July 9, 1992
TO: STATE SECURITIES MEMBERS NO. 33-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 34-92
RE: VERMONT COMMENTS ON FUND LIABILITY FOR TELEPHONE
TRANSACTIONS
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The Vermont Securities Division recently began issuing
comments with respect to language in fund prospectuses relieving
the fund or its affiliates of any liability for acting upon
instructions in connection with telephone redemptions or
exchanges. It is our understanding that such disclosure is
fairly common in prospectuses and/or account applications. An
example of the language that the staff of the Vermont Securities
Division has objected to is:
Neither the Fund nor the Transfer Agent will be responsible
for acting upon any instructions believed by them to be
genuine.
According to the comment letter issued by the Division
(samples attached), the staff is concerned that a fund may not
have implemented procedures to ensure the authenticity of the
caller and/or transaction. The letter is somewhat confusing in
that it implies that a fund should be held strictly liable for
investor losses but also states that funds should be responsible
for transfers which occur because of the transfer agent’s
"negligence or failure to perform its fiduciary duties."
The Institute contacted the Director of the Division to
seek clarification of the Division’s comments. According to the
Director, Vermont is not taking the position that funds should
be held strictly liable for telephone transactions. Rather, a
fund should be responsible for losses due to negligence.
Moreover, a fund receiving this comment letter from the Division
should submit a response outlining the fund’s procedures with
respect to telephone transactions which includes the safeguards
the fund has adopted to protect against fraudulent transactions
(e.g., testing the identity of the caller by requiring the caller
to state an identification number or some other information that
would be known only by the shareholder or refusing to send the
redemption proceeds to an address that is not the shareholder’s
address of record). By doing so, the fund will not be required
to "sticker" the prospectus for Vermont.
Inasmuch as it is our understanding that several states
have expressed concern with respect to telephone disclaimers, the
Institute contacted the NASAA Investment Company
Registration/Trading Practices Committee. The Institute will be
submitting a detailed letter to the NASAA Committee, and
appropriate states, outlining the legal basis for such
disclaimers as well as the safeguards funds have adopted to
protect shareholders in the very near future.
We will keep you advised of developments.
Patricia Louie
Assistant Counsel
Attachments