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Rule 405A. Non-Managed Fee-Based Account Programs—Disclosure and Monitoring

This rule is no longer applicable effective December 15, 2008.

(1) General Disclosures Required

Each member or member organization shall provide each customer, prior to the opening of an account in a Non-Managed Fee-Based Account Program, a disclosure document describing the types of Non-Managed Fee-Based Account Programs available to such customer. The document shall disclose, for each such Program type, sufficient information for the customer to make a reasonably informed determination as to whether the Program is appropriate for them, including, at minimum: a description of the services provided, eligible assets, fees charged, an explanation of how costs will be computed and/or the provision of cost estimates based on hypothetical portfolios, any conditions or restrictions imposed, and a summary of the Program's advantages and disadvantages.
(2) Opening of Accounts

Members and member organizations are required to make a determination, prior to opening an account in a Non-Managed Fee-Based Account Program, that such Program is appropriate for each customer taking into account the services provided, anticipated costs, and customer objectives.
(3) Monitoring of Accounts

Each member or member organization must establish and maintain systems and procedures adequate to monitor, on an ongoing basis, transactional activity by customers in Non-Managed Fee-Based Account Programs. Such systems and procedures must include specific written criteria for identifying customers whose level of account activity may be inappropriate in the context of the customer's Program. The determination of appropriateness should take into consideration costs incurred, Program services, customer investment objectives, and customer preferences.
(4) Review and Follow-Up

Each member or member organization must maintain written procedures for contacting and following-up with customers identified pursuant to Paragraph (3) of this rule, as appropriate. The timeframe for identifying such customers shall be, at minimum, a rolling 12 month period. More frequent contact is required should circumstances warrant. The means (e.g., letter, phone call, or email) and general content of each follow-up customer contact must be documented and retained in an easily accessible place. At minimum, such contact must include notification that the level of account activity for a specified timeframe may be inconsistent with the Program costs incurred by the customer.
(5) Applicability of Rule

This rule shall not apply to accounts opened on behalf of "Qualified Investors" as that term is defined in Section 3(a)(54) of the Securities Exchange Act of 1934 (15 U.S.C. 78c) or to any member or member organization that does not offer Non-Managed Fee-Based Account Programs to its customers.
(6) Definition

For purposes of this rule, the term "Non-Managed Fee-Based Account Program" shall refer to arrangements in which no investment advisory services are provided by the member or member organization and in which customers are charged a fixed fee and/or a percentage of account value, rather than transaction-based commissions.

 

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.10 See also Rule 405(1) requirement that member organizations use due diligence to learn the essential facts relative to every customer and every cash or margin account, including accounts in Non-Managed Fee-Based Account Programs, accepted or carried by such member organization.
Amendment.
June 22, 2005 (NYSE-2004-13).

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