Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities, 32771-32775 [E8-12948]

Download as PDF Federal Register / Vol. 73, No. 112 / Tuesday, June 10, 2008 / Notices Proposal met these objectives. Although Form 19b–4 requires that a proposed rule change be accurate, consistent, and complete, including the information necessary for the Commission’s review, the Form does not require SROs to anticipate and respond in advance to each of the points that commenters may raise in opposition to a proposed rule change. With this Order, the Commission has determined that the points raised by the commenter do not provide a basis to decline to approve the Proposal. Finally, commenters raised concerns regarding the contract terms that will govern the distribution of ArcaBook data.264 In particular, one notes that NYSE Arca has not filed its vendor distribution agreement with the Commission for public notice and comment and Commission approval.265 NYSE Arca has stated, however, that it plans to use the vendor and subscriber agreements used by CTA and CQ Plan Participants (the ‘‘CTA/CQ Vendor and Subscriber Agreements’’) to govern the distribution of NYSE Arca Data. According to the Exchange, the CTA/CQ Vendor and Subscriber Agreements ‘‘are drafted as generic one-size-fits-all agreements and explicitly apply to the receipt and use of certain market data that individual exchanges make available in the same way that they apply to data made available under the CTA and CQ Plans,’’ and the contracts need not be amended to cause them to govern the receipt and use of the Exchange’s data.266 The Exchange maintains that because ‘‘the terms and conditions of the CTA/CQ contracts do not change in any way with the addition of the Exchange’s market data * * * there are no changes for the industry or Commission to review.’’ 267 The Commission believes that the Exchange may use the CTA/CQ Vendor and Subscriber Agreements to govern the distribution of NYSE Arca Data.268 264 See section III.A.7 above. I at 7. In this regard, the commenter states that, procedurally, the Exchange ‘‘is amending and adding to the CTA vendor agreement without first submitting its contractual changes through the CTA’s processes, which are subject to industry input through the new Advisory Committee mandated by Regulation NMS.’’ SIFMA I at 8. 266 NYSE Arca Response I at 3. 267 NYSE Arca Response I at 3 (emphasis in original). 268 The Commission is not approving the CTA/CQ Vendor and Subscriber Agreements, which the CTA and CQ Plan Participants filed with the Commission as amendments to the CTA and CQ Plans that were effective on filing with the Commission pursuant to Rule 608(b)(3)(iii) of Regulation NMS (previously designated as Exchange Act Rule 11Aa3–2(c)(3)(iii)). See, e.g., Securities Exchange Act Release No. 28407 dwashington3 on PRODPC61 with NOTICES 265 SIFMA VerDate Aug<31>2005 15:35 Jun 09, 2008 Jkt 211001 It notes that the NYSE used the CTA Vendor Agreement to govern the distribution of its OpenBook and Liquidity Quote market data products.269 Moreover, the Exchange represents that, following consultations with vendors and end-users, and in response to client demand: [The Exchange] chose to fold itself into an existing contract and administration system rather than to burden clients with another set of market data agreements and another market data reporting system, both of which would require clients to commit additional legal and technical resources to support the Exchange’s data products.270 In addition, the Exchange has represented that it is ‘‘not imposing restrictions on the use or display of its data beyond those set forth’’ in the existing CTA/CQ Vendor and Subscriber Agreements.271 The Commission therefore does not believe that the Exchange is amending or adding to such agreements. A commenter also stated that the Exchange has not recognized the rights of a broker or dealer, established in Regulation NMS, to distribute its order information, subject to the condition that it does so on terms that are fair and reasonable and not unreasonably discriminatory.272 In response, the Exchange states that the CTA/CQ Vendor and Subscriber Agreements do not prohibit a broker-dealer member of an SRO participant in a Plan from making available to the public information relating to the orders and transaction reports that it provides to the SRO participant.273 Accordingly, the Commission believes that the Exchange has acknowledged the rights of a broker or dealer to distribute its market (September 6, 1990), 55 FR 37276 (September 10, 1990) (File No. 4–2811) (notice of filing and immediate effectiveness of amendments to the CTA Plan and the CQ Plan). Rule 608(b)(3)(iii) of Regulation NMS (previously designated as Exchange Act Rule 11Aa3–2(c)(3)(iii)) allows a proposed amendment to a national market system plan to be put into effect upon filing with the Commission if the plan sponsors designate the proposed amendment as involving solely technical or ministerial matters. 269 Securities Exchange Act Release Nos. 53585 (March 31, 2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR–NYSE–2004–43 and NYSE–2005–32) (relating to OpenBook); and 51438 (March 28, 2005), 70 FR 17137 (April 4, 2005) (order approving File No. SR–NYSE–2004–32) (relating to Liquidity Quote). For both the OpenBook and Liquidity Quote products, the NYSE attached to the CTA Vendor Agreement an Exhibit C containing additional terms governing the distribution of those products, which the Commission specifically approved. NYSE Arca is not including additional contract terms in the Proposal. 270 NYSE Arca Response I at 4. 271 NYSE Arca Response I at 3. 272 SIFMA I at 7. 273 NYSE Arca Response I at 4. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 32771 information, subject to the requirements of Rule 603(a) of Regulation NMS. A commenter also stated that the Exchange has failed to consider the administrative burdens that the proposal would impose, including the need for broker-dealers to develop system controls to track ArcaBook access and usage.274 In response, the Exchange represents that it has communicated with its customers to ensure system readiness and is using ‘‘a long-standing, well-known, broadlyused administrative system’’ to minimize the amount of development effort required to meet the administrative requirements associated with the proposal.275 Accordingly, the Commission believes that NYSE Arca has reasonably addressed the administrative requirements associated with the Proposal. VI. Conclusion It is therefore ordered that the earlier action taken by delegated authority, Securities Exchange Act Release No. 54597 (October 12, 2006) 71 FR 62029 (October 20, 2006), is set aside and, pursuant to section 19(b)(2) of the Exchange Act, the Proposal (SR– NYSEArca–2006–21) is approved. By the Commission. [FR Doc. E8–12928 Filed 6–9–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–57920; File No. SR–FINRA– 2008–019] Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities June 4, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘SEA’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 21, 2008, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described 274 SIFMA I at 8. Arca Response I at 4–5. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 275 NYSE E:\FR\FM\10JNN1.SGM 10JNN1 32772 Federal Register / Vol. 73, No. 112 / Tuesday, June 10, 2008 / Notices in Items I, II, and III below, which Items have been prepared substantially by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend certain provisions of NASD Rule 2821.3 Below is the text of the proposed rule change. Proposed new language is italicized; proposed deletions are in brackets. * * * * * dwashington3 on PRODPC61 with NOTICES 2821. Members’ Responsibilities Regarding Deferred Variable Annuities (a) General Considerations (1) Application This Rule applies to recommended [the] purchases [or] and exchanges of [a] deferred variable annuit[y]ies and recommended initial [the] subaccount allocations. This Rule does not apply to reallocations [of] among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity. This Rule also does not apply to deferred variable annuity transactions made in connection with any tax-qualified, employer-sponsored retirement or benefit plan that either is defined as a ‘‘qualified plan’’ under Section 3(a)(12)(C) of the [Securities] Exchange Act [of 1934] or meets the requirements of Internal Revenue Code Sections 403(b), 457(b), or 457(f), unless, in the case of any such plan, a member or person associated with a member makes recommendations to an individual plan participant regarding a deferred variable annuity, in which case the Rule would apply as to the individual plan participant to whom the member or person associated with the member makes such recommendations. (2) No change. (3) No change. (b) Recommendation Requirements (1) No member or person associated with a member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless such member or person associated with a 3 On March 17, 2008, FINRA filed a separate proposed rule change, which became effective upon filing, to delay the effective date of paragraphs (c) and (d) of NASD Rule 2821 until 180 days following the Commission’s approval or rejection of this substantive proposed rule change. See FINRA Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Delay the Effective Date of Certain FINRA Rule Changes Approved in SR– NASD–2004–183, Securities Exchange Act Release No. 57769 (May 2, 2008), 73 FR 26176 (May 8, 2008) (SR–FINRA–2008–015). Paragraphs (a), (b), and (e) of NASD Rule 2821, as approved in SR– NASD–2004–183, became effective as originally scheduled on May 5, 2008. VerDate Aug<31>2005 15:35 Jun 09, 2008 Jkt 211001 member has a reasonable basis to believe (A) that the transaction is suitable in accordance with Rule 2310 and, in particular, that there is a reasonable basis to believe that (i) No change. (ii) No change. (iii) the particular deferred variable annuity as a whole, the underlying subaccounts to which funds are allocated at the time of the purchase or exchange of the deferred variable annuity, and riders and similar product enhancements, if any, are suitable (and, in the case of an exchange, the transaction as a whole also is suitable) for the particular customer based on the information required by [sub]paragraph (b)(2) of this Rule; and (B) in the case of an exchange of a deferred variable annuity, the exchange also is consistent with the suitability determination required by [sub]paragraph (b)(1)(A) of this Rule, taking into consideration whether (i) No change. (ii) No change. (iii) the customer[’s account] has had another deferred variable annuity exchange within the preceding 36 months. The determinations required by this paragraph shall be documented and signed by the associated person recommending the transaction. (2) No change. (3) Promptly after receiving information necessary to prepare a complete and correct application package for a deferred variable annuity, a person associated with a member who recommends the deferred variable annuity shall transmit the complete and correct application package to an office of supervisory jurisdiction of the member. (c) Principal Review and Approval Prior to transmitting a customer’s application for a deferred variable annuity to the issuing insurance company for processing, but no later than seven business days after [the customer signs the application] an office of supervisory jurisdiction of the member receives a complete and correct application package, a registered principal shall review and determine whether he or she approves of the recommended purchase or exchange of the deferred variable annuity. [Subject to the exception in this paragraph, and treating all transactions as if they have been recommended for purposes of this principal review, a] A registered principal shall approve the recommended transaction only if he or she [the registered principal] has determined that there is a reasonable PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 basis to believe that the transaction would be suitable based on the factors delineated in paragraph (b) of this Rule. [Notwithstanding the foregoing, a registered principal may authorize the processing of the transaction if the registered principal determines that the transaction was not recommended and that the customer, after being informed of the reason why the registered principal has not approved the transaction, affirms that he or she wants to proceed with the purchase or exchange of the deferred variable annuity.] The determinations required by this paragraph shall be documented and signed by the registered principal who reviewed and then approved[,] or rejected[, or authorized] the transaction. (d) No change. (e) Training Members shall develop and document specific training policies or programs reasonably designed to ensure that associated persons who effect and registered principals who review transactions in deferred variable annuities comply with the requirements of this Rule and that they understand the material features of deferred variable annuities, including those described in [sub]paragraph (b)(1)(A)(i) of this Rule. Supplementary Material: .01 Under Rule 2821, a member that is permitted to maintain customer funds under SEA Rules 15c3–1 and 15c3–3 may, prior to the member’s principal approval of the deferred variable annuity, deposit and maintain customer funds for a deferred variable annuity in an account that meets the requirements of SEA Rule 15c3–3. .02 If a customer provides a member that is permitted to hold customer funds with a lump sum or single check made payable to the member (as opposed to being made payable to the insurance company) and requests that a portion of the funds be applied to the purchase of a deferred variable annuity and the rest of the funds be applied to other types of products, Rule 2821 would not prohibit the member from promptly applying those portions designated for purchasing products other than a deferred variable annuity to such use. A member that is not permitted to hold customer funds can comply with such requests only through its clearing firm that will maintain customer funds for the intended deferred variable annuity purchase in an account that meets the requirements of SEA Rule 15c3–3. In such circumstances, the checks would need to be made payable to the clearing firm. E:\FR\FM\10JNN1.SGM 10JNN1 dwashington3 on PRODPC61 with NOTICES Federal Register / Vol. 73, No. 112 / Tuesday, June 10, 2008 / Notices .03 Rule 2821 does not prohibit a member from forwarding a check made payable to the insurance company or, if the member is fully subject to SEA Rule 15c3–3, transferring funds for the purchase of a deferred variable annuity to the insurance company prior to the member’s principal approval of the deferred variable annuity, as long as the member fulfills the following requirements: (1) the member must disclose to the customer the proposed transfer or series of transfers of the funds and (2) the member must enter into a written agreement with the insurance company under which the insurance company agrees to (a) segregate the member’s customers’ funds in a bank in an account equivalent to the deposit of those funds by a member into a ‘‘Special Account for the Exclusive Benefit of Customers’’ (set up as described in SEA Rules 15c3– 3(k)(2)(i) and 15c3–3(f)) to ensure that the customers’ funds will not be subject to any right, charge, security interest, lien, or claim of any kind in favor of the member, insurance company, or bank where the insurance company deposits such funds or any creditor thereof or person claiming through them and hold those funds either as cash or any instrument that a broker or dealer may deposit in its Special Reserve Account for the Exclusive Benefit of Customers, (b) not issue the variable annuity contract prior to the member’s principal approval, and (c) promptly to return the funds to each customer at the customer’s request prior to the member’s principal approval or upon the member’s rejection of the application. .04 A member is not prohibited from forwarding a check provided by the customer for the purpose of purchasing a deferred variable annuity and made payable to an IRA custodian for the benefit of the customer (or, if the member is fully subject to SEA Rule 15c3–3, funds) to the IRA custodian prior to the member’s principal approval of the deferred variable annuity transaction, as long as the member enters into a written agreement with the IRA custodian under which the IRA custodian agrees (a) to forward the funds to the insurance company to complete the purchase of the deferred variable annuity contract only after it has been informed that the member’s principal has approved the transaction and (b), if the principal rejects the transaction, to inform the customer, seek immediate instructions from the customer regarding alternative disposition of the funds (e.g., asking whether the customer wants to transfer VerDate Aug<31>2005 15:35 Jun 09, 2008 Jkt 211001 the funds to another IRA custodian, purchase a different investment, or provide other instructions), and promptly implement the customer’s instructions. .05 Rule 2821 requires that the member or person associated with a member consider whether the customer has had another deferred variable annuity exchange within the preceding 36 months. Under this provision, a member or person associated with a member must determine whether the customer has had such an exchange at the member and must make reasonable efforts to ascertain whether the customer has had an exchange at any other broker-dealer within the preceding 36 months. An inquiry to the customer as to whether the customer has had an exchange at another broker-dealer within 36 months would constitute a ‘‘reasonable effort’’ in this context. Members shall document in writing both the nature of the inquiry and the response from the customer. .06 Rule 2821 requires principal review and approval ‘‘[p]rior to transmitting a customer’s application for a deferred variable annuity to the issuing insurance company for processing* * * .’’ In circumstances where an insurance company and its affiliated broker-dealer share office space and/or employees who carry out both the principal review and the issuance process, FINRA will consider the application ‘‘transmitted’’ to the insurance company only when the broker-dealer’s principal, acting as such, has approved the transaction, provided that the affiliated brokerdealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer. 07 Rule 2821 does not prohibit using the information required for principal review and approval in the issuance process, provided that the broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer. For instance, the rule does not prohibit a broker-dealer from inputting information used as part of its suitability review into a shared database (irrespective of the media used for that database, i.e., paper or electronic) that the insurance company uses for the issuance process, provided that the broker-dealer and the insurance company have agreed that the insurance company will not issue the contract prior to principal approval by the broker-dealer. * * * * * PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 32773 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose FINRA is proposing to amend NASD Rule 2821 to modify the rule’s scope and the timing of principal review. FINRA also is proposing to clarify various issues that commenters have raised through a ‘‘Supplementary Material’’ section following the rule text. Reasons for these changes are discussed below. Limit Application of the Rule To Recommended Transactions As approved by the Commission, NASD Rule 2821(c) requires principals to treat ‘‘all transactions as if they have been recommended for purposes of this principal review.’’ Following the Commission’s approval of the rule, however, numerous commenters asked the SEC and FINRA to reconsider this approach. Some of the commenters asserted that applying the rule to nonrecommended transactions would have the unintended and harmful consequence of essentially forcing some firms that offer low-priced alternatives and do not allow recommendations or use transaction-based compensation out of the deferred variable annuities business. Still other commenters believed that, absent a recommendation, a customer should be completely free to invest in a deferred variable annuity without interference or second guessing from a broker-dealer. After further reflection, FINRA is proposing to limit the rule’s application to recommended transactions. This approach is consistent with that taken by FINRA’s general suitability rule, Rule 2310. This change, moreover, should not detract from the effectiveness of Rule NASD 2821 in providing additional protection to investors in deferred variable annuities. For instance, brokers recommend the vast majority of purchases and exchanges of E:\FR\FM\10JNN1.SGM 10JNN1 32774 Federal Register / Vol. 73, No. 112 / Tuesday, June 10, 2008 / Notices deferred variable annuities. Thus, the rule would continue to cover most transactions. FINRA emphasizes, moreover, that members must implement reasonable measures to detect and correct circumstances when brokers mischaracterize recommended transactions as non-recommended. Where the transaction truly is initiated by the customer and not recommended by the broker, there generally is less of a concern regarding potential or actual conflicts of interest and less of a need for heightened sales practice requirements. In addition, this change would promote competition by allowing a wide variety of business models to exist, including those premised on keeping costs low by, in part, eliminating the need for a sales force and large numbers of principals. Modifying the Starting Point for the Seven-Business-Day Review Period dwashington3 on PRODPC61 with NOTICES NASD Rule 2821(c) requires principal review and approval ‘‘[p]rior to transmitting a customer’s application for a deferred variable annuity to the issuing insurance company for processing, but no later than seven business days after the customer signs the application.’’ A number of firms asserted that seven business days beginning from the time when the customer signs the application may not allow for a thorough principal review in all cases. These firms provided examples of situations where a principal might not be able to complete the required review within the allotted time, such as when a customer inadvertently omits information from the application, when information provided by a customer on the application needs clarification, when a customer signs the application but does not mail it for several days after signature, and when a customer mails the application by regular U.S. mail. FINRA is proposing to modify the beginning of the period within which the principal must review and determine whether to approve or reject the application. Under the proposal, the period would begin to run not from the date of the customer’s signature but from the date when the firm’s office of supervisory jurisdiction (OSJ) receives a complete and correct copy of the application.4 This period should be 4 As FINRA and the Commission previously have noted, ‘‘Many broker-dealers are subject to lower net capital requirements under [Exchange Act] Rule 15c3–1 and are exempt from the requirement to establish and fund a customer reserve account under [Exchange Act] Rule 15c3–3 because they do not carry customer funds or securities.’’ SEC Order Granting a Conditional Exemption to Broker-Dealers from Requirements in Rules 15c3–1 and 15c3–3 VerDate Aug<31>2005 15:35 Jun 09, 2008 Jkt 211001 sufficient to permit a principal to conduct an appropriate review, building in time for readily foreseeable delays, while still maintaining a definite period within which the principal must make a final decision. To help ensure that the process remains efficient from the beginning, the proposal also would require the associated person who recommended the annuity to promptly transmit the complete and correct application package to the OSJ. However, that latter provision, proposed paragraph (b)(3) of NASD Rule 2821, would not preclude the customer from transmitting the complete and correct application package to the OSJ. For instance, there may be occasions where the application package is technically complete and correct but the customer wants to take it home and consider the purchase or exchange some more before sending the application to the OSJ. Proceeding in such a manner would not be inconsistent with the proposed provision. Clarification of Issues Through Supplementary Material Commenters have raised a number of additional issues requiring clarification. A ‘‘Supplementary Material’’ section following the rule’s text examines those issues that were raised by multiple groups and that potentially could have a significant impact on how members sell or process deferred variable annuities. FINRA refuted, for instance, the misconception that firms generally allowed to handled and carry customer funds under Exchange Act Rules 15c3– 1 and 15c3–3 could not deposit funds for a deferred variable annuity prior to principal approval. FINRA also reconsidered the question of whether members could forward funds to insurance companies for under the Securities Exchange Act of 1934 to Promptly Transmit Customer Checks for the purchase of deferred variable annuity contracts, Securities Exchange Act Release No. 56376 (Sept. 7, 2007), 72 FR 52400 (Sept. 13, 2007). Although some of these firms receive checks from customers made payable to third parties, the SEC does not deem a firm to be carrying customer funds if it ‘‘promptly transmits’’ the checks to third parties. The SEC has interpreted ‘‘promptly transmits’’ to mean that ‘‘such transmission or delivery is made no later than noon of the next business day after receipt of such funds or securities.’’ Id. In conjunction with its approval of NASD Rule 2821, the Commission provided an exemption to the ‘‘promptly transmits’’ requirement as long as, among other things, the ‘‘principal has reviewed and determined whether he or she approves of the purchase or exchange of the deferred variable annuity within seven business days in accordance with [Rule 2821].’’ Id. FINRA believes that the Commission’s exemption order allows for the modification to the event that triggers the review period, discussed above. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 deposit in the companies’ ‘‘suspense accounts’’ prior to principal approval. FINRA modified its earlier position rejecting such a process, discussed in Regulatory Notice 07–53 (Nov. 2007), and proposed to allow such action under certain conditions, including, inter alia, that the insurance company segregate the funds in a manner equivalent to that required of a member under Exchange Act Rule 15c3–3. In addition, the Supplementary Material section discusses customers’ lump sum payments for the purchase of deferred variable annuities and other products, the forwarding of customer checks or funds to an IRA custodian prior to principal approval, the timing of ‘‘transmittal’’ of the application where an insurance company and its affiliated broker-dealer share office space and/or employees, consideration of what constitutes a ‘‘reasonable effort’’ to determine whether a customer has had a recent exchange at another brokerdealer,5 and the permissibility of using information required for principal review in the contract issuance process. These are all issues that commenters have raised on multiple occasions and that could broadly impact how brokerdealers sell, or process transactions in, deferred variable annuities. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Exchange Act, 6 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The rule change will promote investor protection because it will allow firms to focus on recommended transactions, which generally have the potential to raise more significant sales-practice issues than do non-recommended transactions, and will provide firms with adequate time to perform an appropriately thorough principal review. It will also provide firms with 5 FINRA notes that the proposal also clarifies in NASD Rule 2821(b)(1)(B)(iii) that an analysis of whether the customer has had another recent exchange includes possible exchanges at other broker-dealers. The rule currently states that the member must consider whether ‘‘the customer’s account has had another deferred variable annuity exchange within the preceding 36 months.’’ Id. As FINRA stated in Regulatory Notice 07–53 (Nov. 2007), however, FINRA did not intend the use of the term ‘‘account’’ in that passage to limit the analysis only to exchanges at the member firm performing the review at issue. The proposal eliminates the term ‘‘account’’ to make this point even more clear. 6 15 U.S.C. 78o–3(b)(6). E:\FR\FM\10JNN1.SGM 10JNN1 Federal Register / Vol. 73, No. 112 / Tuesday, June 10, 2008 / Notices guidance to clarify various issues with respect to the operation of the rule. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Florence E. Harmon, Acting Secretary. [FR Doc. E8–12948 Filed 6–9–08; 8:45 am] BILLING CODE 8010–01–P Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2008–019 on the subject line. dwashington3 on PRODPC61 with NOTICES rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m.. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2008–019 and should be submitted on or before July 1, 2008. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–57909; File No. SR–ISE– 2008–41] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Odd-Lot and Mixed-Lot Orders June 3, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’)1 and Rule 19b–4 thereunder,2 Paper Comments notice is hereby given that on May 28, • Send paper comments in triplicate 2008, the International Securities to Secretary, Securities and Exchange Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) Commission, 100 F Street, NE., filed with the Securities and Exchange Washington, DC 20549–1090. Commission (‘‘Commission’’) the All submissions should refer to File proposed rule change as described in Number SR–FINRA–2008–019. This file Items I and II below, which Items have number should be included on the been substantially prepared by the subject line if e-mail is used. To help the Exchange. The Exchange has designated Commission process and review your this proposal as non-controversial under comments more efficiently, please use only one method. The Commission will 7 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). post all comments on the Commission’s 2 17 CFR 240.19b–4. Internet Web site (https://www.sec.gov/ VerDate Aug<31>2005 15:35 Jun 09, 2008 Jkt 211001 PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 32775 Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The ISE proposes to amend its rules governing equities to allow cross orders and the stock leg(s) of complex orders to be entered and executed in odd-lot or mixed-lot sizes. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.ise.com), at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to amend ISE Rule 2105 (Order Entry) to allow cross orders,5 and the stock leg(s) of complex orders,6 to be entered and executed in odd-lot and mixed-lot sizes. Because cross orders are, by definition, two-sided orders, they are not eligible to interact with MidPoint Match orders.7 Currently, the System rejects odd-lot orders in their entirety and rejects the odd-lot component of a mixed-lot order subsequent to executing the round lot portion(s) of the mixed-lot order. The Exchange has recently adopted four new order types that allow Equity Electronic Access Members to enter various two3 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). 5 See ISE Rule 2104(p), (q), (r), and (s). 6 See ISE Rule 722(a). 7 See ISE Rule 2107(b). 4 17 E:\FR\FM\10JNN1.SGM 10JNN1

Agencies

[Federal Register Volume 73, Number 112 (Tuesday, June 10, 2008)]
[Notices]
[Pages 32771-32775]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-12948]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57920; File No. SR-FINRA-2008-019]


Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Sales Practice Standards and Supervisory Requirements for Transactions 
in Deferred Variable Annuities

June 4, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on May 21, 2008, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') (f/k/a National Association of Securities 
Dealers, Inc. (``NASD'')) filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described

[[Page 32772]]

in Items I, II, and III below, which Items have been prepared 
substantially by FINRA. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend certain provisions of NASD Rule 
2821.\3\ Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets.
---------------------------------------------------------------------------

    \3\ On March 17, 2008, FINRA filed a separate proposed rule 
change, which became effective upon filing, to delay the effective 
date of paragraphs (c) and (d) of NASD Rule 2821 until 180 days 
following the Commission's approval or rejection of this substantive 
proposed rule change. See FINRA Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Delay the Effective Date of 
Certain FINRA Rule Changes Approved in SR-NASD-2004-183, Securities 
Exchange Act Release No. 57769 (May 2, 2008), 73 FR 26176 (May 8, 
2008) (SR-FINRA-2008-015). Paragraphs (a), (b), and (e) of NASD Rule 
2821, as approved in SR-NASD-2004-183, became effective as 
originally scheduled on May 5, 2008.
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* * * * *
2821. Members' Responsibilities Regarding Deferred Variable Annuities
    (a) General Considerations
    (1) Application
    This Rule applies to recommended [the] purchases [or] and exchanges 
of [a] deferred variable annuit[y]ies and recommended initial [the] 
subaccount allocations. This Rule does not apply to reallocations [of] 
among subaccounts made or to funds paid after the initial purchase or 
exchange of a deferred variable annuity. This Rule also does not apply 
to deferred variable annuity transactions made in connection with any 
tax-qualified, employer-sponsored retirement or benefit plan that 
either is defined as a ``qualified plan'' under Section 3(a)(12)(C) of 
the [Securities] Exchange Act [of 1934] or meets the requirements of 
Internal Revenue Code Sections 403(b), 457(b), or 457(f), unless, in 
the case of any such plan, a member or person associated with a member 
makes recommendations to an individual plan participant regarding a 
deferred variable annuity, in which case the Rule would apply as to the 
individual plan participant to whom the member or person associated 
with the member makes such recommendations.
    (2) No change.
    (3) No change.
    (b) Recommendation Requirements
    (1) No member or person associated with a member shall recommend to 
any customer the purchase or exchange of a deferred variable annuity 
unless such member or person associated with a member has a reasonable 
basis to believe
    (A) that the transaction is suitable in accordance with Rule 2310 
and, in particular, that there is a reasonable basis to believe that
    (i) No change.
    (ii) No change.
    (iii) the particular deferred variable annuity as a whole, the 
underlying subaccounts to which funds are allocated at the time of the 
purchase or exchange of the deferred variable annuity, and riders and 
similar product enhancements, if any, are suitable (and, in the case of 
an exchange, the transaction as a whole also is suitable) for the 
particular customer based on the information required by [sub]paragraph 
(b)(2) of this Rule; and
    (B) in the case of an exchange of a deferred variable annuity, the 
exchange also is consistent with the suitability determination required 
by [sub]paragraph (b)(1)(A) of this Rule, taking into consideration 
whether
    (i) No change.
    (ii) No change.
    (iii) the customer['s account] has had another deferred variable 
annuity exchange within the preceding 36 months.
    The determinations required by this paragraph shall be documented 
and signed by the associated person recommending the transaction.
    (2) No change.
    (3) Promptly after receiving information necessary to prepare a 
complete and correct application package for a deferred variable 
annuity, a person associated with a member who recommends the deferred 
variable annuity shall transmit the complete and correct application 
package to an office of supervisory jurisdiction of the member.
    (c) Principal Review and Approval
    Prior to transmitting a customer's application for a deferred 
variable annuity to the issuing insurance company for processing, but 
no later than seven business days after [the customer signs the 
application] an office of supervisory jurisdiction of the member 
receives a complete and correct application package, a registered 
principal shall review and determine whether he or she approves of the 
recommended purchase or exchange of the deferred variable annuity.
    [Subject to the exception in this paragraph, and treating all 
transactions as if they have been recommended for purposes of this 
principal review, a] A registered principal shall approve the 
recommended transaction only if he or she [the registered principal] 
has determined that there is a reasonable basis to believe that the 
transaction would be suitable based on the factors delineated in 
paragraph (b) of this Rule. [Notwithstanding the foregoing, a 
registered principal may authorize the processing of the transaction if 
the registered principal determines that the transaction was not 
recommended and that the customer, after being informed of the reason 
why the registered principal has not approved the transaction, affirms 
that he or she wants to proceed with the purchase or exchange of the 
deferred variable annuity.]
    The determinations required by this paragraph shall be documented 
and signed by the registered principal who reviewed and then 
approved[,] or rejected[, or authorized] the transaction.
    (d) No change.
    (e) Training
    Members shall develop and document specific training policies or 
programs reasonably designed to ensure that associated persons who 
effect and registered principals who review transactions in deferred 
variable annuities comply with the requirements of this Rule and that 
they understand the material features of deferred variable annuities, 
including those described in [sub]paragraph (b)(1)(A)(i) of this Rule.

Supplementary Material:

    .01 Under Rule 2821, a member that is permitted to maintain 
customer funds under SEA Rules 15c3-1 and 15c3-3 may, prior to the 
member's principal approval of the deferred variable annuity, deposit 
and maintain customer funds for a deferred variable annuity in an 
account that meets the requirements of SEA Rule 15c3-3.
    .02 If a customer provides a member that is permitted to hold 
customer funds with a lump sum or single check made payable to the 
member (as opposed to being made payable to the insurance company) and 
requests that a portion of the funds be applied to the purchase of a 
deferred variable annuity and the rest of the funds be applied to other 
types of products, Rule 2821 would not prohibit the member from 
promptly applying those portions designated for purchasing products 
other than a deferred variable annuity to such use. A member that is 
not permitted to hold customer funds can comply with such requests only 
through its clearing firm that will maintain customer funds for the 
intended deferred variable annuity purchase in an account that meets 
the requirements of SEA Rule 15c3-3. In such circumstances, the checks 
would need to be made payable to the clearing firm.

[[Page 32773]]

    .03 Rule 2821 does not prohibit a member from forwarding a check 
made payable to the insurance company or, if the member is fully 
subject to SEA Rule 15c3-3, transferring funds for the purchase of a 
deferred variable annuity to the insurance company prior to the 
member's principal approval of the deferred variable annuity, as long 
as the member fulfills the following requirements: (1) the member must 
disclose to the customer the proposed transfer or series of transfers 
of the funds and (2) the member must enter into a written agreement 
with the insurance company under which the insurance company agrees to 
(a) segregate the member's customers' funds in a bank in an account 
equivalent to the deposit of those funds by a member into a ``Special 
Account for the Exclusive Benefit of Customers'' (set up as described 
in SEA Rules 15c3-3(k)(2)(i) and 15c3-3(f)) to ensure that the 
customers' funds will not be subject to any right, charge, security 
interest, lien, or claim of any kind in favor of the member, insurance 
company, or bank where the insurance company deposits such funds or any 
creditor thereof or person claiming through them and hold those funds 
either as cash or any instrument that a broker or dealer may deposit in 
its Special Reserve Account for the Exclusive Benefit of Customers, (b) 
not issue the variable annuity contract prior to the member's principal 
approval, and (c) promptly to return the funds to each customer at the 
customer's request prior to the member's principal approval or upon the 
member's rejection of the application.
    .04 A member is not prohibited from forwarding a check provided by 
the customer for the purpose of purchasing a deferred variable annuity 
and made payable to an IRA custodian for the benefit of the customer 
(or, if the member is fully subject to SEA Rule 15c3-3, funds) to the 
IRA custodian prior to the member's principal approval of the deferred 
variable annuity transaction, as long as the member enters into a 
written agreement with the IRA custodian under which the IRA custodian 
agrees (a) to forward the funds to the insurance company to complete 
the purchase of the deferred variable annuity contract only after it 
has been informed that the member's principal has approved the 
transaction and (b), if the principal rejects the transaction, to 
inform the customer, seek immediate instructions from the customer 
regarding alternative disposition of the funds (e.g., asking whether 
the customer wants to transfer the funds to another IRA custodian, 
purchase a different investment, or provide other instructions), and 
promptly implement the customer's instructions.
    .05 Rule 2821 requires that the member or person associated with a 
member consider whether the customer has had another deferred variable 
annuity exchange within the preceding 36 months. Under this provision, 
a member or person associated with a member must determine whether the 
customer has had such an exchange at the member and must make 
reasonable efforts to ascertain whether the customer has had an 
exchange at any other broker-dealer within the preceding 36 months. An 
inquiry to the customer as to whether the customer has had an exchange 
at another broker-dealer within 36 months would constitute a 
``reasonable effort'' in this context. Members shall document in 
writing both the nature of the inquiry and the response from the 
customer.
    .06 Rule 2821 requires principal review and approval ``[p]rior to 
transmitting a customer's application for a deferred variable annuity 
to the issuing insurance company for processing* * * .'' In 
circumstances where an insurance company and its affiliated broker-
dealer share office space and/or employees who carry out both the 
principal review and the issuance process, FINRA will consider the 
application ``transmitted'' to the insurance company only when the 
broker-dealer's principal, acting as such, has approved the 
transaction, provided that the affiliated broker-dealer and the 
insurance company have agreed that the insurance company will not issue 
the contract prior to principal approval by the broker-dealer.
    07 Rule 2821 does not prohibit using the information required for 
principal review and approval in the issuance process, provided that 
the broker-dealer and the insurance company have agreed that the 
insurance company will not issue the contract prior to principal 
approval by the broker-dealer. For instance, the rule does not prohibit 
a broker-dealer from inputting information used as part of its 
suitability review into a shared database (irrespective of the media 
used for that database, i.e., paper or electronic) that the insurance 
company uses for the issuance process, provided that the broker-dealer 
and the insurance company have agreed that the insurance company will 
not issue the contract prior to principal approval by the broker-
dealer.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend NASD Rule 2821 to modify the rule's 
scope and the timing of principal review. FINRA also is proposing to 
clarify various issues that commenters have raised through a 
``Supplementary Material'' section following the rule text. Reasons for 
these changes are discussed below.
Limit Application of the Rule To Recommended Transactions
    As approved by the Commission, NASD Rule 2821(c) requires 
principals to treat ``all transactions as if they have been recommended 
for purposes of this principal review.'' Following the Commission's 
approval of the rule, however, numerous commenters asked the SEC and 
FINRA to reconsider this approach. Some of the commenters asserted that 
applying the rule to non-recommended transactions would have the 
unintended and harmful consequence of essentially forcing some firms 
that offer low-priced alternatives and do not allow recommendations or 
use transaction-based compensation out of the deferred variable 
annuities business. Still other commenters believed that, absent a 
recommendation, a customer should be completely free to invest in a 
deferred variable annuity without interference or second guessing from 
a broker-dealer.
    After further reflection, FINRA is proposing to limit the rule's 
application to recommended transactions. This approach is consistent 
with that taken by FINRA's general suitability rule, Rule 2310. This 
change, moreover, should not detract from the effectiveness of Rule 
NASD 2821 in providing additional protection to investors in deferred 
variable annuities. For instance, brokers recommend the vast majority 
of purchases and exchanges of

[[Page 32774]]

deferred variable annuities. Thus, the rule would continue to cover 
most transactions. FINRA emphasizes, moreover, that members must 
implement reasonable measures to detect and correct circumstances when 
brokers mischaracterize recommended transactions as non-recommended. 
Where the transaction truly is initiated by the customer and not 
recommended by the broker, there generally is less of a concern 
regarding potential or actual conflicts of interest and less of a need 
for heightened sales practice requirements. In addition, this change 
would promote competition by allowing a wide variety of business models 
to exist, including those premised on keeping costs low by, in part, 
eliminating the need for a sales force and large numbers of principals.
Modifying the Starting Point for the Seven-Business-Day Review Period
    NASD Rule 2821(c) requires principal review and approval ``[p]rior 
to transmitting a customer's application for a deferred variable 
annuity to the issuing insurance company for processing, but no later 
than seven business days after the customer signs the application.'' A 
number of firms asserted that seven business days beginning from the 
time when the customer signs the application may not allow for a 
thorough principal review in all cases. These firms provided examples 
of situations where a principal might not be able to complete the 
required review within the allotted time, such as when a customer 
inadvertently omits information from the application, when information 
provided by a customer on the application needs clarification, when a 
customer signs the application but does not mail it for several days 
after signature, and when a customer mails the application by regular 
U.S. mail.
    FINRA is proposing to modify the beginning of the period within 
which the principal must review and determine whether to approve or 
reject the application. Under the proposal, the period would begin to 
run not from the date of the customer's signature but from the date 
when the firm's office of supervisory jurisdiction (OSJ) receives a 
complete and correct copy of the application.\4\ This period should be 
sufficient to permit a principal to conduct an appropriate review, 
building in time for readily foreseeable delays, while still 
maintaining a definite period within which the principal must make a 
final decision.
---------------------------------------------------------------------------

    \4\ As FINRA and the Commission previously have noted, ``Many 
broker-dealers are subject to lower net capital requirements under 
[Exchange Act] Rule 15c3-1 and are exempt from the requirement to 
establish and fund a customer reserve account under [Exchange Act] 
Rule 15c3-3 because they do not carry customer funds or 
securities.'' SEC Order Granting a Conditional Exemption to Broker-
Dealers from Requirements in Rules 15c3-1 and 15c3-3 under the 
Securities Exchange Act of 1934 to Promptly Transmit Customer Checks 
for the purchase of deferred variable annuity contracts, Securities 
Exchange Act Release No. 56376 (Sept. 7, 2007), 72 FR 52400 (Sept. 
13, 2007). Although some of these firms receive checks from 
customers made payable to third parties, the SEC does not deem a 
firm to be carrying customer funds if it ``promptly transmits'' the 
checks to third parties. The SEC has interpreted ``promptly 
transmits'' to mean that ``such transmission or delivery is made no 
later than noon of the next business day after receipt of such funds 
or securities.'' Id. In conjunction with its approval of NASD Rule 
2821, the Commission provided an exemption to the ``promptly 
transmits'' requirement as long as, among other things, the 
``principal has reviewed and determined whether he or she approves 
of the purchase or exchange of the deferred variable annuity within 
seven business days in accordance with [Rule 2821].'' Id. FINRA 
believes that the Commission's exemption order allows for the 
modification to the event that triggers the review period, discussed 
above.
---------------------------------------------------------------------------

    To help ensure that the process remains efficient from the 
beginning, the proposal also would require the associated person who 
recommended the annuity to promptly transmit the complete and correct 
application package to the OSJ. However, that latter provision, 
proposed paragraph (b)(3) of NASD Rule 2821, would not preclude the 
customer from transmitting the complete and correct application package 
to the OSJ. For instance, there may be occasions where the application 
package is technically complete and correct but the customer wants to 
take it home and consider the purchase or exchange some more before 
sending the application to the OSJ. Proceeding in such a manner would 
not be inconsistent with the proposed provision.
Clarification of Issues Through Supplementary Material
    Commenters have raised a number of additional issues requiring 
clarification. A ``Supplementary Material'' section following the 
rule's text examines those issues that were raised by multiple groups 
and that potentially could have a significant impact on how members 
sell or process deferred variable annuities. FINRA refuted, for 
instance, the misconception that firms generally allowed to handled and 
carry customer funds under Exchange Act Rules 15c3-1 and 15c3-3 could 
not deposit funds for a deferred variable annuity prior to principal 
approval.
    FINRA also reconsidered the question of whether members could 
forward funds to insurance companies for deposit in the companies' 
``suspense accounts'' prior to principal approval. FINRA modified its 
earlier position rejecting such a process, discussed in Regulatory 
Notice 07-53 (Nov. 2007), and proposed to allow such action under 
certain conditions, including, inter alia, that the insurance company 
segregate the funds in a manner equivalent to that required of a member 
under Exchange Act Rule 15c3-3.
    In addition, the Supplementary Material section discusses 
customers' lump sum payments for the purchase of deferred variable 
annuities and other products, the forwarding of customer checks or 
funds to an IRA custodian prior to principal approval, the timing of 
``transmittal'' of the application where an insurance company and its 
affiliated broker-dealer share office space and/or employees, 
consideration of what constitutes a ``reasonable effort'' to determine 
whether a customer has had a recent exchange at another broker-
dealer,\5\ and the permissibility of using information required for 
principal review in the contract issuance process. These are all issues 
that commenters have raised on multiple occasions and that could 
broadly impact how broker-dealers sell, or process transactions in, 
deferred variable annuities.
---------------------------------------------------------------------------

    \5\ FINRA notes that the proposal also clarifies in NASD Rule 
2821(b)(1)(B)(iii) that an analysis of whether the customer has had 
another recent exchange includes possible exchanges at other broker-
dealers. The rule currently states that the member must consider 
whether ``the customer's account has had another deferred variable 
annuity exchange within the preceding 36 months.'' Id. As FINRA 
stated in Regulatory Notice 07-53 (Nov. 2007), however, FINRA did 
not intend the use of the term ``account'' in that passage to limit 
the analysis only to exchanges at the member firm performing the 
review at issue. The proposal eliminates the term ``account'' to 
make this point even more clear.
---------------------------------------------------------------------------

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Exchange Act, \6\ which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest. The rule change will promote 
investor protection because it will allow firms to focus on recommended 
transactions, which generally have the potential to raise more 
significant sales-practice issues than do non-recommended transactions, 
and will provide firms with adequate time to perform an appropriately 
thorough principal review. It will also provide firms with

[[Page 32775]]

guidance to clarify various issues with respect to the operation of the 
rule.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-019 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-019. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m.. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2008-019 and 
should be submitted on or before July 1, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-12948 Filed 6-9-08; 8:45 am]
BILLING CODE 8010-01-P
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