Bulk Transfers Using Negative Response Letters

Should the Company wish to transfer a group of customer accounts, there are situations where a negative response letter may be appropriate to provide for the efficient transfer of those accounts (a negative response letter generally informs the recipient of the letter of an impending action, and requires the recipient to respond or act within a specified time frame if the recipient objects to the action. If the recipient does not respond, he or she is deemed to have consented to the action). In identifying these situations, the designated Principal must consider the need to effect a timely transfer of the account and the interests of customers affected by the transfer. Company personnel must adhere to FINRA guidance on this subject and may consider the use of negative response letters to be appropriate in the following circumstances:

 A Member Experiencing Financial or Operational Difficulties. An introducing firm that is experiencing financial or operational difficulties may seek the transfer of all of its customer accounts to another introducing firm using negative response letters;

 An Introducing Firm No Longer in Business. When an introducing firm has gone out of business, the clearing firm may effect the transfer of all of the introducing firm's customer accounts to another introducing firm using negative response letters;

 Changes in a Networking Arrangement with a Financial Institution. Upon the conclusion or termination of a networking arrangement with a financial institution pursuant to Consolidated FINRA Rule 3160, a member may seek the transfer of all customer accounts established pursuant to the networking arrangement to a new firm with which the financial institution has formed a networking arrangement using negative response letters;

 Acquisition or Merger of a Member Firm. When a firm is acquired by or merges with another firm, the firm originating the accounts may seek the transfer of all of its accounts to the new firm using negative response letters; and

 Change in Clearing Firm by an Introducing Firm. When an introducing firm decides to enter into a clearing arrangement with a different firm, the introducing firm may use negative response letters to transfer customer accounts to the new clearing firm.

In addition, applicable rules permit the Company to use "negative response letters" to obtain authorization to take certain actions on behalf of its customers without obtaining affirmative consent, but only in limited circumstances. For instance, Rule 2510(d) allows a member to use negative response letters in certain situations to

effect the bulk exchange of a customer's money market mutual fund for a different fund without the affirmative consent of a customer, provided certain conditions are met. (However, the use of negative consent letters to change the BD of record in mutual fund or variable annuity accounts held at product sponsors or issuers (“application-way” accounts) is NOT permitted; affirmative customer consent must be sought and obtained to change the BD of record.) FINRA trade-reporting rules regarding riskless principal trading also permit the use of negative response letters to document an institutional customer's agreement to trade with a firm on a net basis.

The use of a negative response letter to facilitate the bulk transfer of customer accounts in these situations may be appropriate, given the potential risk to investors and costs to firms that could result if firms were required to solicit individual transfer instructions from each customer. The bulk transfer of accounts in these situations also helps minimize interruptions to customers' access to their accounts and the trading markets. Should the Company wish to use negative consent letters in bulk transfers in circumstances outside of the scenarios described above, it will seek specific guidance from FINRA through FINRA's interpretive letter process, as needed.

While the use of negative response letters by the Company to transfer customer accounts may be appropriate in the situations described above, negative response letters may not be used by Registered Representatives to transfer customer accounts. Should a Registered Representative wish to transfer accounts by these means, he or she must contact her/her designated Principal to seek approval. Certain exceptions may be granted by the designated Principal due to special circumstances or following FINRA guidance. The designated Principal will make records of exceptions granted, if any, and maintain them in the appropriate files (RR and customer).

Required Disclosures in Negative Response Letters

The Company, when seeking to transfer customer accounts using negative response letters, will provide account holders, consistent with just and equitable principles of trade under Consolidated FINRA Rule 2010, with adequate time and information to decide whether to object to the transfer. Appointed staff will provide each customer with the following information in the negative response letter:

• A brief description of the circumstances necessitating the transfer; • A statement that the customer has the right to object to the transfer; • Information on how a customer can effectuate a transfer to another

firm;

• A sufficient time period for the customer to respond to the letter (at least 30 days from the receipt of the letter unless exigent circumstances exist that warrant a shorter timer period);

• Disclosure of any cost that will be imposed on the customer as a result of the transfer, including costs to the customer if the customer initiates a transfer of the account after the account is moved pursuant to the negative response letter; and

• A statement regarding the Company’s compliance with SEC Regulation S-P (Privacy of Consumer Financial Information) in connection with the transfer.

Should the Company receive customer accounts pursuant to a transfer by a negative response letter, it must furnish customers with any applicable customer account information and agreements upon the receipt of the accounts. Both the transferring and receiving firms in a customer account transfer situation must be in full compliance with SEC Regulation S-P. Regulation S-P governs the collection, use, and maintenance by a financial institution of nonpublic personal information of consumers and customers. Unless the transfer is being conducted pursuant to a permitted exception to Regulation S-P, the transferring firm should have reserved the right to transfer customer accounts in its privacy notice that was previously sent to its customers. Generally, firms receiving the customer accounts must provide privacy notices upon the establishment of a customer account. (See Section 7.11) EXCEPTIONS TO THIS RULE: Given current market conditions, FINRA has issued interpretive guidance regarding changes to money market sweep accounts when the existing account ceases to accept new deposits or issue additional shares without giving adequate notice to permit the Company to notify its customers 30 days prior to making changes in their sweep account. In these cases, the Company may cease attempting to sweep balances into current designated money market accounts and select and activate an alternative sweep arrangement for the client under the following conditions:

• The Company must use its best efforts to select a new sweep option that is appropriate for its customers considering the yield, fees, investment objectives, risks and current market conditions;

• The Company must establish instructions (notify its clearing firm) to sweep cash balances into the newly selected money market option;

• The Company must promptly notify its affected customers of the change using negative response letters that included disclosure outlined above; and • The Company must provide customer written notification as to alternative

sweep options available for their account.

Also, FINRA announced in September 2008 (Notice 08-48) that firms could exchange customer assets that are invested in the Reserve Primary Fund, the Reserve Yield Plus Fund, and the Reserve International Liquidity Fund (Funds whose NAV’s (net asset value) had dropped below $1.00 per share) in bulk for shares of another money market mutual fund or for deposits in an FDIC-insured bank without complying with all of the Rule 2510(d) requirements summarized above, subject to certain conditions. The Company, when relying on this exception, is permitted to:

 Exchange shares of the Funds either for shares of another money market mutual fund with a NAV of $1.00 per share or an FDIC-insured deposit account. The Company must ensure that the money market mutual fund or bank deposit account into which it is moving customer assets is suitable for each customer; and

 Conduct the bulk exchange prior to notifying customers, provided written notification is sent out promptly thereafter. The notice must include the tabular comparison of the nature and amount of fees charged by each fund as required by Rule 2510(d)(2)(B) and the comparative description of the investment objectives of each fund and a prospectus of the new money market mutual fund as required by Rule 2510(d)(2)(C). If customers’ assets are being moved into an

FDIC-insured bank account, the notice must include a description of the account, any fees associated with the account, and a listing of the account’s terms and conditions that the bank normally provides to customers opening such an account.

The designated Principal, in his or her periodic review of account activity, will review negative consent letters sent to customers in order to confirm that all applicable requirements described above were met.