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ACATS/IPS Business Advisory Group Recommendation Paper May 2003

Depository Trust & Clearing Corporation

ACATS/IPS Business Advisory Group

Business Recommendation Paper

May 2003


Depository Trust & Clearing Corporation 2

Acknowledgements This paper was a collaborative effort by members of the ACATS/IPS Business Advisory Group.

NAME GROUP Steve Callan Bear Stearns Bill Kapogiannis DTCC Bob Yodice DTCC Craig Gurien DTCC Edlyn Meringolo DTCC Kristie Thompson Edward Jones Deb Seabury Lincoln Life Beth Sordillo Manulife Kim Smithson Merrill Lynch James Boyle Morgan Stanley Joe Wengler Morgan Stanley Dan Davis Nationwide Sherri Coleman Nationwide Frank Norton Pacific Life Ron Marino PaineWebber Kevin McCoster Pershing Jim O’Neill Prudential Securities Marie Prelli The Hartford Jeanann Smith Wells Fargo – Group Chair Melanie Kleinschmidt

Wells Fargo



Table of Contents

I. Executive Summary ..........................................................................................4 II. Business Issues Defined and Recommended Solutions................................7 1. Above and Below the Line Assets .......................................................................................................................7 2. Selling Agreements ..............................................................................................................................................8 3. Client Authorization Requirements and Retention...............................................................................................8 4. Asset Detail Record .............................................................................................................................................9 5. Insurance Carrier Response to Broker/Dealer Change Notifications ...................................................................9 6. Annuity Custodial Account Transfers................................................................................................................10 7. Mismatch Registration Transfers .......................................................................................................................10 8. Settlement Value ................................................................................................................................................10 9. Mandating the Use of ACATS/IPS ....................................................................................................................11 10. Standard vs. Non Standard and Accelerated Transfers....................................................................................11 11. Brokerage Account Only Holds Annuity Asset...............................................................................................11 III. Pre-process to Use ACATS/IPS ...................................................................12 IV. Proposed New Functionality ........................................................................14 1. ACATS Process Flow for Annuities ..................................................................................................................14 2. Broker/Dealer Change Process Flow via IPS.....................................................................................................17 V. Next Steps .......................................................................................................19 VI. Appendices .....................................................................................................20 A. Sample Selling Agreement Addendums ............................................................................................................20 B. Custodial Changes with Annuities (in reference to Section II, Part 6)...............................................................23 C. Mismatch Registrations with Annuities (in reference to Section II, Part 7).......................................................24 VII. Glossary of Terms .........................................................................................25



I. Executive Summary

Positioning Statement: DTCC’s IPS and ACATS services provide standardization and automation for financial service companies in order to create a more efficient and cost effective environment. Our goal is to enhance the capabilities of ACATS, so annuity assets can be included in the overall account transfer process. We do this by linking ACATS and IPS, allowing both Broker/Dealers1and Insurance Carriers to process broker/dealer change information more efficiently, and benefit from the standardization and automation that DTCC offers. The Automated Customer Account Transfer Service/Insurance Processing Service (ACATS/IPS) Business Advisory Group (BAG) was chartered to identify and recommend solutions to business issues that may impact the success of including annuities in the current ACATS process. Based on these recommendations, the group created a business model that automates the broker/dealer change process for annuities through ACATS. The BAG is comprised of eight Broker/Dealers and five Insurance Carriers with experiences in Account Transfers and Annuity Operations. In addition, the group has representation from Depository Trust and Clearing Corporation’s (DTCC’s) Insurance and ACATS departments. With many Broker/Dealers currently reflecting annuity assets as part of their clients’ brokerage accounts, the BAG looked to utilize DTCC’s ACATS service, which transfers client assets from one Broker/Dealer to another. To initiate an ACATS transfer request, a client must sign a Transfer Initiation Form (TIF), which will transfer such assets as equities, fixed income, mutual funds, options and cash. This form is currently not utilized by the insurance industry, often resulting in a delay in the processing of broker/dealer changes for annuities. In the current processing environment, Insurance Carriers require a separate client authorization to be received before completing the change. This creates the client’s inability to get an accurate picture of their complete portfolio upon transfer of assets. Based on an analysis conducted on ACATS transaction activity, it was concluded that the inclusion of an annuity asset would not increase the number of ACATS transactions, but would generate approximately 12,000 additional asset records on average per month.2 By including annuities, the proposed initiative will automate the broker/dealer change process to ensure the same timeliness and quality as other assets currently supported by ACATS. This process can benefit Broker/Dealers and Insurance Carriers by minimizing errors and exceptions, ensuring high velocity throughput of a broker/dealer change process; and increasing efficiency

1 Broker/Dealers is the term used in this paper to reference all distribution channels that may be able to utilize ACATS/IPS. It does not imply that only Broker/Dealer firms may use this service. 2 This number was determined from a survey of Broker/Dealers representing 89 percent of the ACATS activity during a 4 month period in 2002.



with the processing of such changes. By utilizing the ACATS paperless process, it will allow Broker/Dealers the ability to support close to 100% of all client assets reflected in the brokerage account. Short term, ACATS/IPS increases the level of customer service by simplifying the notification of broker/dealer changes between Broker/Dealers and Insurance Carriers. Long term, it allows annuities to fit within the Broker/Dealers’ standard practices for transferring client assets by automating a unique and manual process. To achieve these short-term and long-term benefits, the BAG identified and resolved business issues that would impact the successful rollout of this initiative. Below is a summary of the issues defined and their recommended solution (refer to Section II for more details on each of these issues). • Above and Below the Line – As long as Broker/Dealers can uniquely identify annuity

assets on their system, this new process can be utilized irrespective of whether annuities are held above or below the line.

• Selling Agreements – A selling agreement addendum was recommended to cover automated broker/dealer, rep of record, broker identification number(BIN) and custodial changes.

• Client Authorization Requirements and Retention – Broker/Dealers and Insurance Carriers will need to recognize the automated broker/dealer change process since the actual client authorization will not be shared between trading partners unless requested.

• Asset Detail Record – The Delivering Broker/Dealer will be required to send specific annuity asset information through ACATS to the Receiving Broker/Dealer.

• Insurance Company Response to Broker/Dealer Change Notification – Insurance Carriers will respond via IPS based on the automated broker/dealer change request. Two reject types were created to determine whether corrective action would be required.

• Annuity Custodial Account Transfers – Custodial changes on annuities were deemed in scope for this initiative and will be included in the ACATS process.

• Mismatch Registrations Transfers – A suggested standard on handling of the mismatch registration of the annuity and the titling of the brokerage account was created to facilitate broker/dealer changes through IPS.

• Settlement Value – ACATS/IPS process is strictly an information exchange, therefore the assets will not have an ACATS settling value.

• Mandating the Use of ACAT/IPS – The recommendation is to not pursue mandating of this service at the present time with a regulatory body. As usage increases, this issue will be reevaluated.

• Standard vs. Non Standard and Accelerated Transfers – These are ACATS transfer types that were reviewed and deemed in scope for annuity usage.

• Brokerage Account Only Holds Annuity Asset – To eliminate the potential increase in ACATS rejection or purged account rate; in case of rejection, annuities will be handled similar to a non transferable mutual fund only asset and will be line deleted by the Receiving Broker/Dealer.



With resolution of the business issues, the probability of success greatly increases. In addition, the fact that ACATS is a system that has already achieved critical mass in the brokerage community, it is a natural progression to utilize DTCC’s existing services (ACATS and IPS) to complete the automated broker/dealer change for annuities. Therefore, it is the BAG’s recommendation that the industry continue to define the business requirements, which includes development of the record layouts to support the ACATS/IPS initiative.



II. Business Issues Defined and Recommended Solutions The main objective of the Business Advisory Group (BAG) was to analyze business issues identified in the initial Steering Committee Meeting in September 2002. Several important issues were identified during this meeting that needed to be resolved in order to move forward with this initiative. This group tackled each of the issues identified in that meeting and continued to identify additional issues that needed resolution. The following section describes each of the business issues identified and the recommended solutions. 1. Above and Below the Line Assets One of the first issues raised during the initial meeting in September 2002 was whether annuities are considered above the line or below the line assets and how this would effect the processing of these assets through ACATS. This issue became a concern due to uncertainty by Broker/Dealers as to whether an annuity asset can be included in the ACATS process, if considered below the line. Definition of Above and Below the Line: Above the line Above the line assets are held on a firm’s stock record and are regulated by SEC Rule 15c-3-3 (Possession and Control rule).

• Broker/Dealer reports annuity asset to a client as contained within the brokerage account.

• Broker/Dealer has possession and control of registered assets. • Custodian manages all aspects of the asset.

Below the line Assets considered below the line are reported on the client statement as “Assets Held Away” and are NOT listed on their stock record.

• Broker/Dealer links Annuity to account and reports to client as a courtesy • Broker/Dealer is not in possession and control of assets.

For most Broker/Dealers, annuities are considered below the line assets. However, the BAG deemed this a non-issue based on the fact that the annuity is not actually being transferred, so the control aspect of the asset does not change. ACATS will only be used as a vehicle to transmit a notification of annuity assets held within the Delivering Broker/Dealer. The actual change of Broker/Dealer would not be processed via ACATS but rather the Insurance Processing Service (IPS). The real issue became, not how annuities are held, but can Broker/Dealers uniquely identify annuity assets (which are usually below the line) as part of the regular ACATS process. Based on both a BAG survey and an analysis of current IPS Positions and Values usage, a conclusion was made that the majority of the Broker/Dealers can identify annuities, and with technical development link these assets to the ACATS system.



2. Selling Agreements Currently, selling agreements between Broker/Dealers and Insurance Carriers do not cover electronic transfer of broker/dealer change information or specifically ACATS. In order to facilitate the broker/dealer change process via ACATS/IPS and to ensure that the Broker/Dealers and Insurance Carriers meet all compliance and legal requirements, it has been suggested that a selling agreement addendum be created to cover electronic account changes. Both the Broker/Dealers and Insurance Carrier would sign the addendum. The addendum would include the following points:

1. Insurance Carriers will not require a client’s authorization to process a change of agent and Broker/Dealer on a contract.

2. Receiving Broker/Dealers will be responsible for obtaining and storing the appropriate client authorizations.

3. The receiving Broker/Dealers will be required to supply the Insurance Carrier with the Transfer Initiation Form (TIF) if requested. The TIF will need to be retained by the Broker/Dealer for a time frame specified by regulatory authorities.

4. Broker/Dealers will be liable for all information sent in an automated fashion. 5. In situations where a 3rd party is the custodian, the delivering Broker/Dealers will be

responsible for notifying the 3rd party custodian of the custodial change. The BAG has recommended boilerplate language that can be used in the addendum. Several legal departments within the BAG reviewed the boilerplate language and concluded that the following transactions should be covered in the addendum:

1. Registered Representative of Record Changes 2. Broker/Dealer of Record Changes 3. Broker Identification Number (BIN) Changes 4. Custodial changes, which would include a beneficiary and ownership change.

**See Appendix A for sample addendums** 3. Client Authorization Requirements and Retention In the current processing environment, Insurance Carriers receive and process broker/dealer changes via client signed authorizations. In the proposed processing environment, the Insurance Carrier will not receive the actual client authorization, but agrees to recognize the electronic transmission initiated by the ACATS/IPS interface and will process the broker/dealer change request via the IPS automated process. As with the current ACATS process, it will be the Receiving Broker/Dealer’s responsibility to obtain appropriate customer authorization and upon request by the Delivering Broker/Dealer and/or Insurance Carrier furnish the client authorization within 24 hours. In regard to retention,



it is the BAG’s recommendation that the Receiving Broker/Dealer preserve the Transfer Initiation Form (TIF) for a period determined by regulatory authorities. The BAG has determined that it may be necessary for Broker/Dealers to modify their TIF language to allow for the inclusion of annuity information. Example: "I/we acknowledge that by signing this transfer form I/we authorize the change of broker/dealer for any annuities correlating to my/our above referenced brokerage account." 4. Asset Detail Record Annuity assets have detailed information that a Receiving Broker/Dealer must validate to determine whether or not it can be the broker/dealer of record. The BAG first reviewed what type of information would be needed for the Receiving Broker/Dealer to validate the annuity asset. Initially, the BAG considered using the product CUSIP number plus a CUSIP extension ID to identify the features of the product; however, the required details of the annuity is greater than what a CUSIP extension could provide. The BAG recommends that the Delivering Broker/Dealer be required to send specific information on the annuity asset to the Receiving Broker/Dealer via ACATS. The information, which is defined in the ACATS Process flow (see Section IV), will satisfy the Receiving Broker/Dealer’s ability to validate and determine if the assets are acceptable. Similar to other assets (options, mutual funds) that are currently sent through ACATS, it was determined that an asset record will need to be created for annuities. The annuity asset detail record would include: Standard & Poors’ CUSIP (this CUSIP must be on file with IPS) IRS Tax Qualification Code Commission Option Sub-Account Data Service Feature Data Owner Data Contract Status Code Registration Type Other TBD Data

For more details, refer to the ACATS for Annuities process flow in Section IV. 5. Insurance Carrier Response to Broker/Dealer Change Notifications There will be instances where the Insurance Carrier may not be able to process a broker/dealer change request without additional information. The BAG tried to identify potential reasons why this may occur and a process to handle these situations.



The BAG identified several reasons for the Insurance Carriers to reject broker/dealer changes. It was concluded that over half the reject reasons could be resolved by the selling agreement addendum since it was found that many were signature related. To resolve the non-signature related reject reasons, our recommendation is to create two rejections. These rejections may be defined as corrective rejections (soft rejection reasons), which gives the Receiving Broker/Dealer the ability to correct and resubmit the change back to the Insurance Carrier through IPS; or hard rejections, which signify that no corrective action can be taken in an automated fashion. For more details, refer to the IPS Broker/Dealer change Process Flow in Section IV. 6. Annuity Custodial Account Transfers The most common type of custodial change involves a transfer from a Custodial IRA at the Delivering Broker/Dealer to a Custodial IRA at the Receiving Broker/Dealer. This type of custodial change was deemed in scope for this initiative and would be included in the ACATS process. There are other types of transfers, such as a Direct Rollover from a Qualified Plan to an IRA, that are considered out of scope for this phase of the initiative and would not be included in the ACATS process. These types of transfers require account type changes that may cause additional modifications at the carrier level. In Appendix C, the BAG has identified three different custodial scenarios, two of which can be processed using the ACATS/IPS interface. **See Appendix B – Custodial Changes with Annuities** 7. Mismatch Registration Transfers Due to the fact that annuities are considered as below the line assets and are reflected for informational purposes only, the holding of the annuity is greatly dependent on the Broker/Dealer’s internal annuity networking rules. The BAG has created a suggested standard on handling of the mismatched registration of the annuity and the titling of the brokerage account. Broker/Dealers who require identical registrations may have to modify the annuity registration instruction they send or they will have to reject the annuity asset and process the change request outside of ACATS. **See Appendix C – Mismatch registrations with Annuities** 8. Settlement Value



Another issue addressed by the BAG was the ACATS settlement value for annuity assets. Currently, ACATS uses settlement value of other asset types as an incentive for the Delivering Broker/Dealers to complete the asset delivery. One of the basic principals of this initiative is the fact that the annuity is not being transferred; it is strictly an informational exchange. Therefore, there is no need to assign a settling value to the asset. ACATS uses separate and distinct settlement location codes to process all assets being passed to Receiving Broker/Dealers. Even though there is no settling value, it was determined that a new settlement location be created to pass the broker/dealer change information from ACATS to IPS. 9. Mandating the Use of ACATS/IPS Based on the BAG’s review and interpretation of NYSE Rule 412 and NASD Rule 11870, it is the group’s recommendation that we do not pursue the mandating of this service at the present time. The BAG may choose to reevaluate at a future date as the usage of ACATS/IPS grows. This is consistent with the philosophy of past DTCC mandated products, such as ACATS/FundSERV for mutual funds. 10. Standard vs. Non Standard and Accelerated Transfers ACATS has a number of transfer types which are grouped into two categories, Standard and Non-Standard (Residual Credits and Partial transfers) transactions (see glossary for definitions). The BAG determined that annuities would be eligible for these two transfer types. The BAG also determined that based on the new annuity asset record being created by the Delivering Broker/Dealer, annuities can be included in either regular or accelerated settlement cycles. 11. Brokerage Account Only Holds Annuity Asset When an annuity asset is identified as the only asset in a brokerage account, a concern was raised on what impact it may have to the ACATS transfer, as well as the potential for regulatory inquiries, based on an increased rejection or purged account rate. After review by the BAG, this became a non-issue. Annuities will be handled similar to a mutual fund only asset that is not transferable. In this case, the Delivering Broker/Dealer would code the asset as a non-transferable asset (NTA) in ACATS, and the transfer would take place outside of the system. In addition, the annuity asset may be line deleted by the Receiving Broker/Dealer, for a reason such no selling agreement. In either scenario, ACATS would complete the process by attributing a settle close status to the account, which would not increase rejection or purged rates.



III. Pre-process to Use ACATS/IPS The BAG has identified tasks that need to be implemented prior to using ACATS/IPS.

Insurance Carrier:

• Create and adopt an ACATS for Annuities addendum to their General Agency

Agreement (a.k.a. Selling Agreement) to enable business to be transacted electronically.

• Implement internal procedures for processing electronic broker/dealer change transactions. This would include procedures for requesting backup client authorizations.

• Create and support new transactions in IPS to automate broker/dealer changes, rep of record changes, BIN changes and custodial changes (owner, beneficiary).

• Adopt and implement any recommended L&A best practices.

• Become a member of IPS.

• File CUSIPs with DTCC for ACATS and IPS eligibility.

Delivering Broker/Dealer:

• Sign and adopt the ACATS/IPS addendum to their General Agency Agreement (a.k.a. Selling Agreement) to enable business to be transacted electronically with their trading partners.

• Recognize and load annuity assets on all ACATS transactions.

• Build functionality to identify and list proprietary annuities as nontransferable assets (NTA) in ACATS, if applicable.

• If using in-house (user defined) CUSIPS to identify products, you must use the official Standard & Poors CUSIP before passing information through ACATS/IPS.

• Create and transmit a new annuity asset record via ACATS/IPS (CUSIPS, Owner info etc.)

• Evaluate what ACATS/IPS support will be provided for correspondent Broker/Dealers, if applicable.

• Create and support new transactions in IPS to automate broker/dealer changes, rep of record changes, BIN changes and custodial changes (owner, beneficiary).

• Create new ACAT/IPS settlement report.



• Become participant/member of ACATS and IPS systems.

Receiving Broker/Dealer:

• Recognize an annuity asset and read the asset record for validation purposes.

• Create capability to line delete annuity if not acceptable after validation.

• Build functionality to validate licensing and appointment status of reps.

• Ability to establish house accounts for invalid or pending licensing and appointment accounts.

• Create new re-registration instructions pertaining to annuities.

• Create and support new transactions in ACATS/IPS to automate IPS re-registration capabilities.

• Evaluate what ACATS/IPS support will be provided for their correspondent Broker/Dealers, if applicable.

• Add verbiage to TIF so client acknowledges change of broker/dealer on annuity with ACATS.

• Create new ACAT/IPS settlement report.

• Become a participant/member of ACATS and IPS systems.



IV. Proposed New Functionality 1. ACATS Process Flow for Annuities

Narrative for ACATS for Annuities Process

1. Receiving Broker/Dealer submits ACAT record (electronic request to transfer account from Delivering Broker/Dealer) and NSCC assigns control number to the record.

2. Delivering Broker/Dealer reviews ACAT request by validating brokerage registration, social security number, Delivering Broker/Dealer account number, and account type identifier. 2a. If a Delivering Broker/Dealer identifies information that is incorrect or does not match the account to be transferred, the

ACAT record is rejected and the process ends. 2b. If Delivering Broker/Dealer accepts and validates the transfer to be in “good order”, the Delivering Broker/Dealer will gather

and load all of the assets to the ACAT asset record. 3. The Delivering Broker/Dealer determines annuity asset settling location (send through IPS interface link). 3a. The Delivering Broker/Dealer determines annuity assets are proprietary and cannot have a broker/dealer change processed and

will list the annuity assets as non-transferable (NTA). The Delivering Broker/Dealer will create a letter to the client outlining that the annuity asset will not be transferred as part of the ACAT.

3b. The Delivering Broker/Dealer loads annuity assets with IPS settling location including any annuity asset detail fields

including CUSIP number, IRS Qualification Code, Commission Option, Sub-Account Data, Service Feature Data, Owner Data, Contract Status Code, Registration Type and other TBD data.



4. Using the ACAT system, NSCC will perform a tri-check to validate the Receiving and Delivering Broker/Dealers as well eligibility for the CUSIP numbers.

4a. If NSCC determines that the annuity asset record does not pass the tri-check; a Receive and Deliver (R&D) settling location

will be assigned and the record will not go through IPS. 4b. The Receiving Broker/Dealer reviews ACAT asset list including any annuity assets and determines if the assets are okay to

receive. This will also allow the Receiving Broker/Dealer to make any margin calculations if needed for additional review (annuities are not marginable assets). The Receiving Broker/Dealer at this time will review the annuity asset record loaded by the Delivering Broker/Dealer to determine if the annuity is available for a broker/dealer change and will validate licensing and appointment requirement for the new broker of record.

4c. The Receiving Broker/Dealer determines that the broker/dealer change cannot be requested and processed with the insurance

carrier and will line item delete the annuity from the ACAT transfer. The Receiving Broker/Dealer will create letter to client outlining the annuity asset cannot be transferred as part of the ACAT.

5. The Receiving Broker/Dealer will make a final review of all ACAT assets.

5a. The Receiving Broker/Dealer accepts the ACAT record for transfer including any annuity assets. 5b. The Receiving Broker/Dealer does not accept the ACAT record for transfer and rejects through ACATS with a reject code 21

(this is a ACATS specific reject code). 6. After the Receiving Broker/Dealer reviews and accepts the account transfer, the Receiving Broker/Dealer determines if the

account will settle in the normal settlement process or the Receiving Broker/Dealer will accelerate the account transfer. 7. If the ACAT is accelerated, the Receiving Broker/Dealer will submit the registration record (IPS transaction – broker of

record, broker/dealer change, BIN number change and custodial change, if applicable) to ACATS the same day. If the Receiving Broker/Dealer determines a normal settlement, the registration record will be sent the next day.

7a. If the Receiving Broker/Dealer does not create the registration record; ACATS will create a default (house account) registration for IPS. 8. ACATS system feeds registration information to IPS.





2. Broker/Dealer Change Process Flow via IPS

10a

Carrier sends Reject toboth Delivering andReceiving B/D with thefollowing information:1.Transaction Ref. Code2. Rejection code3. Reason Code **

Acceptable to Carrier? Process ChangeRequestYes

Receiving B/D resubmits to carriercorrective change along with thefollowing information:1. Transaction Reference Code2. Correction Code = Pending a. Correcting Data in IPS b. Process outside of system3. Type Code/Info code4. New or revised Data

Confirmation/Statusto Receiving andDelivering Firms

IPS

Carrier sends a CorrectiveReject to both Deliveringand Receiving B/D with thefollowing information:1. Transaction Ref Code or controlnumber2. Exception code3. Reason Code*

ReceivingB/Ddetermines

corrective action(manual or IPS)

No (hard reject reason)No (soft reject reason)

IPS

See ACATS for AnnuitiesProcess Flow

*Reasons for Corrective Action:- Agent not appointed- Agent registered with a different firm- Missing Split Percentage Details- Product not in GA- Firm not authorized to service product- ACAT Delivering B/D of record does notmatch Carrier's B/D of record

** Reasons for Rejection:Proprietary ProductContract TerminatedDeath Claim PendingAssorted Carrier RestrictionCodes such as QDRO - (Qualified

Domestric Relations Order)

IPS Broker/Dealer Change Process

8

9 9a 9b

10 12

End of Process9c

Delivering B/Dkeeps annuity on itsbooks in a pendingdeliver status until

further confirmationof pending change

10b10a

11

Soft Reject - Carrierneeds more informationto make broker/dealerchange.

Hard Reject - Carrierrejects B/D change. NOfurther action takenthrough IPS.



Narrative of IPS Broker/Dealer Change Process 8. The Receiving Broker/Dealer will send the registration record (broker of record, broker/dealer and BIN number change and Custodial change, if applicable) to Insurance Carrier via ACATS/IPS interface. 9. Insurance Carrier determines if the registration record is acceptable to be processed. 9a. Insurance Carrier accepts and processes the process change request. 9b. Insurance Carrier sends via IPS a confirmation status of change to both Receiving and Delivering Broker/Dealers. 9c. End of IPS Broker/Dealer Change Process. 10. Insurance Carrier determines the change request cannot be processed for a specific reason (rep not appointed, agent registered

with different broker/dealer, missing split percentage details, etc) but with corrective action the request can be resubmitted through IPS. Insurance Carrier returns confirmation Status along with the Exception and/or Reason Code for Corrective Action via IPS to both Delivering and Receiving Broker/Dealer.

10a. Receiving Broker/Dealer determines corrective action and whether it will require manual or automated processing (via IPS). 10b. Delivering Broker/Dealer continues to reflect the annuity asset on its books in pending status until further confirmation of

change. 11. The registration record is resubmitted including transaction reference code (NSCC control number) for insurance carrier to process

broker/dealer change. 12. Insurance Carrier determines the change request cannot be processed due to a hard reject reason (proprietary product, contract

terminated, death claim pending, etc). Carrier send reject to both Delivering and Receiving Broker/Dealers via IPS.



V. Next Steps The BAG will be presenting this Recommendation Paper to the NAVA Steering Committee, SIA CATS division and other interested parties during May 2003. This paper serves as a first look at what the ACATS/IPS business flow will look like. It is the hope of the BAG that companies reading this paper will be able to utilize it as an initial look at the scope of this initiative, and be able to present it to their development areas for feasibility estimates, based on internal programming needs for including annuities into the ACATS process. Concurrently, DTCC will begin assessing development needs and costs to both the ACATS and IPS systems. This understanding will grow once the next phase begins. In June 2003, the next phase will begin with the formation of two Transactional Working Groups to continue the business analysis and begin the technical design. The objective of these groups is to define the business requirements, which includes development of the record layouts to support the ACATS/IPS initiative. DTCC is looking to support both an NSCC fixed format record layout and an ACORD XML format for IPS transactions. DTCC will continue to support ACATS in a NSCC format only. As with any other initiatives, DTCC may look for some of the participating companies to pilot this initiative in 2004 during the rollout phase. Also, as the business requirements are more clearly defined, the BAG anticipates that both DTCC and participants will better understand development costs and expected volumes, which will ultimately lead to the announcement of a pricing structure.



VI. Appendices

A. Sample Selling Agreement Addendums

Sample 1

Bilateral NSCC/DTCC Agreement The parties named below have executed and filed the standard agreements required for participation with the National Securities Clearing Corporation (NSCC)/The Depository Trust & Clearing Corporation (DTCC). Each party agrees to participate in the Automated Customer Account Transfer Service (ACATS) and/or Insurance Processing Services (IPS) with the other under the terms of the standard agreements. Broker/Dealer agrees to indemnify and hold harmless (Insurance Company Name), its subsidiaries and affiliates and their respective officers, directors and employees against any and all losses, claims, damages, liabilities or expenses (including the reasonable costs of legal representation and investigation) to which (Insurance Company Name) may become subject which arise out of or are based on (Insurance Company Name) reliance on incorrect information submitted to (Insurance Company Name) in the transmission of data, or arising out of or based on a breach or violation of the representations, warranties or covenants contained in the standard NSCC/DTCC agreements. By: _________________________________________________ Date: ______________ Name: __________________________________________________ Title: __________________________________________________ Company:________________________________________________ By: __________________________________________________ Date: ______________ Insurance Company Name Address City, State Zip



Sample 2

Electronic Agent Change Addendum to

General Agent Agreement

Effective Date: ______________________ This Addendum No. ___ to the General Agent Agreement is made on the ____ day of ___________________, 2003, by and among (Insurance Company) and (General Agent). WHEREAS, (Insurance Company) and General Agent have entered into a General Agent Agreement dated __________________ and amended ________________________; WHEREAS, Insurance Company and General Agent desire to amend the General Agent Agreement to provide for the submission of Agent changes through an electronic process; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: A. ELECTRONIC PROCESS FOR AGENT CHANGES

1. General Agent may submit Agent changes to (Insurance Company Name) by electronic transmission (“Transmission”) in accordance with the written procedures established by (Insurance Company Name) in the _______________. Compliance with these Transmission procedures is a good order requirement. General Agent warrants that the information contained in the Transmission is the accurate and complete information to be used in changing the Agent upon which (Insurance Company Name) may rely.

2. General Agent may submit Custodial Account changes necessary due to an Agent change to (Insurance Company Name) by electronic transmission (“Transmission”) in accordance with the written procedures established by (Insurance Company Name) in the _______________. Compliance with these Transmission procedures is a good order requirement. General Agent warrants that the information contained in the Transmission is the accurate and complete information to be used in changing the Agent upon which (Insurance Company Name) may rely.

3. General Agent will obtain all appropriate client signatures on the Transfer In Account Form (TIF). Such TIF shall be maintained for a period of no less than seven (7) years from the date the account is terminated.

4. General Agent will only submit electronic Agent change requests for Agents who are currently licensed and appointed with (Insurance Company Name).

5. Upon completion of all good order requirements, (Insurance Company Name) will notify the General Agent of the status by electronic transmission.



6. Upon request, General Agent shall provide (Insurance Company Name) with a copy of the TIF. Such copy shall be provided to (Insurance Company Name) no later than two (2) business days from the request date.

B. GENERAL

1. General Agent shall indemnify and hold harmless (Insurance Company Name), its subsidiaries and affiliates and their respective officers, directors and employees against any and all losses, claims, damages, liabilities or expenses (including the reasonable costs of legal representation and investigation) to which (Insurance Company Name) may become subject which arise out of or are based on (Insurance Company Name)’ s reliance on incorrect information submitted to (Insurance Company Name) in the Transmission, or arising out of or based on a breach or violation of the representations, warranties or covenants contained herein.

2. A party may terminate this addendum upon 30 calendar day’s written notice. Such notice

of termination shall apply only to this addendum without affecting any other terms of the General Agent Agreement, as amended.

GENERAL AGENT (INSURANCE COMPANY NAME)

By:__________________________ By:___________________________ Title:_________________________ Title: _________________________



B. Custodial Changes with Annuities (in reference to Section II, Part 6) Scenario 1: - In Scope Brokerage Registration Del B/D Cust for John Doe IRA Receiving B/D Cust for John Doe IRA Annuity Registration Del B/D Cust for John Doe IRA Or John Doe IRA • ACATS request would be submitted for an IRA to IRA. • IPS transactions would be submitted by receiving B/D as follows: • Broker/Dealer Change • Broker of Record Change • BIN (Broker Identification Number) Change • Custodian Change (owner, beneficiary) (if annuity can be held at receiving B/D as custodian) Scenario 2: - In Scope Brokerage Registration Del B/D Cust for John Doe IRA Receiving B/D Cust for John Doe IRA Annuity Registration John Doe (Non-Qualified Single) ACATS request would be submitted for an IRA to IRA. However, in this case, the annuity is not registered as an IRA. If the receiving B/D cannot accommodate unlike registrations, they will line delete the annuity from the ACATS and create and send a letter to the client indicating annuity cannot come over in the ACATS request. If the receiving B/D can accommodate unlike registrations, they will submit the following IPS transactions: • Broker/Dealer Change • Broker of Record Change • BIN (Broker Identification Number) Change • Custodian Change (owner, beneficiary) Scenario 3: - Out of Scope Brokerage Registration Del B/D Cust for John Doe PSP Receiving B/D Cust for John Doe IRA Annuity Registration Del B/D Cust for John Doe PSP or John Doe PSP This is the most common Direct Rollover scenario. ACATS request would be submitted for Profit Sharing Plan to IRA as a direct rollover. Annuity will need to be identified by the Delivering B/D as a non-transferable (NTA) asset. Annuity will be transferred outside the ACATS system by the receiving B/D.



C. Mismatch Registrations with Annuities (in reference to Section II, Part 7) Scenario: Brokerage Registration Single – John Doe Single – John Doe Annuity Registration Joint – Mary and John Doe In this scenario, the brokerage account is registered as a single account on both delivering and receiving side. John Doe has an annuity that is held jointly with Mary. In the ACATS transfer, the receiving Broker/Dealer would submit the ACATS request for a Single to Single Account Type. Suggested Standard for processing mismatched registrations Delivering Broker/Dealer: • Validates the account type at the brokerage account level • Validates the assets and identifies annuity asset has a different annuity registration type (ACATS will create new field

identifying annuity registration types – J (Joint), T (Trust), S (Single), C (Custodian), etc. • Loads all assets to ACATS, including all annuity assets Receiving Broker/Dealer: • Reviews the assets and determines whether the annuity assets can or cannot come over due to an annuity registration

mismatch. (decision will be based on internal networking rules). • Line deletes the annuity asset and creates manual transfer process outside of ACATS. • Creates letter to client identifying that annuity cannot come over during the ACAT process due to annuity registration

mismatch. B/Ds may choose to still allow for the annuity asset(s) to come over through the ACAT process and internally move the asset to another brokerage account. This will allow for the Broker/Dealer and rep (if applicable) change to still occur through the ACATS/IPS interface. This would be a Broker/Dealer decision.



VII. Glossary of Terms

ACATS Automated Customer Account Transfer Service (ACATS) automates

and standardizes procedures for the transfer of assets in a customer account from one brokerage firm to another, expediting the transfer process.

ACATS Settlement Value ACATS uses settlement value in the transfer of other assets types as an incentive for the deliverer to complete the asset delivery. There will no settlement value for annuities.

ACATS/IPS The proposed link between the ACATS system and the IPS system to

automate broker/dealer changes for annuities.

Accelerated Transfers Occurs in ACATS when the Receiving Broker/Dealer requests a transfer to be processed one day earlier than standard time frames. (i.e. On the same day the Delivering Broker/Dealer validates assets in an account, the Receiving Broker/Dealer can request the transfer to be completed in two business days, rather than the standard three business days from time of asset input.)

Account Type Identifies the different types of retail and non-retail accounts that can be held on the books of a Broker/Dealer (i.e. Retail Accounts – Single, Joint, Trust/Non-retail Accounts – IRA, 401K, Profit Sharing plan, Simple IRA, ROTH IRA).

ACORD ACORD (Association for Cooperative Operations Research and Development) is a nonprofit insurance association whose mission is to facilitate the development and use of standards for the insurance and related financial services industries.

ACORD XML ACORD XML (Extensible Markup Language) is the electronic language of the insurance Internet, facilitating real-time, cross-platform, peer-to-peer communication. ACORD XML for Life Insurance is based on the robust, industry-tested ACORD Life Data Model.

Corrective (soft) Rejects Insurance Carriers response for more information before a Broker/Dealer change request can be made.

CUSIP number This stands for Committee on Uniform Securities Identification Procedures. It is a number used to uniquely identify securities/products. ACATS/IPS would require that all annuities have a valid Standard and Poors CUSIP number in order to pass through the ACATS/IPS system.

Delivering Broker/Dealer The deliverer is a NSCC participant subscribing to ACATS. The deliverer has the account and must deliver the assets to the receiver.

DTCC The Depository Trust & Clearing Corporation (DTCC) is the largest financial services post-trade infrastructure organization in the world.



Through its subsidiaries, DTCC acts as a central counter party (CCP), providing trade guarantee, netting and risk management services for equity and debt transactions from U.S. stock exchanges and markets, and it provides custody of and asset servicing for 2 million securities of issuers from the U.S. and 65 other countries, valued at $23 trillion. In addition, its subsidiary serves as a major clearinghouse for institutional post-trade settlement (processing book-entry deliveries valued at more than $116 trillion in 2000).

Full Transfer (FUL) Request by the Receiving Broker/Dealer to transfer all the assets in a customer’s account held at the Delivering Broker/Dealer.

Hard Rejects Broker/dealer change is rejected for a reason that cannot be settled in

an automated fashion. The automated process would end and trading partners would need to solve issues off line.

Insurance Carriers (aka Insurance Companies) These organizations manufacture Insurance products for distribution.

IPS Insurance Processing Service is a central processing and settlement system for the transfer of insurance information between Insurances Carriers and Broker/Dealers. The following product make up the IPS system: Positions and Values, Commission Settlement, Annuity Asset Pricing, Initial Applications and Subsequent Premiums, Financial Activity Reporting, Licensing & Appointments and Product Profile.

Mandating ACATS is a mandated service by the NYSE and NASD, which requires Broker/Dealers to process account transfers through this system.

NSCC Control Number A unique number that identifies each transaction that passes through the ACATS or IPS system.

NSCC format A fixed format record layout created and used by IPS members to transmit information.

Non-Standard Transfer Transfers initiated by the Delivering Broker/Dealer that have shortened settlement time frames. (i.e. Residual Credits, Partial Transfers, Reclaims, Fail Reversals and Custody Re-Deliveries.)

Non Transferable Assets (NTA) Assets that cannot be transferred to the new Broker/Dealer. It may be that these assets are proprietary to the Delivering Broker/Dealer.

Partial Transfer Deliverer

A non-standard transfer allowing the Delivering Broker/Dealer to transfer portions of a customer’s account to the Receiving Broker/Dealer, per a customer’s instruction to the Delivering Broker/Dealer or in response to a “Partial Transfer Receiver” request by the Receiver.

Partial Transfer Receiver A request by the Receiver to the Deliverer that portions of a customer account be transferred.

Receiving Broker/Dealer The receiver is a NSCC participant subscribing to ACATS that will be getting the account assets from the deliverer.

Residual Credits Allows the original deliverer to transfer any residual credit balances



remaining in the account to the original receiver

Receive & Deliver (R&D) Settling Location

Settling location in ACATS, which allows you to track and settle securities that do not have an automated settling system such as foreign securities.

Selling Agreement A mutual agreement that sets the guidelines for a permissible selling arrangement between trading partners.

Standard Transfer This is a full transfer. Normally there is one day for Review status, one day for Settle-Prep status, and then the item settles two days later. This transfer could be accelerated so that Settle-Prep occurs the same day as the Review status.

Status Field containing the overall ACATS status for the transfer. Since the ACATS system is a multi-batch system, each input can, and usually will, change the status of the transfer.

Steering Committee All companies that have shown an interest in ACATS/IPS and are included in the distribution of information pertaining to this initiative.

TIF Immobilization The practice of retaining the original Transfer Initiation Form (TIF) in a secure location at the Receiver. This reduces the flow of paperwork between the Receiver and Deliverer, expediting the transfer of accounts. Participants practicing TIF Immobilization agree to furnish a copy of the TIF to the Deliverer immediately upon request.

Transfer Initiation Form (TIF) A form signed by the account holder, which gives the Receiver authorization to have the account transferred.

Transaction Type Field identifying that the submitter is adding, changing, rejecting, or accelerating a transfer.

Tri-Check Validation A validation that would be performed by DTCC when using ACATS/IPS. It would check to ensure that the Delivering Firm, Receiving Firm and CUSIP are all eligible to use the system. If the check fails the ACAT would not process and no information would be sent the Insurance Carrier.

Documents

ACATS/IPS Business Advisory Group Business Recommendation .../media/Files/Downloads/Investment-Product... · ACATS/IPS Business Advisory Group Recommendation Paper May 2003 Depository