Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, Relating to Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities, 18419-18424 [E9-9159]
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Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The proposed change
will enhance the clarity of NASDAQ
OMX’s governance documents by
restating the various documents
comprising the Certificate as a single
document.
B. Self-Regulatory Organizations’
Statements on Burden on Competition
The NASDAQ OMX Exchange
Subsidiaries do not believe that the
proposed rule changes will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
C. Self-Regulatory Organizations’
Statements on Comments on the
Proposed Rule Changes Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Changes and Timing for
Commission Action
The foregoing rule changes have
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 8 and
subparagraph (f)(3) of Rule 19b–4
thereunder.9 At any time within 60 days
of the filing of the respective proposed
rule change by the applicable NASDAQ
OMX Exchange Subsidiary, the
Commission may summarily abrogate
such rule changes if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
changes, are consistent with the Act.
Comments may be submitted by any of
the following methods:
All submissions should refer to File
Nos. SR–BX–2009–019, SR–NASDAQ–
2009–032, SR–Phlx–2009–31. These file
numbers 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
changes that are filed with the
Commission, and all written
communications relating to the
proposed rule changes 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 on official business days between
the hours of 10 a.m. and 3 p.m. Copies
of such filings also will be available for
inspection and copying at the principal
offices of the Exchange. 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 Nos. SR–BX–2009–
019, SR–NASDAQ–2009–032, and SR–
Phlx–2009–31, and should be submitted
on or before May 13, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–9202 Filed 4–21–09; 8:45 am]
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
Nos. SR–BX–2009–019, SR–NASDAQ–
2009–032, SR–Phlx–2009–31 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
8 15
9 17
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(3).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–59772; File No. SR–FINRA–
2008–019]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval to a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, Relating to
Sales Practice Standards and
Supervisory Requirements for
Transactions in Deferred Variable
Annuities
April 15, 2009.
I. Introduction
On May 21, 2008, the 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’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend certain provisions of NASD Rule
2821.3 The proposed rule change would
modify the rule’s scope and the timing
of principal review in addition to
clarifying, through a ‘‘Supplementary
Material’’ section following the rule
text, various issues raised by
commenters.4 The proposed rule change
was published for comment in the
Federal Register on June 10, 2008.5 The
Commission received letters from 14
commenters in response to the proposed
rule change.6 On November 12, 2008,
FINRA responded to the comments 7
and submitted Amendment No. 1 to the
proposed rule change. On April 1, 2009,
FINRA submitted Amendment No. 2 to
the proposed rule change. This order
provides notice of the proposed rule
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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 the
substantive proposed rule changes found in this
filing. See Securities Exchange Act Release No.
57769 (May 2, 2008), 73 FR 26176 (May 8, 2008)
(delaying order). Paragraphs (a), (b), and (e) of
NASD Rule 2821 became effective as originally
scheduled on May 5, 2008.
4 Id.
5 See Securities Exchange Act Release No. 57920
(June 4, 2008); 73 FR 32771 (June 10, 2008)
(‘‘notice’’ or ‘‘proposal’’).
6 See infra note 9.
7 See Letter from James Wrona, Associate Vice
President and Associate General Counsel, FINRA, to
Florence Harmon, Acting Secretary, Commission,
dated November 12, 2008 (‘‘FINRA’s Response’’).
2 17
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Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices
change, as modified by Amendment
Nos. 1 and 2, and approves the
proposed rule change, as amended, on
an accelerated basis.
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II. Description of the Proposed Rule
Change
FINRA proposed to amend NASD
Rule 2821 to modify the rule’s scope
and the timing of principal review. In
addition, FINRA proposed to clarify
various issues that commenters have
raised through a ‘‘Supplementary
Material’’ section following the rule
text. These proposed changes are
discussed in further detail below.
A. Limit Application of the Rule to
Recommended Transactions
Paragraph (c) of NASD Rule 2821
requires principals to treat all
transactions as if they have been
recommended for purposes of the rule.
Following the Commission’s approval of
the rule, however, several commenters
asked that the Commission and FINRA
reconsider this approach. As FINRA
stated in the notice, some commenters
asserted that applying the rule to nonrecommended transactions would have
unintended and harmful consequences.
In particular, these commenters claimed
that applying the rule to nonrecommended transactions would
effectively force out of the deferred
variable annuities business some firms
that offer low priced products, but that
do not make recommendations or pay
transaction-based compensation. In
addition, commenters stated that, absent
a recommendation, a customer should
be free to invest in a deferred variable
annuity without interference or second
guessing from a broker-dealer.
In response, FINRA proposed to limit
the rule’s application to recommended
transactions. In the notice, FINRA
explained that limiting the rule to
recommended transactions would be
consistent with the approach taken in
its general suitability rule, Rule 2310.
FINRA also stated that this change
would not detract from the effectiveness
of Rule 2821 because at firms that
permit registered representatives to
make recommendations concerning
deferred variable annuities, the vast
majority of purchases and exchanges of
deferred variable annuities are
recommended. FINRA offered further
support for the rule change by stating
that non-recommended transactions
pose fewer concerns regarding conflicts
of interest and less of a need for
heightened sales-practice requirements.
FINRA also indicated that this change
would promote competition by allowing
a wide variety of business models to
exist, including those premised on
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keeping costs low by, in part,
eliminating the need for a sales force
and large numbers of principals.
Finally, FINRA stated that attempts by
registered representatives to
mischaracterize transactions as nonrecommended would be mitigated by
the requirement that firms implement
reasonable measures to detect and
correct circumstances when brokers
mischaracterize recommended
transactions as non-recommended.
B. 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
commenters have asserted that this
seven-day period may not allow for a
thorough principal review. As
mentioned in the notice, these
commenters provided examples of
situations where principal review might
be delayed, such as when a customer
inadvertently omits information from
the application or when information
provided by a customer on the
application needs clarification.
FINRA proposed modifying the
starting point for the seven-day review
period. Under the proposal, the period
would begin on the date when the firm’s
office of supervisory jurisdiction
(‘‘OSJ’’) receives a complete and correct
copy of the application. FINRA stated
that this approach would allow firms to
resolve issues that result in foreseeable
delays and to conduct a thorough
review, while maintaining a definite
period within which the principal must
make a final decision.
To help ensure that the process
remains efficient, the proposal would
also require the associated person who
recommended the annuity to promptly
transmit the complete and correct
application package to the OSJ.
However, that provision, proposed
paragraph (b)(3), would not preclude a
customer who chooses to forward
documents directly from transmitting
the complete and correct application
package to the OSJ.
C. Clarification of Issues Through
Supplementary Material
As indicated in the notice, previous
commenters to the rule have raised a
number of questions that FINRA
believes require clarification.
Accordingly, FINRA proposed adding a
‘‘Supplementary Material’’ section
following the rule. FINRA also
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reconsidered the question of whether a
member may forward funds to an
insurance company for deposit in the
insurance company’s ‘‘suspense
account’’ pending completion of
principal review. In the notice, FINRA
proposed modifying its earlier position
rejecting such a process. Instead, FINRA
proposed to allow the use of a
‘‘suspense account’’ under limited
circumstances, including, among other
things, a requirement that the insurance
company segregate the funds in a
manner equivalent to that required of a
member under Exchange Act Rule
15c3–3.8
The proposed Supplementary
Material section also offered
clarification in a number of areas,
including the application of lump-sum
payments where part of the payment is
intended for a deferred variable annuity,
forwarding customer checks, what
constitutes a ‘‘reasonable effort’’ to
determine whether a customer has had
a recent exchange at another brokerdealer, and the permissibility of using
information required for principal
review in the contract issuance process.
FINRA indicated that each of these
issues could broadly impact how
broker-dealers sell, or process
transactions in, deferred variable
annuities.
III. Comment Letters
The Commission received letters from
14 commenters on the proposed rule
change.9 FINRA responded to the
8 17
CFR 240.15c3–3.
Committee of Annuity Insurers (‘‘CAI’’)
submitted two separate letters that we consider to
be one comment. See letter from Clifford Kirsch,
Sutherland Asbill & Brennan LLP, on behalf of the
CAI, dated July 1, 2008 (‘‘CAI Letter’’) and from
Clifford Kirsch, Sutherland Asbill & Brennan LLP,
on behalf of CAI, dated December 19, 2008 (‘‘CAI
Letter II’’).
See letters from Deborah Peters, Director, Broker
Dealer Compliance, EquiTrust Marketing Services,
LLC to James Wrona [Associate Vice President and
Associate General Counsel, FINRA], dated June 11,
2008 (‘‘EquiTrust Letter’’); Darrell Braman, Vice
President and Associate Legal Counsel and Sarah
McCafferty, Vice President and Chief Compliance
Officer, T. Rowe Price Investment Services, Inc.,
dated June 23, 2008 (‘‘T. Rowe Price Letter’’);
Theodore Tsung, Financial Services Software
Innovator—Founder of digiTRADE and EAssist,
dated June 30, 2008; Laurence S. Schultz, President,
Public Investors Arbitration Bar Association, dated
June 26, 2008 (‘‘PIABA Letter’’); Teresa Luiz, GWFS
Equities, Inc., dated June 30, 2008 (‘‘GWFS Letter’’);
Heidi Stam, Managing Director and General
Counsel, Vanguard, dated June 30, 2008 (‘‘Vanguard
Letter’’); William A. Jacobson, Associate Clinical
Professor, Cornell Law School, and Director,
Cornell Securities Law Clinic, dated July 1, 2008
(‘‘Cornell Letter’’); Dale E. Brown, President and
CEO, Financial Services Institute, dated July 1, 2008
(‘‘FSI Letter’’); Heather Traeger, Assistant Counsel,
Investment Company Institute, dated July 1, 2008
(‘‘ICI Letter’’); Cheryl Tobin, Asst. Vice President,
Insurance Counsel, Pacific Life Insurance Company
9 The
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comments in a letter to the
Commission.10 The comments and
FINRA’s Response are discussed below.
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A. Limiting Application of the Rule to
Recommended Transactions
Several commenters supported
FINRA’s proposal to limit Rule 2821’s
application to ‘‘recommended’’
transactions,11 generally indicating that
the proposed change would: Make the
rule consistent with other rules that
have a suitability requirement; promote
competition; and not detract from the
rule’s effectiveness because most
variable annuity transactions involve a
recommendation. Two commenters,
however, disagreed with the approach,
arguing, among other things, that
registered representatives could falsely
assert that an unsuitable transaction was
not recommended.12 FINRA
acknowledged the concern, but
responded that it would be mitigated by
the requirement that broker-dealers
implement reasonable measures to
detect and correct circumstances in
which transactions can be
mischaracterized.13 In addition, FINRA
stated that when a transaction is truly
initiated by a customer, actual or
potential conflicts of interest are less
likely, and thus there is a lesser need for
heightened sales-practice
requirements.14
Another commenter requested
clarification that a non-recommended
transaction includes a direct sale (i.e.,
one in which no sales-related
compensation is paid and no registered
representative is involved).15 FINRA
responded that whether a transaction is
recommended does not turn on whether
it is a direct sale: Some firms use an
Internet-based computer system to make
‘‘recommendations’’ without assistance
from a registered representative, while
others compensate registered
representatives for transactions solely
initiated by the customer.16 FINRA also
reiterated several factors relevant to
to James Wrona, Associate Vice President and
Associate General Counsel, FINRA, dated July 1,
2008 (‘‘Pacific Life Letter’’); Michael P. DeGeorge,
General Counsel, NAVA, Inc., dated July 1, 2008
(‘‘NAVA Letter’’); Neal E. Nakagiri, President, CEO,
CCO, NPB Financial Group, LLC, dated July 2, 2008
(‘‘NPB Letter’’) and Carl B. Wilkerson, Vice
President & Chief Counsel, American Council of
Life Insurers, dated August 20, 2008 (‘‘ACLI
Letter’’). Unless otherwise noted, all letters are
addressed to the Secretary or Acting Secretary of
the Commission.
10 FINRA’s Response, supra note 7.
11 See ACLI Letter, CAI Letter, ICI Letter, NAVA
Letter, Vanguard Letter, T. Rowe Price Letter.
12 See Cornell Letter and PIABA Letter.
13 See FINRA’s Response, supra note 7.
14 Id.
15 See Pacific Life Letter.
16 See FINRA’s Response, supra note 7.
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15:31 Apr 21, 2009
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determining when a particular
communication would be deemed a
recommendation, including: A
communication’s content, context and
presentation; the tailoring of the
communication to a certain customer or
customers; and whether the
communication was initiated by a
person employed by the firm or by a
computer program used by the firm.17
One commenter sought clarification of
the rule’s application to
recommendations in the context of
retirement plans.18 FINRA’s Response
cited the rule’s text, which states that
the rule does not generally apply to
transactions made in connection with
specific employer-sponsored retirement
plans except for recommendations made
to an individual plan participant
regarding a deferred variable annuity.19
Furthermore, FINRA indicated that a
member’s ‘‘generic communication to
all plan participants indicating that the
employer has chosen a deferred variable
annuity as the funding vehicle for its
retirement plan likely would not
constitute a ‘recommendation’ triggering
application of the proposed rule.’’ 20
Finally, FINRA reiterated that the rule
would not apply to plan-level decisions
made by sponsors, trustees, or
custodians of qualified retirement or
benefit plans, regardless of whether a
member has made a recommendation to
an individual plan participant.21
B. Modifying the Starting Point for the
Seven-Business-Day Review Period
Most commenters supported FINRA’s
proposal to have the seven-business-day
period for principal review of the
application begin on the day that an OSJ
receives the application.22 One
commenter expressed the view that the
proposal gives the broker-dealer too
much time and that the time period
should start when any office receives
the application.23 Some commenters
stated that the time period for review
should be longer,24 and some indicated
that there should be an exception to the
time limitations when a customer
consents to a further holding period.25
FINRA responded that they regard seven
business days after receipt by any OSJ
17 Id.
(citing NASD Policy Statement Regarding
Application of the NASD Suitability Rule to Online
Communications, NASD Notice to Members 01–23
(April 2001)).
18 See GFWS Letter.
19 NASD Rule 2821(a)(1).
20 See FINRA’s Response, supra note 7.
21 Id.
22 See ACLI Letter, CAI Letter, FSI Letter, ICI
Letter, NAVA Letter, NPB Letter.
23 See Pacific Life Letter.
24 See ACLI Letter, CAI Letter.
25 See ACLI Letter, CAI Letter, EquiTrust Letter,
NAVA Letter.
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18421
as sufficient time in which to review an
application.26
C. Supplementary Material
1. Forwarding of Customer Checks/
Funds
Proposed SM.03 states that under
certain conditions, a FINRA member
may forward a customer’s check or
funds to the insurance company prior to
principal approval.27 One of those
conditions is that the insurance
company issuer agrees to ‘‘(1) segregate
the member’s customers’ funds in a
bank * * * account * * * (set up as
described in [Exchange Act] 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 * * *.’’
The commenters on this provision
generally viewed current insurer
suspense account practices as sufficient
but stated that the special account
requirement would be feasible if
modified.28 For example, one
commenter suggested that insurers be
permitted to segregate funds in an
account ‘‘similar in form and function to
a Reserve Bank Account under
[Exchange Act] Rule 15c3–3(e).’’ 29 This
commenter also suggested that FINRA
consider adopting exemptions from the
SM.03 requirements depending on the
treatment particular states afford to
insurance company suspense
accounts.30
FINRA’s Response stated that during
the period before the transaction is
approved, when funds may need to be
returned to the customer, it is important
for a FINRA member to have reasonable
assurances that the insurer will handle
customer funds in a manner that
provides at least as much protection as
26 See
FINRA’s Response, supra note 7.
Rule 2821 initially prohibited brokerdealers from ever forwarding checks/funds prior to
principal approval of the transaction. Most
commenters to the original proposal favored
allowing broker-dealers to forward checks/funds,
but they differed regarding their views of FINRA’s
proposed requirements for allowing it.
28 See e.g., ACLI Letter, NAVA Letter, Pacific Life
Letter, CAI Letter.
29 See CAI Letter. Exchange Act Rule 15c3–3(e)
applies to broker-dealers that transmit funds
promptly and that do not hold those funds for
periods longer than one business day. 17 CFR
240.15c3–3(e).
30 See CAI Letter.
27 NASD
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Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices
if those funds were handled by a brokerdealer that is permitted to hold
customer funds.31 Accordingly, FINRA
declined to modify or eliminate the
proposed requirements to maintain
equivalent standards.32
In response to one commenter’s
question regarding whether the ‘‘Special
Account Requirement’’ of SM.03
requires the segregation by the
insurance company of customer funds
from one broker-dealer from those of
other broker-dealers,33 FINRA indicated
that it does not.34 FINRA’s Response
further stated that the insurer could use
one special account for the customers of
all the broker-dealers with which it does
business.35
One commenter asked whether an
insurance company could return
customer checks/funds to the brokerdealer rather than directly to the
customer if the broker-dealer’s principal
rejects the transaction.36 FINRA
responded that the insurance company
may make checks payable to the brokerdealer if the broker-dealer is permitted
to hold customer funds.37 If brokerdealers that are not authorized to hold
31 See
FINRA’s Response, supra note 7.
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32 Id.
33 See NAVA Letter. NAVA also stated that, in its
experience, ‘‘unaffiliated broker-dealers do not
forward customer funds prior to principal
approval.’’ Id. In this regard, FINRA noted that
SM.03 allows a broker-dealer to forward checks/
funds under certain circumstances prior to
principal approval; it does not require it. Moreover,
the Commission’s previous exemptive order
allowing firms to hold checks for up to seven
business days to complete the principal review
applies under the proposed amendments. See
FINRA’s Response, supra note 7.
34 See FINRA’s Response, supra note 7.
35 Id.
36 See CAI Letter.
37 See FINRA’s Response, supra note 7. 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.’’ Securities
Exchange Act Release No. 56376 (September 7,
2007), 72 FR 52400 (September 13, 2007). Although
some of these firms receive checks from customers
made payable to third parties, the Commission does
not deem a firm to be carrying customer funds if
it ‘‘promptly transmits’’ the checks to third parties.
The Commission 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. The
Commission’s exemptive order remains applicable
notwithstanding the modification to the event that
triggers the principal review period. See discussion
in Section III.B, supra of the amendment to rule
2821(c) establishing the timing for principal review.
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15:31 Apr 21, 2009
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customer funds receive checks from the
insurance company, they should be
payable to the customer. In those cases,
FINRA stressed that broker-dealers must
forward such checks to their customers
‘‘promptly’’ and keep an incoming and
outgoing record of the customer checks,
as well as any other funds that are
remitted to the broker-dealer.38
Finally, one commenter expressed
confusion regarding this provision,
stating that ‘‘the insurance company
would necessarily have a claim for
payment if an application is approved
and a contract issued, while the member
would necessarily have a claim for a
return of the funds if the application is
not approved and the contract is not
issued.’’ 39 FINRA responded that it did
not intend to suggest that the funds had
to remain in a segregated bank account
of the type referenced in SM.03 in
perpetuity, but only until such time as
the insurance company is notified of the
broker-dealer’s approval and is provided
with the application, or is notified of the
broker-dealer’s rejection of the
application.40
2. Inquiries About Exchanges
One commenter supported FINRA’s
proposal to clarify, in Rule
2821(b)(1)(B)(iii) and SM.05, that an
analysis of whether the customer has
had another recent exchange should
include exchanges at other brokerdealers, but suggested that brokerdealers should be required to do more
than simply ask the customer whether
he or she has had another exchange.41
The commenter explained that variable
annuity transactions can be complex
and confusing, and that some customers
might not understand that they had
engaged in previous exchanges.42
FINRA responded that requiring
broker-dealers to investigate whether
the customer has in fact had another
exchange at another broker-dealer is
38 See
FINRA’s Response, supra note 7.
NAVA Letter.
40 See FINRA’s Response, supra note 7. Under the
rule as amended by Amendment No. 1, there could
be delays between the time when a principal
approves an application and the time when an
insurer receives the approved application (e.g.,
when a broker-dealer conveys principal approval to
the insurer electronically but sends an approved
application via regular mail), thereby creating a
situation where the funds in a suspense account are
released before the insurance company has received
the application. Amendment No. 2 clarifies that the
insurance company must receive both a notification
of approval and the application before funds can be
released from the suspense account.
41 See PIABA Letter. The rule currently states that
the broker-dealer must consider whether ‘‘the
customer’s account has had another deferred
variable annuity exchange within the preceding 36
months.’’ The proposal would eliminate the
reference to an ‘‘account.’’
42 Id.
39 See
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overly burdensome in light of the
potential benefits. FINRA indicated that
instances of customer confusion
regarding whether or not an exchange
had occurred would likely be the
exception rather than the rule.43 FINRA
further noted that SM.05 requires that a
broker-dealer determine whether a
customer has had another exchange at
that firm and that, solely for exchanges
that occurred at other firms, is permitted
to rely on a customer’s response to an
inquiry regarding possible exchanges by
the customer at other broker-dealers.44
In addition, FINRA reiterated the SM.05
requirement that broker-dealers
document in writing both the nature of
the inquiry and the response from the
customer.45 FINRA stated that it
believes that this requirement would
help ensure that broker-dealers ask
customers about exchanges in a manner
that is reasonably calculated to elicit
accurate responses.46
D. Effective Date of the Proposed
Amendments
Some commenters requested a delay
in the effective date of the proposed rule
change of between 12 and 18 months.47
One commenter stated that the method
by which the effective dates would be
determined has been confusing.48
Although FINRA believes that a delay of
12 to 18 months would be unreasonably
long,49 it nevertheless agreed to delay
the effective date until 240 days
following publication of the Regulatory
Notice announcing Commission
approval. FINRA will announce the
effective date of the proposed rule
change in a Regulatory Notice to be
published no later than 60 days
following Commission approval.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning whether the
proposed rule change as modified by
Amendment Nos. 1 and 2 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
43 See
FINRA’s Response, supra note 7.
44 Id.
45 Id.
46 Id.
47 See
e.g., ACLI Letter, CAI Letter.
CAI Letter II.
49 See FINRA’s Response, supra note 7.
48 See
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Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
Paper Comments
impediments to and perfect the
• Send paper comments in triplicate
mechanism of a free and open market
to Elizabeth M. Murphy, Secretary,
and a national market system, and, in
Securities and Exchange Commission,
general, to protect investors and the
100 F Street, NE., Washington, DC
public interest.
The Commission finds that the
20549–1090.
proposed rule change, as amended, is
All submissions should refer to File
Number SR–FINRA–2008–019. This file reasonably designed to accomplish
these ends by creating a mechanism
number should be included on the
subject line if e-mail is used. To help the through which policies and procedures
that are designed to ensure that
Commission process and review your
recommended variable annuity
comments more efficiently, please use
only one method. The Commission will transactions are properly identified and
post all comments on the Commission’s subject to timely principal review are
put in place. As FINRA noted, while
Internet Web site (https://www.sec.gov/
most variable annuity transactions are
rules/sro.shtml). Copies of the
‘‘recommended,’’ whether by a
submission, all subsequent
registered representative or an Internetamendments, all written statements
based computer system, and thus would
with respect to the proposed rule
be subject to principal review, there are
change that are filed with the
some broker-dealers that do not make
Commission, and all written
any recommendations as part of a
communications relating to the
business model that provides lower cost
proposed rule change between the
52
Commission and any person, other than products. The Commission believes
that principal review is less necessary
those that may be withheld from the
when a particular variable annuity
public in accordance with the
transaction is not recommended.
provisions of 5 U.S.C. 552, will be
Accordingly, the Commission believes
available for inspection and copying in
that the rule change strikes the proper
the Commission’s Public Reference
balance between investor protection and
Room, 100 F Street, NE., Washington,
efficiency by requiring principal review
DC 20549, on official business days
of recommended transactions while, at
between the hours of 10 a.m. and 3 p.m.
the same time, removing an unnecessary
Copies of such filing also will be
impediment to the purchase of these
available for inspection and copying at
investments by investors who do not
the principal office of FINRA. All
need or seek a recommendation.
comments received will be posted
In addition, the Commission believes
without change; the Commission does
that FINRA struck a reasonable balance
not edit personal identifying
with regard to the timeframe during
information from submissions. You
which variable annuity transactions
should submit only information that
must be reviewed by a principal.
you wish to make available publicly. All Requiring the seven-business-day
submissions should refer to File
review requirement to begin at the time
Number SR–FINRA–2008–019 and
that a signed and completed application
should be submitted on or before May
is received by an OSJ will encourage the
13, 2009.
OSJ that received the application to
route it, within a reasonable time, to the
V. Discussion and Findings
principal required to review it. We are
After careful review of the proposal
not persuaded that the principal review
and consideration of the comment
clock should begin to run when any
letters and FINRA’s Response, the
office of a broker-dealer receives an
Commission finds that the proposed
application because of the practical
rule change, as amended, is consistent
delays often associated with processing
with the requirements of the Exchange
an application and routing it to the
Act and the rules and regulations
appropriate person. We also are not
50 In
thereunder applicable to FINRA.
persuaded that the principal review
particular, the Commission finds that
clock should be delayed until a
the proposed rule change is consistent
particular OSJ receives the application,
with Section 15A(b)(6) of the Exchange
because doing so could result in undue
51 which requires, among other
Act,
delays to the prompt processing and
things, that FINRA’s rules be designed
completion of an investor’s transaction.
The Commission gave careful
50 In approving this proposed rule change, the
consideration to the comments raised
Commission has considered the proposed rule’s
regarding the forwarding of customer
impact on efficiency, competition, and capital
dwashington3 on PROD1PC60 with NOTICES
Number SR–FINRA–2008–019 on the
subject line.
formation. See 15 U.S.C. 78c(f).
51 15 U.S.C. 78o–3(b)(6).
VerDate Nov<24>2008
15:31 Apr 21, 2009
52 See
Jkt 217001
PO 00000
FINRA’s Response, supra note 7.
Frm 00076
Fmt 4703
Sfmt 4703
18423
funds during the period when an
application is under principal review.
We believe that until a transaction has
been approved or denied, segregation of
customer funds in a special account
similar in form and function as those
described in Exchange Act Rules 15c3–
3(k)(2)(i) and 15c3–3(f) 53 offers the best
assurance that investors’ funds will be
safeguarded in a manner that most
closely parallels the protective features
of the Federal securities laws, and that
investors in different products should
receive similar treatment. Specifically,
when an investor purchases a nonvariable annuity investment through a
broker-dealer, she is protected by the
Securities Investor Protection
Corporation in the event the brokerdealer becomes insolvent. Because
insurance companies are subject to a
different regulatory scheme than brokerdealers, including differences resulting
from variation in State insurance laws,
we believe deferred variable annuity
investors are best protected by a rule
that closely mimics the protections and
safeguards governing other investors.
Consequently, we believe that FINRA’s
proposed rule change strikes a fair
balance between the practical needs of
broker-dealers associated with
transmitting funds to insurance
companies and protecting investors
from the possibility that an insurance
company may become insolvent.
With regard to FINRA’s proposed
requirement that broker-dealers
determine the number of prior customer
exchanges, the Commission agrees with
FINRA that it is reasonable and
appropriate for a broker-dealer to be
required to determine the number of
exchanges that have occurred at the firm
itself. We believe this burden should be
minimal, in that the broker-dealer will
have ready access to that information
from its books and records. The
Commission also believes that it is
reasonable to rely on a customer’s
representations regarding exchanges
conducted at other firms given that most
customers are in a good position to
know whether they have made any
exchanges. While a customer’s
recollection of this information may not
always be fully accurate, the burdens
associated with requiring broker-dealers
to obtain this information through other
means outweigh the benefits of any
potential improvement in accuracy.
Moreover, this requirement is designed
to help ensure that broker-dealers ask
about customers’ exchanges in a manner
that is reasonable calculated to elicit
accurate responses from customers
53 17
E:\FR\FM\22APN1.SGM
CFR 240.15c3–3(k)(2)(i), 15c3–3(f).
22APN1
dwashington3 on PROD1PC60 with NOTICES
18424
Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices
when they are asked about exchanges at
other broker-dealers.
Finally, given the rule’s operational
impact, we believe that it is appropriate
for its effective date to be delayed by
240 days following publication of the
Regulatory Notice announcing
Commission approval. This should
provide sufficient time for brokerdealers and any other affected parties to
make necessary changes to their systems
and procedures without undue further
delay of the rule’s implementation.
In approving Rule 2821, the
Commission took note of the numerous
examinations of, and enforcement
actions against, broker-dealers involving
the sale of variable annuity products.54
We understood that many FINRA
enforcement actions against brokerdealers involved unsuitable
recommendations of variable annuities
and noted that the rule was designed to
curb these sales practice abuses.55 Rule
2821 has been subject to a thorough
notice and comment process, and these
amendments to the rule respond
directly to comments and questions
raised by commenters. For that reason,
we believe that it is appropriate to
finalize the rule in order to provide
broker-dealers and others affected by it
with the clarity needed to make
operational and systems changes
required to implement the rule and
achieve the investor protections for
which it is designed. Accordingly, based
on the foregoing reasons, the
Commission believes that good cause
exists, consistent with Sections
15A(b)(6) 56 and 19(b)(2) 57 of the
Exchange Act, to approve the proposed
rule change.
The Commission also finds good
cause for approving the proposed rule
change as modified by Amendment Nos.
1 and 2 prior to the thirtieth day after
the date of publication of notice in the
Federal Register. Amendment No. 1
originally indicated that funds had to
remain in a segregated bank account
until such time as the insurance
company is notified of the brokerdealer’s approval or rejection of the
application. Under the rule as amended
by Amendment No. 1, there could be
delays between the time when a
principal approves an application and
the time when an insurer receives the
approved application (e.g., when a
broker-dealer conveys principal
approval to an insurer electronically but
54 See Securities Exchange Act Release No. 56375
(September 7, 2007), 72 FR 52403, 52411
(September 13, 2007).
55 Id.
56 15 U.S.C. 78o–3(b)(6).
57 15 U.S.C. 78s(b)(2).
VerDate Nov<24>2008
15:31 Apr 21, 2009
Jkt 217001
sends an approved application via
regular mail), thereby creating a
situation where the funds in a suspense
account are released before the
insurance company has received the
application necessary to issue the
contract. Therefore, Amendment No. 2
clarifies that the insurance company
must receive both a notification of
approval and the application before
funds can be released from the suspense
account. Because these amendments do
not significantly alter the proposed rule,
which was subject to a full notice and
comment period, the Commission finds
that it is in the public interest to
approve the proposed rule change, as
modified by Amendment Nos. 1 and 2,
as soon as possible to expedite their
implementation. Accordingly, the
Commission finds that there is good
cause, consistent with and in
furtherance of the objectives of Sections
15A(b)(6) 58 and 19(b)(2) 59 of the
Exchange Act, to approve Amendment
Nos. 1 and 2 on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,60
that the proposed rule change (SR–
FINRA–2008–019), as modified by
Amendment Nos. 1 and 2, be and
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.61
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–9159 Filed 4–21–09; 8:45 am]
BILLING CODE 8010–01–P
SOCIAL SECURITY ADMINISTRATION
[Docket No. SSA–2009–0024]
Financial Literacy Research
Consortium Request for Applications
(RFA); Program Announcement No.
SSA–ORP–09–1
Social Security Administration.
Notice and request for
applications.
AGENCY:
ACTION:
SUMMARY: Social Security benefits are a
key foundation in providing income
security for millions of Americans.
However, they are intended to
complement other sources of income
wherever feasible, such as pensions, taxdeferred retirement savings accounts, or
personal savings. The current economic
58 15
U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
60 15 U.S.C. 78s(b)(2).
61 17 CFR 200.30–3(a)(12).
59 15
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
climate means that many Americans are
now in danger of having insufficient
savings for retirement and other life
events. This situation occurs at a time
when workers also need to take
increasing responsibility for their
savings decisions as many employers
are moving from defined benefit to
defined contribution plans.
As described in the new SSA Agency
Strategic Plan, we believe we have a
special responsibility to help Americans
of all working ages to understand the
role of Social Security benefits and the
need for Americans to save as they plan
for retirement and other life events.
More fundamentally, we also need to
educate the public about the role of
Social Security as one of the
foundations of household income in the
event of retirement, disability, or death.
This includes a focus on key decisions
such as when to stop working and when
to take retirement benefits.
The Financial Literacy Research
Consortium (FLRC) will be an
innovative, non-partisan
multidisciplinary research and
development (R&D) initiative to develop
products to better inform the public
about key financial literacy topics
related to retirement savings and
planning. We are interested in
developing products—such as Internet
tools as well as print materials—that
help foster retirement and other savings
strategies at all stages of the life cycle.
Products may be tailored to new
entrants to the workforce, mid-career
workers, those approaching retirement,
and those in retirement who must
successfully manage retirement assets.
In addition, as part of the FLRC, we are
seeking some (but not exclusive) focus
on educational products to help low and
moderate income populations
successfully plan and save for
retirement and other life events, as well
as products that improve understanding
of Social Security’s programs. We are
also interested in potentially evaluating
optimal distributional channels for
some or many of these products.
Due to our existing relationship with
the public, we are uniquely positioned
to encourage saving. We have over 1,300
field offices across the country, a Web
site that received over 88 million visits
in 2008, a Social Security Statement that
is sent to approximately 150 million
workers every year and professional
public affairs staff around the country.
We may distribute FLRC products (or
revised products) to better inform the
public about retirement savings topics.
In addition, the FLRC will make
available to the public products
developed by the FLRC that may be of
E:\FR\FM\22APN1.SGM
22APN1
]]>Agencies
[Federal Register Volume 74, Number 76 (Wednesday, April 22, 2009)]
[Notices]
[Pages 18419-18424]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-9159]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59772; File No. SR-FINRA-2008-019]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval to a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, Relating to Sales Practice Standards and
Supervisory Requirements for Transactions in Deferred Variable
Annuities
April 15, 2009.
I. Introduction
On May 21, 2008, the 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''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend certain provisions of
NASD Rule 2821.\3\ The proposed rule change would modify the rule's
scope and the timing of principal review in addition to clarifying,
through a ``Supplementary Material'' section following the rule text,
various issues raised by commenters.\4\ The proposed rule change was
published for comment in the Federal Register on June 10, 2008.\5\ The
Commission received letters from 14 commenters in response to the
proposed rule change.\6\ On November 12, 2008, FINRA responded to the
comments \7\ and submitted Amendment No. 1 to the proposed rule change.
On April 1, 2009, FINRA submitted Amendment No. 2 to the proposed rule
change. This order provides notice of the proposed rule
[[Page 18420]]
change, as modified by Amendment Nos. 1 and 2, and approves the
proposed rule change, as amended, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\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 the substantive
proposed rule changes found in this filing. See Securities Exchange
Act Release No. 57769 (May 2, 2008), 73 FR 26176 (May 8, 2008)
(delaying order). Paragraphs (a), (b), and (e) of NASD Rule 2821
became effective as originally scheduled on May 5, 2008.
\4\ Id.
\5\ See Securities Exchange Act Release No. 57920 (June 4,
2008); 73 FR 32771 (June 10, 2008) (``notice'' or ``proposal'').
\6\ See infra note 9.
\7\ See Letter from James Wrona, Associate Vice President and
Associate General Counsel, FINRA, to Florence Harmon, Acting
Secretary, Commission, dated November 12, 2008 (``FINRA's
Response'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
FINRA proposed to amend NASD Rule 2821 to modify the rule's scope
and the timing of principal review. In addition, FINRA proposed to
clarify various issues that commenters have raised through a
``Supplementary Material'' section following the rule text. These
proposed changes are discussed in further detail below.
A. Limit Application of the Rule to Recommended Transactions
Paragraph (c) of NASD Rule 2821 requires principals to treat all
transactions as if they have been recommended for purposes of the rule.
Following the Commission's approval of the rule, however, several
commenters asked that the Commission and FINRA reconsider this
approach. As FINRA stated in the notice, some commenters asserted that
applying the rule to non-recommended transactions would have unintended
and harmful consequences. In particular, these commenters claimed that
applying the rule to non-recommended transactions would effectively
force out of the deferred variable annuities business some firms that
offer low priced products, but that do not make recommendations or pay
transaction-based compensation. In addition, commenters stated that,
absent a recommendation, a customer should be free to invest in a
deferred variable annuity without interference or second guessing from
a broker-dealer.
In response, FINRA proposed to limit the rule's application to
recommended transactions. In the notice, FINRA explained that limiting
the rule to recommended transactions would be consistent with the
approach taken in its general suitability rule, Rule 2310. FINRA also
stated that this change would not detract from the effectiveness of
Rule 2821 because at firms that permit registered representatives to
make recommendations concerning deferred variable annuities, the vast
majority of purchases and exchanges of deferred variable annuities are
recommended. FINRA offered further support for the rule change by
stating that non-recommended transactions pose fewer concerns regarding
conflicts of interest and less of a need for heightened sales-practice
requirements. FINRA also indicated that 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. Finally,
FINRA stated that attempts by registered representatives to
mischaracterize transactions as non-recommended would be mitigated by
the requirement that firms implement reasonable measures to detect and
correct circumstances when brokers mischaracterize recommended
transactions as non-recommended.
B. 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 commenters have asserted that this seven-day period may not
allow for a thorough principal review. As mentioned in the notice,
these commenters provided examples of situations where principal review
might be delayed, such as when a customer inadvertently omits
information from the application or when information provided by a
customer on the application needs clarification.
FINRA proposed modifying the starting point for the seven-day
review period. Under the proposal, the period would begin on the date
when the firm's office of supervisory jurisdiction (``OSJ'') receives a
complete and correct copy of the application. FINRA stated that this
approach would allow firms to resolve issues that result in foreseeable
delays and to conduct a thorough review, while maintaining a definite
period within which the principal must make a final decision.
To help ensure that the process remains efficient, the proposal
would also require the associated person who recommended the annuity to
promptly transmit the complete and correct application package to the
OSJ. However, that provision, proposed paragraph (b)(3), would not
preclude a customer who chooses to forward documents directly from
transmitting the complete and correct application package to the OSJ.
C. Clarification of Issues Through Supplementary Material
As indicated in the notice, previous commenters to the rule have
raised a number of questions that FINRA believes require clarification.
Accordingly, FINRA proposed adding a ``Supplementary Material'' section
following the rule. FINRA also reconsidered the question of whether a
member may forward funds to an insurance company for deposit in the
insurance company's ``suspense account'' pending completion of
principal review. In the notice, FINRA proposed modifying its earlier
position rejecting such a process. Instead, FINRA proposed to allow the
use of a ``suspense account'' under limited circumstances, including,
among other things, a requirement that the insurance company segregate
the funds in a manner equivalent to that required of a member under
Exchange Act Rule 15c3-3.\8\
---------------------------------------------------------------------------
\8\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------
The proposed Supplementary Material section also offered
clarification in a number of areas, including the application of lump-
sum payments where part of the payment is intended for a deferred
variable annuity, forwarding customer checks, what constitutes a
``reasonable effort'' to determine whether a customer has had a recent
exchange at another broker-dealer, and the permissibility of using
information required for principal review in the contract issuance
process. FINRA indicated that each of these issues could broadly impact
how broker-dealers sell, or process transactions in, deferred variable
annuities.
III. Comment Letters
The Commission received letters from 14 commenters on the proposed
rule change.\9\ FINRA responded to the
[[Page 18421]]
comments in a letter to the Commission.\10\ The comments and FINRA's
Response are discussed below.
---------------------------------------------------------------------------
\9\ The Committee of Annuity Insurers (``CAI'') submitted two
separate letters that we consider to be one comment. See letter from
Clifford Kirsch, Sutherland Asbill & Brennan LLP, on behalf of the
CAI, dated July 1, 2008 (``CAI Letter'') and from Clifford Kirsch,
Sutherland Asbill & Brennan LLP, on behalf of CAI, dated December
19, 2008 (``CAI Letter II'').
See letters from Deborah Peters, Director, Broker Dealer
Compliance, EquiTrust Marketing Services, LLC to James Wrona
[Associate Vice President and Associate General Counsel, FINRA],
dated June 11, 2008 (``EquiTrust Letter''); Darrell Braman, Vice
President and Associate Legal Counsel and Sarah McCafferty, Vice
President and Chief Compliance Officer, T. Rowe Price Investment
Services, Inc., dated June 23, 2008 (``T. Rowe Price Letter'');
Theodore Tsung, Financial Services Software Innovator--Founder of
digiTRADE and EAssist, dated June 30, 2008; Laurence S. Schultz,
President, Public Investors Arbitration Bar Association, dated June
26, 2008 (``PIABA Letter''); Teresa Luiz, GWFS Equities, Inc., dated
June 30, 2008 (``GWFS Letter''); Heidi Stam, Managing Director and
General Counsel, Vanguard, dated June 30, 2008 (``Vanguard
Letter''); William A. Jacobson, Associate Clinical Professor,
Cornell Law School, and Director, Cornell Securities Law Clinic,
dated July 1, 2008 (``Cornell Letter''); Dale E. Brown, President
and CEO, Financial Services Institute, dated July 1, 2008 (``FSI
Letter''); Heather Traeger, Assistant Counsel, Investment Company
Institute, dated July 1, 2008 (``ICI Letter''); Cheryl Tobin, Asst.
Vice President, Insurance Counsel, Pacific Life Insurance Company to
James Wrona, Associate Vice President and Associate General Counsel,
FINRA, dated July 1, 2008 (``Pacific Life Letter''); Michael P.
DeGeorge, General Counsel, NAVA, Inc., dated July 1, 2008 (``NAVA
Letter''); Neal E. Nakagiri, President, CEO, CCO, NPB Financial
Group, LLC, dated July 2, 2008 (``NPB Letter'') and Carl B.
Wilkerson, Vice President & Chief Counsel, American Council of Life
Insurers, dated August 20, 2008 (``ACLI Letter''). Unless otherwise
noted, all letters are addressed to the Secretary or Acting
Secretary of the Commission.
\10\ FINRA's Response, supra note 7.
---------------------------------------------------------------------------
A. Limiting Application of the Rule to Recommended Transactions
Several commenters supported FINRA's proposal to limit Rule 2821's
application to ``recommended'' transactions,\11\ generally indicating
that the proposed change would: Make the rule consistent with other
rules that have a suitability requirement; promote competition; and not
detract from the rule's effectiveness because most variable annuity
transactions involve a recommendation. Two commenters, however,
disagreed with the approach, arguing, among other things, that
registered representatives could falsely assert that an unsuitable
transaction was not recommended.\12\ FINRA acknowledged the concern,
but responded that it would be mitigated by the requirement that
broker-dealers implement reasonable measures to detect and correct
circumstances in which transactions can be mischaracterized.\13\ In
addition, FINRA stated that when a transaction is truly initiated by a
customer, actual or potential conflicts of interest are less likely,
and thus there is a lesser need for heightened sales-practice
requirements.\14\
---------------------------------------------------------------------------
\11\ See ACLI Letter, CAI Letter, ICI Letter, NAVA Letter,
Vanguard Letter, T. Rowe Price Letter.
\12\ See Cornell Letter and PIABA Letter.
\13\ See FINRA's Response, supra note 7.
\14\ Id.
---------------------------------------------------------------------------
Another commenter requested clarification that a non-recommended
transaction includes a direct sale (i.e., one in which no sales-related
compensation is paid and no registered representative is involved).\15\
FINRA responded that whether a transaction is recommended does not turn
on whether it is a direct sale: Some firms use an Internet-based
computer system to make ``recommendations'' without assistance from a
registered representative, while others compensate registered
representatives for transactions solely initiated by the customer.\16\
FINRA also reiterated several factors relevant to determining when a
particular communication would be deemed a recommendation, including: A
communication's content, context and presentation; the tailoring of the
communication to a certain customer or customers; and whether the
communication was initiated by a person employed by the firm or by a
computer program used by the firm.\17\
---------------------------------------------------------------------------
\15\ See Pacific Life Letter.
\16\ See FINRA's Response, supra note 7.
\17\ Id. (citing NASD Policy Statement Regarding Application of
the NASD Suitability Rule to Online Communications, NASD Notice to
Members 01-23 (April 2001)).
---------------------------------------------------------------------------
One commenter sought clarification of the rule's application to
recommendations in the context of retirement plans.\18\ FINRA's
Response cited the rule's text, which states that the rule does not
generally apply to transactions made in connection with specific
employer-sponsored retirement plans except for recommendations made to
an individual plan participant regarding a deferred variable
annuity.\19\ Furthermore, FINRA indicated that a member's ``generic
communication to all plan participants indicating that the employer has
chosen a deferred variable annuity as the funding vehicle for its
retirement plan likely would not constitute a `recommendation'
triggering application of the proposed rule.'' \20\ Finally, FINRA
reiterated that the rule would not apply to plan-level decisions made
by sponsors, trustees, or custodians of qualified retirement or benefit
plans, regardless of whether a member has made a recommendation to an
individual plan participant.\21\
---------------------------------------------------------------------------
\18\ See GFWS Letter.
\19\ NASD Rule 2821(a)(1).
\20\ See FINRA's Response, supra note 7.
\21\ Id.
---------------------------------------------------------------------------
B. Modifying the Starting Point for the Seven-Business-Day Review
Period
Most commenters supported FINRA's proposal to have the seven-
business-day period for principal review of the application begin on
the day that an OSJ receives the application.\22\ One commenter
expressed the view that the proposal gives the broker-dealer too much
time and that the time period should start when any office receives the
application.\23\ Some commenters stated that the time period for review
should be longer,\24\ and some indicated that there should be an
exception to the time limitations when a customer consents to a further
holding period.\25\ FINRA responded that they regard seven business
days after receipt by any OSJ as sufficient time in which to review an
application.\26\
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\22\ See ACLI Letter, CAI Letter, FSI Letter, ICI Letter, NAVA
Letter, NPB Letter.
\23\ See Pacific Life Letter.
\24\ See ACLI Letter, CAI Letter.
\25\ See ACLI Letter, CAI Letter, EquiTrust Letter, NAVA Letter.
\26\ See FINRA's Response, supra note 7.
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C. Supplementary Material
1. Forwarding of Customer Checks/Funds
Proposed SM.03 states that under certain conditions, a FINRA member
may forward a customer's check or funds to the insurance company prior
to principal approval.\27\ One of those conditions is that the
insurance company issuer agrees to ``(1) segregate the member's
customers' funds in a bank * * * account * * * (set up as described in
[Exchange Act] 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 * *
*.''
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\27\ NASD Rule 2821 initially prohibited broker-dealers from
ever forwarding checks/funds prior to principal approval of the
transaction. Most commenters to the original proposal favored
allowing broker-dealers to forward checks/funds, but they differed
regarding their views of FINRA's proposed requirements for allowing
it.
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The commenters on this provision generally viewed current insurer
suspense account practices as sufficient but stated that the special
account requirement would be feasible if modified.\28\ For example, one
commenter suggested that insurers be permitted to segregate funds in an
account ``similar in form and function to a Reserve Bank Account under
[Exchange Act] Rule 15c3-3(e).'' \29\ This commenter also suggested
that FINRA consider adopting exemptions from the SM.03 requirements
depending on the treatment particular states afford to insurance
company suspense accounts.\30\
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\28\ See e.g., ACLI Letter, NAVA Letter, Pacific Life Letter,
CAI Letter.
\29\ See CAI Letter. Exchange Act Rule 15c3-3(e) applies to
broker-dealers that transmit funds promptly and that do not hold
those funds for periods longer than one business day. 17 CFR
240.15c3-3(e).
\30\ See CAI Letter.
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FINRA's Response stated that during the period before the
transaction is approved, when funds may need to be returned to the
customer, it is important for a FINRA member to have reasonable
assurances that the insurer will handle customer funds in a manner that
provides at least as much protection as
[[Page 18422]]
if those funds were handled by a broker-dealer that is permitted to
hold customer funds.\31\ Accordingly, FINRA declined to modify or
eliminate the proposed requirements to maintain equivalent
standards.\32\
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\31\ See FINRA's Response, supra note 7.
\32\ Id.
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In response to one commenter's question regarding whether the
``Special Account Requirement'' of SM.03 requires the segregation by
the insurance company of customer funds from one broker-dealer from
those of other broker-dealers,\33\ FINRA indicated that it does
not.\34\ FINRA's Response further stated that the insurer could use one
special account for the customers of all the broker-dealers with which
it does business.\35\
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\33\ See NAVA Letter. NAVA also stated that, in its experience,
``unaffiliated broker-dealers do not forward customer funds prior to
principal approval.'' Id. In this regard, FINRA noted that SM.03
allows a broker-dealer to forward checks/funds under certain
circumstances prior to principal approval; it does not require it.
Moreover, the Commission's previous exemptive order allowing firms
to hold checks for up to seven business days to complete the
principal review applies under the proposed amendments. See FINRA's
Response, supra note 7.
\34\ See FINRA's Response, supra note 7.
\35\ Id.
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One commenter asked whether an insurance company could return
customer checks/funds to the broker-dealer rather than directly to the
customer if the broker-dealer's principal rejects the transaction.\36\
FINRA responded that the insurance company may make checks payable to
the broker-dealer if the broker-dealer is permitted to hold customer
funds.\37\ If broker-dealers that are not authorized to hold customer
funds receive checks from the insurance company, they should be payable
to the customer. In those cases, FINRA stressed that broker-dealers
must forward such checks to their customers ``promptly'' and keep an
incoming and outgoing record of the customer checks, as well as any
other funds that are remitted to the broker-dealer.\38\
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\36\ See CAI Letter.
\37\ See FINRA's Response, supra note 7. 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.'' Securities Exchange Act
Release No. 56376 (September 7, 2007), 72 FR 52400 (September 13,
2007). Although some of these firms receive checks from customers
made payable to third parties, the Commission does not deem a firm
to be carrying customer funds if it ``promptly transmits'' the
checks to third parties. The Commission 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. The
Commission's exemptive order remains applicable notwithstanding the
modification to the event that triggers the principal review period.
See discussion in Section III.B, supra of the amendment to rule
2821(c) establishing the timing for principal review.
\38\ See FINRA's Response, supra note 7.
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Finally, one commenter expressed confusion regarding this
provision, stating that ``the insurance company would necessarily have
a claim for payment if an application is approved and a contract
issued, while the member would necessarily have a claim for a return of
the funds if the application is not approved and the contract is not
issued.'' \39\ FINRA responded that it did not intend to suggest that
the funds had to remain in a segregated bank account of the type
referenced in SM.03 in perpetuity, but only until such time as the
insurance company is notified of the broker-dealer's approval and is
provided with the application, or is notified of the broker-dealer's
rejection of the application.\40\
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\39\ See NAVA Letter.
\40\ See FINRA's Response, supra note 7. Under the rule as
amended by Amendment No. 1, there could be delays between the time
when a principal approves an application and the time when an
insurer receives the approved application (e.g., when a broker-
dealer conveys principal approval to the insurer electronically but
sends an approved application via regular mail), thereby creating a
situation where the funds in a suspense account are released before
the insurance company has received the application. Amendment No. 2
clarifies that the insurance company must receive both a
notification of approval and the application before funds can be
released from the suspense account.
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2. Inquiries About Exchanges
One commenter supported FINRA's proposal to clarify, in Rule
2821(b)(1)(B)(iii) and SM.05, that an analysis of whether the customer
has had another recent exchange should include exchanges at other
broker-dealers, but suggested that broker-dealers should be required to
do more than simply ask the customer whether he or she has had another
exchange.\41\ The commenter explained that variable annuity
transactions can be complex and confusing, and that some customers
might not understand that they had engaged in previous exchanges.\42\
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\41\ See PIABA Letter. The rule currently states that the
broker-dealer must consider whether ``the customer's account has had
another deferred variable annuity exchange within the preceding 36
months.'' The proposal would eliminate the reference to an
``account.''
\42\ Id.
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FINRA responded that requiring broker-dealers to investigate
whether the customer has in fact had another exchange at another
broker-dealer is overly burdensome in light of the potential benefits.
FINRA indicated that instances of customer confusion regarding whether
or not an exchange had occurred would likely be the exception rather
than the rule.\43\ FINRA further noted that SM.05 requires that a
broker-dealer determine whether a customer has had another exchange at
that firm and that, solely for exchanges that occurred at other firms,
is permitted to rely on a customer's response to an inquiry regarding
possible exchanges by the customer at other broker-dealers.\44\ In
addition, FINRA reiterated the SM.05 requirement that broker-dealers
document in writing both the nature of the inquiry and the response
from the customer.\45\ FINRA stated that it believes that this
requirement would help ensure that broker-dealers ask customers about
exchanges in a manner that is reasonably calculated to elicit accurate
responses.\46\
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\43\ See FINRA's Response, supra note 7.
\44\ Id.
\45\ Id.
\46\ Id.
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D. Effective Date of the Proposed Amendments
Some commenters requested a delay in the effective date of the
proposed rule change of between 12 and 18 months.\47\ One commenter
stated that the method by which the effective dates would be determined
has been confusing.\48\ Although FINRA believes that a delay of 12 to
18 months would be unreasonably long,\49\ it nevertheless agreed to
delay the effective date until 240 days following publication of the
Regulatory Notice announcing Commission approval. FINRA will announce
the effective date of the proposed rule change in a Regulatory Notice
to be published no later than 60 days following Commission approval.
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\47\ See e.g., ACLI Letter, CAI Letter.
\48\ See CAI Letter II.
\49\ See FINRA's Response, supra note 7.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning whether the proposed rule change as modified by
Amendment Nos. 1 and 2 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
[[Page 18423]]
Number SR-FINRA-2008-019 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
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 May 13, 2009.
V. Discussion and Findings
After careful review of the proposal and consideration of the
comment letters and FINRA's Response, the Commission finds that the
proposed rule change, as amended, is consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to FINRA.\50\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\51\ which requires, among other things, that FINRA's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\50\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\51\ 15 U.S.C. 78o-3(b)(6).
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The Commission finds that the proposed rule change, as amended, is
reasonably designed to accomplish these ends by creating a mechanism
through which policies and procedures that are designed to ensure that
recommended variable annuity transactions are properly identified and
subject to timely principal review are put in place. As FINRA noted,
while most variable annuity transactions are ``recommended,'' whether
by a registered representative or an Internet-based computer system,
and thus would be subject to principal review, there are some broker-
dealers that do not make any recommendations as part of a business
model that provides lower cost products.\52\ The Commission believes
that principal review is less necessary when a particular variable
annuity transaction is not recommended. Accordingly, the Commission
believes that the rule change strikes the proper balance between
investor protection and efficiency by requiring principal review of
recommended transactions while, at the same time, removing an
unnecessary impediment to the purchase of these investments by
investors who do not need or seek a recommendation.
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\52\ See FINRA's Response, supra note 7.
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In addition, the Commission believes that FINRA struck a reasonable
balance with regard to the timeframe during which variable annuity
transactions must be reviewed by a principal. Requiring the seven-
business-day review requirement to begin at the time that a signed and
completed application is received by an OSJ will encourage the OSJ that
received the application to route it, within a reasonable time, to the
principal required to review it. We are not persuaded that the
principal review clock should begin to run when any office of a broker-
dealer receives an application because of the practical delays often
associated with processing an application and routing it to the
appropriate person. We also are not persuaded that the principal review
clock should be delayed until a particular OSJ receives the
application, because doing so could result in undue delays to the
prompt processing and completion of an investor's transaction.
The Commission gave careful consideration to the comments raised
regarding the forwarding of customer funds during the period when an
application is under principal review. We believe that until a
transaction has been approved or denied, segregation of customer funds
in a special account similar in form and function as those described in
Exchange Act Rules 15c3-3(k)(2)(i) and 15c3-3(f) \53\ offers the best
assurance that investors' funds will be safeguarded in a manner that
most closely parallels the protective features of the Federal
securities laws, and that investors in different products should
receive similar treatment. Specifically, when an investor purchases a
non-variable annuity investment through a broker-dealer, she is
protected by the Securities Investor Protection Corporation in the
event the broker-dealer becomes insolvent. Because insurance companies
are subject to a different regulatory scheme than broker-dealers,
including differences resulting from variation in State insurance laws,
we believe deferred variable annuity investors are best protected by a
rule that closely mimics the protections and safeguards governing other
investors. Consequently, we believe that FINRA's proposed rule change
strikes a fair balance between the practical needs of broker-dealers
associated with transmitting funds to insurance companies and
protecting investors from the possibility that an insurance company may
become insolvent.
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\53\ 17 CFR 240.15c3-3(k)(2)(i), 15c3-3(f).
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With regard to FINRA's proposed requirement that broker-dealers
determine the number of prior customer exchanges, the Commission agrees
with FINRA that it is reasonable and appropriate for a broker-dealer to
be required to determine the number of exchanges that have occurred at
the firm itself. We believe this burden should be minimal, in that the
broker-dealer will have ready access to that information from its books
and records. The Commission also believes that it is reasonable to rely
on a customer's representations regarding exchanges conducted at other
firms given that most customers are in a good position to know whether
they have made any exchanges. While a customer's recollection of this
information may not always be fully accurate, the burdens associated
with requiring broker-dealers to obtain this information through other
means outweigh the benefits of any potential improvement in accuracy.
Moreover, this requirement is designed to help ensure that broker-
dealers ask about customers' exchanges in a manner that is reasonable
calculated to elicit accurate responses from customers
[[Page 18424]]
when they are asked about exchanges at other broker-dealers.
Finally, given the rule's operational impact, we believe that it is
appropriate for its effective date to be delayed by 240 days following
publication of the Regulatory Notice announcing Commission approval.
This should provide sufficient time for broker-dealers and any other
affected parties to make necessary changes to their systems and
procedures without undue further delay of the rule's implementation.
In approving Rule 2821, the Commission took note of the numerous
examinations of, and enforcement actions against, broker-dealers
involving the sale of variable annuity products.\54\ We understood that
many FINRA enforcement actions against broker-dealers involved
unsuitable recommendations of variable annuities and noted that the
rule was designed to curb these sales practice abuses.\55\ Rule 2821
has been subject to a thorough notice and comment process, and these
amendments to the rule respond directly to comments and questions
raised by commenters. For that reason, we believe that it is
appropriate to finalize the rule in order to provide broker-dealers and
others affected by it with the clarity needed to make operational and
systems changes required to implement the rule and achieve the investor
protections for which it is designed. Accordingly, based on the
foregoing reasons, the Commission believes that good cause exists,
consistent with Sections 15A(b)(6) \56\ and 19(b)(2) \57\ of the
Exchange Act, to approve the proposed rule change.
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\54\ See Securities Exchange Act Release No. 56375 (September 7,
2007), 72 FR 52403, 52411 (September 13, 2007).
\55\ Id.
\56\ 15 U.S.C. 78o-3(b)(6).
\57\ 15 U.S.C. 78s(b)(2).
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The Commission also finds good cause for approving the proposed
rule change as modified by Amendment Nos. 1 and 2 prior to the
thirtieth day after the date of publication of notice in the Federal
Register. Amendment No. 1 originally indicated that funds had to remain
in a segregated bank account until such time as the insurance company
is notified of the broker-dealer's approval or rejection of the
application. Under the rule as amended by Amendment No. 1, there could
be delays between the time when a principal approves an application and
the time when an insurer receives the approved application (e.g., when
a broker-dealer conveys principal approval to an insurer electronically
but sends an approved application via regular mail), thereby creating a
situation where the funds in a suspense account are released before the
insurance company has received the application necessary to issue the
contract. Therefore, Amendment No. 2 clarifies that the insurance
company must receive both a notification of approval and the
application before funds can be released from the suspense account.
Because these amendments do not significantly alter the proposed rule,
which was subject to a full notice and comment period, the Commission
finds that it is in the public interest to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, as soon as possible to
expedite their implementation. Accordingly, the Commission finds that
there is good cause, consistent with and in furtherance of the
objectives of Sections 15A(b)(6) \58\ and 19(b)(2) \59\ of the Exchange
Act, to approve Amendment Nos. 1 and 2 on an accelerated basis.
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\58\ 15 U.S.C. 78o-3(b)(6).
\59\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\60\ that the proposed rule change (SR-FINRA-2008-019), as
modified by Amendment Nos. 1 and 2, be and hereby is, approved on an
accelerated basis.
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\60\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
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\61\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-9159 Filed 4-21-09; 8:45 am]
BILLING CODE 8010-01-P
