Pursuant to Section 19(b)(1) of the Securities Exchange of 1934 (“Act”), notice is hereby given that on August 16, 2001, the National Association of Securities Dealers, Inc. (“NASD”), through its wholly owned subsidiary, NASD Regulation, Inc. (“NASD-R”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by NASD-R. The Commission is publishing this notice and order to solicit comments on the proposed rule change from interested persons and to grant accelerated approval.
I. Self-Regulatory Organization's Statement of Terms and Substance of the Proposed Rule Change
NASD Regulation proposes to amend NASD Uniform Practice Code Rule 11870(c) and 11870(d) in order to expedite the transfer of customer accounts that contain proprietary or third party products (e.g., mutual funds or money market funds) that the receiving member cannot receive or carry.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD-R included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The test of these statements may be examined at the places specified in Item IV below NASD-R has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.Start Printed Page 48302
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to conform Uniform Practice Code Rule 11870 to recent modifications to the Automated Customer Account Transfer Service (“ACATS”), which is administered by the National Securities Clearing Corporation (“NSCC”). Recent ACATS modifications offer the capability to facilitate the transfer of accounts containing third party and/or proprietary products. The proposed changes to NASD Rules 11870(c) and 11870(d) would correspond to those modifications and would give member firms the ability to expedite the transfer of such accounts. The proposed rule change also conforms the NASD Rules to a recent amendment to the Interpretation of the New York Stock Exchange (“NYSE”) Rule 412.
Under current Rules 11870(c) and 11870(d), when a customer whose securities account is carried by a member (“carrying member”) wishes to transfer the entire account to another member (“receiving member”) the customer submits a signed broker-to-broker transfer instruction to the receiving member. The receiving member immediately submits the instruction to the carrying member, and the carrying member has three business days either to validate and return the transfer instruction to the receiving member (with an attachment reflecting all positions and money balances as shown on its books) or to take exception to the instruction. Prior to or at the time of validation of the transfer instruction, the carrying member must request in writing instructions from the customer with respect to the disposition of any assets in the account that it identifies as nontransferable, including any asset that is a proprietary product of the carrying member. The customer may ask the carrying member to liquidate the asset, continue to retain the asset, or physically transfer the asset in the customer's name to the customer.
The account, however, also may contain assets that have not been identified by the carrying member as nontransferable because they are the 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 assets. Notwithstanding the presence of such assets in the account, the carrying member currently must include such assets in the transfer of the account, the carrying member currently must include such assets in the transfer of the account. If the receiving member is unable to receive/carry an asset that is a product of a third party, the receiving member must send the asset back to the carrying member.
The carrying member must complete the transfer of the account to the receiving member within three business days following the validation of a transfer instruction, 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 against the long positions and short positions, respectfully, in the customer's account that have not been delivered or received, and the receiving member must debit and the carrying member must credit the related money amount. These fails require substantial processing time for both the carrying and receiving members and require carrying members to credit the receiving firm funds equivalent to the value of the assets they are unable to deliver. These fails can also cause customers confusion in that customers receive multiple account statements from the carrying and receiving firms as the firms transfer and then reverse transactions.
The proposed rule change would require the receiving member upon receipt of the asset validation report to designate any assets that are the product of a third party 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.
The receiving member after designating those third party assets it is unable to receive/carry would have to provide the customer with a list of those assets and request instructions from the customer regarding their disposition. The customer would be given the alternatives of having to liquidate the assets, having the carrying broker-dealer continue to retain the assets, having the assets physically transferred in the customer's name to the customer, or transferring the assets to the third party that is the original source of the product for credit to an account opened by the customer with the third party.
The proposed rule change would also deem as a nontransferable asset a proprietary product of the carrying member unless the receiving member agrees to accept transfer of the assets.
Current Rule 11870(d)(3)(C) provides that a member may take exception to a transfer instruction if the account number is invalid (account number is not on the carrying member's books). The proposed change to Rule 11870(d)(3)(C) will make clear that the carrying member is responsible for tracking account number changes; therefore, an account number that has been changed due to internal reassignment of an account to another broker or account executive with the carrying member will not be considered invalid for purposes of taking exception to a transfer instruction.
2. Statutory Basis
NASD-R believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, which requires, among other things, that NASD's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD-R believes that the proposed rule change is designed to accomplish these goals by making the transfer of customer accounts faster and more efficient, reducing customer confusion, and facilitating the transfer of third-party and proprietary products. The proposed rule change will also conform NASD requirements to recent amendments to the Interpretation of NYSE Rule 412.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD-R does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The Commission finds that the proposed rule change is consistent with the requirements of Section 15A of the Act, which requires, among other things, that the rules of a national securities association be designed to remove the impediments to and perfect the mechanism of a free and open market and a national market system Start Printed Page 48303and protect investors and the public interest. These obligations are met when procedures governing the transfer of customer accounts are made more efficient. The rule change should eliminate the present need for reversing the transfer of third party and/or proprietary products, thereby reducing delay, and also reduce the cost of customer transfers incurred by members under the current system. For example, the proposed designation and notice requirements on the part of the receiving firm should reduce the overall timeframe for transferring or disposing of third party products and should lower the related costs incurred by NASD's members. The rule change should also reduce customer confusion and facilitate decisions by customers concerning the disposition of proprietary and third party products. Finally, because the proposed rule change is designed to conform NASD Rules 11870(c) and 11870(d) with recent amendments to the Interpretation of NYSE Rule 412, the proposal should help provide uniformity.
NASD-R has requested that the Commission find good cause pursuant to Section 19(b)(2) of the Act  for approving the proposed rule change prior to the thirtieth day after publication of notice of the filing in the Federal Register. The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication in the Federal Register because accelerated approval will allow the NASD to implement these changes when NSCC implements changes to ACATS. The Commission is approving the proposed rule change prior to the expiration of the comment period in order to permit the NASD to conform its rule with the NYSE and benefit customers as soon as possible.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at NASD's principal office. All submissions should refer to File No. SR-NASD-2001-53 and should be submitted by October 10, 2001.
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NASD-2001-53) be, and hereby is, approved on an accelerated basis.
For the Commission by the Division of Market Regulation, pursuant to delegated authority.Start Signature
Margaret H McFarland,
2. The Commission has modified the text of the summaries prepared by NASD.Back to Citation
3. Securities Exchange Act Release No. 44596 (July 26, 2001), 66 FR 40306 (Aug. 2, 2001).Back to Citation
[FR Doc. 01-23308 Filed 9-18-01; 8:45 am]
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