NASD Gets Support for Ending Account Freezes

Customers shouldn't get embroiled in employment disputes. That was the majority view of commenters on an NASDR-proposed rule interpretation that would prohibit customer account freezes during employment disputes. Firms often are successful in getting judges to order the recruiting firm not to accept account transfers from the losing dealer, based on employment agreements. The NASDR received 82 comment

Customers shouldn't get embroiled in employment disputes.

That was the majority view of commenters on an NASDR-proposed rule interpretation that would prohibit customer account freezes during employment disputes. Firms often are successful in getting judges to order the recruiting firm not to accept account transfers from the losing dealer, based on employment agreements.

The NASDR received 82 comment letters on the issue. Sixty commenters supported the idea, nine spoke out against the proposal and 12 submitted mixed views. (One commentator thought the NASD was proposing to prohibit transfers.)

Most of the positive comments came from reps, investors, lawyers and a few firms, including A.G. Edwards.

“The money belongs to the customer; something … the securities business has forgotten,” wrote Kenneth Kesler, a rep with SWS Financial Services in Missouri City, Texas.

“The firm doesn't own the client, nor does the broker; people in this country are not owned like property,” wrote Thomas Duffin, a rep with First Union Securities in Conshohocken, Pa.

American Express Financial Advisors asked the NASDR to hold off submitting the interpretation for SEC approval until brokerage firms had a chance to meet and “discuss and agree whether the rule is necessary.”

Merrill Lynch did not comment, despite the fact that it actively pursues brokers who leave.

Edward Jones, Charles Schwab and bank affiliate ABN AMRO Financial Services voiced fears that the proposal would make them more vulnerable to raids. Schwab attached a copy of the Tully report to its letter, complaining the report's recommendation to curtail recruitment bonuses had not been implemented.

Edward Jones argued the interpretation would essentially gut nonsolicitation clauses. Most departing brokers get letters out to clients over the weekend, Jones wrote, before the firm has a chance to go to court. Without the ability to freeze accounts, all it could do at that point is block the second round of solicitations, which “is, in reality, no prohibition at all,” the firm stated.

J. Pat Sadler, an Atlanta attorney who represents brokers, recommended the NASDR simply ban nonsolicits and nonaccept orders. Otherwise, customers are forced to choose their firms and brokers “only with the benefit of information provided by one side,” he stated.

Barbara Roper, director of investor protection for the Consumer Federation of America, noted that complaints about account transfers “still are among the most common against broker dealers.” The right of clients to choose their brokers and firms should be “incontrovertible,” Roper argued.

The NASDR will review the comments and either amend the proposal or submit it as is to the SEC. A spokesperson says the NASDR does not have a time frame for submitting the proposal.

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