FINRA Rule 11870
FINRA Rule 11870 regulates how customer accounts are handled when the customer wants to change brokerage firms. While most of these account transfers will be handled through the Automated Customer Account Transfer Service (ACATS), Rule 11870 codifies requirements that this system strives to reach while also regulating how transfers can be done without going through ACATS.
The requirements of FINRA Rule 11870 are strict and thorough. Not meeting them can draw the attention of regulatory agents, as they can harm the customer whose accounts are being transferred and can be the first signs of securities misconduct or even fraud. This is especially inconvenient for brokerage firms that are losing a client, as enforcement actions would serve as an additional penalty in a situation where there is no lasting benefit to the firm.
The FINRA defense team and securities litigation attorneys at Oberheiden P.C. have helped numerous brokerage firms and regulated securities professionals take the appropriate steps to comply with the requirements of Rule 11870 and avoid scrutiny from FINRA. They have also defended brokerage firms that have been accused of dragging their feet or violating the mandates of Rule 11870 to the detriment of their former customers.
Experienced FINRA Defense Lawyers
Basic Requirements of FINRA Rule 11870
FINRA 11870 lays out how brokerage firms are legally required to handle situations where a customer wants to move from one firm to another. Most of the legal obligations fall on the carrying firm, or the one that the customer is leaving. In creating these requirements, the Financial Industry Regulatory Authority (FINRA) aims to protect investors from brokerage firms who are willing to bog down the process or otherwise make it difficult to leave, effectively pressuring customers to stay with them.
The customer account transfer process starts with the investor filing a Transfer Initiation Form, or TIF, with the receiving firm, or the one that they want to change to.
If both the receiving firm and the carrying firm participate in ACATS, the receiving firm enters the data on the TIF into the system. The carrying firm is notified of the transfer and has one business day to either validate and approve the transfer or to take exception to it. After validating the order, the carrying firm has to freeze the account and transfer it to the receiving firm within three business days.
If either of the firms does not participate in ACATS, or if the assets in the account being transferred are not eligible for the automated system, the process occurs manually. While the procedures are largely the same, the timeframe is much longer.
Grounds for Taking Exception to the Transfer
The carrying firm has only limited grounds for taking exception, or refusing to immediately validate, the transfer from its firm. FINRA Rule 11870(d)(3) states that carrying firms can only take exception to a transfer if:
- Additional documentation is required to complete the transfer
- There are no transferable assets in the account
- The carrying firm does not have the account
- The transfer request is a duplicate
- Validating the request would violate the carrying firm’s credit policy
- There are unrecognized credit assets in the account and the receiving firm cannot identify who owns them
- The customer cancels the transfer request
- The customer’s identifying information does not match the account or the information on the transfer request does not match the account
- The transfer request is missing or inadequate
- The customer has already taken possession of the assets that were in the account
If none of these grounds are available, the carrying firm has to validate the account within a business day and transfer it to the receiving firm within three.
Not all assets in a customer’s account can be transferred through this process. FINRA Rule 11870(c)(1)(D) states that assets are not transferrable if they are any of the following:
- The carrying member’s proprietary product
- The product of a third party that does not have the necessary relationship or arrangement with the receiving brokerage firm to maintain
- The receiving firm is subject to regulatory limitations that prevent it from taking on the assets
- The asset is a bankrupt issue and the carrying firm cannot transfer it because it does not have the proper denominations or the necessary number of shares
- Issuance terms or government regulations keep the firms from obtaining the proper denominations of the asset, often because it is a foreign security
- The asset is a limited partnership interest in retail accounts
The Rule demands that the carrying and the receiving firms work together in order to quickly and efficiently resolve these situations.
Using Receiver Deletes for Nontransferable Assets
Recently, FINRA weighed in on the receiving firms’ use of a “receiver delete” function in ACATS to remove certain assets from the account. In Regulatory Notice 22-19, FINRA reminded brokerage houses that the only reason they can remove certain assets from an incoming customer account is if they are nontransferable. This implies that, just because the receiving firm is not comfortable or used to handling certain types of assets or securities, it does not mean that the firm can simply refuse to accept them. Additionally, FINRA reminded brokerages that removing assets from the account or refusing to include them in the transfer requires the firm to notify the customer, in writing:
- Which assets are potentially nontransferable, and
- Request instructions for how to dispose of them.
Generally, the request for further instructions should include alternative methods for disposing of, or accounting for, the nontransferable assets, such as:
- Liquidating them
- Letting the carrying brokerage firm keep them for the customer’s benefit
- Shipping them to the customer in the customer’s name
- Transferring them to the third party that originally issued the assets
Frequently Asked Questions About FINRA Rule 11870 and the Law Firm of Oberheiden P.C.
What Can Happen if the Customer Account Transfer Does Not Go Smoothly?
Brokerage firms – whether the carrying firm or the receiving firm – that fail to uphold the legal obligations imposed by FINRA 11870 can find themselves facing reputational harm or, worse, allegations of civil or even criminal misconduct.
Carrying firms that take too long to transfer a customer account to another brokerage can get accused of dragging their feet in order to prove to the customer that switching firms is too much of a hassle. Firms that get the reputation for being slow to transfer their accounts can see potential clients take that factor into consideration before using the firm in the first place. Receiving firms that delay in the transfer can lose their customer’s confidence before they have even joined the company.
More importantly, though, if assets disappear during the transfer, both brokerage firms can find themselves accused of embezzlement or some other form of securities fraud. These allegations can be prosecuted civilly or criminally. In either case, the financial repercussions can be extreme. Additionally, FINRA will likely take action against the firm’s ability to transact in securities if misconduct is detected.
Why Should I Consider Hiring Oberheiden P.C.?
Because Oberheiden P.C. only has senior-level lawyers on its staff. This means two things for our clients.
First, it means that you can rest assured that all of the legal work that we provide is performed by an attorney with extensive experience in the securities field. Other law firms generally have a hierarchy of senior lawyers at the top with legions of junior associates below them, and paralegals below them. When you hire those firms, very little of the legal work on your case will be performed by the senior lawyer whose experience convinced you to go to their firm. Instead, it will be assigned to a junior associate – many of whom are just out of law school – and potentially further delegated to a paralegal. While the senior lawyer is supposed to oversee the legal work product, that oversight is often not as close as you want it to be. At Oberheiden P.C., that does not happen.
Second, it means that all of your communications with our firm go straight to a lawyer who has numerous years of experience handling cases like your own. Not only does this mean that you promptly get informed answers to the questions or concerns that you have; it also means that your call or email does not have to get passed up the chain of command, with each stage carrying the potential for your concerns to be altered or dropped entirely.
Why Don’t You Call Yourself the Best FINRA Defense Firm?
We would rather let our prior clients say those sorts of things about our law firm. Many of them have left testimonials to that effect on our website.
FINRA Defense and Compliance Lawyers at Oberheiden P.C.
The customer account transfer process can be a complicated one, particularly for large customers with a wide variety of investments in their portfolio. However, making mistakes during the process can open a brokerage firm up to allegations of misconduct that harm the firm’s reputation and lead to scrutiny by FINRA or even by the U.S. Securities and Exchange Commission (SEC).
The FINRA defense and securities compliance lawyers at Oberheiden P.C. have extensive experience in this nuanced area of securities law. Contact them online or call them at (888) 680-1745 for legal guidance.