[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