Rule 412 Customer Account Transfer Contracts
This rule interpretation is no longer applicable effective November 11, 2008.
Unless otherwise indicated, Rule 412 and this Interpretation are applicable when a customer utilizes the Automated Customer Account Transfer Service (ACATS) to transfer securities account assets, either in whole or in specifically designated part, from one member organization to another. If a customer desires to transfer a portion of his or her account assets outside the ACATS System, authorized alternate instructions should be transmitted to the carrying organization indicating such intent and specifying the designated assets to be transferred. Although such transfers are not subject to Rule 412, member organizations are expected to expedite all authorized account asset transfers, whether through the ACATS System or via other means permissible under Rule 412 and this Interpretation, and coordinate their activities with respect thereto.
Member organizations must develop written procedures for customer securities account asset transfers that ensure implementation of and compliance with the requirements of Rule 412.
Security account asset transfers accomplished pursuant to Rule 412 are subject to certain conditions. The customer must be informed of, affirm, or authorize (as the case may be) the following conditions through their inclusion in the transfer instruction form the customer is required to authorize in order to initiate the account asset transfer:
With respect to the transfer of retirement plan securities account assets in whole, the customer must be informed that the choice of method of disposition of such assets other than liquidation and transfer may result in liability for the payment of taxes and penalties with respect to such assets.
A carrying organization may not take exception to a transfer instruction, and therefore deny validation of the transfer instruction, because of a dispute over securities positions or money balance to be transferred. Such alleged discrepancies notwithstanding, the carrying organization must transfer the securities positions and/or money balance reflected on its books for the account.
An organization may take exception to a transfer instruction only if:
Upon validation of an instruction to transfer securities account assets in whole, the carrying organization should "freeze" the account to be transferred, i.e., all open orders should be cancelled and no new orders should be accepted; except for transactions closing options positions which expire within seven (7) days.
Upon validation of an instruction to transfer securities account assets in whole or in specifically designated part, the carrying organization must return the transfer instruction to the receiving organization with an attachment indicating all securities positions, safekeeping positions, and money balances to be transferred as shown on the books of the carrying organization. Except as hereinafter provided, the attachment must include a then current market value for all assets 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 (see (f)/04 below), 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 organization 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.
For purposes of this rule, a "safekeeping position" shall mean any security held by a carrying organization in the name of the customer, including securities that are unendorsed or have a stock/bond power attached.
For purposes of this rule, a "nontransferable asset" shall mean an asset that is incapable of being transferred from the carrying organization to the receiving organization because it is:
The receiving organization, upon receipt of the asset validation report that indicates all positions and money balances in the account, shall designate any assets that are a product of a third party (e.g., mutual fund/money market fund) with which the receiving organization does not maintain the relationship or arrangement necessary to receive/carry the asset for the customer's account. The carrying organization, upon receipt of such designation, shall treat such designated assets as nontransferable and refrain from transferring the designated assets.
Upon validation of an instruction to transfer securities account assets in whole or in specifically designated part, the carrying organization 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.
A carrying organization 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:
After validation of the transfer instruction by the carrying organization, a receiving organization may reject a transfer of account assets in whole only if the account is not in compliance with the receiving organization's credit policies or minimum asset requirements. (A receiving organization may deem an account that is not in compliance with Regulation T requirements as not being in compliance with its credit policies.) However, a receiving organization may only reject 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 organization's credit policies or minimum asset requirements) while accepting the remainder.
A carrying organization may not reject ("DK") a fail contract, including a deliver or receive order generated by an automated customer account transfer system, in connection with assets in an account transferred that have not been delivered to the receiving organization.
All fail contracts established pursuant to the requirements of Rule 412 should be clearly marked or captioned as such.
The staff of the Securities and Exchange Commission Division of Market Regulation has advised the Exchange that it would not recommend enforcement action if member organizations interpret SEA Rule 15c3-1(c)(2)(ix), which requires deductions from net capital for fail to deliver contracts outstanding five or more business days (twenty-one or more business days with respect to municipal securities), as not applying to fail to deliver contracts established pursuant to the requirements of Rule 412, including the interpretations thereunder.
All fail contracts required to be established on safekeeping positions, as defined in (b)(1)/04 above, must indicate that they relate to a safekeeping position. Member organizations should adopt additional procedures to ensure appropriate recordkeeping with respect to such safekeeping position related fail contracts and thereby avoid erroneous deliveries and dividend adjustments.
Open fail contracts established pursuant to the requirements of Rule 412 should be marked-to-market regularly.
If, with respect to the transfer of 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 organization as a debit item with the account.
All fail contracts required to be established pursuant to Rule 412, except for fail contracts on those assets specified in (f)/05 below, must be closed out within ten business days of their establishment. If a receiving organization has not received an asset on which a fail contract was established by the seventh business day after the contract was established, the receiving organization must at that time provide the carrying organization with written notice of its intent to buy-in the asset on the tenth business day after the contract was established, in accordance with the standard buy-in procedures of the principal marketplace where the security is traded or of the self-regulatory organization whose rules would be applicable unless the carrying organization delivers the asset to the receiving organization before 2 PM on such tenth business day, and the receiving organization must proceed in such manner.
Member organizations may agree to close out fail contracts established pursuant to the requirements of Rule 412 through the delivery of securities that are substantially comparable to those owed.
A receiving organization should reject a delivery of a security that cannot be deemed a safekeeping position, as defined in (b)(1)/04 above, against a fail contract indicated as established on a safekeeping position in accordance with (b)(2)/04 above.
For purposes of paragraph (e) of this rule, the term "participant in a registered clearing agency" shall mean a member of a registered clearing agency that would be eligible to make use of the agency's automated customer securities account transfer capabilities.
It is the responsibility of the receiving organization to obtain the approval of its custodian/trustee accepting a customer's retirement plan securities account before submitting a transfer instruction for such account assets to the carrying organization or a registered clearing agency. Such approval should be transmitted to the carrying organization or its custodian/trustee to facilitate transfer of the account assets.
Nontransferable assets (as defined in (b)(1)/04 above) must be, pursuant to the customer's instructions, either liquidated, retained by the carrying organization for the customer's benefit, or shipped, physically and directly, in the customer's name to the customer. If the customer has authorized liquidation or shipment of such assets, the carrying organization must distribute the resulting money balance to the customer or initiate the shipment, respectively, within five business days following receipt of the customer's disposition instructions.
Nontransferable assets (as defined in (b)(1)/04 above) 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 organization for shipment, physically and directly, to the customer, are exempt from the requirement in sub-paragraph (b)(3) of the 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.
The following assets are deemed subject to delayed delivery for purposes of Rule 412 and are thereby exempt from the requirement in sub-paragraph (b)(3) of the 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:
Fail contracts established on the following assets pursuant to Rule 412 must be closed out within thirty business days, rather than ten business days, after their establishment:
If the aforementioned buy-in procedures of the principal market place where the security is traded or of the self-regulatory organization whose rules would be applicable are followed, the thirty business day time frame for closing out fail contracts referred to in (f)/05 above shall not be applicable.
A receiving organization must deem receipt of a duly executed limited partnership change of trustee form with respect to limited partnership interests as adequate delivery for purposes of transferring such assets pursuant to the rule.
With respect to mutual fund shares, a receiving organization must deem receipt of a mutual fund re-registration form evidencing book shares in an account as adequate delivery for purposes of transferring such shares, provided the re-registration form contains the customer's new account number at the fund. The carrying organization shall be responsible for obtaining this number and entering it on the form prior to submission to the receiving organization. This interpretation is applicable to book shares and is not intended to preclude the delivery of physical certificates.