[Federal Register Volume 67, Number 9 (Monday, January 14, 2002)]
[Notices]
[Pages 1790-1792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45239; File No. SR-NASD-95]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Adoption of Interpretive 
Material Regarding Interfering With the Transfer of Customer Accounts

January 4, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 21, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), 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 NASD Regulation. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to interpret NASD Rule 2110 to prohibit 
members from interfering with a customer's request to transfer his or 
her account in connection with the change in employment of the 
customer's registered representative, provided that the account is not 
subject to any lien for monies owed by the customer or other bona fide 
claim.
    The text of the proposed rule change appears below. New text is in 
italic.
* * * * *

IM 2110-7.  Interfering With the Transfer of Customer Accounts in the 
Context of Employment Disputes

    It shall be inconsistent with just and equitable principles of 
trade for a member or person associated with a member to interfere with 
a customer's request to transfer his or her account in connection with 
the change in employment of the customer's registered representative, 
provided that the account is not subject to any lien for monies owed by 
the customer or other bona fide claim. Prohibited interference 
includes, but is not limited to, seeking a judicial order or decree 
that would bar or restrict the submission, delivery or acceptance of a 
written request from a customer to transfer his or her account. Nothing 
in this interpretation shall affect the operation of Rule 11870.
* * * * *

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 Regulation 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. NASD Regulation 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

1. Purpose
    NASD Regulation represents that, as a condition of employment, 
certain members require their registered representatives to sign 
employment contracts in which each registered representative agrees 
that when he or she leaves the firm, he or she will not take, copy, or 
share with others any firm records. In addition, NASD Regulation 
asserts that the registered representative may agree that, for a 
certain period of time following his or her departure from the firm, he 
or she will not solicit the firm's customers for business. Nonetheless, 
NASD Regulation represent when a registered representative leaves his 
or her firm for a position at a different firm, clients serviced by the 
registered representative may request that the registered 
representative's former firm transfer their accounts to the registered 
representative's new firm so that the clients may continue their 
relationship with the registered representative. NASD Regulation 
asserts that the registered representative's former firm, concerned 
that its former employee may have breached his or her employment 
contract by sharing client information with the new employer, or 
soliciting clients to transfer their accounts to the registered 
representative's new firm, sometimes seeks a court order to prevent the 
transfer of accounts to the registered representative's new firm.\3\
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    \3\ NASD Code of Arbitration Procedure Rule 10335 permits the 
parties to arbitration disputes to seek temporary injunctive relief. 
Proposed amendments to Rule 10335 are currently pending before the 
SEC. NASD Regulation represents that the (instant) proposed rule 
change would not conflict with or affect the operation of Rule 10335 
(i.e., the procedure by which temporary injunctive relief may be 
obtained in intra-industry arbitration disputes), but rather would 
address the substantive problem of customer harm resulting from 
firms obtaining temporary injunctive relief that prevents customers 
from transferring their accounts.

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[[Page 1791]]

    NASD Regulation asserts that in some cases members have obtained 
relief in the form of court orders requiring the registered 
representative's new employer to reject customer account transfers 
received from the registered representative's former firm. NASD 
Regulation asserts that members also have obtained court orders 
requiring the registered representative's new firm to send letters to 
customers that may have been solicited in breach of an employment 
agreement stating that the firm is prohibited by a court order from 
having contact with that customer.
    NASD Regulation believes that it is inconsistent with the high 
standards of commercial honor and just and equitable principles of 
trade mandated by NASD Rule 2110 for a member, in the context of an 
employment dispute with a former registered representative, to seek to 
override a customer's request to transfer his or her account by 
obtaining a court order stopping the transfer. NASD Regulation believes 
that customers should have the freedom to choose the registered 
representatives and firms that service their brokerage accounts. 
Moreover, NASD Regulation believes that customers whose account 
transfer requests have been delayed in this manner could be deprived of 
brokerage services and access to their accounts while their registered 
representative and his or her former firm attempt to resolve an 
employment dispute.
    In NASD Notice to Members 79-7 (February 13, 1979), the NASD 
alerted its members that the SEC had issued a notice to broker/dealers 
stating that unnecessary delays in transferring customer accounts, 
including delays accompanied by attempts to persuade customers not to 
transfer their accounts, are inconsistent with just and equitable 
principles of trade. NASD Regulation believes that obtaining court 
orders to prevent customers from following a registered representative 
to a different firm are similar to the unfair practice of delaying 
transfers that the SEC warned of in its notice.
    To address this practice, the NASD submits this proposed rule 
change to adopt Interpretive Material 2110-7, which would state that it 
is inconsistent with just and equitable principles of trade for a 
member or person associated with a member to interfere with a 
customer's request to transfer his or her account in connection with 
the change in employment of the customer's registered representative, 
provided that the account is not subject to any lien for monies owed by 
the customer or other bona fide claim. The proposed rule change would 
not affect the operation of Rule 11870 (governing customer account 
transfers). NASD Regulation represents that members would continue to 
have the ability to delay or take exception to account transfers in 
situations where, for example, the account contains nontransferable 
assets or the transfer request provides information that is inadequate 
to identify the account to be transferred.\4\
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    \4\ The SEC recently approved amendments to NASD Rule 11870 that 
facilitate the transfer of customer accounts containing third party 
proprietary products by allowing a firm receiving a customer account 
from another firm to assess whether the account contains assets that 
the receiving firm is unable to support, and to inform the customer 
of his or her available options concerning those assets. See 
Exchange Act Release No. 44787 (September 12, 2001), 66 FR 48301 
(September 19, 2001).
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    NASD Regulation represents that the proposed rule change does not 
affect the ability of member firms to use employment agreements to 
prevent former representatives from soliciting firm customers. 
Similarly, NASD Regulation believes that the proposal would not prevent 
a firm from enforcing employment agreements with former 
representatives. For example, NASD Regulation represents that a member 
could seek an injunction against a former registered representative 
and/or his or her new firm to prohibit solicitation of the member's 
customers if the registered representative had signed an employment 
contract agreeing not to solicit those customers. Rather, NASD 
Regulation represents that the proposed rule change is limited to 
restricting a member from interfering with a customer's right to 
transfer his or her account in the context of an employment dispute, 
once the customer has requested the transfer.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\5\ 
which requires, among other things, that the Association's rules must 
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 Regulation believes 
that member firms that seek to override a customer's request to 
transfer his or her account to a new firm in the context of an 
employment dispute with a former registered representative violate NASD 
Rule 2110. NASD Regulation believes that this proposed rule change is 
necessary to protect investors and the public interest with respect to 
transfers of customers accounts.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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

    On May 22, 2001, NASD Regulation published Notice to Members 01-36 
(``NTM 01-36'') seeking comment on a proposed interpretive material to 
NASD Rule 2110 that would state:
    It shall be inconsistent with just and equitable principles of 
trade for a member or person associated with a member to take any 
action that, directly or indirectly, interferes with a customer's 
ability to transfer his or her account, including seeking a judicial 
order or decree that would bar or restrict the submission, delivery or 
acceptance of a written request from a customer to transfer his or her 
account. Nothing in this interpretation shall affect the operation of 
Rule 11870.
    The comment period expired on July 5, 2001. Eighty-five comments 
were received in response to the notice. Of the 85 comments received, 
67 agreed that customers should have the ability to move their accounts 
to new firms without interference from the member firm holding the 
account. These commenters expressed the view that a firm should not be 
able to override a customer's decision to move his or her account to a 
new firm.
    Other commenters, while generally supportive of a customer's right 
to transfer an account to his or her brokerage firm of choice, raised 
concerns that the language of the proposed interpretative material 
could impede a member's ability to collect debts and enforce liens 
against a customer's account. These commenters suggested that the 
proposed interpretative material should not prevent a member from 
interfering with a customer's ability to transfer his or her account to 
avoid paying debts accrued in the account or to evade a lien on assets 
held in the account. Because

[[Page 1792]]

NASD Regulation did not intend to interpret rule 2110 in a manner that 
would affect the ability of members to collect debts or enforce liens 
against customers, the language contained in NTM 01-36 has been 
modified for this proposed rule change to clarify the inapplicability 
of the proposed rule change in these contexts.
    Numerous commenters described other situations in which they 
thought a member should be able to take action to stop a customer from 
transferring his or her account. NASD Regulation represents that 
existing NASD rules address many of these situations. In certain other 
situations described by commenters, NASD Regulation believes that the 
right of a customer to transfer his or her account, once the customer 
has requested the transfer, should take precedence. For example, some 
commenters believed that a member should be able to interfere with a 
customer's ability to transfer his or her account to follow the 
member's registered representative to a new firm if the registered 
representative did not disclose to customers the consequences of the 
transfer (e.g., transfer fees and manner of disposition of any non-
transferable assets).
    While this scenario raises concerns, NASD Regulation believes that 
the current regulatory scheme addresses these concerns. NASD Regulation 
represents that firms are required to deliver to customers information 
regarding the applicable fees for opening, maintaining and closing an 
account. In addition, NASD Rule 11870 requires that customers 
requesting transfer of an account be notified of non-transferable 
assets in an account. NASD Regulation notes that anti-fraud provisions, 
as well as NASD Rule 2110, are available to address false or misleading 
statements a registered representative may have made to a customer to 
induce the customer to transfer his or her account.
    Some commenters suggested that a member should be able to interfere 
with the customer's ability to transfer his or her account to follow 
one of the member's registered representatives to a new firm if the 
customer was the client of one of the member's other registered 
representatives, or if the customer opened the account to form a 
relationship with the member, and not with a particular registered 
representative. NASD Regulation believes that the customer's decision 
should be controlling, even under these circumstances.
    Sixteen commenters objected to the adoption of an interpretative 
material that would prohibit members from interfering with a customer's 
request to transfer his or her account to a new firm when the customer 
sought to follow a registered representative to a new firm. Among the 
objections raised were concerns that such an interpretation would 
encourage registered representatives to breach employment contracts. 
NASD Regulation, however, represents that nothing in NTM 01-36 or this 
proposed rule change gives registered representatives the right to 
breach employment contracts or disclose personal nonpublic information 
in violation of law. Further, NASD Regulation notes that member firms 
may seek redress against a registered representative who acts in this 
manner by, for example, seeking from the registered representative 
monetary damages or an injunction from further misconduct.
    Other commenters asserted that the proposal was inconsistent with 
the Gramm-Leach-Bliley Act of 1999 (``GLBA''), which requires companies 
to safeguard the confidentiality of customer information, because a 
company pursuing legal action against a registered representative 
pursuant to the member's obligations to protect customer information 
under GLBA could be in violation of the interpretation. NASD 
Regulation, however, believes that the proposed rule change does not 
prohibit a member from taking action against a registered 
representative as necessary to safeguard confidential customer 
information. NASD Regulation believes that the proposed rule change 
prevents a member from taking action to restrict a customer's ability 
to transfer his or her account to a new firm once the customer has 
requested the transfer. NASD Regulation believes that, to the extent 
that any improper sharing of confidential customer information occurred 
before the customer's decision to transfer, the firm could seek legal 
redress without interfering with the customer's decision to move his or 
her account.
    Commenters objecting to the proposal also expressed concern that 
the interpretation deprived members of access to legal remedies 
available to resolve employment disputes. NASD Regulation represents 
that the proposed rule change does not deny to members remedies that 
assist in resolving employment disputes between members and their 
former registered representatives; the proposed rule change articulates 
the view of the Association that it is inconsistent with just and 
equitable principles of trade for a member to harm customers as a means 
of resolving employment disputes.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the proposed rule change is a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule, it has become effective upon filing 
pursuant to Section 19(b)(3)(A) of the Act \6\ and paragraph (f)(1) of 
Rule 19b-4 thereunder.\7\ At any time within 60 days of the filing of 
the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.\8\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(1).
    \8\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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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 NW, Washington DC 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 filings will also be 
available for inspection and copying at the principal office of the 
NASD.
    All submissions should refer to File No. SR-NASD-2001-95 and should 
be submitted by February 4, 2002.

    For the Commission, by the Division of Market regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-883 Filed 1-11-02; 8:45 am]
BILLING CODE 8010-01-M