Q: Can a negative response letter be used in a bulk transfer situation?
A: Without knowing the exact details of the situation, I can’t give you a definitive answer. I can tell you that FINRA Rule 11870 describes the customer account transfer process and does permit member firms to use negative response letters rather than obtaining affirmative authorization from the client in certain limited situations.
When the circumstances allow for negative response letters, the Rule requires that the letter contain certain specific disclosures and include a 30-day notice period before the transfer takes effect. In a September 2002 Notice to Members (NTM 02-57), FINRA identified several situations in which the use of negative response letters could be appropriate to effect a bulk transfer of customer’s accounts to another member.
Specifically, the Notice identifies the following situations where bulk transfers are permitted: a member experiencing financial or operational difficulties; an introducing firm no longer in business; changes in a networking arrangement with a financial institution; acquisition or merger of a member firm; and a change in clearing firm by an introducing firm.
Additionally, FINRA requires that the negative response letter contain: “(1) a brief description of the circumstances necessitating the transfer; (2) a statement that the customer has the right to object to the transfer; (3) information on how a customer can effectuate a transfer to another firm; (4) a sufficient time period for the customer to respond to the letter (at least 30 days from the receipt of the letter unless exigent circumstances exist that warrant a shorter timer period); (5) disclosure of any cost that will be imposed on the customer as a result of the transfer, including costs to the customer if the customer initiates a transfer of the account after the account is moved pursuant to the negative response letter; and (6) a statement regarding the firm's compliance with Securities and Exchange Commission (SEC) Regulation S-P (privacy of consumer financial information) in connection with the transfer.”
While the Notice to Members only specifies these instances, FINRA has issued guidance in the form of interpretive letters allowing the use of negative response letters in other limited situations. If your particular situation does not fall into one of the types referred to in either the Notice to Members or the interpretive guidance, I would recommend you seek additional guidance from FINRA.
