Brokers win battle in block transfer war

Nov 15, 2004 @ 12:01 am

By Bruce Kelly

NEW YORK - Score a qualified victory for independent broker-dealers.

Backing away from an earlier stance, NASD last Monday said that it will allow broker-dealers to continue the block transfers of mutual funds and variable annuities if clients' accounts face being potentially dumped or abandoned when a broker switches firms.

But there is a catch.

In a notice to its broker-dealer members last month, NASD said that they must get clients to sign off on all block transfers. That eliminated the typical industry practice. Two firms, the one the rep was joining and the one he was leaving, signed off on the block transfer.

Last week, NASD said that broker-dealers could use "negative-consent letters" for clients if their accounts are in danger of being "abandoned" or not effectively overseen by the broker-dealer of record.

Lending an ear

A negative-consent letter, according to NASD, generally informs the client of an upcoming action by the broker-dealer. If the client doesn't respond to the letter within a specific time frame, they are deemed to have consented to the action.

NASD has proved it can listen to its broker-dealer members about a key business issue, brokerage executives said. Executives at many firms have complained recently that NASD regulators fail to understand how they do business, and are regulating the industry through enforcement.

While some independent broker-dealer executives said that the outcome is "workable" but far from perfect, they were cheered by the outcome with NASD.

"We might have gotten half a loaf, but half a loaf is better than no loaf," said Terry L. Lister, general counsel and director of government affairs for the Financial Services Institute of Atlanta.

"The full loaf would have been to do it the way it was done before," he said. Now broker-dealers have to take the extra step where the firm the registered rep is leaving has to send the negative-consent letter.

Mr. Lister is also a lawyer in Kansas City, Mo., with Sonnenschein Nath & Rosenthal LLP of Chicago.

Still, he is clearly heartened by the outcome.

From the process of persuading NASD of its position, the FSI, a new trade group for independent-contractor broker-dealers, gained credibility with regulators and showed that it is serious about NASD's rulemaking process, Mr. Lister said.

NASD recognized that the members of its committee for independent and insurance-owned broker-dealers has a concern, he said.

"The key is, we want to be part of the process," Mr. Lister added. "We just want a seat at the table."

An NASD spokesman didn't return calls to explain the reasons why NASD regulators altered their stance on the issue of block transfers.

After NASD's notice to its members last month, executives with independent broker-dealers had long discussions with NASD staff members about cutting away at firms' abilities to make block transfers, Mr. Lister said. NASD changed its decision because it came to a better understanding of how its broker-dealer members operate, he said.

Since NASD's notice to members last month, industry executives have expressed concern over the fate of such potential "orphaned" client accounts, as they are commonly called when a registered rep leaves a firm.

b>Recruiting fears

"If a customer's registered representative is no longer available to service the customer's directly held accounts, and the member firm does not intend to continue to service such accounts, then the interruption in services effectively causes the account to become 'abandoned' with respect to the provision of customer service," NASD said in an interpretive letter.

"NASD staff believes that the potential 'abandonment' of such an account presents a compelling concern that would make it appropriate for the firm currently named as the [broker-dealer] of record to use negative-response letters to change the [broker-dealer] of record on the account."

Block transfers of funds and annuities occur when a registered rep breaks affiliation with one firm to move to another. In the case of independent-contractor brokers, block transfers of mutual funds and variable annuities occur in the accounts of clients whose investments are in "directly held accounts," or those controlled by the fund or insurance company that creates the product.

Block transfers of mutual funds and annuities are basically a clerical switching of the broker-dealer's name on the client accounts. Many in the industry feared that the step to get a client's positive consent would cause recruiting of brokers to grind to a halt.

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