NASD Adopts New Rule Interpretation on Client Account Transfers

The hotly-debated and controversial question of “who owns the client” appears to have been answered by the NASD and the SEC: it’s the broker, not the firm. The NASD announced today it will bar member firms from blocking customers from transferring accounts to their brokers after they have switched companies. The NASD also announced that brokerages should not use the courts to stop customers from following

The hotly-debated and controversial question of “who owns the client” appears to have been answered by the NASD and the SEC: it’s the broker, not the firm.

The NASD announced today it will bar member firms from blocking customers from transferring accounts to their brokers after they have switched companies. The NASD also announced that brokerages should not use the courts to stop customers from following their brokers to new firms--and threatened to fine them if they did.

"It is a fundamental right of an investor to choose with whom he or she does business, and the fact that a broker changes firms should not affect an investor's ability to continue to access his or her account and to do business with that broker,'' according to the NASD.

Firms have 30 days to comply.

“This is great news; we’ve been fighting this battle for years and years,” says an West Coast-based UBS PaineWebber rep who was formerly with Merrill Lynch. “When I left Merrill, my clients had to wait months and months before their accounts were transferred--and in between the transfer, they made phone call after phone call and wrote letter after letter. It became a big joke. Merrill just refused to move the account.”

However, as a West Coast-based Salomon Smith Barney pointed out: “Are we talking about accounts brokers got themselves or the accounts he or she inherits? There’s still some questions to be answered about this rule. There’s a very big gray area.” Calls to several major firms were not returned.

Merrill Lynch, Morgan Stanley and Salomon Smith Barney reportedly pledged last month to stop blocking customers from transferring accounts in light of several U.S. state securities regulators expressing concern that investors were harmed by legal disputes between competing firms.

When brokers move to competing firms, the former employers file lawsuits, seeking temporary restraining orders in an attempt to prevent the new employer from accepting transfers of the brokers' former customer accounts. Court orders have stopped thousands of customers from consulting their brokers on trades for as long as a week until cases are settled, the NASD says.

But that ploy has been halted by the new rule.

“Actions that delay or impede a customer's right to transfer his or her account or interfere with customer choice and are not consistent with the NASD's just and equitable principles of trade rule,” according to the NASD.

An East Coast-based Merrill Lynch rep formerly with PaineWebber says he “couldn’t even get my best friend’s account transferred for almost six months--and he’d been with me for 18 years. So no one’s happier than me that this issue has been resolved.”

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