to the registered representative's new firm so that he may continue his relationship with these clients. Your letter indicates that the registered representative would like to send each of his clients a letter stating that he is moving to the new firm and that the client's account will be transferred within 15 days, or within 30 days if the account is a retirement account. The letter to clients would state that the customer should call Merit Capital if he or she has any problems or questions. Your letter refers to this letter as a "negative response letter."

 

In our conversations, you indicated that Merit Capital would not charge a transfer fee to customers whose accounts are transferred pursuant to such negative response letters. You also indicated that the registered representative would pay any transfer fees charged to a customer who, after the transfer, decided to transfer his or her account to another firm or back to Merit Capital. You also represented during our conversations that there would be no change in the service provided or the commissions charged to the customer.

 

There is no specific NASD rule governing the use of negative response letters in this context. However, the staff has serious concerns about the use of a negative response letter under the circumstances described in your letter. Specifically, when a member seeks to transfer a customer from one introducing broker to another, the customer should be provided the opportunity to make an informed decision and should give affirmative consent to the transfer. Failure to provide the customer with that ability may conflict with a member's obligation to observe high standards of commercial honor and just and equitable principles of trade pursuant to NASD Rule 2110. For these reasons, the staff believes that it would be inappropriate to use a negative response letter under the circumstances your letter described.

 

Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation, Inc. 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 the NASD, or all the possible regulatory and legal issues involved.

 

Sincerely,

 

Sarah J. Williams

 

cc:

 

Frank Birgfeld, Vice President and Director
NASD Regulation, Inc., District No. 3

Bill Cassarini, Legal Department
Prudential Securities