Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-26, on Customer Account Transfers, To Modernize the Rule and Promote a Uniform Customer Account Transfer Standard, 27307-27315 [2017-12266]
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Federal Register / Vol. 82, No. 113 / Wednesday, June 14, 2017 / Notices
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,25 that the
proposed rule change (SR–NYSEArca–
2017–44), as modified by Amendment
Nos. 1 and 2 thereto, be, and it hereby
is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–12260 Filed 6–13–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80890; File No. SR–MSRB–
2017–03]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed
Rule Change To Amend MSRB Rule G–
26, on Customer Account Transfers,
To Modernize the Rule and Promote a
Uniform Customer Account Transfer
Standard
June 7, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule
19b–4 thereunder,2 notice is hereby
given that on May 26, 2017 the
Municipal Securities Rulemaking Board
(the ‘‘MSRB’’ or ‘‘Board’’) filed with the
Securities and Exchange Commission
(the ‘‘SEC’’ or ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the MSRB. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB filed with the Commission
a proposed rule change to amend MSRB
Rule G–26, on customer account
transfers, to modernize the rule and
promote a uniform customer account
transfer standard for all brokers, dealers,
municipal securities brokers and
municipal securities dealers
(collectively, ‘‘dealers’’) (‘‘proposed rule
change’’).3 The MSRB requests that the
25 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 For clarity and ease of reference, current
provisions of Rule G–26 will be cited herein as
‘‘Rule G–26,’’ and proposed amendments to Rule G–
26 will be cited herein as ‘‘proposed Rule G–26’’.
26 17
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proposed rule change be effective three
months from the date of Commission
approval.
The text of the proposed rule change
is available on the MSRB’s Web site at
www.msrb.org/Rules-andInterpretations/SEC-Filings/2017Filings.aspx, at the MSRB’s principal
office, and at the Commission’s Public
Reference Room.
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
MSRB 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 MSRB 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
The purpose of the proposed rule
change is to modernize Rule G–26 and
promote a uniform customer account
transfer standard for all dealers. The
MSRB believes that, by including
certain provisions parallel to the
customer account transfer rules of other
SROs, particularly FINRA Rule 11870,
in current Rule G–26, as outlined below,
the transfer of customer securities
account assets will be more flexible, less
burdensome, and more efficient, while
reducing confusion and risk to investors
and allowing them to better move their
municipal securities to their dealer of
choice.
Current Rule G–26
Rule G–26 requires dealers to
cooperate in the transfer of customer
accounts and specifies procedures for
carrying out the transfer process. Such
transfers occur when a customer decides
to transfer an account from one dealer,
the carrying party (i.e., the dealer from
which the customer is requesting the
account be transferred) to another, the
receiving party (i.e., the dealer to which
the customer is requesting the account
be transferred). The rule establishes
specific time frames within which the
carrying party is required to transfer a
customer account; limits the reasons for
which a receiving party may take
exception to an account transfer
instruction; provides for the
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establishment of fail-to-receive and failto-deliver contracts; 4 and requires that
fail contracts be resolved in accordance
with MSRB close-out procedures,
established by MSRB Rule G–12(h). In
addition, the current rule requires the
use of the automated customer account
transfer service in place at a registered
clearing agency registered with the
Commission when both dealers are
direct participants in the same clearing
agency.5 Finally, the rule contains a
provision for enhancing compliance by
requiring submission of transfer
instructions to the enforcement
authority with jurisdiction over the
dealer carrying the account, if the
enforcement authority requests such
submission.6
The MSRB adopted Rule G–26 in
1986 as part of an industry-wide
initiative to create a uniform customer
account transfer standard by applying a
customer account transfer procedure to
all dealers that are engaged in municipal
securities activities.7 The uniform
standard for all customer account
transfers (i.e., automated and manual
processes) is largely driven by the
National Securities Clearing
Corporation’s (‘‘NSCC’’) Automated
Customer Account Transfer Service
(‘‘ACATS’’). The MSRB adopted Rule
G–26 in conjunction with the adoption
of similar rules by other self-regulatory
organizations (‘‘SROs’’)—New York
Stock Exchange (‘‘NYSE’’) Rule 412 and
Financial Industry Regulatory Authority
(‘‘FINRA’’) Rule 11870.8 Those rules are
not applicable to certain accounts at
dealers, particularly municipal securityonly accounts and accounts at bank
dealers.9 Current Rule G–26 governs the
municipal security-only customer
account transfers performed by those
4 Fail-to-receive and fail-to-deliver contracts are
records maintained by the receiving party and the
carrying party, respectively, when a customer
account transfer fails.
5 See Rule G–26(h).
6 See Rule G–26(i).
7 See Exchange Act Release No. 22810 (Jan. 17,
1986), 51 FR 3287 (Jan. 24, 1986) (SR–MSRB–86–
2) (proposing Rule G–26). See also Exchange Act
Release Nos. 22663 (Nov. 27 1985) (SR–NYSE–85–
17) (approving NYSE Rule 412); 22941 (Feb. 24,
1986) (SR–NASD–29) (approving NASD/FINRA
Rule 11870).
8 In 2007, FINRA was created through the
consolidation of the National Association of
Securities Dealers (‘‘NASD’’) and the member
regulation, enforcement and arbitration operations
of the NYSE. Current NYSE Rule 412 crossreferences NASD/FINRA Rule 11870 for the
purpose of incorporating it into the NYSE rulebook.
9 See Exchange Act Release No. 22810 (Jan. 17,
1986), 51 FR 3287 (Jan. 24, 1986) (SR–MSRB–86–
2) (‘‘Currently certain municipal securities brokers
or municipal securities dealers, particularly those
with municipal security-only accounts and bank
dealers, will not be covered by the standards
governing the rest of the securities industry.’’).
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dealers to ensure that all customer
account transfers are subject to
regulation that is consistent with the
uniform industry standard. Thus, in
order to maintain consistency and the
uniform standard, the MSRB has, from
time to time, modified the requirements
of Rule G–26 to conform to certain
provisions of the parallel FINRA and
NYSE customer account transfer rules,
as well as to enhancements made to the
ACATS process by NSCC, that had
relevance to municipal securities.
On January 6, 2017, the MSRB
published a request for comment,
proposing a number of draft
amendments to Rule G–26 to maintain
consistency with the rules of the NSCC,
the NYSE and FINRA by conforming to
significant updates to those other SRO
rules that have relevance to municipal
securities and municipal security-only
customer account transfers.10 In
response to the Request for Comment,
the MSRB received three comment
letters, supporting the general purpose
of the amendments to Rule G–26, but
suggesting alternative approaches and
raising a few other issues.11 After
carefully considering all of the
comments received, the MSRB
determined to file this proposed rule
change.
Residual Credit Positions
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In 1989, the NSCC expanded ACATS
to include the transfer of customer
account residual credit positions. These
are assets in the form of cash or
securities that can result from
dividends, interest payments or other
types of assets received by the carrying
party after the transfer process is
completed, or which were restricted
from being included in the original
transfer.12 The NYSE and FINRA made
corresponding changes to their rules
that require dealers that participate in a
registered clearing agency with
automated residual credit processing
capabilities to utilize those facilities to
transfer residual credit positions that
accrue to an account after a transfer.13
Prior to allowing for these transfers, a
check frequently would have to be
produced, or a delivery bill or report,
which then required a check to be
10 MSRB Notice 2017–01 (Jan. 6, 2017) (‘‘Request
for Comment’’).
11 See infra note 81.
12 See Exchange Act Release No. 26659 (Mar. 22,
1989), 54 FR 12984 (Mar. 29, 1989) (SR–NSCC–89–
3).
13 See Exchange Act Release Nos. 34633 (Sept. 2,
1994), 59 FR 46872 (Sept. 12, 1994) (SR–NYSE–94–
21); 35031 (Nov. 30, 1994), 59 FR 62761 (Dec. 6,
1994) (SR–NASD–94–56). See also former NYSE
Rule 412(e)(3); FINRA Rule 11870(m)(3).
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issued or securities to be transferred.14
This process could result in lost or
improperly routed checks and
securities, as well as the expenses of
postage and processing.15
The MSRB is proposing to update
Rule G–26 to include the transfer of
customer account residual credit
positions, which would benefit both
customers and dealers by substantially
decreasing the paperwork, risks,
inefficiencies and costs associated with
the practice of check issuance and
initiation of securities deliveries to
resolve residual credit positions.16
Partial Account Transfers
In 1994, the NYSE and FINRA
amended their rules to permit partial or
non-standard customer account
transfers (i.e., the transfer of specifically
designated assets from an account held
at one dealer to an account held at
another dealer).17 Subsequently, in
2004, the NYSE and FINRA further
amended their rules generally to apply
the same procedural standards and time
frames that are applicable to the transfer
of entire accounts to partial transfers as
well.18 Because customer and dealer
obligations resulting from the transfer of
an entire account differ from the
obligations arising from the transfer of
specified assets within an account that
will remain active at the carrying party,
the NYSE and FINRA rules distinguish
between the transfer of security account
assets in whole or in specifically
designated part. For example, it would
not be necessary for a customer to
instruct the carrying party as to the
disposition of his or her assets that are
nontransferable if the customer is not
transferring the entire account.
The MSRB is proposing to update
Rule G–26 to permit partial account
transfers under the same time frames
applicable to transfers of entire
accounts, which the MSRB believes
would provide dealers with the ability
to facilitate more efficient and
expeditious transfers, as well as increase
accountability for dealers and reduce
difficulties encountered by customers
related to transfers.19 The MSRB also
14 See Exchange Act Release No. 26659 (Mar. 29,
1989) (SR–NSCC–89–3).
15 Id.
16 See proposed Rule G–26(k)(ii).
17 See Exchange Act Release Nos. 34633 (Sept. 2,
1994), 59 FR 46872 (Sept. 12, 1994) (SR–NYSE–94–
21); 35031 (Nov. 30, 1994), 59 FR 62761 (Dec. 6,
1994) (SR–NASD–94–56). See also former NYSE
Rule 412, Interpretation (a)/01; FINRA Rule
11870(a)(2).
18 See Exchange Act Release Nos. 49415 (Mar. 12,
2004), 69 FR 13608 (Mar. 23, 2004) (SR–NYSE–
2003–29); 50018 (July 14, 2004), 69 FR 43873 (July
22, 2004) (SR–NASD–2004–058).
19 See proposed Rule G–26(b), (c)(ii), (d)(i), (e)(ii),
(k)(i). The proposed rule change would require that
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believes this change will further
competition among dealers by more
easily allowing investors to transfer
their municipal securities to the dealer
of their choice.
Transfer of Third-Party and/or
Proprietary Products
In 1998, the NSCC modified ACATS
to better facilitate and expedite the
transfer of a customer account
containing third-party and/or
proprietary products that the receiving
party is unable to receive or carry.20 The
NYSE and FINRA made conforming
changes in 2001.21 Prior to the NSCC’s
modernization of ACATS in 1998, a
receiving party was not permitted to
reject an individual account asset and
only could reject an account in its
entirety. Today, however, under these
other SROs’ rules, the receiving party
has the capability to either accept all
assets in the account being transferred
or, to the extent permitted by the
receiving party’s designated examining
authority, accept only some of the assets
in the account.22
Although most securities can be
transferred, dealers vary in their ability
to accept and support certain third-party
investment products. Under the NSCC’s
prior customer account transfer
procedures, and the current procedures
outlined in Rule G–26, a customer that
wishes to transfer its entire account to
another dealer would submit a signed
transfer instruction to the receiving
party.23 The receiving party would
immediately submit the transfer
instruction to the carrying party, and the
carrying party would have three days to
either validate and return the transfer
instruction or take exception to the
instruction.24 Prior to or at the time of
validation of the transfer instruction, the
carrying party would be required to
notify the customer with respect to the
disposition of any assets it identified as
nontransferable 25 and request
dealers expedite all authorized municipal securities
account asset transfers, whether through ACATS or
via other means permissible, and coordinate their
activities with respect thereto.
20 See Exchange Act Release No. 40657 (Nov. 10,
1998), 63 FR 63952 (Nov. 17, 1998) (SR–NSCC–98–
06).
21 See Exchange Act Release Nos. 44596 (July 26,
2001), 66 FR 40306 (Aug. 2, 2001) (SR–NYSE–00–
61); 44787 (Sept. 12, 2001), 66 FR 48301 (Sept. 19,
2001) (SR–NASD–2001–53). See also former NYSE
Rule 412, Interpretation (b)(1),/01,/04,/06; FINRA
Rule 11870(c)(2).
22 See FINRA Rule 11870(c)(3)–(4).
23 See Rule G–26(d)(i).
24 Id.
25 Currently, the term ‘‘nontransferable asset’’
means an asset that is incapable of being transferred
from the carrying party to the receiving party
because (A) it is an issue in default for which the
carrying party does not possess the proper
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instructions from the customer with
respect to their disposition.26
A customer account could also
contain assets that are nontransferable
but have not yet been identified as
nontransferable (e.g., a municipal fund
security that the receiving party is
unable to carry—unbeknownst to the
carrying party). Under current Rule G–
26, the carrying party would have to
include such nontransferable assets in
the transfer of the account, and, if the
receiving party were unable to receive/
carry the nontransferable asset, the
receiving party would have to send the
asset back to the carrying party.27 While
the instances in which dealers would
need to rely upon Rule G–26 and the
special procedures for transfer of
nontransferable assets may be rare, these
fails require substantial processing time
for both the carrying and receiving
parties, and require carrying parties to
credit the receiving party’s funds
equivalent to the value of the assets they
are unable to deliver. These fails can
also cause customers confusion in that
customers receive multiple account
statements from the carrying and
receiving parties as the dealers initiate
and then reverse transfers.
The NSCC’s modifications regarding
third-party and proprietary products
allow the receiving party to review the
asset validation report, designate those
nontransferable assets it is unable to
receive/carry, provide the customer
with a list of those assets, and require
instructions from the customer
regarding their disposition.28 The
proposed rule change would make Rule
G–26 consistent with this change by
requiring the receiving party to
designate any third-party products it is
unable to receive.29 Accordingly, the
MSRB believes the proposed rule
change will eliminate the present need
for reversing the transfer of
nontransferable assets, reduce the
overall time frame for transferring thirdparty products, and generally reduce
delay in and the cost of customer
account transfers.
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Electronic Signature for Customer
Authorization of Account Transfer
Under current Rule G–26, a customer
can initiate a transfer of a municipal
securities account from one dealer to
denominations to effect delivery and no transfer
agent is available to re-register the securities, or (B)
it is a municipal fund security which the issuer
requires to be held in an account carried by one or
more specified dealers that does not include the
receiving party. See Rule G–26(a)(iii).
26 See Rule G–26(c)(ii).
27 See Rule G–26(d)(i)–(ii).
28 See NSCC Rule 50 Section 8.
29 See proposed Rule G–26(e)(vii).
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another by giving written notice to the
receiving party.30 NYSE Rule 412 and
FINRA Rule 11870 previously had the
same requirement; however, in 2004,
the NYSE and FINRA established that a
customer also can initiate an account
transfer, in whole or in part, using either
the customer’s actual signature or an
electronic signature in a format
recognized as valid under federal law to
conduct interstate commerce.31 The
MSRB believes that updating the written
notice requirement in Rule G–26 to
include electronic signatures will
expedite the transfer of customer assets
between dealers and more easily allow
investors to transfer their assets to the
dealer of their choice. Accordingly, the
MSRB is proposing to replace the
written notice requirement with an
authorized instruction requirement,
which can be a customer’s actual
written or electronic signature.32
Shortened ACATS Cycle
ACATS has been modified over time
to provide a more seamless and timely
customer account transfer process.
Specifically, in 1994, the NSCC
accelerated the time (from two days to
one day) in which accounts are
transferred by reducing the time a
receiving party has after receipt of the
transfer instruction to determine
whether to accept, reject or request
adjustments to the account.33 In 1998
and 2000, the NYSE and FINRA,
respectively, shortened the time frame
for the asset review portion of the
transfer period from two days to one
day, and the time frame the carrying
party has to complete the transfer of
customer securities account assets to the
receiving party from four days to three
days following the validation of a
transfer instruction.34 Further, in 2007,
FINRA more generally provided that the
time frame(s) in FINRA Rule 11870 will
change, as determined from time to time
30 Under Rule G–26(c)(i), customers and dealers
may use Form G–26 (the transfer instruction
prescribed by the MSRB), the transfer instructions
required by a clearing agency registered with the
SEC in connection with its automated customer
account transfer system or transfer instructions that
are substantially similar to those required by such
clearing agency to accomplish a customer account
transfer.
31 See Exchange Act Release Nos. 49415 (Mar. 12,
2004), 69 FR 13608 (Mar. 23, 2004) (SR–NYSE–
2003–29); 50018 (July 14, 2004), 69 FR 43873 (July
22, 2004) (SR–NASD–2004–058).
32 See Supplementary Material .01 to proposed
Rule G–26.
33 See Exchange Act Release No. 34879 (Oct. 21,
1994), 59 FR 54229 (Oct. 28, 1994) (SR–NSCC–94–
13).
34 See Exchange Act Release Nos. 40712 (Nov. 25,
1998), 63 FR 67163 (Dec. 4, 1998) (SR–NYSE–98–
30); 43635 (Nov. 29, 2000), 65 FR 75990 (Dec. 5,
2000) (SR–NASD–00–68). See also former NYSE
Rule 412(b)(3); FINRA Rule 11870(e).
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in any publication, relating to the
ACATS facility, by the NSCC.35 Rule G–
26 currently specifies three days as the
time to validate or take exception to the
transfer instructions and four days as
the time frame for completion of a
customer account transfer.36 The MSRB
believes that reducing those time frames
to one and three day(s), respectively,
will ensure consistency with the
industry standard set by the NSCC and
harmonization with other SROs, while
providing greater efficiency and
improving the customer experience in
the customer account transfer process.37
Therefore, the proposed rule change
would shorten the time for validation
from three days to one, and shorten the
time for completing the customer
account transfer from four days to three.
Because Rule G–26 applies to manual
customer account transfers, in addition
to automated processes, the MSRB is, at
this time, not incorporating by reference
changes in the time frame of the transfer
cycle as determined by future changes
in the ACATS time frames made by the
NSCC. The MSRB believes that the
current time frames are sufficiently long
to accommodate manual processes, but
it would be important for the MSRB to
evaluate the ability of bank dealers and
other dealers with municipal securitiesonly accounts, which are subject to Rule
G–26, to perform such processes under
shorter time frames before adopting any
such proposal in the future.
Definition of ‘‘Nontransferable Asset’’
In response to a specific question in
the Request for Comment,38 the
Securities Industry and Financial
Markets Association (‘‘SIFMA’’)
indicated that dealers may sell
proprietary products that are municipal
securities to customers, the
transferability of which FINRA Rule
11870 addresses.39 Given this
affirmative response, and because a
receiving party cannot hold a
proprietary product of a carrying party,
the MSRB believes it is important to
include proprietary products of the
carrying party in the definition of
‘‘nontransferable asset’’ to better
harmonize with FINRA’s corresponding
definition and to ensure that bank
dealers, and other dealers subject to
Rule G–26, have clarity when handling
35 See Exchange Act Release No. 56677 (Oct. 19,
2007), 72 FR 60699 (Oct. 25, 2007) (SR–FINRA–
2007–005).
36 See Rule G–26(d)(i), (v).
37 See proposed Rule G–26(d)(i), (f)(i).
38 See Request for Comment, Question 8 (‘‘Do
municipal securities brokers or municipal securities
dealers sell proprietary products that are municipal
securities to customers?’’).
39 See letter from SIFMA at note 81 infra.
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such proprietary products in customer
account transfers.40 Accordingly, the
proposed rule change would also
provide the following options for the
disposition of such proprietary products
that would be nontransferable assets:
Liquidation; retention by the carrying
party for the customer’s benefit; or
transfer, physically and directly, in the
customer’s name to the customer.41
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Transfer Instructions
Disposition of Nontransferable Assets
Under current Rule G–26, if there are
nontransferable assets included in a
transfer instruction, there are multiple
options available to the customer for
their disposition, and the carrying party
must request further instructions from
the customer with respect to which
option the customer would like to
exercise.42 Depending on the type of
nontransferable asset at issue, FINRA
Rule 11870(c) requires either the
carrying party or the receiving party to
provide the customer with a list of the
specific nontransferable assets and
request the customer’s desired
disposition of such assets. For example,
FINRA Rule 11870(c)(4) places the
burden on the receiving party for thirdparty products that are nontransferable.
In response to the Request for Comment,
SIFMA noted that current industry
practice and standard requires that,
depending on the type of
nontransferable asset, either the carrying
party or the receiving party provide the
customer with a list of the
nontransferable assets and request the
customer’s desired disposition of such
assets, as opposed to limiting that
requirement to the carrying party, which
was proposed in the Request for
Comment.43 Because there are thirdparty products that are municipal
securities that a receiving party may not
be able to carry, and such a receiving
party may be the only party to a
customer account transfer with that
knowledge, the MSRB believes allowing
the receiving party to notify the
customer of any nontransferable assets
in a transfer and request their
disposition in such circumstances will
help ensure that nontransferable assets
are properly identified and that both
parties to a transfer are coordinating
closely to complete the transfer
efficiently and expeditiously. To allow
for this, to improve harmonization with
FINRA Rule 11870 and to promote a
uniform standard for all dealers, the
proposed rule change would explicitly
require that the carrying party and/or
the receiving party provide the list of
nontransferable assets.44
Liquidation of Nontransferable Assets
Under current Rule G–26, one of the
disposition options for nontransferable
assets available to customers is
liquidation.45 When providing
customers with this option, dealers are
required to specifically indicate any
redemption or other liquidation-related
fees that may result from such
liquidation and that those fees may be
deducted from the money balance due
the customer.46 FINRA Rule 11870
provides the same requirements, but
also requires dealers to refer customers
to the disclosure information for thirdparty products or to the registered
representative at the carrying party for
specific details regarding any such fees,
as well as to distribute any remaining
balance to the customer and an
indication of the method of how it will
do so.47 The MSRB believes the
inclusion of these additional
requirements in Rule G–26 will help
ensure that customers receive as much
relevant information as possible
regarding potential redemption fees,
including for municipal fund
securities.48 Specifically, the proposed
rule change would require a referral to
the program disclosure for a municipal
fund security or to the registered
representative for specific details
regarding any such fees for the same.49
Further, for clarity, the MSRB believes
it is important to require explicitly the
distribution of the remaining balance to
the customer and an indication of how
it will be accomplished.50 Therefore, the
proposed rule change would require
dealers to specifically indicate any
redemption or other liquidation-related
fees that may result from liquidation
and that those fees may be deducted
from the money balance due the
customer.
Transfer of Nontransferable Assets to
Customers
FINRA Rule 11870(c)(3)(C) provides
an option for nontransferable assets that
are proprietary products to be
transferred, physically and directly, in
the customer’s name to the customer.
The MSRB believes that some municipal
securities that are nontransferable assets
could similarly be transferred,
proposed Rule G–26(c)(ii).
Rule G–26(c)(ii).
46 See Rule G–26(c)(ii)(A).
47 See FINRA Rule 11870(c)(3)(A), (c)(4)(A).
48 See proposed Rule G–26(c)(ii)(A).
49 Id.
50 Id.
proposed Rule G–26(a)(iii)(C); FINRA Rule
11870(c)(1)(D)(i).
41 See proposed Rule G–26(c)(ii)(A)–(C).
42 See Rule G–26(c)(ii).
43 See letter from SIFMA at note 81 infra.
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Timing of Disposition of
Nontransferable Assets
Rule G–26 currently does not provide
a time frame for the carrying party to
effect the disposition of nontransferable
assets as instructed by the customer.
FINRA Rule 11870(c)(5) requires that
the money balance resulting from
liquidation must be distributed, and any
transfer instructed by the customer must
be initiated, within five business days
following receipt of the customer’s
disposition instruction. The MSRB
believes it is important to provide
clarity as to the timing of these
dispositions to ensure that customer
transfers are handled expeditiously.
Accordingly, the proposed rule change
would harmonize with FINRA Rule
11870(c)(5) and establish the same fiveday requirement.52
Transfer Procedures
Current Rule G–26(d) establishes, as
part of the transfer procedures, the
requirements for validation of the
transfer instructions and completion of
the transfer. To detail the specific
validation/exception and completion
processes more clearly and to better
harmonize with FINRA Rule 11870, the
proposed rule change would provide the
provisions describing those processes in
new, separate sections of the rule.53
Validation of Transfer Instructions
Under current Rule G–26(d)(iv)(A),
upon validation of a transfer instruction,
the carrying party must ‘‘freeze’’ the
account to be transferred and return the
transfer instruction to the receiving
party with an attachment indicating all
securities positions and money balance
in the account as shown on the books
of the carrying party. Because the
proposed rule change would allow for
partial account transfers of specifically
designated municipal securities assets,
the proposed rule change would require
the account freeze only for validation of
the transfer of an entire account, as the
44 See
45 See
40 See
physically and directly, to the customer,
so the proposed rule change would add
this option to the alternative
dispositions available to customers.51
The MSRB notes that not all municipal
securities may be appropriate for this
option and that the carrying party
would not be required to physically
deliver any nontransferable assets of
which it does not have physical
possession.
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51 See
proposed Rule G–26(c)(ii)(C).
proposed Rule G–26(c)(iii).
53 See proposed Rule G–26(e), (f). As a result of
this restructuring, the subsequent, existing sections
of the rule would be renumbered in proposed Rule
G–26.
52 See
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customer’s account at the carrying party
should not be frozen if certain
municipal securities would remain in
the account and the customer may want
to continue transacting in that
account.54 For whole and partial
account transfers, the carrying party
would continue to have the
responsibility to return the instructions
and indicate the securities positions and
money balance to be transferred.55
However, to identify the assets held in
the customer account at the carrying
party more comprehensively and to
harmonize with FINRA Rule
11870(d)(5)(A), the proposed rule
change would also require the carrying
party to indicate safekeeping
positions,56 which are defined to be any
security held by a carrying party in the
name of the customer, including
securities that are unendorsed or have a
stock/bond power attached thereto.57
Additionally, current Rule G–
26(d)(iv)(B) requires the carrying party
to include a then-current market value
for all assets to be transferred. FINRA
Rule 11870(d)(5) provides that the
original cost should be used as the value
if a then-current value cannot be
determined for an asset. The proposed
rule change would include a provision
substantially similar to the FINRA
provision to provide clarity on how any
such municipal securities should be
valued and to improve harmonization
between the MSRB and FINRA rules.58
Exceptions To Transfer Instructions
As part of the validation process,
current Rule G–26 provides that the
carrying party may take certain
exceptions to the transfer instructions
authorized by the customer and
provided by the receiving party.
Specifically, Rule G–26(d)(ii) allows a
carrying party to take exception to a
transfer instruction only if it has no
record of the account on its books or the
transfer instruction is incomplete.59
FINRA Rule 11870(d)(3) provides
numerous other bases to take exception
to a transfer instruction that the MSRB
believes would more comprehensively
address potential issues with a transfer
instruction with which a carrying party
could reasonably take issue and better
harmonize with FINRA Rule 11870.
Accordingly, in addition to the existing
bases for exceptions, the proposed rule
change would allow a carrying party to
take exception to a transfer instruction
54 See
proposed Rule G–26(e)(i).
proposed Rule G–26(e)(ii).
56 See proposed Rule G–26(e)(ii).
57 See proposed Rule G–26(a)(vi).
58 See proposed Rule G–26(e)(ii).
59 See Rule G–26(d)(ii).
55 See
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if: (1) The transfer instruction contains
an improper signature; (2) additional
documentation is required (e.g., legal
documents such as death or marriage
certificate); (3) the account is ‘‘flat’’ and
reflects no transferable assets; 60 (4) the
account number is invalid (i.e., the
account number is not on the carrying
party’s books); 61 (5) it is a duplicate
request; (6) it violates the receiving
party’s credit policy; (7) it contains
unrecognized residual credit assets (i.e.,
the receiving party cannot identify the
customer); (8) the customer rescinds the
instruction (e.g., the customer has
submitted a written request to cancel
the transfer); (9) there is a mismatch of
the Social Security Number/Tax ID (e.g.,
the number on the transfer instruction
does not correspond to that on the
carrying party’s records); (10) the
account title on the transfer instruction
does not match that on the carrying
party’s records; (11) the account type on
the transfer instruction does not
correspond to that on the carrying
party’s records; (12) the transfer
instruction is missing or contains an
improper authorization (e.g., the transfer
instruction requires an additional
customer authorization or successor
custodian’s acceptance authorization or
custodial approval; or (13) the customer
has taken possession of the assets in the
account (e.g., the municipal securities
account assets in question have been
transferred directly to the customer).62
Additionally, FINRA Rule 11870(d)(2)
precludes a carrying party from taking
an exception and denying validation of
the transfer instruction because of a
dispute over security positions or the
money balance in the account to be
transferred, and it requires the carrying
party to transfer the positions and/or
money balance reflected on its books for
the account. The MSRB believes this
provision will be equally valuable to
transfers covered under Rule G–26 to
ensure that customers are able to hold
60 For such an exception, the receiving party
would have to resubmit the transfer instruction
only if the most recent customer statement is
attached. See proposed Rule G–26(e)(v).
61 If the carrying party has changed the account
number for purposes of internally reassigning the
account, it would be the responsibility of the
carrying party to track the changed account number,
and such reassigned account number would not be
considered invalid for purposes of fulfilling a
transfer instruction. See proposed Rule G–
26(e)(iv)(F).
62 In order to include the exceptions to transfer
instructions with the provisions related to
validation, the proposed rule change would move
the existing exceptions to, and add the new
exceptions in, the new, separate section on
validation of transfer instructions. See proposed
Rule G–26(e)(iv).
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their municipal securities at their
dealers of choice.63
Recordkeeping and Customer
Notification
During the validation process for a
customer account transfer, there is a risk
that the parties to the transfer fail to
identify certain nontransferable assets,
resulting in the improper transfer of
those assets. FINRA Rule 11870(c)(1)(E)
explicitly requires that the parties
promptly resolve and reverse any such
misidentified nontransferable assets,
update their records and bookkeeping
systems and notify the customer of the
action taken. The MSRB believes it is
important to add this explicit
requirement to Rule G–26 to ensure that
dealers address any errors in the transfer
process promptly.64 Therefore, the
proposed rule change would require
that the parties promptly resolve and
reverse any such misidentified
nontransferable assets, update their
records and bookkeeping systems and
notify the customer of the action taken.
Transfer Rejection
FINRA Rule 11870(d)(8) allows the
receiving party to reject a full account
transfer if the account would not be in
compliance with its credit policies or
minimum asset requirements. A
receiving party may not reject only a
portion of the account assets (i.e., the
particular assets not in compliance with
the dealer’s credit policies or minimum
asset requirement). Rule G–26 currently
does not include any comparable
provisions, but the MSRB believes it is
reasonable for a receiving party to deny
a customer’s transfer request due to
noncompliance with its credit policies
or minimum asset requirements.
Accordingly, the proposed rule change
would provide this ability to the
receiving party in Rule G–26.65
Resolution of Discrepancies
Rule G–26(f) currently provides that
any discrepancies relating to positions
or money balances that exist or occur
after transfer of a customer account
must be resolved promptly.66 FINRA
Rule 11870(g) includes the same
standard but also requires that the
carrying party must promptly distribute
to the receiving party any transferable
assets that accrue to the customer’s
transferred account after the transfer has
been effected. Further, FINRA Rule
11870(g) provides clarity to the
promptness requirement by requiring
63 See
proposed Rule G–26(e)(iii).
proposed Rule G–26(e)(vi).
65 See proposed Rule G–26(e)(viii).
66 See Rule G–26(f).
64 See
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that any claims of discrepancies after a
transfer must be resolved within five
business days from notice of such claim
or the non-claiming party must take
exception to the claim and set forth
specific reasons for doing so. To provide
the same level of clarity and to improve
harmonization with FINRA Rule
11870(g), the proposed rule change
would include these same additional
provisions.67
Participant in a Registered Clearing
Agency
When both the carrying party and the
receiving party are direct participants in
a clearing agency that is registered with
the SEC and offers automated customer
securities account transfer capabilities,
Rule G–26(h) currently requires the
account transfer procedure to be
accomplished pursuant to the rules of
and through such registered clearing
agency.68 FINRA Rule 11870(m) has a
similar requirement that provides an
exception for specifically designated
securities assets transferred pursuant to
the submittal of a customer’s authorized
alternate instructions to the carrying
party. As discussed above, FINRA Rule
11870(m)(3) also requires the transfer of
residual credit positions through the
registered clearing agency. Further,
FINRA Rule 11870(m)(4) prescribes
several conditions for such transfers for
participants in a registered clearing
agency.69 The MSRB believes customers
and the parties to a customer account
transfer should have the option of
performing the transfer outside of the
facilities of a registered clearing agency
when an appropriate authorized
alternate instruction is given.
Additionally, the MSRB believes the
additional prescription related to the
process provided by FINRA will give
greater clarity to customers and dealers.
Accordingly, the proposed rule change
would include these provisions.70
Transfer of Residual Positions
When both the carrying party and the
receiving party are direct participants in
a clearing agency registered with the
SEC offering automated customer
securities account transfer capabilities,
FINRA Rule 11870(n) requires each
67 See
proposed Rule G–26(i)(ii)–(iii).
Rule G–26(h).
69 FINRA also defines a ‘‘participant in a
registered clearing agency’’ as ‘‘a member of a
registered clearing agency that is eligible to make
use of the agency’s automated customer securities
account transfer capabilities,’’ and ‘‘registered
clearing agency’’ as ‘‘a clearing agency as defined
in, and registered in accordance with, the Exchange
Act.’’ The proposed rule change would include
these same definitions. See proposed Rule G–
26(a)(iv)–(v).
70 See proposed Rule G–26(k).
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68 See
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party to transfer credit balances that
occur in any transferred account assets
(both cash and securities) through the
automated service within 10 business
days after the credit balances accrue to
the account for a minimum period of six
months. Given that the majority of
customer account transfers subject to
Rule G–26 occur manually, the MSRB
believes it is important to provide
clarity on the obligation and timing
required to transfer such credit balances
for any customer account transfer, so the
proposed rule change would include a
provision with the same 10-businessday requirement as FINRA Rule
11870(n) that is not limited to when
both parties are direct participants in a
clearing agency registered with the SEC
offering automated customer securities
account transfer capabilities.71
Written Procedures
Current Rule G–26 does not itself
include any requirement for policies
and procedures, but Supplementary
Material .01 to FINRA Rule 11870
requires the establishment, maintenance
and enforcement of written procedures
to affect and supervise customer
account transfers. The MSRB believes it
is important for dealers to document the
procedures they follow to effect
customer account transfers and to
require explicitly written procedures for
supervision of the same, which is
consistent with MSRB Rule G–27, on
supervision. Accordingly, the proposed
rule change would include such a
requirement.72
FINRA Rule 11650—Transfer Fees
Neither current Rule G–26 nor any
other MSRB rule specifically addresses
transfer fees. However, FINRA Rule
11650, on transfer fees, specifies that the
party at the instance of which a transfer
of securities is made shall pay all
service charges of the transfer agent. The
MSRB believes it is important to clarify
which party is responsible for the fees
incurred for a customer account
transfer. Accordingly, the proposed rule
change would include a provision
identical to FINRA Rule 11650.73
2. Statutory Basis
Section 15B(b)(2) of the Act 74
provides that:
[t]he Board shall propose and adopt rules to
effect the purposes of this title with respect
to transactions in municipal securities
effected by brokers, dealers, and municipal
71 See
proposed Rule G–26(g).
Supplementary Material .02 to proposed
Rule G–26.
73 See Supplementary Material .03 to proposed
Rule G–26.
74 15 U.S.C. 78o–4(b)(2).
72 See
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securities dealers and advice provided to or
on behalf of municipal entities or obligated
persons by brokers, dealers, municipal
securities dealers, and municipal advisors
with respect to municipal financial products,
the issuance of municipal securities, and
solicitations of municipal entities or
obligated persons undertaken by brokers,
dealers, municipal securities dealers, and
municipal advisors.
Section 15B(b)(2)(C) of the Act 75
provides that the MSRB’s rules shall:
be designed to prevent fraudulent and
manipulative acts and practices, to promote
just and equitable principals of trade, to
foster cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with respect
to, and facilitating transactions in municipal
securities and municipal financial products,
to remove impediments to and perfect the
mechanism of a free and open market in
municipal securities and municipal financial
products, and, in general, to protect
investors, municipal entities, obligated
persons, and the public interest.
The MSRB believes that the proposed
rule change is consistent with the
provisions of Sections 15B(b)(2) 76 and
15B(b)(2)(C) 77 of the Act because it
would re-establish consistency with the
customer account transfer rules of other
SROs by conforming to significant
updates by the NSCC, the NYSE and
FINRA that have relevance to municipal
securities. Further, the MSRB believes
that including certain provisions from
the other rules in the proposed rule
change will make the transfer of
customer securities account assets more
flexible, less burdensome, and more
efficient, while reducing confusion and
risk to investors and allowing them to
better move their securities to their
dealer of choice. The MSRB believes the
proposed rule change will promote
fairness and provide greater efficiency
in the transfer of customer accounts,
which should prevent fraudulent and
manipulative acts and practices,
promote just and equitable principals of
trade, foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in municipal
securities and municipal financial
products, remove impediments to and
perfect the mechanism of a free and
open market in municipal securities and
municipal financial products, and, in
general, protect investors and the public
interest.
The MSRB also believes that the
proposed rule change is consistent with
75 15
U.S.C. 78o–4(b)(2)(C).
U.S.C. 78o–4(b)(2).
77 15 U.S.C. 78o–4(b)(2)(C).
76 15
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Section 15B(b)(2)(G) of the Act,78 which
provides that the MSRB’s rules shall:
prescribe records to be made and kept by
municipal securities brokers, municipal
securities dealers, and municipal advisors
and the periods for which such records shall
be preserved.
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(G) of the Act 79 because it
would require dealers to document the
procedures they follow to effect
customer account transfers and to
require explicitly written procedures for
supervision of the same.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
Section 15B(b)(2)(C) of the Act 80
requires that MSRB rules not be
designed to impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. In determining
whether these standards have been met,
the MSRB was guided by the Board’s
Policy on the Use of Economic Analysis
in MSRB Rulemaking. In accordance
with this policy, the Board has
evaluated the potential impacts on
competition of the proposed rule
change, including in comparison to
reasonable alternative regulatory
approaches, relative to the baseline. The
MSRB does not believe the proposed
rule change imposes any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.
The MSRB does not believe the
proposed rule change will create a
burden on competition, as all municipal
securities brokers and municipal
securities dealers would be subject to
the same modified requirements for
customer account transfers. The MSRB
believes that the proposed rule change
may reduce inefficiencies that stem
from uncertainty and confusion
associated with existing Rule G–26. The
MSRB also believes that dealers may
benefit from clarifications and revisions
that more closely reflect the securities
industry standard, which may, in turn,
reduce operational risk to dealers and
investors. Finally, the MSRB believes
that the proposed rule change will make
the transfer of customer municipal
securities account assets more flexible,
less burdensome, and more efficient,
while reducing confusion and risk to
investors and allowing them to more
conveniently move their municipal
securities to their dealer of choice.
78 15
U.S.C. 78o–4(b)(2)(G).
79 Id.
80 15
U.S.C. 78o–4(b)(2)(C).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The MSRB received three comment
letters in response to the Request for
Comment.81 The comment letters are
summarized below by topic, and the
MSRB’s responses are provided.
The Need for Rule G–26
SIFMA supported the stated purpose
of the draft amendments to modernize
Rule G–26 and promote a uniform
customer account transfer standard, but
it suggests some alternative approaches
to achieve that end. Specifically, SIFMA
recognized that Rule G–26 is only
applicable to municipal securities
brokers and municipal securities
dealers, particularly those with
municipal security-only accounts and
bank dealers, but believes the rule is
unnecessary. Further, SIFMA noted that
the firms subject to Rule G–26 are a
small fraction of the total number of
firms and, for the most part, are not
direct clearing participants of the NSCC
and, therefore, not eligible to participate
in the ACATS process.82 SIFMA stated
that, because these firms are not
members of the NYSE or FINRA and,
therefore, not subject to NYSE Rule 412
and FINRA Rule 11870, they are exempt
from participating in ACATS under
Rule G–26. Finally, SIFMA believes that
there are few customer account transfers
that occur ex-clearing (i.e., a manual
process outside of ACATS), making
Rule G–26 redundant, and suggests that
the MSRB eliminate it.
Although SIFMA is correct that most
of the firms subject to Rule G–26 do not
participate in ACATS, SIFMA did not
recognize that, from the rule’s inception,
it has been intended to cover these
firms, which are not subject to NSCC,
FINRA or NYSE rules, regardless of how
few of them there may be and regardless
of how few customer account transfers
they may perform.83 As such, the MSRB
believes that there remains a need for
Rule G–26 to address the manual
processes used by these firms in
transferring customer accounts.
SIFMA alternatively suggested that, if
the MSRB does not eliminate Rule G–
81 See Letters from: Mike Nicholas, Chief
Executive Officer, Bond Dealers of America
(‘‘BDA’’), dated February 17, 2017; Michael
Paganini (‘‘Paganini’’), dated January 6, 2017; and
Leslie M. Norwood, Managing Director and
Associate General Counsel, SIFMA, dated February
17, 2017.
82 As of May 16, 2017, there were 27 bank dealers
registered with the MSRB.
83 See Exchange Act Release No. 22810 (Jan. 17,
1986), 51 FR 3287 (Jan. 24, 1986) (SR–MSRB–86–
2).
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26, it should amend the rule to
incorporate FINRA Rule 11870 by
reference, similar to what the NYSE has
done in its Rule 412 and what the Board
has done in MSRB Rule G–41, on antimoney laundering compliance
programs.84 SIFMA specifically
proposed that the rule state that dealers
‘‘shall comply with FINRA Rule 11870,
concerning the transfer of customer
accounts between members, and any
amendments thereto, as if such Rule is
part of MSRB’s Rules.’’ SIFMA believed
this ‘‘methodology is the most efficient
way to reduce confusion and risk to
investors, and reduce regulatory risk to
dealers,’’ which SIFMA stated have
largely not been complying with the
rule. SIFMA further believes this would
ensure that all dealers are covered by a
rule and that there is harmonization
between the various SROs’ rules.
Although amending Rule G–26 to
incorporate FINRA Rule 11870 by
reference could be a simple and efficient
solution to provide a uniform industry
standard, the MSRB does not typically
incorporate other regulators’ rules by
reference. The MSRB believes that,
while the incorporation by reference
approach suggested by SIFMA may
enhance harmonization with FINRA’s
rules, that approach would raise
significant concerns for the MSRB,
given its statutory mandate and mission.
For example, if FINRA or its staff were
to provide an interpretation of FINRA
Rule 11870, the MSRB automatically
would be adopting that interpretation
without deliberately considering the
issues that may be unique to, or the
interpretation’s ramifications for, the
municipal securities market. Further,
there are municipal securities dealers
that are not members of FINRA. Those
dealers may not have notice of FINRA’s
rule interpretations unless the MSRB
were to monitor FINRA’s rulemaking
and independently notify dealers.
Therefore, if the MSRB were to regulate
customer account transfers over which
it has jurisdiction by simply
incorporating a FINRA rule by
reference, the MSRB potentially could
be seen as delegating its core mission to
protect investors, issuers, and the public
interest and to promote a fair and
efficient municipal market.
84 Rule G–41 provides that dealers will be deemed
to be in compliance with anti-money laundering
program requirements if they establish and
implement a program that is in compliance with the
rules, regulations or requirements governing the
establishment and maintenance of anti-money
laundering programs of the registered securities
association of which the dealer is a member or the
appropriate regulatory agency as defined in the
Exchange Act.
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Consistency With FINRA Rule 11870
and the Definition of ‘‘Nontransferable
Asset’’
As discussed in the Request for
Comment, FINRA Rule 11870(f)(1)
requires that any fail contracts resulting
from an account transfer, which
includes municipal securities, be
included in a dealer’s fail file and that,
not later than 30 business days
following the date delivery was due, the
dealer shall take steps to obtain physical
possession or control of the municipal
securities so failed to receive by
initiating a buy-in procedure or
otherwise.85 This 30-day time frame,
however, is inconsistent with Rule G–
26, which, through reference to MSRB
Rule G–12(h), provides 10 calendar days
with the option for a one-time extension
of 10 calendar days, totaling up to 20
calendar days, for dealers to close out
failed inter-dealer municipal securities
transactions.86 The Request for
Comment also noted that an additional
layer of inconsistency and complexity
arises due to the system used to process
most failed securities resulting from
customer account transfers and interdealer transactions. Specifically, an
inter-dealer transaction of municipal
securities is processed in the NSCC’s
Continuous Net Settlement (‘‘CNS’’)
system to be paired up with potentially
another counterparty and settled.87 Any
CNS-eligible municipal security in a
customer account transfer that fails to be
delivered also enters CNS. Once in CNS,
it is difficult to determine which fails
resulted from inter-dealer transactions
or customer account transfers, and the
counterparties that are paired up may
not be the same counterparties to the
original transaction/transfer. As a result,
it may be unclear with which rule and
corresponding time frame firms should
85 A buy-in occurs when the seller in a
transaction, who failed to deliver the securities sold
to the buyer, purchases all or any part of the
securities necessary to complete the transaction at
the current market, with the seller bearing any
burden from any change in the market price, and
any benefit from any change in the market price
remaining with the buyer.
86 The MSRB notes that market participants were
very supportive of, and, in fact, suggested the time
frames recently adopted in Rule G–12(h) for closing
out failed inter-dealer transactions. The MSRB
further notes that the inconsistency between the
timing of FINRA’s buy-in procedures under FINRA
Rule 11870(f)(1) (30 business days) and the timing
of the MSRB’s previous close-out procedures for
inter-dealer transactions (up to 90 business days)
existed prior to the amendments to Rule G–12(h).
87 As a key part of the CNS system, NSCC acts as
the central counterparty for clearance and
settlement for virtually all broker-to-broker equity,
corporate and municipal bond and unit investment
trust trading in the United States. CNS processes
include an automated book-entry accounting system
that centralizes settlement and maintains an orderly
flow of security and money balances.
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comply—Rule G–12(h) or FINRA Rule
11870.
To avoid these inconsistencies and
uncertainties, the draft amendments in
the Request for Comment proposed to
amend the definition of
‘‘nontransferable asset’’ to include any
customer long position in a municipal
security that allocates to a short
position, which resulted from either the
carrying party’s trading activity or
failure to receive the securities it
purchased to fill a customer’s municipal
securities order (i.e., an inter-dealer
transaction fail). In the Request for
Comment, the MSRB noted that, if
FINRA were to similarly amend Rule
11870 to make these short positions
nontransferable, then customer account
transfers of municipal securities would
be significantly less likely to fail and
there might no longer be a need to
establish fail contracts and provide a
process by which those fails could be
closed out, eliminating the timing
inconsistencies and ambiguity. The
MSRB further noted that dealers may
not be subject to the costs associated
with these transfer fails, as well as the
complication and confusion that may
arise on coupon payment dates from the
need to provide substitute interest for
tax-exempt municipal securities. The
MSRB stated its belief that this draft
amendment would have the additional
benefits of reducing counterparty risk
and increasing investor confidence.
SIFMA recognized the inconsistency
between Rule G–26 and FINRA Rule
11870, as well as the complexity in CNS
created by the inconsistency; however,
it disagreed with the MSRB’s analysis
that the draft amendment to the
definition of ‘‘nontransferable asset’’
would reduce counterparty risk and
increase customer confidence, and it
believed that it would be disruptive to
industry practice and outside of
standard ACATS procedures. SIFMA
stated that ‘‘[a]utomated systems fail to
be efficient if they require manual
processes, such as validating if a long
municipal security position is allocated
to a short firm position.’’ BDA also had
concerns and believes that the proposed
amendment to the definition is
unworkable. BDA stated that significant
operational changes would have to
occur in order to make the change
feasible because current dealer systems
are not designed to code or segregate
inter-dealer transaction fails and
account transfer fails, and because most
firms track fails at the firm level, not at
the account level for compliance with
regulatory issues, such as properly
tracking substitute interest. BDA urged
the MSRB to engage in dealer outreach
to find a different solution that better
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
aligns with existing dealer systems and
processes.
As an alternative to amending the
definition of ‘‘nontransferable asset,’’
SIFMA believed that FINRA Rule 11870
must be amended as soon as practicable
to reflect the recent amendments to Rule
G–12 relating to close-outs to eliminate
the inconsistency in the time frames.
Accordingly, SIFMA suggested that
FINRA simply cross-reference Rule G–
12(h), and any amendments thereto, for
any fail contracts in municipal
securities resulting from customer
account transfers.88 BDA commented
that it did not see a policy reason to
amend Rule G–26, but BDA’s letter did
not confront the inconsistency between
Rule G–26 and FINRA Rule 11870, and
the related complexity created in CNS.
BDA further questioned the need for any
changes by FINRA to FINRA Rule
11870, and believed FINRA Rule
11870(f) is an adequate standard with
which Rule G–26 should harmonize
instead.
Given both SIFMA’s and BDA’s
concerns about the operational changes
needed and the corresponding costs that
would result from such a change, the
MSRB, at this time, does not believe
amending the definition of
‘‘nontransferable asset’’ to include any
customer long position in a municipal
security that allocates to a short position
is appropriate, particularly without
certainty that FINRA would similarly
amend FINRA Rule 11870 to ensure that
all short municipal securities positions
in customer account transfers receive
identical treatment.
Miscellaneous Comments
As discussed above, in response to
comments from SIFMA, the proposed
rule change would amend the definition
of ‘‘nontransferable asset’’ to include
proprietary products of the carrying
party and would allow for either the
carrying party or the receiving party (or
both) to provide the list of
nontransferable assets to a customer and
request their disposition.89
Additionally, Paganini believed that
firms are ‘‘very inefficient when it
comes to account transfers of specific
types of assets i.e., some municipal
bonds,’’ and that ‘‘it is exasperating,
frustrating, and time consuming for the
private investor’’ when there is a
problem with an account transfer. He
recommended that there be some type of
enforcement mechanism or financial
penalty for transfers that cannot be
88 SIFMA also suggested that FINRA consolidate
its rules relating to customer account transfers,
including related fees, into FINRA Rule 11870.
89 See Definition of ‘‘Nontransferable Asset’’ and
Transfer Instructions supra.
E:\FR\FM\14JNN1.SGM
14JNN1
Federal Register / Vol. 82, No. 113 / Wednesday, June 14, 2017 / Notices
accomplished within a reasonable time
period. The MSRB notes that dealers are
expected to comply with the
appropriate customer account transfer
rule, including Rule G–26 (and the time
frames included therein) where
applicable, and that, if they do not, they
could be subject to an enforcement
action for violating the rule.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period of
up to 90 days (i) as the Commission may
designate 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 or disapprove
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,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
mstockstill on DSK30JT082PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MSRB–2017–03 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–MSRB–2017–03. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (http://www.sec.gov/
rules/sro.shtml). 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
VerDate Sep<11>2014
17:36 Jun 13, 2017
Jkt 241001
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the MSRB. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MSRB–
2017–03 and should be submitted on or
before July 5, 2017.
For the Commission, pursuant to delegated
authority.90
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–12266 Filed 6–13–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80888; File No. SR–
NASDAQ–2017–053]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend Rule
5110(c) To Permit a Reverse Merger
Company To Qualify for Initial Listing
Under Any Applicable Listing Standard
After Satisfying the Required
Seasoning Period
June 8, 2017.
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 May 25,
2017, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) 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 Exchange. 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 Exchange proposes to allow a
former reverse merger company to
qualify for initial listing under any
90 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
27315
applicable listing standard after
satisfying the required seasoning period.
The text of the proposed rule change
is set forth below. Proposed new
language is italicized; deleted text is in
brackets.
*
*
*
*
*
5110. Change of Control, Bankruptcy
and Liquidation, and Reverse Mergers
(a)–(b) No change.
(c) Reverse Mergers
(1) A Company that is formed by a
Reverse Merger (a ‘‘Reverse Merger
Company’’) shall be eligible to submit
an application for initial listing only if
the combined entity has, immediately
preceding the filing of the initial listing
application:
(A) No change.
(B) maintained a closing price [of $4
per share or higher]equal to the share
price requirement applicable to the
initial listing standard under which the
Reverse Merger Company is qualifying
to list for a sustained period of time, but
in no event for less than 30 of the most
recent 60 trading days.
(2) In addition to satisfying all of
Nasdaq’s other initial listing
requirements, a Reverse Merger
Company will only be approved for
listing if, at the time of approval, it has:
(A) No change.
(B) maintained a closing price [of $4
per share or higher]equal to the share
price requirement applicable to the
initial listing standard under which the
Reverse Merger Company is qualifying
to list for a sustained period of time, but
in no event for less than 30 of the most
recent 60 trading days prior to approval.
(3) No change.
*
*
*
*
*
The text of the proposed rule change
is available on the Exchange’s Web site
at http://nasdaq.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
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
Exchange 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
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
E:\FR\FM\14JNN1.SGM
14JNN1
]]>Agencies
[Federal Register Volume 82, Number 113 (Wednesday, June 14, 2017)]
[Notices]
[Pages 27307-27315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12266]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80890; File No. SR-MSRB-2017-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-
26, on Customer Account Transfers, To Modernize the Rule and Promote a
Uniform Customer Account Transfer Standard
June 7, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\
notice is hereby given that on May 26, 2017 the Municipal Securities
Rulemaking Board (the ``MSRB'' or ``Board'') filed with the Securities
and Exchange Commission (the ``SEC'' or ``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by the MSRB. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB filed with the Commission a proposed rule change to amend
MSRB Rule G-26, on customer account transfers, to modernize the rule
and promote a uniform customer account transfer standard for all
brokers, dealers, municipal securities brokers and municipal securities
dealers (collectively, ``dealers'') (``proposed rule change'').\3\ The
MSRB requests that the proposed rule change be effective three months
from the date of Commission approval.
---------------------------------------------------------------------------
\3\ For clarity and ease of reference, current provisions of
Rule G-26 will be cited herein as ``Rule G-26,'' and proposed
amendments to Rule G-26 will be cited herein as ``proposed Rule G-
26''.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the MSRB's Web
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2017-Filings.aspx, at the MSRB's principal office, and at the Commission's
Public Reference Room.
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 MSRB 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 MSRB 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
The purpose of the proposed rule change is to modernize Rule G-26
and promote a uniform customer account transfer standard for all
dealers. The MSRB believes that, by including certain provisions
parallel to the customer account transfer rules of other SROs,
particularly FINRA Rule 11870, in current Rule G-26, as outlined below,
the transfer of customer securities account assets will be more
flexible, less burdensome, and more efficient, while reducing confusion
and risk to investors and allowing them to better move their municipal
securities to their dealer of choice.
Current Rule G-26
Rule G-26 requires dealers to cooperate in the transfer of customer
accounts and specifies procedures for carrying out the transfer
process. Such transfers occur when a customer decides to transfer an
account from one dealer, the carrying party (i.e., the dealer from
which the customer is requesting the account be transferred) to
another, the receiving party (i.e., the dealer to which the customer is
requesting the account be transferred). The rule establishes specific
time frames within which the carrying party is required to transfer a
customer account; limits the reasons for which a receiving party may
take exception to an account transfer instruction; provides for the
establishment of fail-to-receive and fail-to-deliver contracts; \4\ and
requires that fail contracts be resolved in accordance with MSRB close-
out procedures, established by MSRB Rule G-12(h). In addition, the
current rule requires the use of the automated customer account
transfer service in place at a registered clearing agency registered
with the Commission when both dealers are direct participants in the
same clearing agency.\5\ Finally, the rule contains a provision for
enhancing compliance by requiring submission of transfer instructions
to the enforcement authority with jurisdiction over the dealer carrying
the account, if the enforcement authority requests such submission.\6\
---------------------------------------------------------------------------
\4\ Fail-to-receive and fail-to-deliver contracts are records
maintained by the receiving party and the carrying party,
respectively, when a customer account transfer fails.
\5\ See Rule G-26(h).
\6\ See Rule G-26(i).
---------------------------------------------------------------------------
The MSRB adopted Rule G-26 in 1986 as part of an industry-wide
initiative to create a uniform customer account transfer standard by
applying a customer account transfer procedure to all dealers that are
engaged in municipal securities activities.\7\ The uniform standard for
all customer account transfers (i.e., automated and manual processes)
is largely driven by the National Securities Clearing Corporation's
(``NSCC'') Automated Customer Account Transfer Service (``ACATS''). The
MSRB adopted Rule G-26 in conjunction with the adoption of similar
rules by other self-regulatory organizations (``SROs'')--New York Stock
Exchange (``NYSE'') Rule 412 and Financial Industry Regulatory
Authority (``FINRA'') Rule 11870.\8\ Those rules are not applicable to
certain accounts at dealers, particularly municipal security-only
accounts and accounts at bank dealers.\9\ Current Rule G-26 governs the
municipal security-only customer account transfers performed by those
[[Page 27308]]
dealers to ensure that all customer account transfers are subject to
regulation that is consistent with the uniform industry standard. Thus,
in order to maintain consistency and the uniform standard, the MSRB
has, from time to time, modified the requirements of Rule G-26 to
conform to certain provisions of the parallel FINRA and NYSE customer
account transfer rules, as well as to enhancements made to the ACATS
process by NSCC, that had relevance to municipal securities.
---------------------------------------------------------------------------
\7\ See Exchange Act Release No. 22810 (Jan. 17, 1986), 51 FR
3287 (Jan. 24, 1986) (SR-MSRB-86-2) (proposing Rule G-26). See also
Exchange Act Release Nos. 22663 (Nov. 27 1985) (SR-NYSE-85-17)
(approving NYSE Rule 412); 22941 (Feb. 24, 1986) (SR-NASD-29)
(approving NASD/FINRA Rule 11870).
\8\ In 2007, FINRA was created through the consolidation of the
National Association of Securities Dealers (``NASD'') and the member
regulation, enforcement and arbitration operations of the NYSE.
Current NYSE Rule 412 cross-references NASD/FINRA Rule 11870 for the
purpose of incorporating it into the NYSE rulebook.
\9\ See Exchange Act Release No. 22810 (Jan. 17, 1986), 51 FR
3287 (Jan. 24, 1986) (SR-MSRB-86-2) (``Currently certain municipal
securities brokers or municipal securities dealers, particularly
those with municipal security-only accounts and bank dealers, will
not be covered by the standards governing the rest of the securities
industry.'').
---------------------------------------------------------------------------
On January 6, 2017, the MSRB published a request for comment,
proposing a number of draft amendments to Rule G-26 to maintain
consistency with the rules of the NSCC, the NYSE and FINRA by
conforming to significant updates to those other SRO rules that have
relevance to municipal securities and municipal security-only customer
account transfers.\10\ In response to the Request for Comment, the MSRB
received three comment letters, supporting the general purpose of the
amendments to Rule G-26, but suggesting alternative approaches and
raising a few other issues.\11\ After carefully considering all of the
comments received, the MSRB determined to file this proposed rule
change.
---------------------------------------------------------------------------
\10\ MSRB Notice 2017-01 (Jan. 6, 2017) (``Request for
Comment'').
\11\ See infra note 81.
---------------------------------------------------------------------------
Residual Credit Positions
In 1989, the NSCC expanded ACATS to include the transfer of
customer account residual credit positions. These are assets in the
form of cash or securities that can result from dividends, interest
payments or other types of assets received by the carrying party after
the transfer process is completed, or which were restricted from being
included in the original transfer.\12\ The NYSE and FINRA made
corresponding changes to their rules that require dealers that
participate in a registered clearing agency with automated residual
credit processing capabilities to utilize those facilities to transfer
residual credit positions that accrue to an account after a
transfer.\13\ Prior to allowing for these transfers, a check frequently
would have to be produced, or a delivery bill or report, which then
required a check to be issued or securities to be transferred.\14\ This
process could result in lost or improperly routed checks and
securities, as well as the expenses of postage and processing.\15\
---------------------------------------------------------------------------
\12\ See Exchange Act Release No. 26659 (Mar. 22, 1989), 54 FR
12984 (Mar. 29, 1989) (SR-NSCC-89-3).
\13\ See Exchange Act Release Nos. 34633 (Sept. 2, 1994), 59 FR
46872 (Sept. 12, 1994) (SR-NYSE-94-21); 35031 (Nov. 30, 1994), 59 FR
62761 (Dec. 6, 1994) (SR-NASD-94-56). See also former NYSE Rule
412(e)(3); FINRA Rule 11870(m)(3).
\14\ See Exchange Act Release No. 26659 (Mar. 29, 1989) (SR-
NSCC-89-3).
\15\ Id.
---------------------------------------------------------------------------
The MSRB is proposing to update Rule G-26 to include the transfer
of customer account residual credit positions, which would benefit both
customers and dealers by substantially decreasing the paperwork, risks,
inefficiencies and costs associated with the practice of check issuance
and initiation of securities deliveries to resolve residual credit
positions.\16\
---------------------------------------------------------------------------
\16\ See proposed Rule G-26(k)(ii).
---------------------------------------------------------------------------
Partial Account Transfers
In 1994, the NYSE and FINRA amended their rules to permit partial
or non-standard customer account transfers (i.e., the transfer of
specifically designated assets from an account held at one dealer to an
account held at another dealer).\17\ Subsequently, in 2004, the NYSE
and FINRA further amended their rules generally to apply the same
procedural standards and time frames that are applicable to the
transfer of entire accounts to partial transfers as well.\18\ Because
customer and dealer obligations resulting from the transfer of an
entire account differ from the obligations arising from the transfer of
specified assets within an account that will remain active at the
carrying party, the NYSE and FINRA rules distinguish between the
transfer of security account assets in whole or in specifically
designated part. For example, it would not be necessary for a customer
to instruct the carrying party as to the disposition of his or her
assets that are nontransferable if the customer is not transferring the
entire account.
---------------------------------------------------------------------------
\17\ See Exchange Act Release Nos. 34633 (Sept. 2, 1994), 59 FR
46872 (Sept. 12, 1994) (SR-NYSE-94-21); 35031 (Nov. 30, 1994), 59 FR
62761 (Dec. 6, 1994) (SR-NASD-94-56). See also former NYSE Rule 412,
Interpretation (a)/01; FINRA Rule 11870(a)(2).
\18\ See Exchange Act Release Nos. 49415 (Mar. 12, 2004), 69 FR
13608 (Mar. 23, 2004) (SR-NYSE-2003-29); 50018 (July 14, 2004), 69
FR 43873 (July 22, 2004) (SR-NASD-2004-058).
---------------------------------------------------------------------------
The MSRB is proposing to update Rule G-26 to permit partial account
transfers under the same time frames applicable to transfers of entire
accounts, which the MSRB believes would provide dealers with the
ability to facilitate more efficient and expeditious transfers, as well
as increase accountability for dealers and reduce difficulties
encountered by customers related to transfers.\19\ The MSRB also
believes this change will further competition among dealers by more
easily allowing investors to transfer their municipal securities to the
dealer of their choice.
---------------------------------------------------------------------------
\19\ See proposed Rule G-26(b), (c)(ii), (d)(i), (e)(ii),
(k)(i). The proposed rule change would require that dealers expedite
all authorized municipal securities account asset transfers, whether
through ACATS or via other means permissible, and coordinate their
activities with respect thereto.
---------------------------------------------------------------------------
Transfer of Third-Party and/or Proprietary Products
In 1998, the NSCC modified ACATS to better facilitate and expedite
the transfer of a customer account containing third-party and/or
proprietary products that the receiving party is unable to receive or
carry.\20\ The NYSE and FINRA made conforming changes in 2001.\21\
Prior to the NSCC's modernization of ACATS in 1998, a receiving party
was not permitted to reject an individual account asset and only could
reject an account in its entirety. Today, however, under these other
SROs' rules, the receiving party has the capability to either accept
all assets in the account being transferred or, to the extent permitted
by the receiving party's designated examining authority, accept only
some of the assets in the account.\22\
---------------------------------------------------------------------------
\20\ See Exchange Act Release No. 40657 (Nov. 10, 1998), 63 FR
63952 (Nov. 17, 1998) (SR-NSCC-98-06).
\21\ See Exchange Act Release Nos. 44596 (July 26, 2001), 66 FR
40306 (Aug. 2, 2001) (SR-NYSE-00-61); 44787 (Sept. 12, 2001), 66 FR
48301 (Sept. 19, 2001) (SR-NASD-2001-53). See also former NYSE Rule
412, Interpretation (b)(1),/01,/04,/06; FINRA Rule 11870(c)(2).
\22\ See FINRA Rule 11870(c)(3)-(4).
---------------------------------------------------------------------------
Although most securities can be transferred, dealers vary in their
ability to accept and support certain third-party investment products.
Under the NSCC's prior customer account transfer procedures, and the
current procedures outlined in Rule G-26, a customer that wishes to
transfer its entire account to another dealer would submit a signed
transfer instruction to the receiving party.\23\ The receiving party
would immediately submit the transfer instruction to the carrying
party, and the carrying party would have three days to either validate
and return the transfer instruction or take exception to the
instruction.\24\ Prior to or at the time of validation of the transfer
instruction, the carrying party would be required to notify the
customer with respect to the disposition of any assets it identified as
nontransferable \25\ and request
[[Page 27309]]
instructions from the customer with respect to their disposition.\26\
---------------------------------------------------------------------------
\23\ See Rule G-26(d)(i).
\24\ Id.
\25\ Currently, the term ``nontransferable asset'' means an
asset that is incapable of being transferred from the carrying party
to the receiving party because (A) it is an issue in default for
which the carrying party does not possess the proper denominations
to effect delivery and no transfer agent is available to re-register
the securities, or (B) it is a municipal fund security which the
issuer requires to be held in an account carried by one or more
specified dealers that does not include the receiving party. See
Rule G-26(a)(iii).
\26\ See Rule G-26(c)(ii).
---------------------------------------------------------------------------
A customer account could also contain assets that are
nontransferable but have not yet been identified as nontransferable
(e.g., a municipal fund security that the receiving party is unable to
carry--unbeknownst to the carrying party). Under current Rule G-26, the
carrying party would have to include such nontransferable assets in the
transfer of the account, and, if the receiving party were unable to
receive/carry the nontransferable asset, the receiving party would have
to send the asset back to the carrying party.\27\ While the instances
in which dealers would need to rely upon Rule G-26 and the special
procedures for transfer of nontransferable assets may be rare, these
fails require substantial processing time for both the carrying and
receiving parties, and require carrying parties to credit the receiving
party's funds equivalent to the value of the assets they are unable to
deliver. These fails can also cause customers confusion in that
customers receive multiple account statements from the carrying and
receiving parties as the dealers initiate and then reverse transfers.
---------------------------------------------------------------------------
\27\ See Rule G-26(d)(i)-(ii).
---------------------------------------------------------------------------
The NSCC's modifications regarding third-party and proprietary
products allow the receiving party to review the asset validation
report, designate those nontransferable assets it is unable to receive/
carry, provide the customer with a list of those assets, and require
instructions from the customer regarding their disposition.\28\ The
proposed rule change would make Rule G-26 consistent with this change
by requiring the receiving party to designate any third-party products
it is unable to receive.\29\ Accordingly, the MSRB believes the
proposed rule change will eliminate the present need for reversing the
transfer of nontransferable assets, reduce the overall time frame for
transferring third-party products, and generally reduce delay in and
the cost of customer account transfers.
---------------------------------------------------------------------------
\28\ See NSCC Rule 50 Section 8.
\29\ See proposed Rule G-26(e)(vii).
---------------------------------------------------------------------------
Electronic Signature for Customer Authorization of Account Transfer
Under current Rule G-26, a customer can initiate a transfer of a
municipal securities account from one dealer to another by giving
written notice to the receiving party.\30\ NYSE Rule 412 and FINRA Rule
11870 previously had the same requirement; however, in 2004, the NYSE
and FINRA established that a customer also can initiate an account
transfer, in whole or in part, using either the customer's actual
signature or an electronic signature in a format recognized as valid
under federal law to conduct interstate commerce.\31\ The MSRB believes
that updating the written notice requirement in Rule G-26 to include
electronic signatures will expedite the transfer of customer assets
between dealers and more easily allow investors to transfer their
assets to the dealer of their choice. Accordingly, the MSRB is
proposing to replace the written notice requirement with an authorized
instruction requirement, which can be a customer's actual written or
electronic signature.\32\
---------------------------------------------------------------------------
\30\ Under Rule G-26(c)(i), customers and dealers may use Form
G-26 (the transfer instruction prescribed by the MSRB), the transfer
instructions required by a clearing agency registered with the SEC
in connection with its automated customer account transfer system or
transfer instructions that are substantially similar to those
required by such clearing agency to accomplish a customer account
transfer.
\31\ See Exchange Act Release Nos. 49415 (Mar. 12, 2004), 69 FR
13608 (Mar. 23, 2004) (SR-NYSE-2003-29); 50018 (July 14, 2004), 69
FR 43873 (July 22, 2004) (SR-NASD-2004-058).
\32\ See Supplementary Material .01 to proposed Rule G-26.
---------------------------------------------------------------------------
Shortened ACATS Cycle
ACATS has been modified over time to provide a more seamless and
timely customer account transfer process. Specifically, in 1994, the
NSCC accelerated the time (from two days to one day) in which accounts
are transferred by reducing the time a receiving party has after
receipt of the transfer instruction to determine whether to accept,
reject or request adjustments to the account.\33\ In 1998 and 2000, the
NYSE and FINRA, respectively, shortened the time frame for the asset
review portion of the transfer period from two days to one day, and the
time frame the carrying party has to complete the transfer of customer
securities account assets to the receiving party from four days to
three days following the validation of a transfer instruction.\34\
Further, in 2007, FINRA more generally provided that the time frame(s)
in FINRA Rule 11870 will change, as determined from time to time in any
publication, relating to the ACATS facility, by the NSCC.\35\ Rule G-26
currently specifies three days as the time to validate or take
exception to the transfer instructions and four days as the time frame
for completion of a customer account transfer.\36\ The MSRB believes
that reducing those time frames to one and three day(s), respectively,
will ensure consistency with the industry standard set by the NSCC and
harmonization with other SROs, while providing greater efficiency and
improving the customer experience in the customer account transfer
process.\37\ Therefore, the proposed rule change would shorten the time
for validation from three days to one, and shorten the time for
completing the customer account transfer from four days to three.
---------------------------------------------------------------------------
\33\ See Exchange Act Release No. 34879 (Oct. 21, 1994), 59 FR
54229 (Oct. 28, 1994) (SR-NSCC-94-13).
\34\ See Exchange Act Release Nos. 40712 (Nov. 25, 1998), 63 FR
67163 (Dec. 4, 1998) (SR-NYSE-98-30); 43635 (Nov. 29, 2000), 65 FR
75990 (Dec. 5, 2000) (SR-NASD-00-68). See also former NYSE Rule
412(b)(3); FINRA Rule 11870(e).
\35\ See Exchange Act Release No. 56677 (Oct. 19, 2007), 72 FR
60699 (Oct. 25, 2007) (SR-FINRA-2007-005).
\36\ See Rule G-26(d)(i), (v).
\37\ See proposed Rule G-26(d)(i), (f)(i).
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Because Rule G-26 applies to manual customer account transfers, in
addition to automated processes, the MSRB is, at this time, not
incorporating by reference changes in the time frame of the transfer
cycle as determined by future changes in the ACATS time frames made by
the NSCC. The MSRB believes that the current time frames are
sufficiently long to accommodate manual processes, but it would be
important for the MSRB to evaluate the ability of bank dealers and
other dealers with municipal securities-only accounts, which are
subject to Rule G-26, to perform such processes under shorter time
frames before adopting any such proposal in the future.
Definition of ``Nontransferable Asset''
In response to a specific question in the Request for Comment,\38\
the Securities Industry and Financial Markets Association (``SIFMA'')
indicated that dealers may sell proprietary products that are municipal
securities to customers, the transferability of which FINRA Rule 11870
addresses.\39\ Given this affirmative response, and because a receiving
party cannot hold a proprietary product of a carrying party, the MSRB
believes it is important to include proprietary products of the
carrying party in the definition of ``nontransferable asset'' to better
harmonize with FINRA's corresponding definition and to ensure that bank
dealers, and other dealers subject to Rule G-26, have clarity when
handling
[[Page 27310]]
such proprietary products in customer account transfers.\40\
Accordingly, the proposed rule change would also provide the following
options for the disposition of such proprietary products that would be
nontransferable assets: Liquidation; retention by the carrying party
for the customer's benefit; or transfer, physically and directly, in
the customer's name to the customer.\41\
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\38\ See Request for Comment, Question 8 (``Do municipal
securities brokers or municipal securities dealers sell proprietary
products that are municipal securities to customers?'').
\39\ See letter from SIFMA at note 81 infra.
\40\ See proposed Rule G-26(a)(iii)(C); FINRA Rule
11870(c)(1)(D)(i).
\41\ See proposed Rule G-26(c)(ii)(A)-(C).
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Transfer Instructions
Disposition of Nontransferable Assets
Under current Rule G-26, if there are nontransferable assets
included in a transfer instruction, there are multiple options
available to the customer for their disposition, and the carrying party
must request further instructions from the customer with respect to
which option the customer would like to exercise.\42\ Depending on the
type of nontransferable asset at issue, FINRA Rule 11870(c) requires
either the carrying party or the receiving party to provide the
customer with a list of the specific nontransferable assets and request
the customer's desired disposition of such assets. For example, FINRA
Rule 11870(c)(4) places the burden on the receiving party for third-
party products that are nontransferable. In response to the Request for
Comment, SIFMA noted that current industry practice and standard
requires that, depending on the type of nontransferable asset, either
the carrying party or the receiving party provide the customer with a
list of the nontransferable assets and request the customer's desired
disposition of such assets, as opposed to limiting that requirement to
the carrying party, which was proposed in the Request for Comment.\43\
Because there are third-party products that are municipal securities
that a receiving party may not be able to carry, and such a receiving
party may be the only party to a customer account transfer with that
knowledge, the MSRB believes allowing the receiving party to notify the
customer of any nontransferable assets in a transfer and request their
disposition in such circumstances will help ensure that nontransferable
assets are properly identified and that both parties to a transfer are
coordinating closely to complete the transfer efficiently and
expeditiously. To allow for this, to improve harmonization with FINRA
Rule 11870 and to promote a uniform standard for all dealers, the
proposed rule change would explicitly require that the carrying party
and/or the receiving party provide the list of nontransferable
assets.\44\
---------------------------------------------------------------------------
\42\ See Rule G-26(c)(ii).
\43\ See letter from SIFMA at note 81 infra.
\44\ See proposed Rule G-26(c)(ii).
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Liquidation of Nontransferable Assets
Under current Rule G-26, one of the disposition options for
nontransferable assets available to customers is liquidation.\45\ When
providing customers with this option, dealers are required to
specifically indicate any redemption or other liquidation-related fees
that may result from such liquidation and that those fees may be
deducted from the money balance due the customer.\46\ FINRA Rule 11870
provides the same requirements, but also requires dealers to refer
customers to the disclosure information for third-party products or to
the registered representative at the carrying party for specific
details regarding any such fees, as well as to distribute any remaining
balance to the customer and an indication of the method of how it will
do so.\47\ The MSRB believes the inclusion of these additional
requirements in Rule G-26 will help ensure that customers receive as
much relevant information as possible regarding potential redemption
fees, including for municipal fund securities.\48\ Specifically, the
proposed rule change would require a referral to the program disclosure
for a municipal fund security or to the registered representative for
specific details regarding any such fees for the same.\49\ Further, for
clarity, the MSRB believes it is important to require explicitly the
distribution of the remaining balance to the customer and an indication
of how it will be accomplished.\50\ Therefore, the proposed rule change
would require dealers to specifically indicate any redemption or other
liquidation-related fees that may result from liquidation and that
those fees may be deducted from the money balance due the customer.
---------------------------------------------------------------------------
\45\ See Rule G-26(c)(ii).
\46\ See Rule G-26(c)(ii)(A).
\47\ See FINRA Rule 11870(c)(3)(A), (c)(4)(A).
\48\ See proposed Rule G-26(c)(ii)(A).
\49\ Id.
\50\ Id.
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Transfer of Nontransferable Assets to Customers
FINRA Rule 11870(c)(3)(C) provides an option for nontransferable
assets that are proprietary products to be transferred, physically and
directly, in the customer's name to the customer. The MSRB believes
that some municipal securities that are nontransferable assets could
similarly be transferred, physically and directly, to the customer, so
the proposed rule change would add this option to the alternative
dispositions available to customers.\51\ The MSRB notes that not all
municipal securities may be appropriate for this option and that the
carrying party would not be required to physically deliver any
nontransferable assets of which it does not have physical possession.
---------------------------------------------------------------------------
\51\ See proposed Rule G-26(c)(ii)(C).
---------------------------------------------------------------------------
Timing of Disposition of Nontransferable Assets
Rule G-26 currently does not provide a time frame for the carrying
party to effect the disposition of nontransferable assets as instructed
by the customer. FINRA Rule 11870(c)(5) requires that the money balance
resulting from liquidation must be distributed, and any transfer
instructed by the customer must be initiated, within five business days
following receipt of the customer's disposition instruction. The MSRB
believes it is important to provide clarity as to the timing of these
dispositions to ensure that customer transfers are handled
expeditiously.
Accordingly, the proposed rule change would harmonize with FINRA Rule
11870(c)(5) and establish the same five-day requirement.\52\
---------------------------------------------------------------------------
\52\ See proposed Rule G-26(c)(iii).
---------------------------------------------------------------------------
Transfer Procedures
Current Rule G-26(d) establishes, as part of the transfer
procedures, the requirements for validation of the transfer
instructions and completion of the transfer. To detail the specific
validation/exception and completion processes more clearly and to
better harmonize with FINRA Rule 11870, the proposed rule change would
provide the provisions describing those processes in new, separate
sections of the rule.\53\
---------------------------------------------------------------------------
\53\ See proposed Rule G-26(e), (f). As a result of this
restructuring, the subsequent, existing sections of the rule would
be renumbered in proposed Rule G-26.
---------------------------------------------------------------------------
Validation of Transfer Instructions
Under current Rule G-26(d)(iv)(A), upon validation of a transfer
instruction, the carrying party must ``freeze'' the account to be
transferred and return the transfer instruction to the receiving party
with an attachment indicating all securities positions and money
balance in the account as shown on the books of the carrying party.
Because the proposed rule change would allow for partial account
transfers of specifically designated municipal securities assets, the
proposed rule change would require the account freeze only for
validation of the transfer of an entire account, as the
[[Page 27311]]
customer's account at the carrying party should not be frozen if
certain municipal securities would remain in the account and the
customer may want to continue transacting in that account.\54\ For
whole and partial account transfers, the carrying party would continue
to have the responsibility to return the instructions and indicate the
securities positions and money balance to be transferred.\55\ However,
to identify the assets held in the customer account at the carrying
party more comprehensively and to harmonize with FINRA Rule
11870(d)(5)(A), the proposed rule change would also require the
carrying party to indicate safekeeping positions,\56\ which are defined
to be any security held by a carrying party in the name of the
customer, including securities that are unendorsed or have a stock/bond
power attached thereto.\57\
---------------------------------------------------------------------------
\54\ See proposed Rule G-26(e)(i).
\55\ See proposed Rule G-26(e)(ii).
\56\ See proposed Rule G-26(e)(ii).
\57\ See proposed Rule G-26(a)(vi).
---------------------------------------------------------------------------
Additionally, current Rule G-26(d)(iv)(B) requires the carrying
party to include a then-current market value for all assets to be
transferred. FINRA Rule 11870(d)(5) provides that the original cost
should be used as the value if a then-current value cannot be
determined for an asset. The proposed rule change would include a
provision substantially similar to the FINRA provision to provide
clarity on how any such municipal securities should be valued and to
improve harmonization between the MSRB and FINRA rules.\58\
---------------------------------------------------------------------------
\58\ See proposed Rule G-26(e)(ii).
---------------------------------------------------------------------------
Exceptions To Transfer Instructions
As part of the validation process, current Rule G-26 provides that
the carrying party may take certain exceptions to the transfer
instructions authorized by the customer and provided by the receiving
party. Specifically, Rule G-26(d)(ii) allows a carrying party to take
exception to a transfer instruction only if it has no record of the
account on its books or the transfer instruction is incomplete.\59\
FINRA Rule 11870(d)(3) provides numerous other bases to take exception
to a transfer instruction that the MSRB believes would more
comprehensively address potential issues with a transfer instruction
with which a carrying party could reasonably take issue and better
harmonize with FINRA Rule 11870. Accordingly, in addition to the
existing bases for exceptions, the proposed rule change would allow a
carrying party to take exception to a transfer instruction if: (1) The
transfer instruction contains an improper signature; (2) additional
documentation is required (e.g., legal documents such as death or
marriage certificate); (3) the account is ``flat'' and reflects no
transferable assets; \60\ (4) the account number is invalid (i.e., the
account number is not on the carrying party's books); \61\ (5) it is a
duplicate request; (6) it violates the receiving party's credit policy;
(7) it contains unrecognized residual credit assets (i.e., the
receiving party cannot identify the customer); (8) the customer
rescinds the instruction (e.g., the customer has submitted a written
request to cancel the transfer); (9) there is a mismatch of the Social
Security Number/Tax ID (e.g., the number on the transfer instruction
does not correspond to that on the carrying party's records); (10) the
account title on the transfer instruction does not match that on the
carrying party's records; (11) the account type on the transfer
instruction does not correspond to that on the carrying party's
records; (12) the transfer instruction is missing or contains an
improper authorization (e.g., the transfer instruction requires an
additional customer authorization or successor custodian's acceptance
authorization or custodial approval; or (13) the customer has taken
possession of the assets in the account (e.g., the municipal securities
account assets in question have been transferred directly to the
customer).\62\
---------------------------------------------------------------------------
\59\ See Rule G-26(d)(ii).
\60\ For such an exception, the receiving party would have to
resubmit the transfer instruction only if the most recent customer
statement is attached. See proposed Rule G-26(e)(v).
\61\ If the carrying party has changed the account number for
purposes of internally reassigning the account, it would be the
responsibility of the carrying party to track the changed account
number, and such reassigned account number would not be considered
invalid for purposes of fulfilling a transfer instruction. See
proposed Rule G-26(e)(iv)(F).
\62\ In order to include the exceptions to transfer instructions
with the provisions related to validation, the proposed rule change
would move the existing exceptions to, and add the new exceptions
in, the new, separate section on validation of transfer
instructions. See proposed Rule G-26(e)(iv).
---------------------------------------------------------------------------
Additionally, FINRA Rule 11870(d)(2) precludes a carrying party
from taking an exception and denying validation of the transfer
instruction because of a dispute over security positions or the money
balance in the account to be transferred, and it requires the carrying
party to transfer the positions and/or money balance reflected on its
books for the account. The MSRB believes this provision will be equally
valuable to transfers covered under Rule G-26 to ensure that customers
are able to hold their municipal securities at their dealers of
choice.\63\
---------------------------------------------------------------------------
\63\ See proposed Rule G-26(e)(iii).
---------------------------------------------------------------------------
Recordkeeping and Customer Notification
During the validation process for a customer account transfer,
there is a risk that the parties to the transfer fail to identify
certain nontransferable assets, resulting in the improper transfer of
those assets. FINRA Rule 11870(c)(1)(E) explicitly requires that the
parties promptly resolve and reverse any such misidentified
nontransferable assets, update their records and bookkeeping systems
and notify the customer of the action taken. The MSRB believes it is
important to add this explicit requirement to Rule G-26 to ensure that
dealers address any errors in the transfer process promptly.\64\
Therefore, the proposed rule change would require that the parties
promptly resolve and reverse any such misidentified nontransferable
assets, update their records and bookkeeping systems and notify the
customer of the action taken.
---------------------------------------------------------------------------
\64\ See proposed Rule G-26(e)(vi).
---------------------------------------------------------------------------
Transfer Rejection
FINRA Rule 11870(d)(8) allows the receiving party to reject a full
account transfer if the account would not be in compliance with its
credit policies or minimum asset requirements. A receiving party may
not reject only a portion of the account assets (i.e., the particular
assets not in compliance with the dealer's credit policies or minimum
asset requirement). Rule G-26 currently does not include any comparable
provisions, but the MSRB believes it is reasonable for a receiving
party to deny a customer's transfer request due to noncompliance with
its credit policies or minimum asset requirements. Accordingly, the
proposed rule change would provide this ability to the receiving party
in Rule G-26.\65\
---------------------------------------------------------------------------
\65\ See proposed Rule G-26(e)(viii).
---------------------------------------------------------------------------
Resolution of Discrepancies
Rule G-26(f) currently provides that any discrepancies relating to
positions or money balances that exist or occur after transfer of a
customer account must be resolved promptly.\66\ FINRA Rule 11870(g)
includes the same standard but also requires that the carrying party
must promptly distribute to the receiving party any transferable assets
that accrue to the customer's transferred account after the transfer
has been effected. Further, FINRA Rule 11870(g) provides clarity to the
promptness requirement by requiring
[[Page 27312]]
that any claims of discrepancies after a transfer must be resolved
within five business days from notice of such claim or the non-claiming
party must take exception to the claim and set forth specific reasons
for doing so. To provide the same level of clarity and to improve
harmonization with FINRA Rule 11870(g), the proposed rule change would
include these same additional provisions.\67\
---------------------------------------------------------------------------
\66\ See Rule G-26(f).
\67\ See proposed Rule G-26(i)(ii)-(iii).
---------------------------------------------------------------------------
Participant in a Registered Clearing Agency
When both the carrying party and the receiving party are direct
participants in a clearing agency that is registered with the SEC and
offers automated customer securities account transfer capabilities,
Rule G-26(h) currently requires the account transfer procedure to be
accomplished pursuant to the rules of and through such registered
clearing agency.\68\ FINRA Rule 11870(m) has a similar requirement that
provides an exception for specifically designated securities assets
transferred pursuant to the submittal of a customer's authorized
alternate instructions to the carrying party. As discussed above, FINRA
Rule 11870(m)(3) also requires the transfer of residual credit
positions through the registered clearing agency. Further, FINRA Rule
11870(m)(4) prescribes several conditions for such transfers for
participants in a registered clearing agency.\69\ The MSRB believes
customers and the parties to a customer account transfer should have
the option of performing the transfer outside of the facilities of a
registered clearing agency when an appropriate authorized alternate
instruction is given. Additionally, the MSRB believes the additional
prescription related to the process provided by FINRA will give greater
clarity to customers and dealers. Accordingly, the proposed rule change
would include these provisions.\70\
---------------------------------------------------------------------------
\68\ See Rule G-26(h).
\69\ FINRA also defines a ``participant in a registered clearing
agency'' as ``a member of a registered clearing agency that is
eligible to make use of the agency's automated customer securities
account transfer capabilities,'' and ``registered clearing agency''
as ``a clearing agency as defined in, and registered in accordance
with, the Exchange Act.'' The proposed rule change would include
these same definitions. See proposed Rule G-26(a)(iv)-(v).
\70\ See proposed Rule G-26(k).
---------------------------------------------------------------------------
Transfer of Residual Positions
When both the carrying party and the receiving party are direct
participants in a clearing agency registered with the SEC offering
automated customer securities account transfer capabilities, FINRA Rule
11870(n) requires each party to transfer credit balances that occur in
any transferred account assets (both cash and securities) through the
automated service within 10 business days after the credit balances
accrue to the account for a minimum period of six months. Given that
the majority of customer account transfers subject to Rule G-26 occur
manually, the MSRB believes it is important to provide clarity on the
obligation and timing required to transfer such credit balances for any
customer account transfer, so the proposed rule change would include a
provision with the same 10-business-day requirement as FINRA Rule
11870(n) that is not limited to when both parties are direct
participants in a clearing agency registered with the SEC offering
automated customer securities account transfer capabilities.\71\
---------------------------------------------------------------------------
\71\ See proposed Rule G-26(g).
---------------------------------------------------------------------------
Written Procedures
Current Rule G-26 does not itself include any requirement for
policies and procedures, but Supplementary Material .01 to FINRA Rule
11870 requires the establishment, maintenance and enforcement of
written procedures to affect and supervise customer account transfers.
The MSRB believes it is important for dealers to document the
procedures they follow to effect customer account transfers and to
require explicitly written procedures for supervision of the same,
which is consistent with MSRB Rule G-27, on supervision. Accordingly,
the proposed rule change would include such a requirement.\72\
---------------------------------------------------------------------------
\72\ See Supplementary Material .02 to proposed Rule G-26.
---------------------------------------------------------------------------
FINRA Rule 11650--Transfer Fees
Neither current Rule G-26 nor any other MSRB rule specifically
addresses transfer fees. However, FINRA Rule 11650, on transfer fees,
specifies that the party at the instance of which a transfer of
securities is made shall pay all service charges of the transfer agent.
The MSRB believes it is important to clarify which party is responsible
for the fees incurred for a customer account transfer. Accordingly, the
proposed rule change would include a provision identical to FINRA Rule
11650.\73\
---------------------------------------------------------------------------
\73\ See Supplementary Material .03 to proposed Rule G-26.
---------------------------------------------------------------------------
2. Statutory Basis
Section 15B(b)(2) of the Act \74\ provides that:
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78o-4(b)(2).
[t]he Board shall propose and adopt rules to effect the purposes of
this title with respect to transactions in municipal securities
effected by brokers, dealers, and municipal securities dealers and
advice provided to or on behalf of municipal entities or obligated
persons by brokers, dealers, municipal securities dealers, and
municipal advisors with respect to municipal financial products, the
issuance of municipal securities, and solicitations of municipal
entities or obligated persons undertaken by brokers, dealers,
---------------------------------------------------------------------------
municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Act \75\ provides that the MSRB's rules
shall:
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78o-4(b)(2)(C).
be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principals of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities and
municipal financial products, to remove impediments to and perfect
the mechanism of a free and open market in municipal securities and
municipal financial products, and, in general, to protect investors,
---------------------------------------------------------------------------
municipal entities, obligated persons, and the public interest.
The MSRB believes that the proposed rule change is consistent with
the provisions of Sections 15B(b)(2) \76\ and 15B(b)(2)(C) \77\ of the
Act because it would re-establish consistency with the customer account
transfer rules of other SROs by conforming to significant updates by
the NSCC, the NYSE and FINRA that have relevance to municipal
securities. Further, the MSRB believes that including certain
provisions from the other rules in the proposed rule change will make
the transfer of customer securities account assets more flexible, less
burdensome, and more efficient, while reducing confusion and risk to
investors and allowing them to better move their securities to their
dealer of choice. The MSRB believes the proposed rule change will
promote fairness and provide greater efficiency in the transfer of
customer accounts, which should prevent fraudulent and manipulative
acts and practices, promote just and equitable principals of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in municipal securities and municipal
financial products, remove impediments to and perfect the mechanism of
a free and open market in municipal securities and municipal financial
products, and, in general, protect investors and the public interest.
---------------------------------------------------------------------------
\76\ 15 U.S.C. 78o-4(b)(2).
\77\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The MSRB also believes that the proposed rule change is consistent
with
[[Page 27313]]
Section 15B(b)(2)(G) of the Act,\78\ which provides that the MSRB's
rules shall:
---------------------------------------------------------------------------
\78\ 15 U.S.C. 78o-4(b)(2)(G).
prescribe records to be made and kept by municipal securities
brokers, municipal securities dealers, and municipal advisors and
---------------------------------------------------------------------------
the periods for which such records shall be preserved.
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(G) of the Act \79\ because it would require dealers
to document the procedures they follow to effect customer account
transfers and to require explicitly written procedures for supervision
of the same.
---------------------------------------------------------------------------
\79\ Id.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Act \80\ requires that MSRB rules not
be designed to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. In determining
whether these standards have been met, the MSRB was guided by the
Board's Policy on the Use of Economic Analysis in MSRB Rulemaking. In
accordance with this policy, the Board has evaluated the potential
impacts on competition of the proposed rule change, including in
comparison to reasonable alternative regulatory approaches, relative to
the baseline. The MSRB does not believe the proposed rule change
imposes any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\80\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The MSRB does not believe the proposed rule change will create a
burden on competition, as all municipal securities brokers and
municipal securities dealers would be subject to the same modified
requirements for customer account transfers. The MSRB believes that the
proposed rule change may reduce inefficiencies that stem from
uncertainty and confusion associated with existing Rule G-26. The MSRB
also believes that dealers may benefit from clarifications and
revisions that more closely reflect the securities industry standard,
which may, in turn, reduce operational risk to dealers and investors.
Finally, the MSRB believes that the proposed rule change will make the
transfer of customer municipal securities account assets more flexible,
less burdensome, and more efficient, while reducing confusion and risk
to investors and allowing them to more conveniently move their
municipal securities to their dealer of choice.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The MSRB received three comment letters in response to the Request
for Comment.\81\ The comment letters are summarized below by topic, and
the MSRB's responses are provided.
---------------------------------------------------------------------------
\81\ See Letters from: Mike Nicholas, Chief Executive Officer,
Bond Dealers of America (``BDA''), dated February 17, 2017; Michael
Paganini (``Paganini''), dated January 6, 2017; and Leslie M.
Norwood, Managing Director and Associate General Counsel, SIFMA,
dated February 17, 2017.
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The Need for Rule G-26
SIFMA supported the stated purpose of the draft amendments to
modernize Rule G-26 and promote a uniform customer account transfer
standard, but it suggests some alternative approaches to achieve that
end. Specifically, SIFMA recognized that Rule G-26 is only applicable
to municipal securities brokers and municipal securities dealers,
particularly those with municipal security-only accounts and bank
dealers, but believes the rule is unnecessary. Further, SIFMA noted
that the firms subject to Rule G-26 are a small fraction of the total
number of firms and, for the most part, are not direct clearing
participants of the NSCC and, therefore, not eligible to participate in
the ACATS process.\82\ SIFMA stated that, because these firms are not
members of the NYSE or FINRA and, therefore, not subject to NYSE Rule
412 and FINRA Rule 11870, they are exempt from participating in ACATS
under Rule G-26. Finally, SIFMA believes that there are few customer
account transfers that occur ex-clearing (i.e., a manual process
outside of ACATS), making Rule G-26 redundant, and suggests that the
MSRB eliminate it.
---------------------------------------------------------------------------
\82\ As of May 16, 2017, there were 27 bank dealers registered
with the MSRB.
---------------------------------------------------------------------------
Although SIFMA is correct that most of the firms subject to Rule G-
26 do not participate in ACATS, SIFMA did not recognize that, from the
rule's inception, it has been intended to cover these firms, which are
not subject to NSCC, FINRA or NYSE rules, regardless of how few of them
there may be and regardless of how few customer account transfers they
may perform.\83\ As such, the MSRB believes that there remains a need
for Rule G-26 to address the manual processes used by these firms in
transferring customer accounts.
---------------------------------------------------------------------------
\83\ See Exchange Act Release No. 22810 (Jan. 17, 1986), 51 FR
3287 (Jan. 24, 1986) (SR-MSRB-86-2).
---------------------------------------------------------------------------
SIFMA alternatively suggested that, if the MSRB does not eliminate
Rule G-26, it should amend the rule to incorporate FINRA Rule 11870 by
reference, similar to what the NYSE has done in its Rule 412 and what
the Board has done in MSRB Rule G-41, on anti-money laundering
compliance programs.\84\ SIFMA specifically proposed that the rule
state that dealers ``shall comply with FINRA Rule 11870, concerning the
transfer of customer accounts between members, and any amendments
thereto, as if such Rule is part of MSRB's Rules.'' SIFMA believed this
``methodology is the most efficient way to reduce confusion and risk to
investors, and reduce regulatory risk to dealers,'' which SIFMA stated
have largely not been complying with the rule. SIFMA further believes
this would ensure that all dealers are covered by a rule and that there
is harmonization between the various SROs' rules.
---------------------------------------------------------------------------
\84\ Rule G-41 provides that dealers will be deemed to be in
compliance with anti-money laundering program requirements if they
establish and implement a program that is in compliance with the
rules, regulations or requirements governing the establishment and
maintenance of anti-money laundering programs of the registered
securities association of which the dealer is a member or the
appropriate regulatory agency as defined in the Exchange Act.
---------------------------------------------------------------------------
Although amending Rule G-26 to incorporate FINRA Rule 11870 by
reference could be a simple and efficient solution to provide a uniform
industry standard, the MSRB does not typically incorporate other
regulators' rules by reference. The MSRB believes that, while the
incorporation by reference approach suggested by SIFMA may enhance
harmonization with FINRA's rules, that approach would raise significant
concerns for the MSRB, given its statutory mandate and mission. For
example, if FINRA or its staff were to provide an interpretation of
FINRA Rule 11870, the MSRB automatically would be adopting that
interpretation without deliberately considering the issues that may be
unique to, or the interpretation's ramifications for, the municipal
securities market. Further, there are municipal securities dealers that
are not members of FINRA. Those dealers may not have notice of FINRA's
rule interpretations unless the MSRB were to monitor FINRA's rulemaking
and independently notify dealers. Therefore, if the MSRB were to
regulate customer account transfers over which it has jurisdiction by
simply incorporating a FINRA rule by reference, the MSRB potentially
could be seen as delegating its core mission to protect investors,
issuers, and the public interest and to promote a fair and efficient
municipal market.
[[Page 27314]]
Consistency With FINRA Rule 11870 and the Definition of
``Nontransferable Asset''
As discussed in the Request for Comment, FINRA Rule 11870(f)(1)
requires that any fail contracts resulting from an account transfer,
which includes municipal securities, be included in a dealer's fail
file and that, not later than 30 business days following the date
delivery was due, the dealer shall take steps to obtain physical
possession or control of the municipal securities so failed to receive
by initiating a buy-in procedure or otherwise.\85\ This 30-day time
frame, however, is inconsistent with Rule G-26, which, through
reference to MSRB Rule G-12(h), provides 10 calendar days with the
option for a one-time extension of 10 calendar days, totaling up to 20
calendar days, for dealers to close out failed inter-dealer municipal
securities transactions.\86\ The Request for Comment also noted that an
additional layer of inconsistency and complexity arises due to the
system used to process most failed securities resulting from customer
account transfers and inter-dealer transactions. Specifically, an
inter-dealer transaction of municipal securities is processed in the
NSCC's Continuous Net Settlement (``CNS'') system to be paired up with
potentially another counterparty and settled.\87\ Any CNS-eligible
municipal security in a customer account transfer that fails to be
delivered also enters CNS. Once in CNS, it is difficult to determine
which fails resulted from inter-dealer transactions or customer account
transfers, and the counterparties that are paired up may not be the
same counterparties to the original transaction/transfer. As a result,
it may be unclear with which rule and corresponding time frame firms
should comply--Rule G-12(h) or FINRA Rule 11870.
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\85\ A buy-in occurs when the seller in a transaction, who
failed to deliver the securities sold to the buyer, purchases all or
any part of the securities necessary to complete the transaction at
the current market, with the seller bearing any burden from any
change in the market price, and any benefit from any change in the
market price remaining with the buyer.
\86\ The MSRB notes that market participants were very
supportive of, and, in fact, suggested the time frames recently
adopted in Rule G-12(h) for closing out failed inter-dealer
transactions. The MSRB further notes that the inconsistency between
the timing of FINRA's buy-in procedures under FINRA Rule 11870(f)(1)
(30 business days) and the timing of the MSRB's previous close-out
procedures for inter-dealer transactions (up to 90 business days)
existed prior to the amendments to Rule G-12(h).
\87\ As a key part of the CNS system, NSCC acts as the central
counterparty for clearance and settlement for virtually all broker-
to-broker equity, corporate and municipal bond and unit investment
trust trading in the United States. CNS processes include an
automated book-entry accounting system that centralizes settlement
and maintains an orderly flow of security and money balances.
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To avoid these inconsistencies and uncertainties, the draft
amendments in the Request for Comment proposed to amend the definition
of ``nontransferable asset'' to include any customer long position in a
municipal security that allocates to a short position, which resulted
from either the carrying party's trading activity or failure to receive
the securities it purchased to fill a customer's municipal securities
order (i.e., an inter-dealer transaction fail). In the Request for
Comment, the MSRB noted that, if FINRA were to similarly amend Rule
11870 to make these short positions nontransferable, then customer
account transfers of municipal securities would be significantly less
likely to fail and there might no longer be a need to establish fail
contracts and provide a process by which those fails could be closed
out, eliminating the timing inconsistencies and ambiguity. The MSRB
further noted that dealers may not be subject to the costs associated
with these transfer fails, as well as the complication and confusion
that may arise on coupon payment dates from the need to provide
substitute interest for tax-exempt municipal securities. The MSRB
stated its belief that this draft amendment would have the additional
benefits of reducing counterparty risk and increasing investor
confidence.
SIFMA recognized the inconsistency between Rule G-26 and FINRA Rule
11870, as well as the complexity in CNS created by the inconsistency;
however, it disagreed with the MSRB's analysis that the draft amendment
to the definition of ``nontransferable asset'' would reduce
counterparty risk and increase customer confidence, and it believed
that it would be disruptive to industry practice and outside of
standard ACATS procedures. SIFMA stated that ``[a]utomated systems fail
to be efficient if they require manual processes, such as validating if
a long municipal security position is allocated to a short firm
position.'' BDA also had concerns and believes that the proposed
amendment to the definition is unworkable. BDA stated that significant
operational changes would have to occur in order to make the change
feasible because current dealer systems are not designed to code or
segregate inter-dealer transaction fails and account transfer fails,
and because most firms track fails at the firm level, not at the
account level for compliance with regulatory issues, such as properly
tracking substitute interest. BDA urged the MSRB to engage in dealer
outreach to find a different solution that better aligns with existing
dealer systems and processes.
As an alternative to amending the definition of ``nontransferable
asset,'' SIFMA believed that FINRA Rule 11870 must be amended as soon
as practicable to reflect the recent amendments to Rule G-12 relating
to close-outs to eliminate the inconsistency in the time frames.
Accordingly, SIFMA suggested that FINRA simply cross-reference Rule G-
12(h), and any amendments thereto, for any fail contracts in municipal
securities resulting from customer account transfers.\88\ BDA commented
that it did not see a policy reason to amend Rule G-26, but BDA's
letter did not confront the inconsistency between Rule G-26 and FINRA
Rule 11870, and the related complexity created in CNS. BDA further
questioned the need for any changes by FINRA to FINRA Rule 11870, and
believed FINRA Rule 11870(f) is an adequate standard with which Rule G-
26 should harmonize instead.
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\88\ SIFMA also suggested that FINRA consolidate its rules
relating to customer account transfers, including related fees, into
FINRA Rule 11870.
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Given both SIFMA's and BDA's concerns about the operational changes
needed and the corresponding costs that would result from such a
change, the MSRB, at this time, does not believe amending the
definition of ``nontransferable asset'' to include any customer long
position in a municipal security that allocates to a short position is
appropriate, particularly without certainty that FINRA would similarly
amend FINRA Rule 11870 to ensure that all short municipal securities
positions in customer account transfers receive identical treatment.
Miscellaneous Comments
As discussed above, in response to comments from SIFMA, the
proposed rule change would amend the definition of ``nontransferable
asset'' to include proprietary products of the carrying party and would
allow for either the carrying party or the receiving party (or both) to
provide the list of nontransferable assets to a customer and request
their disposition.\89\ Additionally, Paganini believed that firms are
``very inefficient when it comes to account transfers of specific types
of assets i.e., some municipal bonds,'' and that ``it is exasperating,
frustrating, and time consuming for the private investor'' when there
is a problem with an account transfer. He recommended that there be
some type of enforcement mechanism or financial penalty for transfers
that cannot be
[[Page 27315]]
accomplished within a reasonable time period. The MSRB notes that
dealers are expected to comply with the appropriate customer account
transfer rule, including Rule G-26 (and the time frames included
therein) where applicable, and that, if they do not, they could be
subject to an enforcement action for violating the rule.
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\89\ See Definition of ``Nontransferable Asset'' and Transfer
Instructions supra.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period of up to 90 days (i) as
the Commission may designate 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 or disapprove 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, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-MSRB-2017-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2017-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the MSRB. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MSRB-2017-03 and should be
submitted on or before July 5, 2017.
For the Commission, pursuant to delegated authority.\90\
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\90\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-12266 Filed 6-13-17; 8:45 am]
BILLING CODE 8011-01-P
