In November 2004, NASD issued guidance to members regarding whether there are any exceptions to NASD’s position that negative response letters should not be used for special product accounts, including mutual fund and variable annuity accounts where the account is held directly with the issuer.
NASD most recently restated its general position on this issue in Notice to Members (NtM) 04-72 (Oct. 2004), clarifying that a member must obtain affirmative consent from a customer to direct a change in the broker-dealer of record in mutual fund and variable annuity accounts where the account is held directly with the issuer. Accounts held in this manner are sometimes referred to as "check and application," "application way," or "direct application" (collectively, "direct application") business. The broker-dealer of record generally receives fees or commissions resulting from the customer’s transactions in the account.
NASD previously expressed its view in NtM 02-57 (Sept. 2002) that members could use "negative response letters" in limited situations for the bulk transfer of customer accounts, but stated that its guidance did not apply to transfers of mutual fund and variable annuity accounts. NtM 04-72 reiterates NASD’s view that customers should be given sufficient time and information with which to decide whether a new broker-dealer of record should be named on the customer’s account.
In response to continuing questions from members, however, NASD issued an interpretive letter, which explains that negative response letters could be used in a compelling situation, namely, where accounts are otherwise at risk of abandonment because the registered representative is no longer able to service the accounts, and the broker-dealer of record does not intend to perform the account services previously performed by the registered representative. NASD provides a non-exhaustive list of examples where negative response letters may be used to prevent abandonment of the accounts, including (1) transfer of a broker-dealer that is going out of business to a broker-dealer willing to take over the registered representative’s services; (2) departure of the registered representative from the broker-dealer, and the broker-dealer will not be providing the services previously provided by the registered representative; or (3) cancellation or termination of a networking arrangement with a financial institution, and a networking arrangement with a new firm to handle the accounts for the financial institution.
NASD reiterates its expectation, set forth in NtM 04-72, that if negative response letters are used in a compelling situation, the broker-dealer will act consistently with the just and equitable principles of trade required under Conduct Rule 2110, and allow each customer account holder sufficient time and information to decide whether to object to a new broker-dealer of record on the customer’s account.
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