MANDATING OF ACATS FUND/SERV FOR BROKER-TO-BROKER TRANSFERS OF MUTUAL FUND ACCOUNT POSITIONS

October 20, 1994 TO: BANK BROKER/DEALER ADVISORY COMMITTEE NO. 23-94 BROKER/DEALER ADVISORY COMMITTEE NO. 21-94 OPERATIONS COMMITTEE NO. 31-94 SALES FORCE MARKETING COMMITTEE NO. 42-94 RE: MANDATING OF ACATS FUND/SERV FOR BROKER-TO-BROKER TRANSFERS OF MUTUAL FUND ACCOUNT POSITIONS __________________________________________________________ On September 12, 1994 the Institute contacted you regarding the recent Securities and Exchange Commission (SEC) action mandating the use of ACATS Fund/SERV for all Broker-to-Broker Transfers of mutual fund account positions where both the delivering and the receiving brokers are members of the New York Stock Exchange (NYSE). Since that time, the ICI has received numerous phone calls from members seeking to ascertain the impact of this action to their operation. The following question and answer sequence is an effort to clarify any open issues regarding this mandating and the ACATS Fund/SERV service in general. What is ACATS? ACATS is the Automated Customer Account Transfer Service run by the National Securities Clearing Corporation (NSCC). It is a system which automates and standardizes procedures for the transfer of assets in a customer account from one brokerage firm to another. Starting March 1, 1995 all New York Stock Exchange members that are members of a clearing organization that has an automated system for transferring account positions will be mandated to utilize this service or a similar service to transfer mutual fund account positions. Additionally, the National Association of Securities Dealers (NASD) has similarly approved the mandating of this service for its members' mutual fund account position transfers. What is the ACATS Fund/SERV Link? Fund/SERV is an automated central processing system that standardizes mutual fund order entry and account recording procedures, reducing the time and cost of processing transactions. ACATS, as already noted, is a system for transferring customer account positions. The ACATS Fund/SERV interface allows mutual funds to electronically update their account registrations when a customer account is transferred from one broker to another. What does the mandating of ACATS for mutual fund positions mean? It means that when both the delivering and receiving brokers are NYSE or NASD member firms, ACATS must be used. This means that mutual fund account positions will transfer from the delivering broker to the receiving broker in an orderly, automated environment with a pre-determined timetable. It also means that the details of the account transfer can then be passed on to mutual funds for change of registration purposes via the ACATS Fund/SERV Link. Does this mean that mutual funds are mandated to utilize ACATS Fund/SERV? No, but use of the facility provides significant benefits. The ACATS Fund/SERV link saves mutual funds time, and virtually precludes the possibility of data entry error where account registration information needs to be changed as the result of a broker-to-broker transfer. What can mutual funds do to ensure that they can use ACATS Fund/SERV to their best advantage? First, funds need to be NSCC Fund/SERV participants. Second, funds need to be sure they have enabled the ACATS Fund/SERV interface. Unless this link is enabled, broker-to-broker transfers will take place via automation, but changes needing to take place to accounts on funds' transfer agency systems will have to be handled manually. ACATS Fund/SERV only works when the delivering broker, the receiving broker, and the fund are all ACATS Fund/SERV participants. At this point, NYSE and NASD member brokers are compelled to be ACATS Fund/SERV participants by March 1, 1995. It is thus up to the funds to voluntarily enable the AATS Fund/SERV interface to take advantage of the potential time and cost savings. What can mutual funds do to enable the ACATS Fund/SERV link? Enabling the ACATS Fund/SERV link is not a significant undertaking for mutual funds. If you would like to enable the ACATS Fund/SERV link, or if you would like to determine whether the link is already enabled for your fund, simply contact your NSCC account representative or NSCC Marketing (212) 412-8432, and they'll work with you to ensure that you are ACATS Fund/SERV enabled. Are there any other important points regarding ACATS Fund/SERV? Yes. ACATS Fund/SERV works best with accounts that are maintained in a Networked environment. Networking is the automated NSCC recordkeeping system that allows non-trade-related client information to appear identically on the records of the brokerage firm and the fund or its transfer agent. With Networking, firms and funds exchange timely, accurate customer account maintenance and reporting information. In such an environment, firms and funds are more likely to have identical information regarding accounts' asset and share balances, which significantly decreases the likelihood of a transfer being rejected as the result of discrepant asset information. Hopefully this memo has clarified the impact of the mandating of ACATS Fund/SERV. If you have further questions, please do not hesitate to contact the undersigned at (202) 326-5848. Thank you. Kevin Farragher Director of Operations Distribution & Service