What Is the Automated Customer Account Transfer Service (ACATS)?

The Automated Customer Account Transfer Service (ACATS) is a system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank.

The National Securities Clearing Corporation (NSCC) developed the ACATS system, replacing the previous manual asset transfer system with this fully automated and standardized one. This greatly reduced the cost and time of moving assets between brokerage accounts as well as cut down on human error.

How the Automated Customer Account Transfer Service (ACATS) Works

The ACATS system is initiated when the new receiving firm has the client sign the appropriate transfer documents. Once the document is received in good order, the receiving firm submits a request using the client’s account number and sends it to the delivering firm. If the information matches between both the delivering firm and the receiving firm, the ACATS process can begin. The process takes usually takes three to six business days to complete.

The ACATS simplifies the process of moving assets from one brokerage firm to another. The delivering firm transfers the exact holdings to the receiving firm. For example, if the client had 100 shares of Stock XYZ at the delivering firm, then the receiving firm receives the same amount, with the same purchase price.

This makes it more convenient for clients, as they do not need to liquidate their positions and then repurchase them with the new firm. Another benefit is that clients do not need to let their previous brokerage firm or advisor know beforehand. If they are unhappy with their current broker, they can simply go to a new one and start the transfer process.

Securities Eligible for ACATS

Clients can transfer all publicly traded stocks, exchange-traded funds (ETFs), cash, bonds, and most mutual funds through the ACATS system.

ACATS can also transfer certificates of deposit (CDs) from banking institutions through the ACATS system, as long as it is a member of the NSCC. ACATS also works on all types of accounts, such as taxable accounts, individual retirement accounts (IRAs), trusts, and brokerage 401(k)s.

Securities Ineligible for ACATS

There are several types of securities that cannot go through the ACATS system. Annuities cannot transfer through the system, as those funds are held with an insurance company. To transfer the agent of record on an annuity, the client must fill out the correct form to make the change and initiate the process via what is known as a 1035 exchange.

Other ineligible securities depend on the regulations of the receiving brokerage firm or bank. Many institutions have proprietary investments, such as non-transferrable mutual funds and alternative investments that may need to be liquidated and which may not be available for repurchase through the new broker. Also, some firms may not transfer unlisted shares or financial products that trade over the counter (OTC).

What Is an American Depositary Share (ADS)?

An American depositary share (ADS) is an equity share of a non-U.S. company that is held by a U.S. depositary bank and is available for purchase by U.S. investors.

The entire issuance of shares by a foreign company is called an American Depositary Receipt (ADR), while the individual shares are referred to as ADSs. But the terms American Depositary Shares and American Depositary Receipts are often used interchangeably.

Understanding American Depositary Shares

An ADR is a negotiable certificate issued by a U.S. bank, under agreement with the foreign company, and is evidence of ownership of ADSs, much the same way a stock certificate denotes ownership of equity shares.

ADSs are meant to facilitate trading of the shares. They can trade over-the-counter (OTC) or on a major exchange such as the New York Stock Exchange (NYSE) or the Nasdaq (Nasdaq), depending on how much the foreign company is willing to comply with U.S. regulations. Listing on a major exchange generally requires the same level of reporting as that done by domestic companies, as well as adherence to Generally Accepted Accounting Principles (GAAP).

The Benefits of ADSs

Foreign companies that choose to offer shares on U.S. exchanges gain the advantage of a wider investor base, which can also lower costs of future capital. For U.S. investors, ADSs offer the opportunity to invest in foreign companies without dealing with currency conversions and other cross-border administrative hoops.

The Downside of ADSs

There is some currency risk involved in holding ADSs. Fluctuations in the exchange rate between the U.S. dollar and the foreign currency will have some effect on the price of shares as well as on any income payments, which must be converted into U.S. dollars.

Tax treatment of dividends from ADSs is also different. Most countries apply a withholding amount on dividends issued for ADRs. This withholding amount can vary. For example, Chile and Switzerland withhold 35% while France can withhold as much as 75% of the tax on dividends, in the case of non-cooperative countries within the EU. The withholding tax is in addition to the dividend tax already levied by U.S. authorities. The dividend tax can be avoided by ADR investors by filling out Form 1116 for foreign tax credit.

Real World Examples of ADSs

A single ADS often represents more than one share of common stock. Further, ADSs can “gap” up or down outside of U.S. trading hours, when trading is happening in the company’s home country and U.S. markets are closed.

For example, South Korea’s Woori Bank, a subsidiary of Woori Financial Group, has ADSs that are traded in the U.S. The bank’s ADS gapped up by $0.03 on July 20, 2016. A technical analysis of the price action on this ADS shows that for the past decade, its price continued higher two-thirds of the time after a gap up.