Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 11870 establishes the comprehensive framework governing the transfer of a customer's securities account — in whole or in specifically designated part — from one member (the "carrying member") to another (the "receiving member"), commonly referred to as ACATS (Automated Customer Account Transfer Service) transfers.
The rule operates through fourteen lettered paragraphs (a) through (n).
Paragraph (a) establishes both members' general obligation to expedite and coordinate the transfer.
Paragraph (b) establishes the transfer instruction form (TIF) and ACATS submission procedure, with a one-business-day validation/exception window.
Paragraph (c) establishes the transfer instruction's required disclosures, the nontransferable asset categories, and disposition alternatives.
Paragraph (d) establishes the validation procedures, including account-freezing, the twelve permissible exception grounds, safekeeping position definitions, and CUSIP-less municipal securities description requirements.
Paragraph (e) establishes the three-business-day completion deadline and the fail-to-receive/fail-to-deliver contract establishment mechanism.
Paragraph (f) establishes the fail contract framework, including buy-in timing (10 or 30 business days depending on security type), DK prohibitions, and the limited partnership/mutual fund re-registration adequate-delivery provisions.
Paragraph (g) requires prompt resolution of post-transfer discrepancies.
Paragraph (h) establishes close-out procedures directly paralleling FINRA Rule 11810's buy-in framework.
Paragraph (i) establishes sell-out procedures directly paralleling FINRA Rule 11820.
Paragraph (j) establishes exemptions, including the FINRA Rule 9600 Series exemptive pathway and delayed-delivery asset categories.
Paragraph (k) addresses retirement plan securities accounts.
Paragraph (l) defines "securities account" to include money market fund positions.
Paragraph (m) establishes the registered clearing agency participant framework, including ACATS functionalities. And paragraph (n) addresses ex-clearing transfers. Supplementary Material .01 requires written procedures; .02 addresses retirement plan tax/penalty disclosures; .03 sets forth three sample forms. FINRA Rule 11870 was amended by both SR-FINRA-2010-060 and SR-FINRA-2010-030, both effective December 15, 2010, with an extensive prior amendment history extending back to its adoption by SR-NASD-85-29 effective February 24, 1986.
FINRA Rule 11870 sits within the 11800 Close-Out Procedures subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11860's COD orders framework and immediately preceding FINRA Rule 11880's settlement of syndicate accounts framework.
FINRA Rule 11870(a)(1) establishes the foundational terminology and obligation — when a customer whose securities account is carried by a member (the "carrying member") wishes to transfer securities account assets, in whole or in specifically designated part, to another member (the "receiving member") and gives authorized instructions to the receiving member, both members must expedite and coordinate activities with respect to the transfer.
Paragraph (a)(2) addresses transfers outside ACATS — if a customer desires to transfer a portion of his or her account outside of the Automated Customer Account Transfer Service (ACATS), authorized alternate instructions should be transmitted to the carrying member indicating such intent and specifying the designated assets to be transferred.
Although such transfers are not subject to the provisions of this Rule, members must still expedite all authorized account asset transfers and coordinate their activities. Unless otherwise indicated, the automated customer account transfer capabilities referred to in paragraph (m)(1) shall be utilized for partial transfers.
Paragraph (a)(3) confirms a technology-neutral authorization standard — customer authorization pursuant to a transfer instruction could be the customer's actual signature, or an electronic signature in a format recognized as valid under federal law to conduct interstate commerce — directly paralleling the electronic-signature accommodations this dictionary has observed throughout the Uniform Practice Code's modernization.
FINRA Rule 11870(b)(1) establishes the core ACATS mechanism — upon receipt from the customer of an authorized broker-to-broker transfer instruction form ("TIF") to receive such customer's securities account assets, the receiving member must immediately submit such instruction to the carrying member by establishing such instruction in ACATS. The carrying member must, within one business day following establishment of such instructions (or receipt of a TIF directly from the customer authorizing a partial transfer), either (A) validate the transfer instruction (with an attachment reflecting all positions and money balances as shown on its books), or (B) take exception to the transfer instruction for reasons other than securities positions or money balance discrepancies and advise the receiving member of the exception taken. This one-business-day window is itself subject to change as determined from time-to-time by the National Securities Clearing Corporation (NSCC) in any ACATS-related publication — the first explicit acknowledgment this dictionary has encountered of an industry utility (rather than FINRA itself) having authority to adjust a Uniform Practice Code timeframe.
Paragraph (b)(2) requires the carrying member and receiving member to promptly resolve any exceptions taken.
FINRA Rule 11870(c)(1) establishes the disclosures a transfer instruction must contain. Subparagraph (A) discloses that assets not readily transferable (with or without penalties) may not transfer within the rule's required time frames. Subparagraph (B) discloses that the customer will be contacted regarding disposition of nontransferable assets (other than proprietary money market funds) for partial transfers. Subparagraph (C) requires, for whole-account transfers other than retirement plan accounts, the customer's affirmation that any credit/debit cards and unused checks issued in connection with the account have been destroyed or returned.
Subparagraph (D) defines "nontransferable asset" through six categories: (i) a proprietary product of the carrying member; (ii) a third-party product (e.g., mutual fund/money market fund) with which the receiving member lacks the relationship necessary to receive/carry the asset; (iii) an asset that cannot be received due to regulatory limitations on the receiving member's business scope; (iv) a bankrupt issue for which the carrying member lacks proper denominations and no transfer agent is available for re-registration; (v) an issue for which proper denominations cannot be obtained due to governmental regulation or issuance terms (e.g., foreign securities, baby bonds); and (vi) limited partnership interests in retail accounts. Subparagraph (E) requires prompt resolution and reversal of misidentified nontransferable assets, with record updates and customer notification.
Paragraph (c)(2) addresses proprietary-product designation — a proprietary product of the carrying member is deemed nontransferable unless the receiving member agrees to accept it; the receiving member designates third-party products it cannot accommodate, and the carrying member may then treat those as nontransferable.
Paragraphs (c)(3) and (4) establish written-request-and-disposition-alternatives frameworks for, respectively, carrying-member proprietary nontransferable assets (with liquidation, retention, or direct physical transfer to the customer as alternatives) and receiving-member-designated third-party nontransferable assets (with liquidation, retention, shipment to the customer, or transfer to the third-party product issuer as alternatives).
Paragraph (c)(5) requires the carrying member to distribute resulting money balances or initiate transfer within five business days of receiving the customer's disposition instructions.
Paragraph (c)(6) addresses retirement plan accounts — the customer authorizes the custodian/trustee to deduct outstanding fees from any credit balance, or, if insufficient, to liquidate assets to the extent necessary to satisfy such fees — directly connecting to FINRA Rule 11860(b)(2)'s sinking fund and dividend reinvestment custodial framework's broader custodial-fee context.
FINRA Rule 11870(d)(1) requires that upon validation of a whole-account transfer instruction, the carrying member must "freeze" the account — all open orders (except option positions expiring within seven business days) must be canceled, and no new orders may be taken.
Paragraph (d)(2) establishes a critical principle — a carrying member may not take exception to a transfer instruction, and therefore deny validation, because of a dispute over securities positions or money balance; notwithstanding any alleged discrepancy, the carrying member must transfer the positions and/or money balance as reflected on its books.
Paragraph (d)(3) enumerates the only twelve permissible exception grounds, lettered (A) through (L): additional documentation required (e.g., death or marriage certificates); the account is "flat" with no transferable assets; an invalid account number (with a specific carve-out for internally-reassigned account numbers, which remain valid if tracked by the carrying firm); a duplicate request; violation of the member's credit policy; unrecognized residual credit assets; customer rescission; Social Security/Tax ID mismatch; account title mismatch; account type mismatch; missing or improper authorization; or the customer has already taken possession of the account assets. Paragraph (d)(4) permits re-submission of a "flat"-account exception only with the most recent customer statement attached.
Paragraph (d)(5)(A) requires the carrying member, upon validation, to return the transfer instruction with an attachment indicating all securities positions, safekeeping positions, and money balances, generally including then-current market value (or original cost if market value cannot be determined, e.g., for limited partnership interests) — except that delayed delivery assets (per paragraph (j)(2)), nontransferable assets, and assets in transfer directly to the customer need not be valued, though their status must be indicated. Paragraph (d)(5)(B) defines "safekeeping position" as any security held by a carrying member in the customer's name, including unendorsed securities or securities with an attached stock/bond power.
Paragraph (d)(6) requires the carrying member to indicate any outstanding Regulation T initial margin calls as of the validation date — connecting to the Federal Reserve System's Regulation T this dictionary first encountered in connection with FINRA Rule 11130(d) and FINRA Rule 11740(a)'s depositary fallback.
Paragraph (d)(7) requires, for municipal securities lacking CUSIP numbers, a minimum description including issuer name; interest rate and dated date; maturity/put date and callable/revenue-bond status (with revenue type if material); and any additional obligor information — directly connecting to FINRA Rule 11100(d)'s CUSIP requirement as the baseline this provision accommodates an exception to, and to FINRA Rule 11220's description-of-securities framework.
Paragraph (d)(8) limits the receiving member's post-validation rejection rights for whole-account transfers to non-compliance with the receiving member's own credit policies or minimum asset requirements (Regulation T non-compliance may be deemed credit-policy non-compliance) — and such rejection must be all-or-nothing, not selective by asset.
FINRA Rule 11870(e) establishes the three-business-day completion deadline — within three business days following validation, the carrying member must complete the transfer. The receiving and carrying members must immediately establish fail-to-receive and fail-to-deliver contracts at then-current market values against undelivered/unreceived long/short positions (including options), debiting/crediting the related money amount. The customer's assets are thereupon deemed transferred — notwithstanding that the underlying fail contracts may remain open. This three-business-day period, like paragraph (b)'s one-business-day window, is subject to NSCC adjustment.
FINRA Rule 11870(f) establishes the fail contract framework. Paragraph (f)(1) requires fail contracts to be included in the member's fail file, with buy-in steps required not later than 10 business days after the date delivery was due — except for fourteen enumerated categories (banker's acceptances, bond anticipation notes, certificates of deposit, commercial paper, FMAC certificates, FNMA certificates, foreign securities, GNMA certificates, limited partnership interests, municipal bonds, transferable mutual fund shares, revenue anticipation notes, SBA certificates, and tax anticipation notes), for which the period extends to 30 business days.
Paragraph (f)(2) prohibits a carrying member from "DK"-ing a fail contract (including a Receive/Deliver Instruction generated by an automated transfer system) for transferred-but-undelivered account assets — connecting directly to the DK concept this dictionary examined in FINRA Rule 11190.
Paragraph (f)(3) requires fail contracts under this rule to be clearly marked or captioned as such — except where the fail contract participates in a repricing and reconfirmation service offered by a registered clearing agency, directly invoking the RECAPS-type service this dictionary examined in FINRA Rule 11190 and FINRA Rule 11810(e)(2).
Paragraph (f)(4) requires safekeeping-position fail contracts to be so indicated. Paragraph (f)(5) requires open fail contracts to be marked-to-market regularly — directly connecting to FINRA Rule 11740's marking-to-market framework examined earlier in this dictionary's coverage. Paragraph (f)(6) exempts nontransferable and in-process-of-direct-transfer assets from paragraph (e)'s requirement. Paragraph (f)(7) permits members to agree to close out fail contracts via delivery of substantially comparable securities with the customer's prior consent.
Paragraph (f)(8) requires a receiving member to reject a delivery of a security that cannot be deemed a safekeeping position against a fail contract as such.
Paragraph (f)(9) — directly confirming the connection this dictionary anticipated from FINRA Rule 11574's Supplementary Material .01 — requires a receiving member to deem receipt of a duly executed limited partnership change of trustee form (for limited partnership interests) or a mutual fund re-registration form (for mutual fund shares) as adequate delivery for transferring such assets. For book-entry mutual fund shares, the re-registration form must contain the customer's new account number at the fund, with the carrying member responsible for obtaining and entering that number before submission — this provision applies to book-entry shares and does not preclude delivery of physical certificates.
FINRA Rule 11870(g) requires prompt resolution of post-transfer position or money-balance discrepancies (paragraph (g)(1)); requires the carrying member to promptly distribute any transferrable assets accruing to the account after transfer (paragraph (g)(2)); and requires a member receiving a claim notice to resolve it within five business days or take exception with specific reasons (paragraph (g)(3)).
FINRA Rule 11870(h) establishes a close-out procedure for valued fail contracts in securities lacking established close-out procedures, that the carrying member has not completed — closeable by the receiving member not sooner than the third business day following the date delivery was due, directly mirroring FINRA Rule 11810(a)'s timing. The sub-paragraphs replicate FINRA Rule 11810(b) and (h)'s framework closely: written notice delivered by 12:00 noon ET two business days preceding execution (paragraph (h)(1)); notice content including settlement date, quantity, contract price, and a not-prior-to-3:00-p.m.-ET deadline (paragraph (h)(2)(A)); a restriction that original notices may only issue against paragraph (f)(3)-marked fail contracts (paragraph (h)(2)(B)); a re-transmission mechanism with a 12:00 noon ET one-business-day-prior deadline (paragraph (h)(2)(C)); and confirmation that re-transmitted notices may issue against a fail contract regardless of its origin (paragraph (h)(2)(D)).
Paragraph (h)(3)(A) permits the receiving member, on the carrying member's failure to deliver or obtain a stay, to close the contract by purchasing the necessary securities, with such execution also closing out re-transmitted-notice contracts. Paragraph (h)(3)(B) establishes the same-day-then-next-day notification framework this dictionary has now encountered repeatedly — immediate notification (no later than 6:00 p.m. ET) with formal confirmation and billing/payment forwarded as promptly as possible. Paragraph (h)(3)(C) establishes the same seven-calendar-day securities-in-transit extension this dictionary examined in FINRA Rule 11810(g). Paragraph (h)(4) establishes notice expiration paralleling FINRA Rule 11810(e)(1).
FINRA Rule 11870(i)(1) establishes a sell-out remedy directly paralleling FINRA Rule 11820(a) — upon the receiving member's failure to accept delivery, and lacking (A) a properly executed Uniform Reclamation Form, (B) a depository generated rejection advice, or (C) a valid Reversal Form, the carrying member may, without notice, sell-out in the best available market, for the liability of the defaulting party, all or any part of the securities due or deliverable.
The addition of (C) a valid Reversal Form — beyond FINRA Rule 11820(a)'s two alternatives (Uniform Reclamation Form or depository generated advice) — reflects the account-transfer-specific context: paragraph (m)(2)'s Fail Reversal functionality, available through registered clearing agencies with ACATS capabilities, provides a transfer-specific documentary mechanism this general FINRA Rule 11820 framework does not contemplate. Paragraph (i)(2) establishes the same 6:00 p.m. ET same-day notification framework as FINRA Rule 11820(b).
FINRA Rule 11870(j)(1) establishes — pursuant to the Rule 9600 Series, FINRA may exempt from the provisions of this Rule, either unconditionally or on specified terms and conditions, (A) any member or (B) any type of account, security or financial instrument. This represents the first explicit cross-reference to the FINRA Rule 9600 Series this dictionary has encountered — the FINRA Rule 9600 Series establishes FINRA's general exemptive-relief procedures, and FINRA Rule 11870(j)(1)'s invocation confirms that this general exemptive framework applies to the Uniform Practice Code's customer account transfer requirements specifically.
Paragraph (j)(2) deems three categories subject to delayed delivery and exempt from paragraph (e)'s completion requirement: insurance policies (annuities); stripped coupons; and when-issued or when-distributed securities — the latter directly connecting to FINRA Rule 11130's when, as and if issued/distributed contracts framework examined extensively earlier in this dictionary's coverage. Paragraph (j)(3) requires zero-value fail-to-receive and fail-to-deliver instructions for these delayed-delivery categories.
FINRA Rule 11870(k) requires the receiving member to obtain its custodian/trustee's approval before submitting a retirement plan account transfer instruction (paragraph (k)(1)), and establishes a fee-satisfaction hierarchy — deduct from credit balance, liquidate assets if insufficient, or (if liquidation impracticable) transfer the fee to the receiving member as a debit item (paragraph (k)(2)).
FINRA Rule 11870(l) defines "securities account" to include any money market fund positions or their redemption value — confirming money market fund assets are within the rule's scope notwithstanding their cash-equivalent character.
FINRA Rule 11870(m) establishes the registered clearing agency participant framework. Paragraph (m)(1) requires participants in a registered clearing agency with automated transfer capabilities to use those capabilities (except for specifically-designated alternate-instruction assets). Paragraph (m)(2) requires utilization of clearing-agency functionalities including Partial Transfer Receive (PTR), Partial Transfer Delivery (PTD), Fail Reversal, Mutual Fund Fail Cleanup, or Reclaim Processing where available. Paragraph (m)(3) requires utilization of residual credit processing capability for whole-account transfers. Paragraph (m)(4) establishes electronic-transmittal requirements — a Committee-designated agreement, registered-clearing-agency procedures, a representation-by-transmittal that the receiving member holds proper authority, required information content, and non-standard ACAT processing transmittal where the facility permits. Paragraph (m)(5) defines "registered clearing agency" by reference to the Exchange Act — directly paralleling FINRA Rule 11310(c) and FINRA Rule 11860(b)(1)'s definitions — and defines "participant in a registered clearing agency" as an eligible member-user of the agency's automated transfer capabilities.
FINRA Rule 11870(n) addresses ex-clearing transfers — where one or both members is not a registered clearing agency member, fail-to-receive/fail-to-deliver contracts, settlement, and close-out executions must be made "ex-clearing house" (paragraph (n)(1)); and each member must, for a minimum six months post-whole-account-transfer, transfer accruing credit balances within ten business days (paragraph (n)(2)).
Supplementary Material .01 requires members to establish, maintain, and enforce written procedures reasonably designed to achieve compliance with applicable laws, regulations, and FINRA rules regarding account asset transfers.
Supplementary Material .02 requires the carrying member, for retirement plan transfers, to inform the customer that the chosen disposition method for nontransferable assets may carry tax and penalty liability — connecting to the broader investor-protection theme this dictionary has observed throughout the Uniform Practice Code's customer-facing provisions.
Supplementary Material .03 sets forth three sample forms. Form (a), Customer Securities Account Transfer Instruction, includes account identification fields, the readily-transferable-assets disclosure citing this Rule by number, nontransferable-asset contact commitment, good-deliverable-form transfer instructions (including tax waiver affixation), open-order cancellation instruction, and the credit/debit card and unused check destruction affirmation. Form (b), Customer Retirement Plan Securities Account Transfer Instruction, parallels Form (a) for the successor-custodian/trustee context, including the fee-deduction-and-liquidation authorization this dictionary examined under paragraph (c)(6). Form (c), Mutual Fund Re-Registration Instructions Used for Broker-to-Broker Transfers, implements paragraph (f)(9)'s mutual fund re-registration adequate-delivery mechanism, with a release/indemnification section addressed to both the fund and its transfer agent.
FINRA Rule 11870's fourteen-effective-date amendment history — Adopted by SR-NASD-85-29 effective February 24, 1986; SR-NASD-91-61 effective March 1, 1993; SR-NASD-93-41 effective February 1, 1994; SR-NASD-94-56 effective December 2, 1994 and again effective March 3, 1995; SR-NASD-95-59 effective July 1, 1996; SR-NASD-97-05 effective May 8, 1997; SR-NASD-97-28 effective August 7, 1997; SR-NASD-2000-68 effective November 17, 2000; SR-NASD-2001-53 effective September 12, 2001; SR-NASD-2004-58 effective September 13, 2004; SR-FINRA-2007-005 effective October 22, 2007; and both SR-FINRA-2010-030 and SR-FINRA-2010-060 effective December 15, 2010 — places FINRA Rule 11870 among the most actively-refined provisions this dictionary has examined, second only to FINRA Rule 11810. The SR-NASD-94-56 effective December 2, 1994 amendment shares this filing number with the June 7, 1995 amendment to FINRA Rules 11150, 11620, and 11860 — though with a distinct December 2, 1994 effective date, suggesting SR-NASD-94-56 may have been implemented in phases across different rules.
FINRA Rule 11870 connects directly and for the first time in this dictionary's coverage to the FINRA Rule 9600 Series — invoked by paragraph (j)(1)'s exemptive framework. It connects to FINRA Rule 11100(d) — whose CUSIP requirement paragraph (d)(7) provides a specific accommodation for. It connects directly to FINRA Rule 11130 — whose when, as and if issued/distributed framework paragraph (j)(2)(C)'s delayed-delivery exemption invokes. It connects to FINRA Rule 11190 — whose DK concept paragraph (f)(2) prohibits, and whose reconfirmation/repricing service paragraph (f)(3) exempts from the marking requirement. It connects to FINRA Rule 11220 — whose description-of-securities framework underlies paragraph (d)(7)'s municipal securities description requirements. It connects directly to FINRA Rule 11310(c) — whose registered clearing agency and Exchange Act definitional approach paragraph (m)(5) parallels. It connects directly and substantively to FINRA Rule 11574 — whose Limited Partnership Change of Trustee Form, examined in this dictionary's earlier coverage, paragraph (f)(9) confirms as adequate delivery for transferring limited partnership interests. It connects to FINRA Rule 11700 and FINRA Rule 11710 — whose Uniform Reclamation Form paragraph (i)(1)(A) incorporates as one of three rejection-documentation alternatives. It connects directly to FINRA Rule 11740 — whose marking-to-market framework paragraph (f)(5) requires for open fail contracts. And it connects directly and extensively to FINRA Rule 11810 and FINRA Rule 11820 — whose buy-in and sell-out frameworks paragraphs (h) and (i) respectively replicate in close-out-procedure and sell-out-procedure form specifically for customer account transfer fail contracts.
FINRA Rule 11870 is tested extensively on the Series 7 and Series 24 examinations as the customer account transfer (ACATS) framework — establishing carrying-member and receiving-member obligations, validation procedures, fail contract handling, and close-out/sell-out mechanics for transferred account assets.
The key points to retain are these: FINRA Rule 11870(a) establishes the carrying-member/receiving-member terminology and mutual expedite-and-coordinate obligation, with ACATS as the default mechanism; FINRA Rule 11870(b) requires carrying-member validation or exception within one business day of TIF/ACATS establishment; FINRA Rule 11870(c) requires specific transfer-instruction disclosures and defines six categories of nontransferable assets with disposition alternatives (liquidation, retention, direct transfer/shipment, or third-party transfer); FINRA Rule 11870(d) prohibits exception based on position/balance disputes, enumerates twelve permissible exception grounds, requires account-freezing upon whole-account validation, defines safekeeping positions, and limits receiving-member whole-account rejection to credit-policy/minimum-asset grounds on an all-or-nothing basis; FINRA Rule 11870(e) requires completion within three business days of validation, with immediate fail-to-receive/fail-to-deliver contract establishment; FINRA Rule 11870(f) establishes a 10-business-day (30 for fourteen enumerated security types) buy-in timeline, prohibits DKs of transfer-related fails, requires marking and mark-to-market, and deems limited partnership change-of-trustee forms and mutual fund re-registration forms as adequate delivery; FINRA Rule 11870(h) and (i) replicate FINRA Rule 11810's buy-in and FINRA Rule 11820's sell-out frameworks for account-transfer fail contracts, with paragraph (i) adding a Reversal Form option; FINRA Rule 11870(j) provides FINRA Rule 9600 Series exemptive authority and delayed-delivery exemptions for annuities, stripped coupons, and when-issued/when-distributed securities; and the rule was amended by both SR-FINRA-2010-060 and SR-FINRA-2010-030 effective December 15, 2010, with an extensive prior history extending to its 1986 adoption, and eight selected notices — 86-12, 93-17, 93-86, 01-53, 01-66, 04-58, 07-50, and 10-49.
