[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]



-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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