Investors often strategize the transfer of their common stocks from one broker to another seeking lower fees, better service, or cutting-edge research and trading tools. This realm extensively utilizes the Automated Customer Account Transfer Service (ACATS), a system that facilitates the smooth transition of assets from one brokerage firm to another.
Substituting manual methods, ACATS not only accelerates the process but also curbs errors. Yet, it doesn't permit every investment to be transferred. Commonly, the receiving broker initiates and validates the request, while the delivering broker reviews the account and sends qualified assets.
Before the advent of the National Securities Clearing Corporation (NSCC) developed ACATS, a slow and error-prone manual system was used. ACATS has notably broadened its capabilities to transfer stocks, bonds, cash, unit trusts, mutual funds, options, and other investment products, but only NSCC-eligible members and Depository Trust Company member banks can utilize it.
In the ACATS system, both the delivering and receiving firms shoulder unique responsibilities. If a shareholder wants to transfer their shares from one firm to another, the receiving firm initiates the procedure by contacting the delivering firm. The delivering firm, upon receiving the transfer request and validation from the receiving firm, must cancel all open orders and refrain from accepting any new orders on the client’s account.
Once the transfer concludes, the responsibilities of reporting to the shareholder lie on the receiving firm. It is noteworthy that some securities cannot undergo the ACATS system, like annuities procured through insurance companies. However, these annuities can potentially be transferred via a 1035 exchange, an IRS provision allowing tax-free transfer of insurance products under specific conditions.
The SECURE Act passed by the U.S Congress in 2019, eases the process of transferring annuities for investors holding them in an employer-sponsored plan. However, it should be acknowledged that there remain ineligible securities, depending on the delivering and receiving firm's regulations, including mutual funds, unlisted shares, and over the counter (OTC) traded financial products.
Using ACATS for transfers typically takes three to six business days, a significant improvement over the month-long wait for manual transfers. Besides saving time, ACATS' automated nature reduces the risk of human-induced errors or typos. Despite its advantages, investors are suggested to maintain accurate records before and after the transfer to ensure the soundness of their portfolio.