On May 7, 2001 the National Association of Securities Dealers, Inc. (NASD) Regulation (NASDR) Board of Governors authorized the publication for comment of a rule interpretation prohibiting any member firm from taking any action that interferes with a customer's right to transfer his or her account. Battle lines have been forming over this issue for decades --- if not generations --- and the comment period on this proposal promises to be among the more colorful in recent memory.

Historically, brokerage firms seek to have courts issue temporary restraining orders (TRO) as a means of preventing their former employees from taking existing customers to new employers. Such TROs essentially prohibit the transfer of customer accounts in an effort to maintain the status quo pending resolution of the substantive issues at an intra-industry arbitration. This tactic has caused much ill will both between customers and broker-dealers and between registered personnel and broker-dealers.

Customers desiring to transfer their accounts to the new firm of their servicing representative often find such requests tied up for interminable periods of time. The cause of this failed transfer is frequently attributed to

· Incomplete transfer requests;

· Back-office paperwork delays;

· Delays inherent in the ACAT system;

· Refusal of the new BD to accept accounts covered by any TRO; or

· Court-imposed restraint against such transfer.

Regardless of the cause, customers become victimized by a system that should protect their interests above all others. In the long run, such clients routinely leave the former BD, frequently decide to transfer their accounts from the new firm, and become disenchanted with the securities industry’s internecine warfare. Such squabbling benefits no industry participant.

Registered personnel seeking to join a new employer are often surprised to learn that the client accounts may not be legally recognized as their property. Similarly, they discover that the employment agreement they signed years earlier specifically states that client accounts are the broker-dealer’s property --- if only they had read the document before they signed it. Worse, they now understand that any commissions derived from such accounts may be awarded, in full or in part, to their former firm.

In announcing the NASD’s account-transfer proposal, Robert R. Glauber, Chief Executive Officer and President of the NASD stated,

In developing this rule interpretation, we have sought to balance the needs of customers to access and control their brokerage accounts with real competitive concerns of firms. A customer should not be deprived of brokerage services while the broker servicing the customer's account tries to resolve an employment dispute with his or her former firm. Customers should have the freedom to choose the registered representative and the securities firm that service their brokerage accounts.

Accordingly, the NASD’s press release addressing the new interpretation notes that the regulator views any action by a member that interferes, delays or impedes a customer's right to transfer his or her account as being inconsistent with just and equitable principles of trade, and, presumably constituting a violation.

But what appeared to be a somewhat plain-speaking press release was clouded by the curious advisory that the:

interpretation does not restrict employment contracts that may prevent brokers from soliciting a previous employer's customers. It also does not prevent a firm from seeking a court order when a former employee violates an employment contract.

It has become a wide-spread practice among broker-dealers to require job candidates to sign employment contracts or agreements --- the guts of which is a non-solicitation clause. So the NASD’s logic and its leadership on the issue are unclear.  On the one hand, the SRO has come out in favor of eliminating attempts to restrict account transfers; on the other hand, the press release equivocates by skirting the issue of permissive non-solicitation clauses.  How the NASD reconciles  those two apparently contradictory positions will be of concern to all industry participants.

Years ago the NASD announced that the inclusion of so-called confidentiality clauses in settlement agreements between industry participants and public customers was in violation of the rules, to the extent that such prohibitions extended to cooperation with regulatory inquiries (which they often did). The NASD argued that it was not appropriate for the industry to restrain public customers from talking to the NASD, SEC, or other regulator or government agency. Consequently, all such releases were re-drafted to be in accord with the regulator’s position.

Now the NASD has questioned another long-standing practice that is manifested in many standard employment agreements. However, if the regulator is against improper restraints against customer account transfers, it is difficult to understand how it could support non-solicitation provisions. The only rational explanation is that the NASD would not tolerate efforts to prevent the customer from transferring to another firm, but would also not interfere with member firms seeking to contractual prevent employees from soliciting accounts previously serviced at the former employer's.  In plain English, it would appear that the NASD may be espousing a position that says, in essence, you can't prevent the customer from transferring to another firm but you can contractually prevent or limit the former RR from benefiting from such a transfer (if  the RR instigated the transfer in violation of a non-solicitation clause).  But in fairness to the NASD, we will have to read the actual proposal in order to determine what’s involved.

There’s no question that this will be a hotly contested issue; with labor against management and registered representative against broker-dealer. The interesting issue will be if any cohesive voice will emerge on behalf of the 500,000 plus registered personnel in the industry. If the past is prologue, it’s likely that the BDs will speak effectively through SIA and other trade organizations--- but it's also probable that the registered representative community  will fail to mount an effective response. Traditionally, RRs have shown a disinclination to participate in any organized effort on their behalf.  They don't join.  They don't pay dues.  And many of the fledgling associations that have attempted or are attempting to advocate on behalf of the industry's rank and file have proven themselves to be either ineffective or unable to attract sufficient membership to be taken seriously.  

As such the NASD will be under scrutiny to avoid its prior failures to independently and fairly regulate --- especially when the demands of its members conflict with those of public customers and industry employees.  The tremendous challenge facing new NASD President Glauber will be his resolve in the face of a likely well-orchestrated opposition from the BD community concerning any effort to question their ownership of accounts.  BDs have significant financial and competitive concerns surrounding this issue --- and, to be candid, such positions are meritorious.  However, the RR must have his or her role elevated beyond a mere order taker if Wall Street is to be taken seriously.  Who "owns" the account is not an academic question.  It is one that goes to the heart of the ongoing struggle to demand professionalism within the context of customer service.  Consequently, President Glauber must avoid the temptation to once again disenfranchise a weaker industry segment to the advantage of a more powerful one --- as was previously condemned by the SEC in its 1996 21(a) Report.  Further, President Glauber must eventually recognize the hundreds of thousands of hard-working men and women who sell stocks, monitor portfolios, and advise the investing public are disenfranchised at the NASD because they are not members and have no direct vote on any proposal .