[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Notices]
[Pages 206-208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-00039]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36638; File No. SR-NASD-95-59]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. to Amend
Section 65 of the Uniform Practice Code to Require Members Who are
Participants in a Registered Clearing Agency to Use the Electronic
Facilities of such Agency to Transmit Customer Account Transfer
Instructions
December 26, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
16, 1995, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the NASD. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD proposes to amend Section 65 of the Uniform Practice Code
(UPC'') \1\ to require members who are participants in a registered
clearing agency to use the electronic facilities of such agency to
transmit customer account transfer instructions. Below is the text of
the proposed rule change. Proposed new language is italicized; proposed
deletions are in brackets.
\1\ NASD Manual, Uniform Practice Code, Section 65 (CCH) para.
3565.
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UNIFORM PRACTICE CODE
Customer Account Transfer Contracts
Sec. 65.
* * * * *
Participant in a Registered Clearing Agency
(m)(1) 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, the account transfer procedure, including the
establishing and closing out of fail contracts, must be accomplished in
accordance with the provisions of this rule and pursuant to the rules
of and through such registered clearing agency.
(2) When 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 both the carrying member and the receiving member are
participants in a registered clearing agency having automated customer
securities account transfer capabilities with a facility for
transferring residual credit positions (both cash and securities) which
have accrued to an account after the account has been transferred
(residual credit processing), such facilities must be utilized for
transferring residual credit positions from carrying member to
receiving member.
(4) When both the carrying member and the receiving member are
participants in a registered clearing agency having automated customer
securities account transfer capabilities with a facility permitting
electronic transmittal of customer account 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 Section and the clearing agency.
[(4)](5) For purposes of this rule, the term ``registered clearing
agency'' shall be deemed to be a clearing agency as defined in the
Securities Exchange Act of 1934 and registered in accordance with that
Act.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Background
Section 65 of the UPC requires a customer who wishes to transfer an
account from one member to another to give written notice (a Transfer
Instruction Form or ``TIF'') to the member who will be receiving the
[[Page 207]]
account (``receiving member''). The notice is then delivered to the
member carrying the account (``carrying member'') and the carrying
member is then obligated to validate and return the TIF, or take
exception to all or part of it. The account is then transferred to the
receiving member, subject to the exceptions.
Subsection 65(m) of the UPC requires members to use the automated
systems of a registered clearing agency, when available, to accomplish
account transfers when both the receiving member and carrying member
are participants in the clearing agency. The use of such automated
systems avoids the delay and risk associated with physical delivery and
transfer of securities.
The National Securities Clearing Corporation's (``NSCC'') Automated
Customer Account Transfer Service (``ACATS'') is currently the only
automated transfer system and is the system through which virtually all
customer accounts are transferred between members. Until recently,
however, it was standard industry practice to deliver physically (or by
facsimile) a customer-signed TIF to the carrying member, even though
member firms use ACATS to accomplish electronic transfers of the
customer accounts.
In early 1993, NSCC implemented a voluntary TIF Immobilization
Program (``Program'') to permit transfer instructions to be transmitted
electronically through ACATS. The goal of the Program is to automate
the entire customer account transfer process and immobilize the TIF at
the receiving firm.\2\ To participate in the Program current
participants require new participants to execute a ``Pilot Program
Agreement'' (``Agreement'') that specifies the rights, obligations and
liabilities of the participants. The Agreement was developed by the
industry at the encouragement of NSCC when the Program was
initiated.\3\ The most significant aspect of the Agreement is that it
shifts liability for improper transfers to the receiving firm, provided
the carrying firm transfers the account according to the instructions
it receives through ACATS.\4\
\2\ The Program has grown to 27 broker/dealers representing 85%
of the accounts transferred.
\3\ NSCC administers the Program by providing application
material to prospective participants. The application material
includes the Agreement.
\4\ For transfers occurring outside the Program a carrying firm
is liable, in general, if it improperly transfers an account, or
securities in an account. Such an improper transfer could occur, for
example, if the carrying firm transferred the wrong account or if an
IRA account was transferred in a manner that subjected the account
owner to unintended tax liability. Finally, it could occur if the
receiving firm, or a former employee who had moved to the receiving
firm, submitted a transfer instruction that had not been authorized
by the customer. In such cases, if the carrying firm did not verify
the transfer instruction with the customer, the carrying firm would
be primarily liable for the improper transfer even if it could sue
the receiving firm for transmitting an unauthorized or incomplete
transfer instruction.
The forgoing examples are neither exhaustive of possible
improper transfer scenarios, nor are they representative of any
specific cases. Moreover, the NASD is not aware of any cases of
improper transfers occurring because of fraudulent actions by a
receiving firm or its employees.
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The NASD is aware that some investors and others believe that
account transfers are unreasonably delayed for reasons that are not
related to difficulties in account transfer procedures. The NASD
believes that such delays are rare, but that any unreasonable delay in
transferring customer accounts is unacceptable and detrimental to the
interests of investors. The NASD believes that mandating participation
in the Program should help reduce or eliminate the infrequent delays
that some customers may be experiencing when transferring accounts and
improve investor confidence in the industry's ability and willingness
to comply expeditiously with customer instructions.
Proposed Amendment to Section 65 of the UPC
The proposed amendment to Section 65 of the UPC will require
members to transmit account transfer instructions electronically
through automated systems when both the carrying and receiving firms
are participants in a registered clearing agency that has such
automated facilities. The effect of this proposed rule change is to
require members who are NSCC participants to participate in NSCC's TIF
Immobilization Program and to use NSCC's ACATS system to transmit
customer account transfer instructions.
The proposed rule change also requires members participating in the
TIF Immobilization Program to execute an agreement designated by the
NASD's Operations Committee specifying the rights, obligations and
liabilities of all participants in or users of NSCC's ACATS system in
transmitting customer account transfer instructions. The NASD intends
to designate the Pilot Program Agreement currently in use among
participants in order to maintain continuity of rights obligations and
liabilities among current and future participants. In addition, by
providing for the designation of the Agreement for purposes of the
proposed rule, the NASD's Operations Committee will be able to review
and approve any changes to the agreement that may be proposed by
participants or others in the future.
The proposed rule change also requires that customer account
transfer instructions be transmitted in accordance with the procedures
prescribed by the registered clearing agency. NSCC's rules currently
prescribe procedures for transmitting customer account transfer
instructions.\5\
\5\ See NSCC Rule 50.
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The proposed rule change also provides that the transmittal of a
transfer instruction constitutes a representation that the receiving
member has received a properly executed TIF or other actual authority
to receive the customer's account. Although it is similar to a
provision in the Agreement, the NASD intends that this provision will
perform a regulatory function in that a member transmitting account
transfer instructions through ACATS without first obtaining a properly
executed TIF or other actual authority from the customer may be subject
to disciplinary sanctions for misrepresenting its authority to receive
the customer account. Such a misrepresentation may constitute a
violation of Article III, Section 1 of the Rules of Fair Practice.\6\
\6\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH)
para. 2151.
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Finally, the proposed rule change provides that transfer
instructions transmitted through an electronic facility shall contain
the information necessary for the clearing agency and the carrying
member to respond to the transfer instruction as may be specified by
Section 65 of the UPC and the clearing agency. This provision means
that members transmitting transfer instructions must comply with
Section 65 and with the requirements of NSCC's rules \7\ and that
generating a valid transfer instruction involves providing the
information that NSCC considers necessary to accomplish the account
transfer.
\7\ NSCC's rules permit it to specify the information required
for a customer account transfer instruction. Neither the NSCC's
rules nor UPC Section 65 specify the information that constitutes a
valid transfer instruction, however, NSCC currently uses two forms,
one for cash/margin accounts and the other for tax exempt/retirement
accounts. In addition, UPC Section 65 sets forth several bases for
carrying members to take exception to account transfer instructions,
some of which relate to incomplete or missing information about the
account or securities in the account. For automated transmittals of
account transfer instructions, NSCC requires the same information to
be entered into ACATS by the receiving firm as is required on TIFs.
In addition, NSCC reviews transfer instructions received through
ACATS and may require the receiving firm to provide any other
information it deems necessary to accomplish an account transfer.
[[Page 208]]
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act in that requiring
participation in a program that permits account transfer instructions
and customer accounts to be transferred entirely by electronic
communications will promote the protection of investors and the public
interest and enhance the clearance and settlement system by reducing
the delays associated with the physical transmission of TIFs and
increasing investor confidence in the responsiveness of the securities
industry.
(B) Self-Regulatory organization's Statement on Burden on Competition
The NASD 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, as amended.
(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
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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.
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 the principal office of the
NASD. All submissions should refer to SR-NASD-95-59 and should be
submitted by January 24, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Johathan G. Katz,
Secretary.
[FR Doc. 96-00039 Filed 1-2-96; 8:45 am]
BILLING CODE 8010-01-M