[Federal Register Volume 61, Number 53 (Monday, March 18, 1996)]
[Notices]
[Pages 11070-11072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6322]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36955; File No. SR-ASD-95-59]
Self-Regulatory Organizations; Order Approving 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
March 11, 1996.
On December 16, 1995,\1\ the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed a proposed rule
change with the Securities and Exchange Commission (``SEC'' or
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'')\2\ and Rule 19b-4 thereunder.\3\ The rule change
amends Section 65 of the Uniform
[[Page 11071]]
Practice Code (``UPC'')\4\ 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.
\1\ On March 11, 1996, the NASD filed Amendment No. 1 with the
Commission. Amendment No. 1 was technical in nature and does not
require republication of notice and filing. The text of Amendment
No. 1 may be examined in the Commission's Public Reference Room. See
Letter from Elliott R. Curzon, Assistant General Counsel, NASD, to
Mark P. Barracca, Branch Chief, Division of Market Regulation,
Commission, dated March 11, 1996.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ NASD Manual, Uniform Practice Code, Section 65 (CCH) para.
3565.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 36638, December 26, 1995) and by
publication in the Federal Register (61 FR 206, January 3, 1996). No
comment letters were received. This order approves the proposed rule
change.
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
account (``receiving member''). The notice is then delivered to the
member carrying the account (``carrying member'') and the carrying
member is ten 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'') currently is 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 delvier 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 implementated 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.\5\ To participate in the Program current
participants require new participants to execute a uniform ``Pilot
Program Agreement'' (``Agreement'') that specifies the rights,
obligations and liabilities of the participants.\6\ The most
significiant aspect of the Agreement is that it shifts liabiity for
improper transfers to the receiving firm, provided the carrying firm
transfers the account according to the instructions it receives through
ACATS.\7\
\5\ The Program has grown to 27 broker-dealers representing 85%
of the accounts transferred.
\6\ NSCC administers the Program by providing application
material to prospective participants. The application material
includes the Agreement.
\7\ 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.
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The NASD stated in its filing 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 further stated that it believes that any unreasonable delay in
transferring customer accounts is unacceptable and detrimental to the
interests of investors. The rule change approved today is intended to
reduce or eliminate any delays associated with customer account
transfers by mandating participation in the Program.
The amendment to Section 65 of the UPC approved today 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 rule change is to require
members who are NSCC participants to participate in the Program and to
use ACATS to transmit customer account transfer instructions.
The rule change approved today also will require members
participating in the 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 ACATS in transmitting
customer account transfer instructions. The NASD stated in its filing
that it intends to designate the Agreement in order to: (i) maintain
continuity of rights, obligations and liabilities among current and
future participants; and (ii) ensure that 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 rule change also will require 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
instruction.\8\
\8\See NSCC Rule 50.
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The 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 stated in its filing that it intends this provision
to 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. The NSAD also stated that such a
misrepresentation may constitute a violation of Article III, Section 1
of the Rules of Fair Practice.\9\
\9\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH)
para. 2151.
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Finally, the 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\10\ and that generating a
valid
[[Page 11072]]
transfer instruction involves providing the information that NSCC
considers necessary to accomplish the account transfer.
\10\ 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.
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The Commission finds that the rule change is consistent with
Section 15A(b)(6) of the Act because the rule change will reduce the
delays associated with the physical transmission of TIFs by requiring
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. This change will promote the protection of
investors and the public interest and enhance the clearance and
settlement system.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-95-59 be, and hereby is,
approved, effective July 1, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6322 Filed 3-15-96; 8:45 am]
BILLING CODE 8010-01-M
