GUIDANCE
Partial Customer Account Transfers
Effective Date: September 13, 2004
SUGGESTED ROUTING |
KEY TOPICS |
Legal & Compliance
Operations
Senior Management
|
Automated Customer Account Transfer
Service (ACATS)
[Rule 11870]
|
Executive Summary
On July 14, 2004, the Securities and Exchange Commission (SEC)
granted accelerated approval of amendments to [Rule 11870] making
the procedures for transferring specifically designated customer
account assets through the ACATS system consistent with the
procedures for transferring securities account assets in their
entirety through the ACATS system unless the customer authorizes
a partial transfer of assets to be facilitated outside of ACATS.1 The
amendments also permit customers to authorize an account transfer,
in whole or in part, via electronic signature in a format recognized
as valid under federal law to conduct interstate commerce. These
changes conform to recent amendments to New York Stock
Exchange Rule 412 and the Interpretation of Rule 412. The
amendments become effective on September 13, 2004, to allow
firms sufficient time to develop and implement any necessary
systems changes. The text of the amendments is provided in
Attachment A.
Questions/Further Information
Questions concerning this Notice may be directed to the Financial
Operations Department at (202) 728-8211.
Discussion
ACATS is a system administered by the National Securities Clearing Corporation (NSCC)
that automates and standardizes procedures for the transfer of assets in a customer
account from one firm to another. [Rule 11870] mandates the use of ACATS when both
the carrying member and the receiving member are participants in a registered clearing
agency having automated customer securities account transfer capabilities and are
eligible to use such capabilities, and sets forth the procedures for members to use when
transferring customer assets between members.
The amendments to [Rule 11870] clarify that the procedures for transferring specific
assets in a customer account through ACATS are consistent with the procedures for
transferring the entire account through ACATS, unless the customer specifically requests
and authorizes a transfer of assets outside of ACATS. Under [Rule 11870], as amended,
customers continue to have the option of submitting alternate authorized instructions
(e.g., Letters of Authorization or LOAs) to a carrying firm in order to effect the
transfer of "specifically designated assets," i.e., partial transfers from one broker-dealer
to another outside of the ACATS system. The transfers of such assets outside of the
ACATS system continue to be subject to the requirement that members process such
transfers expeditiously.2
Because customer and broker-dealer obligations resulting from the transfer of an entire
account differ from the obligations arising from the transfer of specified assets within
an account that will remain active at the delivering firm, the amendments to [Rule 11870] distinguish between the transfer of security account assets "in whole" (i.e.,
transfer of entire accounts) and security account assets "in specifically designated part"
(i.e., partial transfers). For example, it would not be necessary for a customer to instruct
the delivering firm as to the disposition of his or her non-transferable mutual fund
holdings if the customer is not transferring the account in whole.
Previously, [Rule 11870] specified that a customer who wishes to transfer his or her
account to another member must give "written notice of that fact to the receiving
member" and must "sign" a broker-to-broker transfer instruction form. The
amendments to [Rule 11870] permit customers to authorize an account transfer, in
whole or in part, via electronic signature "in a format recognized as valid under federal
law to conduct interstate commerce."3 Thus, under amended [Rule 11870], customer
authorization of a transfer instruction can be either the customer's actual signature
or a valid electronic signature. Further, [Rule 11870], as amended, no longer requires
specific formats with respect to transfer instructions or reports, since the NSCC no
longer requires specific formats with respect to transfer instructions or reports for use
with the ACATS system.
1See Release No. 34-50018 (July 14, 2004), 69 FR
43873 (July 22, 2004) (File No. [SR-NASD-2004-058]).
2See [Rule 11870](a).
3See "Electronic Signatures in Global and
National Commerce Act" 15 U.S.C. §§ 7001
et seq. (2004).
Attachment A
Below is the text of the proposed rule change. Additions are underlined; deletions are in brackets.
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[11870]. Customer Account Transfer Contracts
(a) Responsibility to Expedite Customer's Request
(1) When a customer whose securities account[(s)] is carried by a member (the "carrying member")
wishes to transfer [the entire] securities account[(s)] assets, in whole or in specifically designated part, to another
member (the "receiving member") and gives [written notice of that fact] authorized instructions to the receiving
member, both members must expedite and coordinate activities with respect to the transfer.
(2) If a customer desires to transfer a portion of [an] his or her account outside of ACATS, [a letter of
authorization] authorized alternate instructions should be transmitted to the carrying member indicating such
intent and specifying the [portion of the account] designated assets to be transferred. Although such transfers
are not subject to the provisions of this [r]Rule, members must expedite all authorized [partial transfers of
customer securities accounts] account asset transfers, whether through ACATS or via other means permissible
under this Rule, and coordinate their activities with respect thereto. Unless otherwise indicated, [T]the
automated customer account transfer capabilities referred to in paragraph (m)(1) of this Rule shall be utilized
for partial transfers.
(3) For purposes of this Rule, customer authorization pursuant to a transfer instruction could be the
customer's actual signature, or an electronic signature in a format recognized as valid under federal law to
conduct interstate commerce.
(b) Transfer Procedures
(1) Upon receipt from the customer of [a signed] an authorized broker-to-broker transfer instruction
form ("TIF") to receive such customer's securities account[(s)] assets in whole or in specifically designated part,
from the carrying member, the receiving member must immediately submit such instruction to the carrying
member. The carrying member must, within three business days following receipt of such instruction, or receipt
of a TIF received directly from the customer authorizing the transfer of assets in specifically designated part:
(A) validate [and return] the transfer instruction to the receiving member (with an attachment reflecting all
positions and money balances to be transferred as shown on its books); or (B) take exception to the transfer
instruction for reasons other than securities positions or money balance discrepancies and advise the receiving
member of the exception taken.
(2) The carrying member and the receiving member must promptly resolve any exceptions taken to the
transfer instruction.
(c) Transfer Instructions
(1)
Securities [A]
account
asset transfers accomplished pursuant to this Rule are subject to the following
conditions, which the customer must be informed of, affirm, or authorize
(as the case may be) through their
inclusion in the transfer instruction [form]
the customer is required to [be completed and signed]
authorize to
initiate the account
asset transfer:
(A) To the extent any account assets [in the account] are not readily transferable, with or
without penalties, such assets may not be transferred within the time frames required by [the] this Rule.
(B) The customer will be contacted in writing by the carrying member, and/or by the receiving
member, with respect to the disposition of [any] nontransferable assets [in the account that are
nontransferable.] other than proprietary money market fund assets (if any), indicated in an instruction to
transfer specifically designated account assets. (See subparagraph (c)(D)(3) below for customer
notification requirements pertaining to transfers of securities account assets in whole.)
(C) If [With respect to transfers of] securities accounts assets in whole other than retirement
plan [securities] account[s] assets are being transferred, the customer must affirm[s] that he or she has
destroyed or returned to the carrying member any credit/debit cards and/or unused checks issued in
connection with the account.
(D) For purposes of this Rule, a "nontransferable asset" shall mean an asset that is incapable of
being transferred from the carrying member to the receiving member because it is:
(i) an asset that is a proprietary product of the carrying member;
(ii) an asset that is a product of a third party (e.g., mutual fund/money market fund)
with which the receiving member does not maintain the relationship or arrangement necessary
to receive/carry the asset for the customer's account;
(iii) an asset that may not be received due to regulatory limitations on the scope of the
receiving member's business;
(iv) an asset that is a bankrupt issue for which the carrying member does not possess
the proper denominations to effect delivery and no transfer agent is available to re-register the
shares;
(v) an asset that is an issue for which the proper denominations cannot be obtained
pursuant to governmental regulation or the issuance terms of the product (e.g., foreign
securities, baby bonds, etc.);
(vi) limited partnership interests in retail accounts.
(E) The carrying member and the receiving member must promptly resolve and reverse any
nontransferable assets [which] that were not properly identified during validation. In all cases, each
member shall promptly update its records and bookkeeping systems and notify the customer of the
action taken.
(2) A proprietary product of the carrying member shall be deemed nontransferable unless the receiving
member has agreed to accept transfer of the product. Upon receipt of the asset validation report, the receiving
member shall designate any assets that are a product of a third party (e.g., mutual fund/money market fund)
with which the receiving member does not maintain the relationship or arrangement necessary to receive/carry
the asset for the customer's account. The carrying member, upon receipt of such designation, may treat such
designated assets as nontransferable and refrain from transferring the designated assets.
(3) If [an]
securities account
assets to be transferred in whole include[s] any nontransferable assets that
are proprietary products of the carrying member, the carrying member must provide the customer with a list of
the specific assets and request, in writing and prior to or at the time of validation of the transfer instruction,
further instructions from the customer with respect to the disposition of such assets. In particular, such request
should provide, where applicable, the customer with the following alternative methods of disposition for
nontransferable assets:
(A) Liquidation, with a specific indication of any redemption or other liquidation-related fees
that may result from such liquidation and that those fees may be deducted from the money balance due
the customer.
(B) Retention by the carrying member for the customer's benefit.
(C) Transfer, physically and directly, in the customer's name to the customer.
(4) If [an]
securities account
assets to be transferred
in whole include[s] any nontransferable assets that
the receiving member has designated as assets that are a product of a third party (e.g., mutual fund/money
market fund) with which the receiving member does not maintain the relationship or arrangement necessary to
receive/carry the asset for the customer's account, the receiving member must provide the customer with a list of
the specific assets and request, in writing and prior to the time it makes such designation, further instructions
from the customer with respect to the disposition of such assets. In particular, such request should, where
applicable, provide the customer with the following alternative methods of disposition for nontransferable
assets:
(A) Liquidation, with a specific indication of any redemption or other liquidation-related fees
that may result from such liquidation and that those fees may be deducted from the money balance due
the customer. The indication must also refer the customer to the fund prospectus or to their registered
representative at the carrying firm for specific details regarding any such fees.
(B) Retention by the carrying member for the customer's benefit.
(C) Shipment, physically and directly, in the customer's name to the customer.
(D) Transfer to the third party that is the original source of the product, for credit to an account
opened by the customer with that third party.
(5) If the customer has authorized liquidation or transfer of assets deemed to be nontransferable, the
carrying member must distribute the resulting money balance to the customer or initiate the transfer within five
(5) business days following receipt of the customer's disposition instructions.
(6) With respect to transfers of retirement plan securities account[s]
assets, the customer authorizes the
custodian/trustee for the account:
(A) to deduct any outstanding fees due the custodian/trustee from the credit balance in the
account, or
(B) if the account does not contain a credit balance, or if the credit balance in the account is
insufficient to satisfy any outstanding fees due the custodian/trustee, to liquidate assets in the account
to the extent necessary to satisfy any outstanding fees due the custodian/trustee.
(d) Validation of Transfer Instructions
(1) Upon validation of an [transfer] instruction to transfer securities account assets in whole, a carrying
member must "freeze" the account to be transferred, i.e., all open orders, with the exception of option
positions [which] that expire within seven (7) business days, must be canceled and no new orders may be taken.
(2) A carrying member may not take exception to a transfer instruction, and therefore deny validation of
the transfer instruction, because of a dispute over securities positions or the money balance in the account to be
transferred. Such alleged discrepancies notwithstanding, the carrying member must transfer the securities
positions and/or money balance reflected on its books for the account.
(3) A carrying member may take exception to a transfer instruction only if:
(A) additional documentation is required (additional legal documents such as death or marriage
needed);
(B) the account is "flat" and reflects no transferable assets;
(C) the account number is invalid (account number is not on carrying member's books);
however, if the carrying member has changed the account number for purposes of internally reassigning
the account to another broker or account executive, it is the responsibility of the carrying firm to track
the changed account number, and such reassigned account number shall not be considered invalid for
purposes of fulfilling a transfer instruction.
(D) it is a duplicate request;
(E) violates member's credit policy;
(F) unrecognized residual credit asset (receiving member cannot identify client);
(G) client rescinds instruction (client submitted written request to cancel transfer);
(H) S.S. number/Tax ID mismatch (number does not correspond to carrying member's);
(I) account title mismatch (receiving member's account title does not correspond to carrying
member's);
(J) account type mismatches (receiving member's account type does not correspond to carrying
member's);
(K) missing or improper [A]authorization [Signature] (TIF requires an additional client [signature]
authorization or successor custodian's acceptance [signature] authorization or custodial approval); or
(L) Client takes possession (account assets in question [(entire account is] are in transfer to
deliver direct to customer).
(4) If a carrying member takes exception to a transfer instruction because the account is "flat", as
provided in subparagraph (3)(B) above, the receiving member may re-submit the transfer instruction only if the
most recent customer statement is attached.
(5)
(A) Upon validation of [a] an [transfer] instruction[,] to transfer securities account assets in
whole or in specifically designated part, the carrying member must return the transfer instruction to the receiving
member with an attachment indicating all securities positions, [any] safekeeping positions, and [any] money
balances to be transferred [in the account] as shown on the books of the carrying member. Except as
hereinafter provided, the attachment must include a then-current market value for all assets [in the account] so
indicated. If a then-current market value for an asset cannot be determined (e.g., a limited partnership interest),
the asset must be valued at original cost. However, delayed delivery assets, nontransferable assets, and assets in
transfer to the customer, i.e., in possession of the transfer agent at the time of receipt of the transfer instruction
by the carrying member for shipment, physically and directly to the customer, need not be valued, although the
"delayed delivery," "nontransferable," or "in-transfer" status, respectively, of such assets must be indicated on
the attachment.
(B) For purposes of this Rule, a "safekeeping position" shall mean any security held by a
carrying member in the name of the customer.
(6) Upon validation of [a] an [transfer] instruction to transfer securities account assets in whole or in
specifically designated part, the carrying member must indicate on the instruction, or by attachment, any
Regulation T calls outstanding as of the date of validation with respect to the account assets to be transferred.
(7) A carrying member must provide the following description, at a minimum, as asset data with respect
to any municipal securities
positions to be transferred that have not been assigned a CUSIP number: [in an
account it is to transfer:]
(A) name of the issuer;
(B) interest rate and dated date;
(C) maturity date and put date, if applicable, and if the securities are limited tax, subject to
redemption prior to maturity (callable), or revenue bonds; an indication to such effect, including in the
case of revenue bonds, the type of revenue, if necessary for a materially complete description of the
securities; and
(D) if necessary for a materially complete description of the securities, the name of any company
or other person in addition to the issuer obligated, directly or indirectly, with respect to debt service, or
if there is more than one such obligor, the statement "multiple obligors" may be shown.
(8) After validation of the transfer instruction by the carrying member, a receiving member may reject
a[n account]transfer of account assets in whole only if the account is not in compliance with the receiving
member's credit policies or minimum asset requirements. (A receiving member may deem an account not in
compliance with Regulation T requirements as not in compliance with its credit policies.) A receiving member,
however, may only reject [an] the entire account for such reasons; it may not reject only a portion of the account
assets (e.g., the particular assets not in compliance with the member's credit policies or minimum asset
requirement) while accepting the remainder.
(e) Completion of the TransferWithin three business days following the validation of a transfer instruction, the carrying member must complete
the transfer of the customer's security account[(s)] assets to the receiving member. The receiving member and the
carrying member must immediately establish fail-to-receive and fail-to-deliver contracts at then-current market values
upon their respective books of account against the long/short positions [in the customer's account[(s)] that have not been
[physically] delivered/received and the receiving/carrying member must debit/credit the related money amount. The
customer's security account[(s)] assets shall thereupon be deemed transferred.
(f) Fail Contracts Established
(1) Any fail contracts resulting from this
securities account
asset transfer procedure shall be included in
a member's fail file and, not later than 10 business days following the date delivery was due, the member shall
take steps to obtain physical possession or control of securities so failed to receive by initiating a buy-in
procedure or otherwise; provided, that with respect to the following types of securities or instruments, not later
than 30 business days following the date delivery was due, the member shall take steps to obtain physical
possession or control of securities so failed to receive by initiating a buy-in procedure or otherwise:
(A) banker's acceptances;
(B) bond anticipation notes;
(C) certificates of deposit;
(D) commercial paper;
(E) FMAC certificates;
(F) FNMA certificates;
(G) foreign securities;
(H) GNMA certificates;
(I) limited partnership interests;
(J) municipal bonds;
(K) mutual fund shares (transferable);
(L) revenue anticipation notes;
(M) SBA certificates; and
(N) tax anticipation notes.
(2) A carrying member may not reject ("DK") a fail contract, including a Receive/Deliver Instruction
generated by an automated customer account transfer system, in connection with assets in an account
transferred that have not been delivered to the receiving member.
(3) All fail contracts established pursuant to the requirements of this Rule should be clearly marked or
captioned as such. This paragraph will not apply if a fail contract participates in a repricing and reconfirmation
service offered by a registered clearing agency.
(4) All fail contracts required to be established on safekeeping positions must be so indicated.
(5) Open fail contracts established pursuant to the requirements of this Rule should be marked-to-market
regularly.
(6) Nontransferable assets and assets in transfer to the customer are exempt from the requirement in
paragraph (e) of this Rule that fail-to-receive and fail-to-deliver contracts must be established for positions in a
customer's securities account that have not been [physically] delivered.
(7) Members may agree to close out fail contracts established pursuant to the requirements of this
[r]Rule through the delivery of securities that are substantially comparable to those owed with prior consent of
the customer.
(8) A receiving member should reject a delivery of a security that cannot be deemed a safekeeping
position against a fail contract as such.
(9) A receiving member must deem receipt of a duly executed limited partnership change of trustee
form with respect to limited partnership interests or a mutual fund re-registration form with respect to mutual
fund shares as adequate delivery for purposes of transferring such assets pursuant to the Rule.
(g) Prompt Resolution of Discrepancies
(1) Any discrepancies relating to positions or money balances that exist or occur after transfer of a
customer's securities account assets must be resolved promptly.
(2) The carrying member must promptly distribute to the receiving member any transferable assets
[which] that accrue to the account after the transfer of a customer's securities account.
(3) When a member receives a [written] claim [letter] notice relating to a[n] securities account asset
transfer, the member must resolve the claim within five (5) business days from receipt of such [letter] claim or
[respond in writing] take exception to the claiming member by setting forth specific reasons for denying the
claim.
(h) and (i) No change
(j) Exemptions
(1) Pursuant to the [Rule 9600] Series, [the Association] NASD may exempt from the provisions of this
Rule, either unconditionally or on specified terms and conditions, (A) any member or (B) any type of account,
security or financial instrument.
(2) The following assets are deemed subject to delayed delivery and are exempt from paragraph (e) of
this Rule that valued fail-to-receive and fail-to-deliver contracts must be established for positions in a customer's
securities account that have not been [physically] delivered:
(A) insurance policies (annuities);
(B) stripped coupons;
(C) when-issued or when-distributed securities.
(3) Zero value fail-to-receive and fail-to-deliver instructions shall be generated for the assets specified in
paragraph (j)(2) hereof.
(k) Retirement Plan Securities Accounts
(1) It is the responsibility of the receiving member to obtain the approval of its custodian/trustee
accepting a customer's retirement plan securities account before submitting a transfer instruction for such [an]
account assets to the carrying member or its custodian/trustee to facilitate transfer of the account assets.
(2) If, with respect to the transfer of a retirement plan securities account assets, outstanding fees are
due the custodian/trustee for the account, such fees must be deducted from the credit balance in the account
or, if the account does not contain a credit balance or if the credit balance is insufficient to satisfy such fees,
assets in the account must be liquidated to the extent necessary to satisfy such fees. If liquidation of assets in
the account is not practicable, such fees must then be transferred to and accepted by the receiving member as
a debit item with the account.
(l) Securities Account[s]
For the purposes of this Rule, the term "securities account[(s)]" shall be deemed to include any and all of the
account's[(s')] money market fund positions or the redemption value thereof.
(m) Participant in a Registered Clearing Agency
(1) When both the carrying member and the receiving member are participants in a registered clearing
agency having automated customer securities account asset transfer capabilities and are eligible to use such
capabilities, the securities account asset transfer procedure, including the establishing and closing out of fail
contracts, must be accomplished in accordance with the provisions of this [r]Rule and pursuant to the rules of
and through such registered clearing agency[.] with the exception of specifically designated assets transferred
pursuant to the submittal of a customer's authorized alternate instructions to the carrying member.
(2) When such registered clearing agency has the capability to transfer mutual fund positions or to
employ functionalities including Partial Transfer Receive (PTR), Partial Transfer Delivery (PTD), Fail Reversal, Mutual
Fund Fail Cleanup, or Reclaim Processing, such capability must be utilized with the exception of specifically
designated assets transferred pursuant to the submittal of a customer's authorized alternate instructions to the
carrying member. [both the carrying member and the receiving member are participants in a registered clearing
agency having automated customer securities account transfer capabilities with an automated facility for
transferring mutual fund positions such facilities must be utilized for transferring mutual fund positions.]
(3) When securities account assets are transferred in whole and [both the carrying member and the
receiving member are participants in a] such registered clearing agency [having automated customer securities
account transfer capabilities with a facility for] has the capability to transfer[ring] residual credit positions (both
cash and securities) [which] that have accrued to an account after the account has been transferred (residual
credit processing), such [facilities] capability must be utilized for transferring residual credit positions from the
carrying member to the receiving member.
(4) When both the carrying member and the receiving member are participants in a registered clearing
agency having automated customer securities account
asset transfer capabilities with a facility permitting
electronic transmittal of customer account
asset transfer instructions, such facilities shall be used in accordance
with the following:
(A) members using such facilities shall execute an agreement designated by the Committee
specifying the rights, obligations and liabilities of all participants in or users of such facilities;
(B) customer account transfer instructions shall be transmitted in accordance with the
procedures prescribed by the registered clearing agency;
(C) the transmittal of a transfer request through such electronic facilities shall constitute a
representation by the receiving member that it has received a properly executed [Transfer Instruction
Form] TIF or other actual authority to receive the customer's securities and funds[; and]
(D) transfer instructions transmitted through such facilities shall contain the information
necessary for the clearing agency and the carrying member to respond to the transfer instruction as may
be specified by this Rule and the clearing agency[.] and;
(E) non-standard ACAT processing, such as Partial Transfer Receives (PTR), Partial Transfer
Deliver (PTD) Fail Reversal, and reclaim processing shall be transmitted through such facilities, if the
facility permits.
(5) For purposes of this Rule, the term "registered clearing agency" shall be deemed to be a clearing
agency as defined in the Act and registered in accordance with that Act.
(n) Transfers Accomplished Ex-Clearing
(1) If one or both of the members processing a customer account transfer pursuant to this Rule is not a
member of a registered clearing agency, the fail-to-receive and fail-to-deliver contracts required to be established
in paragraph (e) of this Rule must be established outside a clearing corporation on an "ex-clearing house" basis.
Similarly, settlement of the fail contracts and any close-out executions must be made "ex-clearing house."
(2) Each member (including members that do not utilize automated customer securities account asset
transfer facilities) is required, [to transfer,] for a minimum period of six (6) months after [an account] the transfer
of securities account assets in whole is completed, to transfer credit balances (both cash and securities) that
occur is such transferred account assets within (10) ten business days after the credit balances accrue to the
account.
(3) A copy of each customer account transfer instruction issued pursuant to paragraph (b) on an
"ex-clearing house" basis shall be forwarded to the local District Office of [the Association] NASD having
jurisdiction over the carrying member.
[(4) Members must use the transfer instructions and provide the reports prescribed by the Association
when accomplishing account transfers pursuant to this Rule. The Association deems the transfer instruction and
reports required by the National Securities Clearing Corporation ("NSCC") in connection with its automated
customer account transfer system, and transfer instructions and reports that are substantially similar to those
required by the NSCC as acceptable for the purpose of accomplishing transfers of accounts under this Rule;
except that members must use the standard transfer forms required under [Rule 11580] to transfer limited
partnership securities unless exempted from the requirements of that Rule.]
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