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Interpretive Letter to T. Douglas Hollowell, UBS Financial Services, Inc.

A member may use negative response letters to effect a bulk transfer of employee equity compensation plan accounts, as directed by an employer.


Dear Mr. Hollowell:

This is in response to your correspondence dated March 16, 2020 and June 16, 2020, in which you request interpretive guidance on behalf of UBS Financial Services Inc. (“UBSFS”), a FINRA member registered with the Securities and Exchange Commission as a broker-dealer and an investment adviser, regarding whether it is permissible to use negative response letters to effect a bulk transfer of employee equity compensation plan accounts, as directed by an employer.

Background

Based upon your correspondence, we understand the facts to be as follows.  UBSFS, as part of its business, administers employee equity compensation plans (hereinafter, “plan” or “plans”) for employers pursuant to contractual arrangements.  When an employee participant joins a plan, the participant receives an email with a link to open up a limited purpose account with UBSFS.  Plan participants must log into their accounts using unique login credentials.  UBSFS maintains account information for each plan participant, all of whom are customers of the firm.  Each time a plan participant earns or purchases the employer’s shares or other equity instruments of the employer, those shares or other equity instruments are deposited in the participant’s account and are held by UBSFS.  The accounts are fully disclosed, segregated accounts and each is identifiable by a UBSFS account number.  The accounts do not hold any other securities.  To sell the shares or other equity instruments of the employer, the plan participant must access his or her account and direct the sale.  UBSFS completes all required reporting resulting from the sale.  An employee may only earn or purchase the employer’s shares or other equity instruments of the employer under a plan so long as the employee is a participant in the plan.

From time to time, an employer may notify UBSFS that the employer is terminating its current administrator relationship with a FINRA member and intends to designate UBSFS as the new administrator.  Similarly, an employer may notify UBSFS that the employer is terminating its current administrator relationship with UBSFS and intends to designate another FINRA member as the new administrator.  You state that, in such situations, employers have informed UBSFS of their desire to effect a bulk transfer of plan participants’ accounts to the new member administrator through the use of negative response letters.  You also state that employers have expressed concerns that, absent the use of negative response letters, plan participants may become confused and burdened with completing the paperwork for affirmative consent to transfer the accounts.  Moreover, you note that, given the size and diversity of an employer’s work force, there is concern that obtaining the affirmative consent of each plan participant would cause potential errors in handling the accounts and create additional administrative burdens for both the employer and participants.

You seek guidance regarding whether UBSFS and other FINRA members that administer a plan for an employer may rely on negative response letters to effect a bulk transfer of plan participants’ accounts to a new member administrator as directed by the employer in the above-described circumstances.  You believe that this situation is analogous to the situation relating to the use of negative response letters to effect a bulk transfer of customers’ accounts following the conclusion or termination of a networking arrangement between a member and a financial institution, which FINRA expressly recognized in Notice to Members (“NTM”) 02-57 (Bulk Transfer of Customer Accounts) (September 2002).

Response

In general, a member must obtain a customer’s affirmative consent or instruction in order to transfer the customer’s account to another member.  In NTM 02-57, FINRA identified several situations in which the use of negative response letters by a member could be appropriate to effect a bulk transfer of customers’ accounts to another member, subject to specified conditions.

As noted in NTM 02-57, the use of a negative response letter to facilitate a bulk transfer of customers’ accounts to another member in the identified situations is appropriate, given the potential risk to customers and costs to firms that could result if firms were required to solicit individual transfer instructions from each customer.  Further, a bulk transfer of accounts in the identified situations helps minimize interruptions to customers’ access to their accounts and the trading markets.  The NTM also stated that, upon request, the staff would consider other situations where the use of negative response letters may be appropriate to effect a bulk transfer of customers’ accounts.

One of the situations identified in NTM 02-57 relates to a bulk transfer of customers’ accounts following the conclusion or termination of a networking arrangement between a member and a financial institution, such as a bank.  Specifically, the NTM provides that upon the conclusion or termination of a networking arrangement between a member and a financial institution pursuant to FINRA Rule 3160 (Networking Arrangements Between Members and Financial Institutions),1 the member may use negative response letters to transfer all customer accounts established under the arrangement to another member with which the financial institution has formed a networking arrangement.

You have requested guidance regarding whether a member that administers an employee equity compensation plan and carries segregated accounts for such a plan pursuant to a contractual arrangement with an employer may, as directed by the employer, use negative response letters to effect a bulk transfer of plan participants’ accounts to another member administrator with which the employer has formed a relationship following the conclusion or termination of the relationship with the original member administrator.

The staff believes that a bulk transfer of plan participants’ accounts in the manner described in your letter is analogous to a bulk transfer of customers’ accounts to another member following the conclusion or termination of a networking arrangement between a financial institution and the original member.  In both situations, the accounts were in effect introduced to a member by a third party pursuant to a contractual arrangement.  Therefore, the staff believes that it would be appropriate for a member administrator of a plan to use negative response letters to effect a bulk transfer of plan participants’ accounts to another member administrator as directed by the respective employer.  Further, the staff believes that it would be appropriate for such employer to send out the negative response letters to its own employees, provided that the member administrator has reasonable supervision and controls to ensure that the letter satisfies the required conditions discussed below (e.g., disclosures and timing) and that it is notified of whether any plan participants are opting out from the transfer.

Consistent with NTM 02-57, a negative response letter used to effect a bulk transfer of plan participants’ accounts as described in this letter must contain: (1) a brief description of the circumstances necessitating the transfer; (2) a statement that the participant has the right to object to the transfer; (3) information on the status of the participant’s account and the available options if the participant objects to the transfer; (4) disclosure of any costs to the participant if the participant objects to the transfer of the account; and (5) a statement regarding members’ compliance with SEC Regulation S-P in connection with the transfer.2 Further, plan participants must be provided, absent exigent circumstances, at least 30 calendar days to respond and opt out of the transfer of their accounts.

We trust 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 FINRA 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 FINRA, or all the possible regulatory and legal issues involved.  In addition, you should be aware that any changes in the facts as you have described them will require further consideration and may cause us to reach a different conclusion.

 

Very truly yours,

/s/ Afshin Atabaki

Afshin Atabaki
Special Advisor and Associate General Counsel

 


1. Formerly NASD Rule 2350 (Broker-Dealer Conduct on the Premises of Financial Institutions).

2.  See Regulation S-P (Privacy of Consumer Financial Information and Safeguarding Personal Information) under the Exchange Act.  17 CFR Part 248.