AWASHINGTON – The Municipal Securities Rulemaking Board is moving forward with a slightly revised proposal to amend its rule on customer account transfers after dealers said some of the provisions would not work and that the rule is unnecessary.
The MSRB addressed some of those concerns in its recent filing of revised changes to its Rule G-26 on customer account transfers with the Securities and Exchange Commission, but did not take the more significant steps of either eliminating the rule or cross-referencing a similar and more up-to-date Financial Industry Regulatory Authority rule as the Securities Industry and Financial Markets Association had suggested.
The MSRB said its changes would “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 municipal securities to their dealer of choice.”
Rule G-26 currently requires dealers to cooperate in the transfer of customer accounts and includes various procedures for carrying out the transfer process. A transfer occurs when a customer decides to transfer an account from one dealer, the carrying party, to another, the receiving party. G-26 lays out specific time frames during which the transfers must occur as well as limits on why the receiving party can protest a customer’s transfer instruction.
The rule was adopted in 1986 and is part of an industry-wide initiative to create a uniform customer account transfer standard, according to the MSRB. The standard is primarily driven by the National Securities Clearing Corp.’s (NSCC) Automated Customer Account Transfer Service (ACATS). ACATS is a system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank.
The MSRB’s rule, which governs municipal security-only customer account transfers, is similar to other self-regulatory organization rules, such as New York Stock Exchange's Rule 412 and Financial Industry Regulatory Authority's Rule 11870. The MSRB periodically modifies its requirements under G-26 to conform to provisions in the parallel rules of other self-regulatory organizaitons so that there is a consistent standard.
Leslie Norwood, managing director and associate general counsel of SIFMA, said the group is “disappointed that the MSRB has rejected our suggestions with regard to eliminating Rule G-26 even though they recognize that it is a very small number of firms that would not be covered.” SIFMA had argued that most of the firms subject to G-26 and not any other regulatory rules regarding account transfers did not participate in ACATS anyway.
Norwood added that SIFMA is also disappointed that the MSRB is not going to incorporate FINRA's Rule 11870 by reference even though it recognizes that it has cross-referenced other regulators' rules before and that SIFMA is going to continue to pursue the desired changes with the SEC.
The MSRB said it is pursuing the rule despite SIFMA’s urging otherwise because even though most of the firms that G-26 covers do not participate in ACATs, the rule was always intended to cover those firms regardless of how few customer account transfers they perform. The self-regulator added that if it were to simply incorporate FINRA's Rule 11870 by reference, it “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.”
John Vahey, managing director of federal policy with Bond Dealers of America, said the group is “going to assess the filing and discuss it with our members” before commenting with the SEC.
The MSRB had also identified a potential problem with dealers resolving transfer failures that it made an effort to address in its original proposal to amend the rule. The problem came from a difference in the time frames for the resolution of failed customer account transfers of municipal securities under MSRB and FINRA rules.
One solution the MSRB proposed was to classify as a “nontransferable asset” any customer long position in a municipal security that allocates to a short position, meaning the carrying party does not actually have the security to transfer. If the asset is by definition nontransferable, the problems that could result from the time frame discrepancies would be less likely to be triggered. That change would also would have required FINRA to take action to help resolve the discrepancy, the MSRB said.
SIFMA and BDA said the definition change would present operational challenges for dealers and lead to unnecessary costs. The MSRB ultimately abandoned the idea because of the dealers' concerns.
The MSRB did separately revise the definition of nontransferable asset in G-26 to include proprietary products, citing a desire to ensure that bank dealers and other dealers have clarity when handling proprietary products in customer account transfers.
Other amendments that the MSRB included in its proposal to the SEC include allowing the transfer of customer account residual credit positions, such as cash or securities from dividend or interest payments, under the rule. The changes to Rule G-26 would also allow electronic signatures as written notice to initiative a transfer and would shorten the time for validation of a transfer to one day from three and the time for completing a customer account transfer to three days from four.
The revised rule would additionally expand the list of reasons for a carrying party to take issue with a transfer, including: an improper signature with the transfer instruction; no transferable assets in the account; and the need for additional documents.
Another portion of the revised rule would require dealers to document the procedures they follow as they carry out account transfers as well as their supervision of the transfers.