NASD Issues Guidance Regarding Portability of Investments
NASD recently issued Notice to Members (NTM) 07-06, which provides guidance to member firms regarding recommendations by newly associated registered representatives to replace existing mutual funds and similar holdings with other investments. In particular, NASD addressed issues relating to “nonportable” assets that customers may not be able to transfer from one member firm to another. NTM 07-06 provides that member firms should have procedures in place that are specifically designed to review and evaluate investment recommendations made by newly associated individuals to existing customers relating to mutual funds and variable products.
NTM 07-06 states that, when registered representatives with established customers move from one member firm to another, they may wish to transfer their customers’ assets to the new firm. However, NASD stated that there may be impediments transferring certain customer assets to the new firm, such as when the asset is a proprietary product of the prior firm and is not portable to the new firm, or if the asset is a nonproprietary product for which the new firm does not have a dealer or servicing agreement with the product sponsor. NASD noted that, in these cases, the new firm might not sell or service the asset or receive trail commissions from the distributor.
NASD stated that these portability issues may lead the transferring representative to recommend that the customers replace the nonportable holdings with other investments. NTM 07-06 indicates that any such recommendation should be made only after fully assessing suitability of the transaction for the customer, and member firms should adopt procedures to review and evaluate investment recommendations made by newly associated individuals to existing customers, including:
- The new firm should seek to learn the nature of a prospective new representative’s business and consider whether the firm would need a dealer or servicing agreement in order for the representative to sell and provide prior service.
- If the new firm is unable or unwilling to service a customer’s mutual fund or variable product, either the new firm or the representative should advise the customer of this fact, and of the options the customer may have to continue holding the investment at the prior firm, before recommending that the customer liquidate or surrender the investment.
- Any recommendation to liquidate, replace, or surrender a mutual fund or variable product must be suitable for the customer based on the customer’s financial needs and investment objectives. Recommendations should not be a function of the desire of the new firm or the new representative to obtain compensation that it would not otherwise receive if the customer retained the investment.
- For a reasonable period following the association of a new representative, the new firm should review any recommendations to liquidate or surrender mutual funds or variable products that may be inconsistent with the customer’s investment needs and objectives, or that have not been preceded by appropriate disclosure, including all fees, expenses, and surrender charges that may be applicable to the replacement product to the customer. Special supervisory consideration should be given to those transactions involving the replacement of a customer’s existing variable annuity product with a “bonus variable annuity” offered by the new firm.
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
John V. Ayanian
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
Telephone: 202.739.5946
Fax: 202.739.3001
jayanian@morganlewis.com
Theodore R. Lazo
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
Telephone: 202.739.5250
Fax: 202.739.3001
tlazo@morganlewis.com
Sohee Yun
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 191032921
Telephone: 215.963.5538
Fax: 215.963.5001
syun@morganlewis.com