ACATS

Bellamy Clearing, as carrying member, receives a transfer instruction through ACATS. Under FINRA Rule 11870 it must do one of only two things within one business day. What are they?

1. A.Freeze the account and await written confirmation of the instruction from the customer.Wrong. Going back to the customer is not among the responses the rule contemplates and simply delays a valid instruction.
2. B.Deliver whatever is transferable and liquidate everything else.Wrong. This skips the response the rule requires and disposes of assets the customer has never been asked about.
3. C.Validate the instruction or, where it disagrees with the positions shown, refuse it.Wrong. Disagreement over what the account holds is specifically not a permitted basis for refusing to act.
4. D.Validate with an attachment of positions and balances, or take exception for a specified reason.Correct. Those are the only two responses the rule allows, and one business day is the window for choosing between them.

Why: Rule 11870 gives the carrying member a binary choice on receipt of a transfer instruction and one business day in which to make it. Either it validates, returning an attachment showing all positions and money balances to be transferred as its own books reflect them, or it takes exception on one of the grounds the rule enumerates, such as a mismatched tax identification number or account title, missing documentation or improper authorization. What it may not do is nothing, and it may not invent a third response of its own. Once the instruction is validated the rule then requires the transfer itself to be completed within three business days.

A customer wants to move her account from a broker-dealer to a bank trust department that is not a participant in the ACATS system. How does this transfer differ operationally from a transfer between two ACATS-participating broker-dealers?

1. A.There is no operational difference; ACATS routes transfers to any financial institution regardless of whether it participates in the system.Wrong. ACATS only connects participating members; it cannot route a transfer to a non-participant.
2. B.The transfer cannot occur at all, since assets may never move from a broker-dealer to a non-ACATS-participating institution under any circumstances.Wrong. The transfer can occur; it simply must be handled through a manual process instead of ACATS.
3. C.Because the receiving party is not an ACATS participant, this transfer must be handled through a manual, non-ACATS process instead of the standard electronic system, since ACATS specifically connects participating members and cannot route a transfer to an institution outside that system.Correct. A transfer to a non-ACATS participant must be handled through a manual process instead.
4. D.The transfer is handled through ACATS exactly as usual, but with an additional fee charged specifically for transfers involving a non-participant.Wrong. ACATS cannot process this transfer at all; it is not simply a matter of an additional fee within the same system.

Why: ACATS specifically connects participating members to each other; it has no way to route a transfer to an institution that has not joined the system, such as a bank trust department that is not an ACATS participant. A transfer to a non-participant has to be handled through a manual, non-ACATS process instead, since the standard electronic system simply cannot reach an institution outside of it.

An account being transferred through ACATS holds shares of a company that has since been delisted and currently has no ascertainable market value. Does this position still transfer along with the rest of the account?

1. A.No -- a position with no ascertainable market value is dropped from the transfer and remains behind at the delivering firm indefinitely.Wrong. A worthless or delisted position is not dropped from the transfer; it still moves with the rest of the account.
2. B.Yes -- the position still transfers along with the rest of the account, since ACATS moves whatever positions the account actually holds regardless of current market value.Correct. The position still transfers; current market value does not affect transfer eligibility.
3. C.No, because a position with no market value must first be formally written off the firm's books before any transfer instruction may be submitted.Wrong. No formal write-off is required before the position can transfer; it simply moves along with the account.
4. D.Yes, but only if the receiving firm specifically agrees in advance to accept positions with no ascertainable market value.Wrong. No special advance agreement from the receiving firm is required for a worthless position to transfer along with the rest of the account.

Why: A position having little or no current market value does not make it ineligible to transfer; the ACATS process moves whatever positions the account actually holds, regardless of whether those positions still carry meaningful value. A delisted, effectively worthless security transfers the same way a healthy, actively traded position would, since valuation is a separate question from whether the position itself is eligible to move.

A carrying member reviewing an ACATS instruction notices that the account title on the instruction does not match the account title on its own books. Separately, at a different account, it notices that its own records show one fewer round lot of a security than the instruction reflects. Which of these is a valid basis for taking exception to the instruction?

1. A.Only the mismatched account title -- a defect in the instruction itself, such as a title that does not match, is a valid basis for exception, while a difference in security position between the two firms' records is expressly not a permitted ground for taking exception.Correct. A mismatched title is a valid instruction defect; a position difference is expressly excluded as a valid ground.
2. B.Only the position discrepancy -- since the firm's own books are the authoritative source, any difference between the instruction and the firm's records is exactly the kind of problem the exception process is meant to address.Wrong. A position discrepancy is expressly excluded as a valid ground for exception; the mismatched title is the valid ground instead.
3. C.Both are valid bases for exception, since both represent some kind of mismatch between the instruction and the carrying member's own records.Wrong. Only the instruction defect (mismatched title) is valid; the position discrepancy is expressly excluded.
4. D.Neither is a valid basis for exception, since the carrying member's only two options are to complete the transfer or reject it outright, with no intermediate exception process available at all.Wrong. An exception process does exist as an intermediate option, and the mismatched title is a valid basis for using it.

Why: The exception process is aimed at defects in the instruction itself -- things like a mismatched account title that raise doubt about whether the instruction actually corresponds to the account and customer it claims to. A difference between the two firms' records regarding a security position, by contrast, is expressly excluded as a valid ground, since that kind of discrepancy is a reconciliation matter to be worked out separately, not a defect that entitles the carrying member to withhold validation of the instruction.