Interpretive Letter to Doug Wright, The Investment Center, Inc. (Use of Negative Response Letters)
February 3, 2003
Chief Compliance Officer
The Investment Center, Inc.
1011 Rt. 22 West
P.O. Box 6915
Bridgewater, NJ 08807-0915
Re: Use of Negative Response Letters
Dear Mr. Wright:
I am responding to your letter of September 25, 2002 in which you requested interpretive guidance on the applicability of NASD rules to the use of negative response letters to transfer customer accounts.
Based on your letter and our subsequent conversations, I understand the facts to be as follows. The Investment Center, Inc. (“TIC”) is an NASD member with approximately 330 registered representatives in 22 states working as independent contractors. TIC was contacted by its clearing firm, Wexford Clearing Services Corporation (“Wexford”) and told that Liss Financial Services (“Liss”) was in the process of being sold to another broker/dealer that does not clear through Wexford, and that a number of registered representatives from Liss wanted to keep their accounts with Wexford by associating with an introducing broker-dealer that clears through Wexford. The president of Liss has authorized a bulk transfer of the accounts serviced by the registered representatives who do not wish to associate with Liss’ acquiring firm to TIC.
Request For Interpretation
Your letter sought advice as to whether the use of negative response letters to transfer the customer accounts from Liss to TIC would be consistent with NASD rules. Your letter states that the registered representatives departing from Liss are doing so only because Liss has been acquired by another member firm that does not clear through Wexford. Your letter indicates that the concerns expressed by the staff in Notice to Members 02-57 (“Use of Negative Response Letters for the Bulk Transfer of Customer Accounts,” September 2002) are moot because the registered representatives are independent contractors, the accounts would be staying at the same clearing firm, and the fees and charges from the clearing firm, as well as the quality of service, will be the same. Your letter notes that there will be no cost to the customer associated with the transfer; however, a fee may be charged if a customer decided to transfer to another broker-dealer thereafter. Your letter further states that it is unclear whether the contractual agreement between Liss and its independent contractor would allow Liss to service an account where the customer decided to keep the account with Liss. You state that to minimize interruptions to customers’ access to their accounts and to minimize customer confusion over having to sign paperwork in order to keep their accounts at Wexford, TIC and the aforementioned registered representatives believe that it is in the best interest of the customers to use negative response letters to expedite the bulk transfer of customer accounts and you seek our guidance as to whether your position conflicts with NASD Rule 2110.
In Notice to Members 02-57, the staff expressed its general view that a customer should affirmatively consent to the transfer of his or her 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. In identifying those situations, the staff considered the need to effect a timely transfer of the account and the interests of the customers affected by the transfer.
The staff does not believe that the facts described in your letter constitute a situation in which the use of negative response letters would be appropriate. The staff believes that customers, in deciding whether to transfer their account to a new introducing firm, may take into account a variety of factors including the services and performance of the introducing firm with which the customer has opened his or her account.1 The fact that the registered representative assigned to the account is compensated as an independent contractor, or that the clearing firm holding the account will remain the same, does not necessarily moot the customer’s considerations about the performance of services by the customer’s introducing firm. For example, customers may, in deciding whether to move from one brokerage firm to another, consider such factors as the manner in which the respective firms comply with their regulatory obligations, including, for example the member firm’s obligation to supervise its registered representatives.2
The staff believes that transferring accounts under the circumstances described in your letter could raise concerns as to whether the member effecting the transfer is acting in a manner that is consistent with the high standards of commercial honor and just and equitable principles of trade required by Rule 2110. The staff notes that its conclusion does not preclude the departing registered representatives of Liss from obtaining the affirmative consent of customers to transfer their accounts to TIC. The staff further notes that a contractual arrangement between a member firm and its registered representatives does not override the member’s obligation to comply with NASD rules, including Rule 2110.
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
Sarah J. Williams
Assistant General Counsel
|cc:||Gary Liebowitz, Senior Vice President and Director
District 9B Office
1 The staff makes an exception from this general proposition for the use of negative response letters to transfer accounts away from an introducing member that has gone out of business, as reflected in Notice to Members 02-57. The staff believes that when an introducing member is no longer operating, the interests of the customers are best served by transferring those accounts to a new introducing firm, even if the new firm is not of the customer’s choosing, to avoid the cessation of brokerage services to the customer and the possible liquidation of customer accounts. Under the circumstances you describe, Liss (or its successor) will continue to provide services to existing customers after it is acquired, so there is little risk of cessation of brokerage services or possible liquidation of the customers’ accounts if affirmative consents are solicited from those customers wanting to transfer their accounts to TIC.
2 See NASD Regulatory & Compliance Alert, Volume 6, Number 2 (June 1992) “Supervision Rules Cover Members’ Off-Site Personnel,” reminding members that their supervisory responsibilities extend to all individuals associated with them, irrespective of the individual's location or compensation arrangement.