How brokerage transfers actually work

**Patrick McKenzie** (0:02)
Welcome to Complex Systems, where we discuss the technical, organizational and human factors underpinning why the world works the way it does.
Hi to you, everybody. My name is Patrick McKenzie, better known as patio11 on the Internet. In 2024, for Bits About Money, I wrote an essay about Acats, which governs the account transfers between brokerages in the United States of America. Acats has some security properties, which, as we'll discuss, are almost unbelievable to uninvolved people. And so, I thought I would read the essay and then tell you what is in the process of potentially changing.
And so, with that, Guys, What is Wrong with Acats? Originally published in Bits About Money on May 24th, 2024
Many beginnings imply a contemporaneous ending. This is often bittersweet. Some personal news implies a tearful goodbye to soon-to-be-former coworkers. A new adventure of scholasticism and self-discovery means saying goodbye to your high school friends. And a new brokerage account often implies leaving a years or decades-long relationship with a firm that's stuck with you. Feels a bit like a jilted lover, and, by the way, happens to constructively control most of your net worth.
This particular beginning and ending is mediated by a complex techno-legal system called Acats, the automated customer account transfer service. Acats is quite impressive, underpins a very important part of the financial system, and some of the quirks of how it operates will probably surprise you. Like many important parts of the financial system, Acats is a work in progress. Since I originally wrote this essay in early 2024, there have been proposed regulatory changes regarding brokerage fraud. After setting the stage for what is still today the status quo, we'll discuss those developments.
A brief digression into self-regulatory organizations.
Brokerages are regulated by Finra. Finra stands for many things, though these days Finra might deny that it is an acronym. In previous years though, it was definitely the Financial Industry Regulatory Authority.
One reason Finra is not an acronym, to the extent it is not an acronym, is that an unsophisticated investor might hear that and assume, ah, Finra is clearly part of the government, and Finra will immediately swear up, down and sideways that they are not. They are just a financial regulator, overseeing trillions of dollars. Self-regulatory organizations, SROs, are industry associations. There are many industry associations in the world. Some pool money to pay for rising tides, liftsaw, bovines advertising. Some exist to get peers together for merriment, diversion and some conspiracy against the public. This is a joking reference to a famous passage from Adam Swift. On a completely unrelated note, please feel free to introduce yourself if you see me at a software conference. I'll be doing a talk about raising prices. SROs are the type of industry associations that partially exist as a blocking play. If we don't get our house in order, dangerous professionals from the government are going to barge into our house to order it for us. That will be disruptive to providing valuable services to our customers at a price they are willing to pay. Finra regulates asset transfers between brokerages. Discount brokerages are large, trustworthy, competent institutions. But there are some brokerages which are not. There are warehouses attached to large investment banks like, for example, JPMorgan, which is large, trustworthy, and competent, but not a discount brokerage. There is Robinhood, a large discount brokerage, but by far the most numerous are small boutiques which keep on keeping on.
Some of those boutiques have been known to be a bit grasping when assets under management attempt to walk out the door. They refuse to let their customer leave.
When told this was extremely improper, they whined and said it was really difficult to facilitate their customer leaving, and wouldn't the customer prefer staying? And Cindy, who can actually take care of this, will be back in the office the first Tuesday after the waxing moon.
And so Finra listened to its members, brokerages, customers, advocates, and counterparts in government, and passed a rule. Cindy can go on vacation any day she wants, but it is the brokerage and not Cindy who is responsible for outcomes, and only one outcome is acceptable. If the customer wants to move their assets out, you must let them. The full rule is necessarily more complicated than that gloss of the intent of the rule. It's not unknowable inside baseball. See Finra rule 11870 It is somewhat some ambulance inducing.
When a customer whose securities account is carried by a member, the carrying member, wishes to transfer securities account assets in whole or in specially designated part to another member, the receiving member, and gives authorized instructions to the receiving member, both members must expedite and coordinate activities with respect to the transfer. But by the standards of many regulations, it is short and actionable.