Negative response letters may be used to change the broker-dealer of record for customers' "direct application" mutual fund and variable annuity accounts in situations involving the acquisition or merger of a member firm, where the acquiring or surviving entity is the legal successor-in-interest to the member firm.
October 20, 2004
Barry Harris, Esq.
Banc of America Investment Services, Inc.
101 South Tryon Street,
Charlotte, NC 28255
Re: Use of Negative Response Letters for Changes in Broker-Dealer of Record in Acquisition and Merger Situations
Dear Mr. Harris:
I am responding to your incoming correspondence and subsequent discussions with the staff in which you seek interpretive guidance regarding whether a member engaged in a merger that will, as the surviving entity, become the successor-in-interest to one or more of the parties in the merger transaction may use negative response letters to change the broker-dealer of record (hereinafter, BD of record) on mutual fund or variable insurance product accounts held directly with the issuer to identify the surviving entity as the new BD of record.
Based on your correspondence and discussions with the staff, I understand the facts to be as follows. There is a pending merger between Banc of America Investment Services, Inc ("BAI") and Quick & Reilly, Inc. ("Q&R") that is scheduled to occur on October 20, 2004. Following the merger, Q&R will cease to exist and all employees and registered representatives of Q&R will become employees of BAI. Additionally, BAI will become the successor-in-interest to Q&R.
Request For Interpretation
Your have requested in your correspondence and in subsequent discussions with the staff that the staff provide interpretive guidance concerning the use of negative response letters to change the BD of record on directly-held mutual fund or variable insurance product accounts from Q&R to BAI.
In October 2004, NASD issued Notice to Members 04-72 ("NtM 04-72" or "Notice") concerning the use of negative response letters to change the BD of record on a mutual fund or variable insurance product account held directly with the issuer. In the Notice, the staff expressed its general view that a member must obtain affirmative consent from a customer to direct a change in the BD of record in either a mutual fund or variable annuity account. The staff also indicated that previous guidance provided in Notice to Members 02-57 ("NtM 02-57") that negative response letters could be appropriate to transfer customer accounts in five specific situations did not apply to changing the BD of record on mutual fund or variable insurance product accounts held directly at the mutual fund or variable product issuer. One of the situations identified in NtM 02-57 is an acquisition or merger of a member firm.1
As the staff recognized in NtM 04-72, the guidance provided in NtM 02-57 noted that the use of negative response letters to facilitate a bulk transfer of customer accounts in those five situations was generally appropriate primarily because the bulk transfer of accounts helps minimize the interruptions to customers' access to their accounts and the trading markets. The staff noted in NtM 04-72, however, that because a change in the BD of record does not affect the owner's access to his or her account, changing the BD of record on a "direct application" account does not present such concerns. Nor does a change in the BD of record materially alter any of the account features, such as account holders, assets, investment objectives, etc. Rather, the change predominantly affects who will receive any fees and commissions the mutual fund or variable insurance product issuer may pay. Accordingly, the staff concluded that a member must seek a customer's affirmative consent prior to changing the BD of record on a customer's "direct application" account.2
However, the staff believes that, in situations involving the acquisition or merger of a member firm, where the acquiring or surviving entity is the legal successor-in-interest to the member firm, it would be appropriate to use negative response letters to change the BD of record for customers' "direct application" mutual fund and variable annuity accounts from the member firm to the successor-in-interest. Accordingly, it is the staff's position that, based on the facts and representations that you present, BAI may use negative consent letters to change the BD of record for such "direct application" accounts from Q&R to BAI.
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.
Assistant General Counsel
1 The other situations are: (1) a member experiencing financial or operational difficulties; (2) an introducing firm no longer in business; (3) changes in a networking arrangement with a financial institution; and a change in a clearing firm by an introducing firm. See Notice to Members 02-57 (September 2004).
2 As noted in NTM 04-72, accounts held in this manner are sometimes referred to as "check and application," "application way," or "direct application." For ease of reference only, this letter uses the term "direct application" to refer to these types of accounts.