
[Federal Register: April 22, 2009 (Volume 74, Number 76)]
[Notices]               
[Page 18419-18424]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap09-88]                         

-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 * * 
*.''
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \31\ See FINRA's Response, supra note 7.
    \32\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \43\ See FINRA's Response, supra note 7.
    \44\ Id.
    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \47\ See e.g., ACLI Letter, CAI Letter.
    \48\ See CAI Letter II.
    \49\ See FINRA's Response, supra note 7.
---------------------------------------------------------------------------

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 (http://
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 (http://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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \52\ See FINRA's Response, supra note 7.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \53\ 17 CFR 240.15c3-3(k)(2)(i), 15c3-3(f).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78o-3(b)(6).
    \59\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-9159 Filed 4-21-09; 8:45 am]

BILLING CODE 8010-01-P
