Securities Litigation:  NASD Issues Notice to Members 07-06

In February 2007 the National Association of Securities Dealers issued Notice to Members 07-06, entitled "Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products."  This Notice deals with issues that may arise when a registered representative leaves one firm to join another firm, and then encourages customers who have moved their accounts to replace mutual funds or variable annuities that were previously held.

The Executive Summary of Notice to Members 07-06 states:

"Registered representatives with an established customer base may, from time to time, change their association from one firm to another and may wish to bring with them customer assets, including mutual funds and variable products.  In some cases these mutual funds or variable products may be held directly with the product issuer or they may be proprietary to the representative's prior firm and the sponsor may not permit them to be transferred into the customer's account at the new firm.  Even nonproprietary products may not be freely transferable if the sponsor does not have a dealer or servicing agreement with the new firm.

"In cases such as these, the new firm may not sell or in some cases even service the investment or receive trail commissions from the distributor.  In these situations, the representative may be inclined to recommend the liquidation and replacement of the customer's investments with other, similar investments.  Although the ability to provide the customer with service in connection with an investment can be a relevant factor to consider in connection with the decision whether to retain the investment, any recommendation by the firm or its associated persons to sell a product and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer and determining that the transaction is in the customer's best interests in view of all considerations.  Member firms and their associated persons may not reach any suitability determination or make any recommendation on the basis that the purchase or a security or sale and replacement of a security will yield greater remuneration for them.  Moreover, the representative should disclose to the customer all of the relevant facts and bases for the recommendation.  See, e.g., Notice to Members 99-35."