[Federal Register: September 13, 2007 (Volume 72, Number 177)]
[Notices]
[Page 52403-52414]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se07-89]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56375; File No. SR-NASD-2004-183]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.);
Notice of Filing of Amendment Nos. 3 and 4 and Order Granting
Accelerated Approval of the Proposed Rule, as Amended, Related to Sales
Practice Standards and Supervisory Requirements for Transactions in
Deferred Variable Annuities
September 7, 2007.
I. Introduction
On December 14, 2004, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 \1\ (``Exchange Act'' or ``Act'') and
Rule 19b-4 \2\ thereunder, proposed new Rule 2821 (``Proposed Rule
2821'') relating to the sales practice standards and supervisory and
training requirements applicable to transactions in deferred variable
annuities.\3\ Proposed Rule 2821, as amended by Amendment No. 1, was
published for comment in the Federal Register on July 21, 2005.\4\ The
Commission received approximately 1500 comments on the proposal.\5\
NASD filed Amendment No. 2 on May 4, 2006, which addressed the comments
and proposed responsive amendments. Amendment No. 2 was published for
comment in the Federal Register on June 28, 2006.\6\ The Commission
received approximately 1950 comments on Amendment No. 2.\7\ To further
explain and modify certain provisions of Proposed Rule 2821 in response
to comments, NASD filed Amendment No. 3 on November 15, 2006 and
Amendment No. 4 on March 5, 2007. Amendment No. 4 supersedes all of the
previous amendments in their entirety. All of the comments that the
Commission has received are available on the Commission's Internet Web
site (http://www.sec.gov/rules/sro.shtml). This order provides notice
of Amendment Nos. 3 and 4 to the proposed rule and approves the
proposed rule as amended on an accelerated basis.\8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On July 26, 2007, the Commission approved a proposed rule
change filed by NASD to amend NASD's Certificate of Incorporation to
reflect its name change to Financial Industry Regulatory Authority
Inc., or FINRA, in connection with the consolidation of the member
firm regulatory functions of NASD and NYSE Regulation, Inc. See
Exchange Act Release No. 56146 (July 26, 2007); 72 FR 42190 (Aug. 1,
2007).
\4\ See Exchange Act Release No. 52046A (July 19, 2005); 70 FR
42126 (July 21, 2005) (SR-NASD-2004-183).
\5\ Approximately 1300 of these comments, primarily from
licensed insurance professionals and variable product salespersons,
are virtually identical. These letters are referred to herein, and
on the list of comments on the Commission's Web site as ``Letter
Type A.'' The Commission also received multiple copies of other
letters, which we refer to as Letters Type B, C, D, E, F, G and H,
below.
\6\ See Exchange Act Release No. 54023 (June 21, 2006); 71 FR
36840 (June 28, 2006) (SR-NASD-2004-183).
\7\ Approximately 1700 of these comments, primarily from
licensed insurance professionals and variable product salespersons,
are virtually identical. These letters are referred to herein as
``Letter Type B.''
\8\ NASD granted consent for the Commission to approve the
proposed rule beyond the timeframes set forth in section 19(b)(2) of
the Act.
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II. Description of the Proposal
Proposed Rule 2821 would create recommendation requirements
(including a suitability obligation), principal review and approval
requirements, and supervisory and training requirements tailored
specifically to transactions in deferred variable annuities. It is
intended to supplement, not replace, NASD's other rules relating to
suitability, supervisory review, supervisory procedures, and training.
Thus, to the extent Proposed Rule 2821 does not apply to a particular
transaction, NASD's general rules on suitability, supervisory review,
supervisory procedures, and training continue to govern when
applicable.\9\ The text of the proposed rule is available on FINRA's
Web site (http://www.finra.org), at FINRA's principal office, and at
the Commission's Public Reference Room.
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\9\ The general suitability obligation requires a broker-dealer
to consider its customer's ability to understand the security being
recommended, including changes in the customer's ability to
understand, monitor, and make further decisions regarding securities
over time.
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Proposed Rule 2821 would apply to the purchase or exchange of a
deferred variable annuity and to an investor's initial subaccount
allocations.\10\ It
[[Page 52404]]
would not apply to reallocations of subaccounts or to subsequent
premium payments made after the investor's initial purchase or
exchange.\11\ It also generally would not apply when an investor's
purchase or exchange of a deferred variable annuity is made within a
tax-qualified, employer-sponsored retirement or benefit plan.\12\ If,
however, a member recommends a deferred variable annuity to an
individual plan participant, then Proposed Rule 2821 would apply to
that purchase (or exchange) and to the initial subaccount allocations.
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\10\ As NASD noted in Amendment No. 2, the proposed rule focuses
on customer purchases and exchanges of deferred variable annuities,
areas that, to date, have given rise to many of the sales practice
abuses associated with variable annuity products. See Exchange Act
Release No. 52046A, at 3-5 (discussing various questionable sales
practices that NASD examinations and investigations have uncovered
and the actions NASD has taken to address those practices). The
proposed rule would thus cover a standalone purchase of a deferred
variable annuity and an exchange of one deferred variable annuity
for another deferred variable annuity. For purposes of the proposed
rule, an ``exchange'' of a product other than a deferred variable
annuity (such as a fixed annuity) for a deferred variable annuity
would be covered by the proposed rule as a ``purchase.'' The
proposed rule would not cover customer sales of deferred variable
annuities, including the sale of a deferred variable annuity in
connection with an ``exchange'' of a deferred variable annuity for
another product (such as a fixed annuity). However, recommendations
of customer sales of deferred variable annuities are covered by Rule
2310, NASD's general suitability rule.
\11\ NASD's general suitability rule, Rule 2310, would continue
to apply to reallocations of subaccounts.
\12\ Proposed Rule 2821 defines such plans as either a
``qualified plan'' under section 3(a)(12)(C) of the Act or a plan
that meets the requirements of Internal Revenue Code sections
403(b), 457(b), or 457(f).
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Proposed Rule 2821 has four main requirements. First, in order to
recommend the purchase or exchange of a deferred variable annuity, a
member would be required to have a reasonable basis to believe that the
transaction is suitable in accordance with NASD's general suitability
rule, Rule 2310.\13\ In particular the member must have a reasonable
basis to believe that:
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\13\ See Proposed Rule 2821(b)(1)(A).
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The customer has been informed, in general terms, of
various features of deferred variable annuities; \14\
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\14\ See Proposed Rule 2821(b)(1)(A)(i). The proposed rule lists
the following features as examples for purposes of this requirement:
(1) Potential surrender period and surrender charge; (2) potential
tax penalty if customers sell or redeem deferred variable annuities
before reaching the age of 59\1/2\; (3) mortality and expense fees;
(4) investment advisory fees; (5) potential charges for and features
of riders; (6) the insurance and investment components of deferred
variable annuities; and (7) market risk.
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The customer would benefit from certain features of
deferred variable annuities, such as tax deferred growth,
annuitization, or a death or living benefit;\15\ and
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\15\ See Proposed Rule 2821(b)(1)(A)(ii).
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The particular deferred variable annuity that the member
is recommending, the underlying subaccounts to which funds are
allocated at the time of the purchase or exchange of the deferred
variable annuity, and the riders and similar product enhancements are
suitable (and in the case of an exchange, the transaction as a whole
also is suitable) for the customer based on the information the person
associated with the member is required to make a reasonable effort to
obtain pursuant to subparagraph (b)(2) of the proposed rule.\16\
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\16\ See Proposed Rule 2821(b)(1)(A)(iii).
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Prior to recommending that a customer exchange a deferred variable
annuity, a registered representative must not only have a reasonable
basis to believe that the exchange is consistent with the suitability
determinations in subparagraph (b)(1)(A) of the proposed rule, but must
also consider whether:
The customer would incur a surrender charge, be subject to
the commencement of a new surrender period, lose existing benefits, or
be subject to increased fees or charges; \17\
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\17\ See Proposed Rule 2821(b)(1)(B)(i).
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The customer would benefit from product enhancements and
improvements; \18\ and
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\18\ See Proposed Rule 2821(b)(1)(B)(ii).
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The customer's account has had another deferred variable
annuity exchange within the preceding 36 months.\19\
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\19\ See Proposed Rule 2821(b)(1)(B)(iii).
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The associated person recommending the transaction would be
required to document these considerations and sign this documentation.
He or she would also have to make reasonable efforts to obtain from the
customer information regarding the customer's age, annual income,
financial situation and needs, investment experience, investment
objectives, intended use of the deferred variable annuity, investment
time horizon, existing assets (including investment and life insurance
holdings), liquidity needs, liquid net worth, risk tolerance, tax
status, and such other information used or considered to be reasonable
by the member or person associated with the member in making
recommendations to customers.\20\
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\20\ See Proposed Rule 2821(b)(2).
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Second, a registered principal would have to review the transaction
and determine whether he or she approves of it prior to transmitting
the customer's application to the issuing insurance company for
processing, but no later than seven business days after the customer
signs the application.\21\ The registered principal may approve the
transaction only if he or she has determined that there is a reasonable
basis to believe that the transaction would be suitable based on all of
the factors contained in paragraph (b) (``Recommendation
Requirements'') of the proposed rule.\22\
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\21\ See Proposed Rule 2821(c). NASD has determined that relief
is needed to allow certain broker-dealers to complete their review
of deferred variable annuity transactions as required by proposed
NASD Rule 2821 without becoming fully subject to Exchange Act Rule
15c3-3 and being required to maintain higher levels of net capital
in accordance with Exchange Act Rule 15c3-1. Consequently, NASD has
requested relief from Rules 15c3-3 and 15c3-1 for these broker-
dealers. In conjunction with the Commission's approval or proposed
rule 2821, it is also granting exemptions from Rules 15c3-1 and
15c3-3 of the Exchange Act to allow NASD members to comply with
proposed Rule 2821 without becoming fully subject to Exchange Act
Rule 15c3-3 and being required to maintain higher levels of net
capital in accordance with Rule 15c3-1.
NASD initially submitted a request for relief to the staff prior
to the consolidation of its member firm regulatory functions with
NYSE Regulation, Inc. This request was replaced by a subsequent
request from the consolidated entity, FINRA. For readability, this
second request is referred to as an NASD request throughout this
order.
\22\ See Proposed Rule 2821(c).
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For purposes of reviewing deferred variable annuity purchases and
exchanges, a registered principal must treat all transactions as if
they have been recommended.\23\ However, if a registered principal
determines that a transaction, which is not suitable based on the
factors contained in paragraph (b), was not recommended, he or she may
nonetheless authorize the processing of it if the customer has been
informed of the reason why the transaction has not been approved and
the customer affirms that he or she wants to proceed with the
transaction.\24\
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\23\ Id.
\24\ Id.
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The registered principal that reviews the transaction must document
and sign the determinations that the proposed rule requires him to
make.\25\ He or she must complete this documentation regardless of
whether he or she approves, rejects, or authorizes the transaction.\26\
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\24\ Id.
\25\ Id.
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Third, Proposed Rule 2821 would require members to develop and
maintain supervisory procedures that are reasonably designed to achieve
compliance with the proposed rule.\27\ Members would be required to
implement surveillance procedures to determine if associated persons
``have rates of effecting deferred variable annuity exchanges that
raise for review whether such rates of exchanges evidence conduct
inconsistent with the applicable provisions of [the rule], other
applicable NASD rules, or the federal securities laws (`inappropriate
exchanges').'' \28\ Members would also be required to have policies and
[[Page 52405]]
procedures reasonably designed to implement corrective measures to
address inappropriate exchanges and the conduct of associated persons
who engage in inappropriate exchanges.\29\
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\27\ See Proposed Rule 2821(d).
\28\ Id.
\29\ Id.
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Fourth, Proposed Rule 2821 would require members to develop and
implement training programs that are tailored to educate registered
representatives and registered principals on the material features of
deferred variable annuities and the requirements of the proposed
rule.\30\
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\30\ See Proposed Rule 2821(e).
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III. Summary of Comments on Amendment No. 2
In its solicitation of comments on Amendment No. 2, the Commission
stated that it would consider the comments it previously received,\31\
and that commenters could reiterate or cross-reference previously
submitted comments.\32\ The Commission has considered all of the
comments it received, including commenters' reiterations of and cross-
references to previously submitted comments. While the summary below
refers to some comments previously submitted, it primarily discusses
new comments on portions of the proposed rule that Amendment No. 2 did
not change and comments on those provisions of the proposed rule that
Amendment No. 2 modified. It also discusses comments received in
response to Amendment No. 1 that are relevant to the timing of
principal review provision in paragraph (c) of the proposed rule.
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\31\ See Exchange Act Release No. 54023 (June 21, 2006); 71 FR
at 36846 n.84.
\32\ Id.
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A. General Comments
A number of commenters reiterated their general opposition to the
proposed rule, viewing it as unnecessary, arguing that NASD has not
demonstrated a need for it, and stating that strong enforcement against
broker-dealer sales practice abuses provides the best deterrent to
negative market conduct.\33\ Some commenters also stated that existing
NASD rules and the prospectus adequately inform and protect
investors.\34\
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\33\ See, e.g., Letters from Stephen A. Batman, CEO, 1st Global
Capital Corp. (July 19, 2006) (``1st Global Letter II''); Carl B.
Wilkerson, Vice President and Chief Counsel, American Counsel of
Life Insurers (July 19, 2006) (``ACLI Letter IV''); Gary A. Sanders,
Senior Counsel, Law and Government Relations, National Association
of Insurance and Financial Advisors and Thomas F. Korb, Vice
President of Policy and Public Affairs, Association for Advanced
Life Underwriting (July 19, 2006) (``NAIFA/AALU Letter II''); Letter
Type B. See also Letter Type D. Unless otherwise noted, all letters
are addressed to the Commission.
\34\ See, e.g., Letters from Dale E. Brown, CAE, Executive
Director and CEO, Financial Services Institute (July 19, 2006)
(``FSI Letter II''); Ari Burstein, Associate Counsel, Investment
Company Institute (July 19, 2006) (``ICI Letter II''); 1st Global
Letter II; ACLI Letter IV; Letter Type B. Two commenters suggested
that the Commission delay action on the proposed rule until there is
some resolution to the Commission's point-of-sale proposal. See ACLI
Letter IV; FSI Letter II. Another commenter stated that it is not
clear how the proposed rule would work with the Commission's point-
of-sale proposal, especially with regard to the disclosure of
material features. See Letter from W. Thomas Conner and Eric A.
Arnold, Sutherland Asbill and Brennan LLP on behalf of Committee of
Annuity Insurers (July 19, 2006) (``CAI Letter II'').
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A few commenters suggested that the proposed rule must take into
account an estimate of its competitive and economic impact and asserted
that the proposed rule must be subject to a cost/benefit analysis.\35\
One commenter took the position that the proposed rule would impose
economic and competitive burdens upon broker-dealers.\36\ The commenter
stated that the rule would require expensive new systems and operation
changes that could initially total more than $200,000 for broker-
dealers to implement and monitor enterprise-wide.\37\ It also
maintained that the ongoing costs of complying with the proposed rule
would be significant and immeasurable.\38\ That commenter did not,
however, provide any specific information about the system changes it
foresaw, or how it arrived at its $200,000 estimate.
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\35\ See Letter from Joan Hinchman, Executive Director,
President and CEO, National Society of Compliance Professionals,
Inc. (July 19, 2006) (``NSCP Letter''); ACLI Letter IV; NAIFA/AALU
Letter II.
\36\ ACLI Letter IV.
\37\ Id.
\38\ Id.
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Some commenters stated that the proposed rule would impose a burden
on competition.\39\ One of these commenters stated that the proposed
rule would disparately impact smaller companies without state-of-the-
art technological resources.\40\ In its view, small to mid-sized
companies may be forced out of the annuity market, thereby reducing
competition and eliminating consumer options.\41\ One commenter posited
three ways in which the proposed rule would burden competition,
stating:
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\39\ See e.g., ACLI Letter IV; NAIFA/AALU Letter II; NSCP
Letter.
\40\ NSCP Letter.
\41\ Id.
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The proposed rule would disrupt enterprise-wide uniformity
of compliance procedures. Compliance with the proposed rule would cost
more than compliance procedures for other products, and thus would make
variable annuities more expensive to sell than other products.
Conversion to the proposed rule would provide openings for
inadvertent and transitional violations and may dampen distributors'
enthusiasm for selling a product with suitability and supervision
standards that are different from all other securities.
Other products have had greater incidences of disciplinary
actions and do not have specific supervision and suitability standards
``that would dampen distributors' sales enthusiasm for fear of
regulatory reprisals or technical violations.'' \42\
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\42\ ACLI Letter IV. Another commenter agreed that the proposed
rule would place those that sell variable annuities at a competitive
disadvantage in comparison with those who market other types of
investments. See NAIFA/AALU Letter II. Two commenters also stated
that adopting product specific suitability requirements and
supervisory procedures would inhibit sales because registered
representatives would be less inclined to sell the product. See
Letter from Michael P. DeGeorge, General Counsel, National
Association for Variable Annuities (July 19, 2006) (``NAVA Letter
III''); FSI Letter II.
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This commenter also argued that the rule targets deferred variable
annuities in a discriminatory and burdensome fashion without
appropriate rationale.\43\
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\43\ ACLI Letter IV.
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Some commenters stated that implementation of the proposed rule
would have unintended consequences.\44\ For example, two commenters
asserted that the proposed rule would raise barriers to access for
investors who could benefit from owning a deferred variable
annuity.\45\ A few commenters also believed that the product-specific
requirements of the proposed rule would signal to investors that
something is wrong with the product.\46\ One commenter stated that the
proposed rule would cause expenses and fees to rise, which in turn
would lead consumers to look to other, less expensive investment
products that may not be as appropriate for their needs.\47\
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\44\ See, e.g., Letter from Rick Dahl, CCO, Sorrento Pacific
Financial LLC (July 19, 2006) (``Sorrento Letter''); FSI Letter II;
NAVA Letter III; NAIFA/AALU Letter II.
\45\ See FSI Letter II; Sorrento Letter.
\46\ See Letter from W. Burk Rosenthal, President, Rosenthal
Retirement Planning, LP (July 19, 2006); FSI Letter II; NAVA Letter
III.
\47\ See NAIFA/AALU Letter II.
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NASD responded to concerns regarding the need for the proposed
rule, the process by which it developed and revised the proposed rule,
and the statutory requirements for its rulemaking in a letter to the
Commission.\48\ With respect to concerns
[[Page 52406]]
that the proposed rule is not necessary, NASD reiterated that its
examinations, investigations, and informal discussions with its members
have uncovered numerous instances of questionable sales practices in
connection with the purchase or exchange of deferred variable
annuities, including unsuitable recommendations, and misrepresentations
and omissions.\49\ It also stated that member supervision and training
procedures are inadequate.\50\ NASD noted that these problems stem from
the unique complexities of deferred variable annuities, which can cause
confusion both for the individuals who sell them and for the customers
who purchase or exchange them.\51\ Despite issuing Notices to Members,
Regulatory and Compliance Alerts, and Investor Alerts, NASD found that
these problems continue to exist.\52\ NASD stated that recent joint
reviews with the Commission, as well as NASD examinations and
enforcement actions, demonstrate that an informal approach has not been
sufficiently effective at curbing the sales practice abuses in this
area.\53\
NASD also discussed its ``measured approach'' to the rulemaking
process.\54\ After NASD determined that a rule specific to deferred
variable annuities was necessary and appropriate, it issued Notice to
Members 04-45 (June 2004) to solicit comments from the public prior to
submitting the proposed rule to the Commission.\55\ In addition, NASD
sought input on the proposal from five NASD standing committees,
including two committees with subject matter expertise in variable
annuities.\56\ NASD Regulation, Inc.'s Board of Directors then approved
the proposal and NASD's Board of Governors had an opportunity to review
it.\57\ NASD modified the proposed rule in light of comments it
received from all of these sources prior to filing it with the
Commission.\58\
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\48\ See Letter from James S. Wrona, Associate Vice President,
NASD (Aug. 31, 2006) (``NASD Response Letter'').
\49\ Id. at 2.
\50\ Id.
\51\ Id.
\52\ Id.
\53\ Id.
\54\ Id. at 3.
\55\ Id.
\56\ Id. at 4.
\57\ Id. at 4. NASD noted that its Board of Governors is
composed of both industry and non-industry members and that one
member must be a representative of an insurance company. Id. at 4,
nt. 6. Similarly, NASD Regulation, Inc.'s Board of Directors is
composed of both industry and non-industry members, and one member
must be a representative of an insurance company or an affiliated
NASD Member. Id. at 4, nt. 6.
\58\ Id. at 4.
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In addition, NASD stated that nothing in section 15A, Section 19,
or any other provision of the Act requires it to generate a competitive
impact statement or otherwise engage in a cost/benefit analysis.\59\ It
also noted that, as required under section 19(b)(1) of the Act,\60\
NASD submitted to the Commission a concise general statement of the
basis and purpose of the proposed rule.\61\
As discussed in Part IV below, in approving a proposed NASD rule,
the Commission must find that the rule is consistent with the
requirements of sections 15A(b)(6) and 15A(b)(9) of the Act. Section
15A(b)(6) requires, among other things, the rules of a national
securities association to be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.\62\ Section 15A(b)(9) provides that proposed rules may
not create a ``burden on competition not necessary or appropriate in
furtherance of the purposes of [the Act].'' \63\ NASD addressed the
consistency of the proposed rule with these requirements, stating:
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\59\ Id.
\60\ 15 U.S.C. 78s(b)(1).
\61\ NASD Response Letter at 4.
\62\ 15 U.S.C. 78o-3(b)(6). See also 15 U.S.C. 78c(f) (the
Commission must consider whether the action will promote efficiency,
competition and capital formation when it is required to consider
whether an action is necessary or appropriate in the public
interest).
\63\ 15 U.S.C. 78o-3(b)(9).
NASD believes that the proposed rule will enhance firms'
compliance and supervisory systems and provide more comprehensive
and targeted protection to investors regarding fraud and
manipulative acts, promote just and equitable principles of trade,
and increase investor protection * * *. Like all regulation, NASD's
rules often impose compliance obligations on the regulated entities.
In every case, the compliance burdens associated with a new rule
will vary from firm to firm depending on the firm's customer base,
business model, and a variety of other factors. Section 15A(b)(9) of
the Act does not, therefore, require that NASD rules impose no
economic burden on NASD members or burden on competition, but rather
that any such burdens are necessary and appropriate to further the
purposes of the Act * * *. NASD believes that the proposed rule is
consistent with, and promotes the goals of the Act.\64\
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\64\ NASD Response Letter at 4-5.
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B. Comments on Proposed Rule 2821(b)--Recommendation Requirements
1. Comments on Proposed Rule 2821(b)(1)(A)--Renumbered Proposed Rule
2821(b)(1)(A)(i)
As proposed in Amendment No. 2, Proposed Rule 2821(b)(1)(A) would
have required registered representatives to have a reasonable belief
that the customer has been informed of the material features of
deferred variable annuities in general prior to recommending a
particular variable annuity to a customer.\65\ One commenter stated
that the rule should clarify what constitutes the material features of
a deferred variable annuity, and should have a safe harbor to protect
good faith attempts to disclose the required information.\66\ Some
commenters reiterated their support for a plain-English disclosure
document to be provided to investors in addition to the prospectus.\67\
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\65\ In response to Amendment No. 1, commenters stated this
provision would amount to a de facto requirement to provide written
disclosure to customers. See, e.g., Letters from Beth L. Climo,
Executive Director, American Bankers Insurance Association/ABA
Securities Association (Sept. 20, 2005); Carl B. Wilkerson, Vice
President and Chief Counsel, America Council of Life Insurers (Sept.
19, 2005) (``ACLI Letter II''), Thomas M. Yacovino, Vice President,
A.G. Edwards & Sons, Inc. (Sept. 20, 2005); Roger C. Ochs,
President, HD Vest Financial Services (Sept. 20, 2005); Michael P.
DeGeorge, General Counsel, National Association for Variable
Annuities (Sept. 19, 2005) (``NAVA Letter II''); Thomas R. Moriarty,
President, Intersecurities, Inc. (Sept. 16, 2005) (``Intersecurities
Letter''); Ira D. Hammerman, Senior Vice President and General
Counsel, Securities Industry Association (Sept. 19, 2005) (``SIA
Letter I''); Ronald C. Long, Senior Vice President, Wachovia
Securities, LLC (Sept. 19, 2005) (``Wachovia Letter''). Commenters
also asserted that this disclosure, along with the other disclosures
already provided to investors who purchase or exchange deferred
variable annuities, would be redundant and would overwhelm
investors. See e.g., Letter from Leesa M. Easley, Chief Legal
Officer, World Group Securities, Inc. (Sept.8, 2005); ACLI Letter
II; Intersecurities Letter; NAIFA/AALU Letter II; NAVA Letter II;
SIA Letter I.
\66\ FSI Letter II.
\67\ See, e.g., Letters from Patricia Struck, President, North
American Securities Administrators Association (July 21, 2006)
(``NASAA Letter II''); Jill I. Gross, Director of Advocacy, Pace
Investor Rights Project (July 19, 2006) (``Pace Letter II''); Robert
S. Banks, Jr., President, Public Investors Arbitration Bar
Association (July 20, 2006).
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The substance of this provision remained the same in Amendment No.
3, but in response to comments NASD explicitly stated that the type of
disclosure required is generic and not specific to the particular
deferred variable annuity being recommended. The provision now provides
that the member or person associated with the member must have a
reasonable basis to believe that ``the customer has been informed, in
general terms, of various features of deferred variable annuities * *
*.
2. Comments on Proposed Rule 2821(b)(1)(B)--Renumbered Proposed Rule
2821(b)(1)(A)(ii)
As proposed in Amendment No. 2, Proposed Rule 2821(b)(1)(B) would
have required a registered representative to
[[Page 52407]]
have a reasonable basis to believe that a customer would benefit from
the unique features of a deferred variable annuity prior to
recommending the purchase or exchange of one. Amendment No. 2 included
tax-deferred growth, annuitization and death benefits as a non-
exhaustive list of unique features.
Some commenters stated that the standard should be that the
customer ``could'' benefit from the features because stating that the
customer would benefit implies a level of certainty and guarantee that
cannot be known at the time of the purchase or exchange.\68\ Other
commenters also suggested deleting the modifier ``unique,'' stating
that the features NASD lists as examples are not unique to deferred
variable annuities.\69\ In the alternative, one of these commenters
suggested that NASD expand the list of features it gives as examples to
include features such as living benefits.\70\
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\68\ See, e.g., Letter from Ira D. Hammerman, General Counsel,
Securities Industry Association (July 19, 2006) (``SIA Letter II'');
ACLI Letter IV; NAVA Letter III. These commenters noted that this
comment is also applicable to Proposed Rule 2821(c)(1)(A). See supra
note 120.
\69\ See, e.g., ACLI Letter IV; CAI Letter II; FSI Letter II;
NAVA Letter III. These commenters noted that this comment is also
applicable to Proposed Rule 2821(c)(1)(A). See supra note 120.
\70\ CAI Letter II.
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NASD agreed that some other products have features similar to those
of a deferred variable annuity, and in Amendment No. 2 deleted the
reference to ``unique.'' NASD also adopted commenters' suggestion to
include ``living benefits'' in the list of features and modified the
proposed rule accordingly in Amendment No. 3.
3. Comments on Proposed Rule 2821(b)(2)
The proposed rule would require registered representatives to make
reasonable efforts to obtain a variety of information about a customer,
including age, financial situation and needs, liquid net worth and
intended use of the deferred variable annuity, prior to recommending a
purchase or exchange of a deferred variable annuity to that
customer.\71\ A number of commenters raised interpretive issues about
or questioned the relevance of particular information.\72\ NASD
declined to amend this provision in response to these comments.
---------------------------------------------------------------------------
\71\ In response to Amendment No. 1, some commenters urged NASD
to eliminate this provision, stating that NASD Rules 2310 and 3110,
as well as Rule 17a-3(a)(17)(i)(A) under the Act, should govern the
information that members are required to gather in making
recommendations to purchase or exchange deferred variable annuities.
See e.g., Letters from Daniel A. Riedl, Senior Vice President and
Chief Operating Officer, Northwestern Mutual Investment Services
(Sept. 16, 2005) (``NMIS Letter''); M. Shawn Dreffein, President and
Chief Executive Officer, National Planning Holdings, Inc. (Sept. 9,
2005); John L. Dixon, President, Pacific Select Distributors, Inc.
(Sept. 16, 2005); NAVA Letter II.
\72\ Three commenters stated that the proposed rule should not
require a registered representative to obtain information if the
customer declines to provide it upon request. Letter from Kerry
Cunningham, Head of Risk Management, ING Advisors Network (July 20,
2006) (``ING Advisors Letter II''); ACLI Letter IV; FSI Letter II.
One commenter stated that the information should be obtained during
the sales process and not necessarily before any recommendation is
made. ING Advisors Letter II. One commenter stated that the
registered representative should make a reasonable effort to
determine overall investment objectives but not intended use. Id. A
number of commenters questioned the difference between the intended
use of a deferred variable annuity and the customer's investment
objective. See, e.g., Letters from Timothy J. Lyle, Senior Vice
President and Chief Compliance Officer, Contemporary Financial
Solutions (July 19, 2006) (``Contemporary Financial Letter'');
Timothy J. Lyle, Senior Vice President and Chief Compliance Officer,
Mutual Service Corporation (July 19, 2006) (``Mutual Service Letter
II''); FSI Letter II; ING Advisors Letter II. Some commenters
suggested that a customer's life insurance holdings are not relevant
to a deferred variable annuity suitability analysis. See, e.g., CAI
Letter II; Contemporary Financial Letter; FSI Letter II; Mutual
Service Letter II; NAVA Letter III; Sorrento Letter; SIA Letter II.
---------------------------------------------------------------------------
4. Comments on Proposed Rule 2821(c)--Principal Review and Approval
a. General Comments
As proposed in Amendment No. 2, the principal review and approval
requirements of paragraph (c) would have applied to both recommended
and non-recommended transactions.\73\ Commenters stated that the
factors a registered principal considers should adequately reflect the
differences between recommended and non-recommended transactions.\74\
These commenters noted that if a transaction is not recommended, a
principal may not have information regarding a customer's overall
investment portfolio and would need to request that information from
the customer.\75\
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\73\ In response to Amendment No. 1, some commenters objected to
requiring principal review of transactions that are not recommended.
See, e.g., Letters from Frances M. Stadler, Deputy Senior Counsel,
Investment Company Institute (Sept. 19, 2005) (``ICI Letter'');
Henry H. Hopkins, Darrell N. Braman and Sara McCafferty, T. Rowe
Price Investment Securities, Inc. (Sept. 19, 2005) (``T. Rowe Price
Letter''); NMIS Letter. One commenter noted that the information
that would be needed for a principal review is not currently
required to be collected for non-recommended annuity transactions.
See T. Rowe Price Letter. Some commenters also stated that requiring
review for non-recommended transactions would allow principals to
second guess investors' decisions. See, e.g., ICI Letter; NMIS
Letter.
\74\ See Letter from Darrell N. Braman, Vice President and
Associate Legal Counsel and Sarah McCafferty, Vice President and
Associate Legal Counsel, T. Rowe Price Associates, Inc. (July 19,
2006) (``T. Rowe Price Letter II''); ICI Letter II.
\75\ ICI Letter II; T. Rowe Price Letter II.
---------------------------------------------------------------------------
In Amendment No. 3, NASD noted some commenters stated that
customers should be free to decide whether they want to purchase a
deferred variable annuity, and thus the proposed rule's principal
review requirements should not apply to non-recommended
transactions.\76\ NASD agreed that a fully informed customer should be
able to make his or her own investment decision and modified this
portion of the proposed rule. As amended, a registered principal ``may
authorize the processing [of a non-recommended transaction] if the
registered principal determines that the transaction was not
recommended and that the customer, after being informed of the reason
why the registered principal has not approved the transaction, affirms
that he or she wants to proceed with the purchase or exchange of the
deferred variable annuity.'' \77\
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\76\ Amendment No. 3 is available on NASD's Web site at http://www.finra.org/web/groups/rules_regs/documents/rule_filing/p017909.pdf
.
\77\ See Proposed Rule 2821(c).
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Two commenters took the position that the supervisory requirements
of the proposed rule would run counter to established legal principles
and the rules, systems, and divisions of responsibility already in
place.\78\ One of these commenters stated that the proposed rule would
impose affirmative duties upon supervisory and compliance personnel to
make individualized suitability determinations, in contravention of the
letter and spirit of section 15(b)(4)(E) of the Act.\79\
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\78\ See NAIFA/AALU Letter II; NSCP Letter. In response to
Amendment No. 1, several commenters stated that the proposed
principal review requirement was unduly duplicative of NASD Rule
3110. See Letters from Deirdre B. Koerick, Vice President, Lincoln
Investment Planning, Inc. (Sept. 19, 2005); Jennifer B. Sheehan,
Assistant Vice President and Counsel, Massachusetts Mutual Life
Insurance Comp. (Sept. 19, 2005); ACLI Letter IV; NAVA Letter II;
SIA Letter II.
\79\ NSCP Letter.
---------------------------------------------------------------------------
Another commenter stated that the proposed rule should provide
specific standards for principal review of age, liquidity needs, and
the dollar amount involved.\80\ In that commenter's view, permitting
firms to set their own standards would invite abuse.\81\ NASD's initial
filing \82\ with the Commission and Amendment No. 1 \83\ would have
[[Page 52408]]
required members to establish standards with respect to a variety of
factors, including the customer's age and the extent to which the
amount of money invested in the deferred variable annuity exceeds a
stated percentage of the customer's net worth. NASD stated in Amendment
No. 2 that ``while conceptually appealing, the establishment of
specific thresholds would unnecessarily limit a firm's discretion in
establishing procedures that adequately address its overall operations.
NASD did not intend to require a firm to reject all deferred variable
annuity transactions involving person over a particular age or dollar
amounts over a particular level. Rather, NASD intended only that
principals consider the highlighted factors as part of their review,
which is a facts and circumstances inquiry.'' \84\
---------------------------------------------------------------------------
\80\ Pace Letter II.
\81\ Id.
\82\ NASD's initial filing is available at http://www.finra.org/web/groups/rules_regs/documents/rule_filing/p012780.pdf
.
\83\ See supra note 4.
\84\ Amendment No. 2 is available on NASD's Web site at http://www.finra.org/web/groups/rules_regs/documents/rule_filing/p016480.pdf
.
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b. Comments on the Timing of Principal Review
Amendment No. 2 would have required registered principals to review
all purchases and exchanges of deferred variable annuities no later
than two business days following the date when the customer's
application is transmitted to the issuing insurance company.\85\ Two
commenters stated that the basis for the two-day timeframe is arbitrary
and has not been explained or justified.\86\ A few commenters viewed
the proposed rule as prioritizing speed over diligence without adequate
justification.\87\ One commenter stated that the timeframe was intended
to allow principals to catch unsuitable sales before a contract has
been issued, but contracts may be issued before the principal's review
is completed even under the revised timeframe.\88\ One commenter stated
that ``free look'' provisions that are available under some states''
insurance laws offer a greater opportunity to redress unsuitable
sales.\89\
---------------------------------------------------------------------------
\85\ Pursuant to Amendment No. 1, registered principals would
have been required to review all purchases and exchanges prior to
transmitting a customer's application to the issuing insurance
company for processing.
\86\ See ACLI Letter IV; FSI Letter II.
\87\ See, e.g., FSI Letter II; NAIFA/AALU Letter II; NSCP
Letter. Another commenter stated that difficulty complying with the
timeframe would force some broker-dealers to cancel contracts once
the insurance company has already issued them. See CAI Letter II.
\88\ CAI Letter II.
\89\ ACLI Letter IV. In NASD's initial filing with the
Commission, it disagreed with commenters who suggested that state-
required ``free look'' periods make early principal review
unnecessary. NASD explained that a ``free look'' period allows the
customer to terminate the contract without paying any surrender
charges and receive a refund of the purchase payments or the
contract value, as required by applicable state law. Free-look
periods, which vary by state law, typically range from ten to thirty
days. NASD went on to state that allowing a suitability analysis to
be reviewed by a principal long after an insurance company issues a
deferred variable annuity contract would be inconsistent with an
adequate supervisory system and would make it difficult for a member
to quickly identify problematic trends. NASD's initial filing is
available on its Web site at http://www.finra.org/web/groups/rules_regs/documents/rule_filing/p012780.pdf
.
---------------------------------------------------------------------------
Numerous commenters stated that it would be difficult to comply
with the revised timeframe.\90\ Two commenters remarked that the
supervisory review timeframe does not take into account the varied
business models of member firms.\91\ These commenters stated that in
some instances, the registered principal who reviews transactions is
stationed at the issuing insurance company.\92\ In those instances, the
commenters stated that those individuals might not be able to serve as
the reviewing principal because the triggering event is the
transmission to the insurance company.\93\ One commenter also noted
that the proposed rule would not accommodate instances in which the
application is transmitted to the issuing insurance company and the
member firm simultaneously.\94\
---------------------------------------------------------------------------
\90\ See, e.g., CAI Letter II; Contemporary Financial Letter;
FSI Letter II; ING Advisors Letter II; Mutual Service Letter II;
NAVA Letter III; NSCP Letter; Sorrento Letter.
\91\ See NSCP Letter; T. Rowe Price Letter II.
\92\ Id.
\93\ Id.
\94\ NSCP Letter. This commenter noted that when this occurs,
the application is reviewed by the insurance company and the member
firm simultaneously.
---------------------------------------------------------------------------
Commenters stated that it would be especially difficult to comply
with the proposed timeframe when the principal needs to get additional
information from the customer, registered representative, or Office of
Supervisory Jurisdiction (``OSJ'') manager.\95\ One commenter stated
that fear of missing the deadline may discourage principals from
seeking this additional information.\96\ Another commenter suggested
that a review should be required to take place no later than two
business days following the date the member transmits the application
or no later than two business days after receipt by the insurance
company to accommodate instances in which the customer sends the
application directly to the insurance company.\97\
---------------------------------------------------------------------------
\95\ See, e.g., CAI Letter II; Contemporary Financial Letter;
FSI Letter II; ING Advisors Letter II; Mutual Service Letter II;
NAVA Letter III; NSCP Letter; Sorrento Letter.
\96\ CAI Letter II.
\97\ T. Rowe Price Letter II.
---------------------------------------------------------------------------
In Amendment No. 4, NASD modified the proposed rule to further
address these comments.\98\ As amended, the proposed rule would require
a principal to review the transaction prior to transmitting a
customer's application to the issuing insurance company for processing,
but no later than seven business days after the customer signs the
application.\99\
---------------------------------------------------------------------------
\98\ NASD also amended the timing or principal review
requirement in Amendment No. 3. That amendment would have required
principals to review the transaction no later than two business days
after the application was sent to the issuing insurance company if
no additional contact was necessary with the customer or the
registered representative. If additional contact was needed with
either the customer or the registered representative, then review
would have had to be completed within five business days of the
application being sent to the issuing insurance company. The
Commission received several comments on this timing provision, all
of which are available on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.
) Commenters stated that the limited
review period in Amendment No. 3 was problematic and arbitrary.
These commenters also suggested requiring principal review to be
completed within a reasonable time period, not to exceed the
expiration of the free look period, following the date the broker-
dealer transmits the application to the issuing insurance company.
See e.g., Letter from Dale E. Brown, Executive Director and CEO,
Financial Services Institute (Mar. 5, 2007) (``FSI Letter III'');
Letters Type E and F.
Comments addressing subparagraph (b)(1)(A) of Amendment No. 3
stated that requiring registered representatives to ``determine''
whether a transaction was suitable, rather than having a
``reasonable basis to believe'' it, raised the bar for suitability
determinations. See e.g., FSI Letter III and Letters Type E and F.
In Amendment No. 4, NASD revised this language to require registered
representatives to have ``a reasonable basis to believe'' that the
deferred variably annuity is suitable.
Commenters also stated the reference in subparagraph
(b)(1)(A)(i) to the ``various'' features of deferred variable
annuities created an ``unacceptable level of ambiguity'' and that
the prior proposal's use of ``material'' features was preferable.
See e.g., FSI Letter III and Letters Type E and F.
\99\ In response to Amendment No. 4, commenters requested that
the Commission seek additional comment on the proposed rule. Letter
from Clifford Kirsch, Sutherland Asbill and Brennan LLP on behalf of
Committee of Annuity Insurers (April 9, 2007) (``CAI Letter III'');
Letters Type G and H. One commenter stated that commenters have not
had an opportunity to address whether Amendment No. 4 causes any
unintended consequences regarding the safeguarding of customer funds
at the broker-dealer for as many as seven days and to provide
feedback regarding the contours of the proposed no-action relief
from Exchange Act Rules 15c3-1 and 15c3-3. CAI Letter III. See also
infra notes 101-112 and accompanying text.
---------------------------------------------------------------------------
One commenter addressed the safeguarding of customer funds during
the principal review and stated that ``clarification is needed
regarding the degree of flexibility afforded to firms with respect to
the safekeeping of customer funds during the review period. Rather than
dictating specific procedures, firms should be permitted
[[Page 52409]]
to design procedures tailored to their business model.''\100\ Exchange
Act Rule 15c3-3 requires broker-dealers to safeguard customer funds and
securities. While Rule 15c3-3 requires that a broker-dealer promptly
forward checks and include as a credit in the reserve formula all
customer free credit balances, it does not specify any specific
procedures that a broker-dealer must use to be in compliance with the
rule. Rather, it allows a broker-dealer to tailor its procedures to its
particular business model. NASD Rule 2821 will not affect the
applicability of Exchange Act Rule 15c3-3 with respect to the
safeguarding of customer funds.
---------------------------------------------------------------------------
\100\ CAI Letter III.
---------------------------------------------------------------------------
The Commission also received comments on the timeframe for
principal review proposed in Amendment No. 4.\101\ Some commenters
addressed NASD's requested no-action relief \102\ and highlighted
related implementation issues.\103\
---------------------------------------------------------------------------
\101\ Letter from Eric A. Arnold and Clifford E. Kirsch,
Sutherland Asbill and Brennan LLP on behalf of Committee of Annuity
Insurers (May 24, 2007) (``CAI Letter IV''); Letters Type G and H.
\102\ See supra note 21.
\103\ See CAI Letter IV.
---------------------------------------------------------------------------
One commenter addressed situations in which an insurer's contract
issuance unit is physically resident at the same location as one of the
insurer's captive broker-dealer offices, and both areas share personnel
with one another.\104\ It asked for clarification of whether receipt of
customer applications by broker-dealer personnel for principal review
in these co-located situations would be considered a transmittal to the
issuing insurance company for processing under proposed Rule
2821(c).\105\ NASD responded by stating that in these situations ``[it]
would consider the application ``transmitted'' to the insurance company
only when the broker-dealer's principal, acting as such, has approved
the transaction, provided that the affiliated broker-dealer ensures
that arrangements and safeguards exist to prevent the insurance company
from issuing the contract prior to principal approval by the broker-
dealer.\106\
---------------------------------------------------------------------------
\104\ Id.
\105\ Id.
\106\ See Letter from James S. Wrona, Associate Vice President,
FINRA (Aug. 10, 2007).
---------------------------------------------------------------------------
The Commission believes that NASD can address implementation
issues, to the extent they arise, during the proposed six month
implementation period. Notably, the revised timeframe in Amendment No.
4 is substantially similar to the timeframe that NASD proposed and that
the Commission published for comment in Amendment No. 1, which would
have required a principal to review a transaction prior to sending the
application to the insurance company for processing. The Commission
received numerous comments on the timing of principal review provision
as it was proposed in Amendment No. 1.\107\ While some commenters
supported it because they believed it would give principals sufficient
time for a thorough review and provide greater assurances that
unsuitable transactions would not be consummated,\108\ others objected
to it.\109\ Some commenters were concerned that members would be
subject to liability for market changes affecting the value of the
deferred variable annuity during the delay for supervisory review.\110\
Some commenters stated that a delay in pricing the contract would be
unfair to customers.\111\ Others stated that the timing deadline would
require costly reprogramming of broker-dealers' electronic processing
systems that forward contracts to the insurance company and the
registered representative's home office at the same time.\112\
---------------------------------------------------------------------------
\107\ A summary of these comments addressing Amendment No. 1 was
published in the Federal Register along with the Commission's notice
of Amendment No. 2. See supra notes 4 and 6.
\108\ Letters from Patricia Struck, President, North American
Securities Administrators Association (September 20, 2005) and
Rosemary J. Shockman, President, Public Investors Arbitration Bar
Association (Sept. 9, 2005).
\109\ See, e.g., Letters from W. Thomas Conner and Eric A.
Arnold, Sutherland Asbill & Brennan on behalf of The Committee of
Annuity Insurers (Sept. 19, 2005) (``CAI Letter I''); John S.
Simmers, CEO, ING Advisors (Sept. 19, 2005) (``ING Letter I''); ACLI
Letter II; NAVA Letter II.
\110\ Letters from Denise M. Evans, General Counsel, Associated
Securities Corp. (Sept. 19, 2005) (``Associated Securities
Letter''); John L. Dixon, President, Pacific Select Distributors
(Sept. 16, 2005) (``Pacific Select Letter''); and Julie Gerbert,
Vice President, United Planners' Financial Services of America
(Sept. 19, 2005) (``United Planners Letter'').
\111\ ACLI Letter II; Pacific Select Letter; and United Planners
Letter.
\112\ CAI Letter I; NMIS Letter.
---------------------------------------------------------------------------
One commenter stated that the interaction of this provision with
other Commission and NASD rules could limit a firm's ability to review
applications thoroughly.\113\ Another stated that time-linking the
application process with supervisory review would impair the goal under
the Investment Company Act of 1940 of timely processing.\114\
A few commenters stated that the time deadline would not work in
the context of direct sales because in those sales an insurance company
may not know of an applicant's interest in a deferred variable annuity
until it receives the application.\115\ Another stated that the timing
deadline would not take into account situations in which the registered
principal is housed in the insurance company.\116\
---------------------------------------------------------------------------
\113\ ING Letter I.
\114\ ACLI Letter II.
\115\ CAI Letter I; NAVA Letter II; T. Rowe Price Letter I. In
direct sales, customers may apply for an annuity contract by calling
the insurance company or by completing an application on the
Internet. NAVA Letter II. Receipt of the application is frequently
the first time the insurance company even knows that the customer
has filled out an application. Id.
\116\ NMIS Letter.
---------------------------------------------------------------------------
A few commenters also stated that their current supervisory
structure as an Office of Supervisory Jurisdiction would be incapable
of dealing with the prior approval requirement and they would be forced
to eliminate this form of supervisory structure.\117\ One commenter
stated the requirement could overwhelm principals,\118\ and another
stated that it would require members to allocate two to three times the
supervisory staff for deferred variable annuities than for any other
product.\119\
---------------------------------------------------------------------------
\117\ Letter from Shawn M. Mihal, Chief Compliance Officer,
Great American Advisors (Sept. 19, 2005) and ING Letter I. These
comments were submitted in response to Amendment No. 1, which would
have required principals to review customers' applications prior to
transmitting them to the issuing insurance company for processing.
The commenters assumed that there would be no relief from Rules
15c3-1 and 15c3-3, and thus broker-dealers would have to forward
checks (along with applications) to the insurance company by noon of
the next business day after receiving those checks. Based on this
assumption, the commenters indicated that there would not be
sufficient time for representatives to forward the paperwork to the
OSJ manager and the OSJ manager to review the application within the
time parameters required by Rules 15c3-1 and 15c3-3. These timing
concerns have been addressed by the Commission's exemptions from
Rules 15c3-1 and 15c3-3 to allow NASD members to comply with the
proposed rule without becoming fully subject to Exchange Act Rule
15c3-3 and being required to maintain higher levels of net capital
in accordance with Rule 15c3-1. See Exchange Act Release No. 56376
(Sept. 7, 2007).
\118\ Wachovia Letter.
\119\ Associated Securities Letter.
---------------------------------------------------------------------------
c. Proposed Rule 2821(c)--Principal Review and Approval
In Amendment No. 2, NASD listed a variety of factors that a
registered principal would be required to consider in reviewing the
purchase or exchange of a deferred variable annuity. In Amendment No.
3, NASD modified this provision to require registered principals to
consider all of the factors that a registered representative must
consider in Proposed Rule 2821(b) (``Recommendation Requirements'') and
eliminated the references to the considerations in subparagraph (c)(1)
(``Principal Review and Approval'') of the proposed rule. NASD also
moved the considerations relating to exchanges
[[Page 52410]]
that were in subparagraph (c)(1)(D) of Amendment No. 2 to paragraph (b)
in Amendments Nos. 3 and 4. By doing this, NASD added these
determinations to those factors a registered representative must
consider and retained them as considerations for principal review.
i. Comments on Proposed Rule 2821(c)(1)(A) as Amended by Amendment No.
2--Principal Review and Approval
The rule, as amended by Amendment No. 2, would have required
principals to consider the extent to which the customer would benefit
from the unique features of a deferred variable annuity. A number of
commenters remarked that their comments on proposed Rule 2821(b)(1)(B)
are equally applicable to this provision and that ``would'' should be
changed to ``could'' and that the modifier ``unique'' should be
deleted.\120\ In response to comments, NASD changed ``unique'' to
``various.'' As amended by Amendment No. 3, the rule would require
registered principals to have a reasonable basis to believe that the
customer has been informed, in general terms, of the various features
of deferred variable annuities.\121\
---------------------------------------------------------------------------
\120\ See, e.g., ACLI Letter IV; FSI Letter II; NAVA Letter III;
SIA Letter II. See also supra notes 68 and 69.
\121\ See Proposed Rule 2821(b)(1)(A)(i).
---------------------------------------------------------------------------
ii. Comments on Proposed Rule 2821(c)(1)(C) as Amended by Amendment No.
2--Principal Review and Approval
The rule, as amended by Amendment No. 2, would have required
principals to consider the extent to which the amount of money invested
would result in an undue concentration in a deferred variable annuity
or deferred variable annuities in the context of the customer's overall
investment portfolio. Two commenters stated the term ``undue
concentration'' is imprecise and capable of multiple
interpretations.\122\ Some commenters also viewed the proposed
requirement to consider the customer's liquidity needs as subsuming the
apparent intent of this provision.\123\ In Amendment No. 3, NASD
deleted this provision.
---------------------------------------------------------------------------
\122\ See, e.g., NAVA Letter III; ACLI Letter IV. Two other
commenters noted that NASD should provide more guidance on what
would amount to an ``undue concentration'' because deferred variable
annuities often take significant portions of a customer's assets.
See FSI Letter II; Sorrento Letter.
\123\ See, e.g., ACLI Letter IV; CAI Letter II; NAVA Letter III.
---------------------------------------------------------------------------
iii. Comments on Proposed Rule 2821(c)(1)(D)(ii) as Amended by
Amendment No. 2--Principal Review and Approval
The rule, as modified by Amendment No. 2 would have required
registered principals to consider the extent to which the customer
would benefit from any potential product enhancements and improvements
in the case of an exchange of a deferred variable annuity. One
commenter stated that ``would'' should be changed to ``could'' because
whether a customer benefits is determined years after the contract is
purchased and depends on market performance.\124\ In Amendment No. 3,
NASD deleted this specific paragraph, but, provided in paragraph (b)
(``Recommendation Requirements'') that principals must consider, in the
case of an exchange, whether the customer would benefit from any
potential product enhancements and improvements in their review.\125\
---------------------------------------------------------------------------
\124\ See NAVA Letter III.
\125\ See Proposed Rule 2821(c) and Proposed Rule
2821(b)(1)(B)(ii).
---------------------------------------------------------------------------
iv. Comments on Proposed Rule 2821(c)(1)(D)(iii) as Amended by
Amendment No. 2--Principal Review and Approval
The rule, as modified in Amendment No. 2, would have required
principals, in the case of an exchange of a deferred variable annuity,
to consider the extent to which the customer's account has had another
deferred variable annuity exchange within the preceding thirty-six
months. One commenter, while supporting this provision, believed that
the registered principal should also review the total sales production
of variable annuities of associated persons to detect unsuitable sales
and other potential abuses.\126\ A number of commenters stated that it
would be difficult to comply with this requirement.\127\ In their view,
principals may have a difficult time obtaining this information,
especially if the exchange occurred at another broker-dealer.\128\
These commenters also stated that customers may not want to share this
kind of information, citing privacy concerns or policy concerns with
the other broker-dealers.\129\
One commenter stated that the proposed rule should specify whether
principals have to collect information on exchanges that occurred at
the reviewing firm only or also on exchanges that occurred at other
broker-dealers.\130\ Two commenters argued that the proposed rule
should clarify whether a registered principal is only obligated to
consider prior exchange information if it is available to him or her at
the time of his or her review.\131\
---------------------------------------------------------------------------
\126\ See NASAA Letter II.
\127\ See, e.g., CAI Letter II; Contemporary Financial Letter;
FSI Letter II; Mutual Service Letter II; Sorrento Letter; T. Rowe
Price Letter II.
\128\ Id.
\129\ Id.
\130\ See CAI Letter II.
\131\ See Contemporary Financial Letter; Mutual Service Letter
II.
---------------------------------------------------------------------------
One commenter stated that the provision would impose substantial
administrative and supervisory costs on broker-dealers, which would
have to implement cumbersome and expensive additional surveillance
tools.\132\ Another commenter stated the proposed rule should clarify
the level of inquiry and documentation necessary to comply with this
provision.\133\ In Amendment No. 3, NASD eliminated this specific
provision, but provided in paragraph (b) (``Recommendation
Requirements'') that principals must consider, in the case of exchange,
the extent to which the customer account has had another deferred
variably annuity exchange within the preceding thirty-six months.\134\
NASD has stated that it will announce the effective date of the
proposed rule change in a Notice to Members to be published no later
than 60 days following Commission approval and that the effective date
will be 120 days following publication of the Notice to Members
announcing Commission approval. NASD has indicated that it may address
the type of implementation issues commenters raised with respect to
determining whether a customer's account has had a deferred variable
annuity exchange within the preceding 36 months in connection with that
Notice to Members.
---------------------------------------------------------------------------
\132\ See NSCP Letter.
\133\ See CAI Letter II.
\134\ See Proposed Rule 2821(c) and Proposed Rule
2821(b)(1)(B)(iii).
---------------------------------------------------------------------------
d. Comments on Proposed Rule 2821(c)(2)--Principal Review and Approval
The proposed rule would require the registered principal who
reviewed and approved, rejected, or authorized the transaction to
document and sign the determinations that he or she is required to make
pursuant to subparagraph (c) of the proposed rule.
As proposed in Amendment No. 2, the principal who approves a
transaction would have been required to sign the registered
representative's suitability determination. One commenter stated that
this provision should be eliminated because ``it would establish an
unprecedented standard of requiring principals to fully endorse all of
the considerations leading to the
[[Page 52411]]
salespersons' recommendations.'' \135\ In this commenter's view, the
principal's role should be to affirm the fact that the salesperson
elicited information for completion of the suitability documents.\136\
In Amendment No. 3, NASD eliminated the requirement that registered
principals sign the registered representative's suitability
determinations.
---------------------------------------------------------------------------
\135\ See ACLI Letter IV.
\136\ Id.
---------------------------------------------------------------------------
5. Comments on Proposed Rule 2821(d)--Supervisory Procedures
The rule, as modified by Amendment No. 2, would have required
members to implement procedures and require principals to consider
whether the associated person effecting the transaction has a
particularly high rate of effecting deferred variable annuity
exchanges.
Two commenters argued that the phrase ``particularly high rate'' is
vague and unworkable.\137\ A number of commenters noted that the
proposed rule implies that principals would have to implement a
transaction-by-transaction review and stated that members should be
able to rely on exception reports as an effective solution to
unsuitable exchanges.\138\ One commenter also requested clarification
regarding what should happen if a registered representative does have a
particular high rate of exchanges.\139\ NASD modified this provision in
Amendment No. 3, eliminating the reference to a ``particularly high
rate'' of exchanges.
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\137\ See ACLI Letter IV; FSI Letter II.
\138\ See ACLI Letter IV; CAI Letter II; FSI Letter II; NAVA
Letter III.
\139\ See CAI Letter II. The commenter questioned whether the
principal has to reject the transaction or just give it closer
scrutiny.
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6. Comments on Proposed Rule 2821(e)--Training
As provided in Amendment No. 2, members would be required to
develop and document specific training policies or programs reasonably
designed to ensure that associated persons who effect and registered
principals who review transactions in deferred variable annuities
comply with the requirements of the proposed rule and that they
understand the material features of deferred variable annuities.
Several commenters questioned the need for this specific requirement,
as well as the standards applicable to the training.\140\ NASD declined
to amend this provision in response to comments.
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\140\ One commenter stated there is no need for additional
training requirements because NASD Rule 2310 requires registered
representatives to understand the material features of the products
they sell. See FSI Letter II; Letter Type C. Other commenters
believed this provision is duplicative of the Firm Element portion
of NASD's continuing education requirements. See, e.g., 1st Global
Letter II; FSI Letter II. One commenter believed the training
requirements would interfere with members' efficient and effective
allocation of training resources. See FSI Letter II. A number of
commenters also suggested members' programs be held to the standard
of being ``reasonably designed to achieve compliance'' with the
proposed rule. See, e.g., Contemporary Financial Letter; ING
Advisors Letter II; Mutual Service Letter II.
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7. NASD's Response to Comments
As discussed above, in response to the comments received on
Amendment No. 1 NASD amended portions of the proposed rule and
responded to comments. NASD also filed a response to the comments
received on Amendment No. 2 with the Commission addressing concerns
regarding the need for the proposed rule, the regulatory process that
NASD undertook in developing the proposed rule, and the statutory
requirements for SRO rulemaking.\141\ In Amendment Nos. 3 and 4, NASD
further responded to comments and modified the proposed rule.
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\141\ See NASD Response Letter.
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IV. Discussion and Commission Findings
The Commission has reviewed carefully Proposed Rule 2821, the
comments, and NASD's responses to the comments, and believes that NASD
has responded appropriately to the concerns raised by the commenters.
The Commission finds that Proposed Rule 2821, as amended, is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association, and, in
particular, with section 15A(b)(6) of the Act, which requires, among
other things, that the rules of a national securities association be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.\142\
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\142\ 15 U.S.C. 78o-3(b)(6).
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Over approximately the past three years, the majority of informal
actions brought against broker-dealers as a result of NASD examinations
of variable annuity sales have involved the failure to establish or
follow written supervisory procedures.\143\ During this time period,
NASD also brought numerous enforcement actions charging broker-dealers
with failing to supervise sales of variable annuities.\144\ In
addition, NASD's examinations found a substantial number of unsuitable
recommendations and instances of failing to obtain customer account
information.\145\ It also brought numerous enforcement actions for
making unsuitable recommendations.\146\
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\143\ See infra note 148.
\144\ See infra note 150.
\145\ See infra note 148.
\146\ See infra note 150.
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The proposed rule is designed to curb sales practice abuses in
deferred variable annuities. Its recommendation requirements provide a
specific framework for a broker-dealer's suitability analysis of these
securities. By setting forth factors that a broker-dealer must
specifically consider in recommending deferred variable annuities and
requiring the registered representative to obtain certain information
from his or her customers, the proposed rule should improve
communications between registered representatives and customers
regarding these securities. The supervisory review component should
foster a thorough analytical review of every deferred variable annuity
transaction in a timeframe that will limit the possibility of
unsuitable recommendations and transactions. The proposed rule as a
whole is geared to protecting investors by requiring firms to implement
more robust compliance cultures, and to give clear consideration of the
suitability of these complex products.
Commenters asserted that the proposed rule, because it is product
specific, would result in significant burdens on competition. Pursuant
to the Act's requirement, the Commission has considered the impact of
Proposed Rule 2821 on efficiency, competition and capital
formation,\147\ as well as whether the rule would impose any burden on
competition not necessary or appropriate in furtherance of the
Act.\148\ We note that other products, including options and penny
stocks, are subject to product-specific regulations, due to their
complexity or their history of sales practice abuses. NASD has
demonstrated through its history of examinations, enforcement actions,
and guidance to members that regulating variable annuities like other
products has not been sufficient to curb sales practice abuses.
Moreover, we note that the Act allows the Commission to approve a self-
regulatory organization rule that imposes burdens on competition so
long as those burdens are necessary or appropriate in furtherance of
the purposes of the Act.\149\ We believe that to the extent the
[[Page 52412]]
proposed rule imposes burdens on competition, these burdens are
necessary or appropriate in furtherance of the purposes of the Act, and
particularly the purpose of protecting investors.
---------------------------------------------------------------------------
\147\ 15 U.S.C. 78c(f).
\148\ 15 U.S.C. 78o-3(b)(9).
\149\ Id.
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Commenters also expressed the view that Proposed Rule 2821 may
impose compliance costs on broker-dealers that exceed their costs of
complying with rules applicable to other products. The complexity of
deferred variable annuities warrant more targeted regulation. NASD has
attempted over the past few years to address problematic and unsuitable
sales through non-rulemaking means, but has not found that approach to
be successful. We agree with NASD that Proposed Rule 2821 will lead
firms to enhance their compliance and supervisory systems, which in
turn will provide more comprehensive and targeted protection to
investors.\150\
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\150\ See NASD Response Letter.
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While NASD has issued a number of Notices to Members and Regulatory
and Compliance Alerts regarding the suitability of deferred variable
annuities,\151\ it continues to encounter numerous questionable sales
practices through its examinations,\152\ as well as through its
investigations and informal discussions with its members.\153\ Just
within the last few years, NASD has brought a number of cases involving
failures to supervise, suitability violations, and misrepresentation in
connection with purchases and exchanges of deferred variable
annuities.\154\
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\151\ See Notice to Members 96-86 and Notice to Members 99-35.
In 2002, NASD issued a Regulatory & Compliance Alert, entitled
``NASD Regulation Cautions Firms for Deficient Variable Annuity
Communications,'' that, among other things, discussed NASD's
discovery of unacceptable sales practices regarding variable
annuities. In another Regulatory & Compliance Alert in 2002,
entitled ``Reminder--Suitability of Variable Annuity Sales,'' NASD
emphasized, in part, that an associated person must be knowledgeable
about a variable annuity before he or she can determine whether a
recommendation to purchase, sell or exchange the variable annuity is
appropriate. NASD has also issued a number of Investor Alerts
regarding variable annuities. In 2001, NASD issued an Investor Alert
entitled ``Should You Exchange Your Variable Annuity?'' highlighting
important issues that investors should consider before agreeing to
exchange a variable annuity. In 2003, NASD issued an Investor Alert
entitled ``Variable Annuities: Beyond the Hard Sell,'' which
cautioned investors about certain inappropriate sales tactics and
highlighted the unique features of these products.
\152\ From July 2004 to April 2007, NASD completed a total of
807 routine examinations involving the review of variable annuities.
See Letter from James S. Wrona, Associate Vice President, NASD (May
15, 2007) (``NASD Examination/Enforcement Update Letter''). These
examinations resulted in 92 Letters of Caution, 45 Compliance
Conferences, and 4 Acceptance, Waiver and Consent letters, in which
a respondent accepts a finding of a violation, consents to the
imposition of sanctions, and agrees to waive the right to a hearing.
Id. While the majority of these actions involved the failure to
establish or follow written supervisory procedures, a number of
actions related to the failure to obtain and maintain customer
account information, unsuitable recommendations, and the failure to
comply with standards relating to communications with the public.
Id. These findings do not include cause examinations, many of which
result in formal action that is captured by enforcement actions,
discussed in note 150 below. Id. Nor do the findings include
information from special examination initiatives. Id.
\153\ See NASD Response Letter.
\154\ See, e.g., Phillip Nelson, NASD Case No. 2006004829701
(April 3, 2007) (providing misleading communication to customer
regarding a variable annuity); Victoria C. Smotherman, NASD Case No.
2006003897501 (March 21, 2007) (fraudulently inducing purchases of
variable annuities); Donna Vogt, NASD Case No. EAF0400730002 (Feb.
21, 2007) (making unsuitable variable annuity recommendations);
Raymond James Financial Services, Inc., NASD Case No. EAF0400730001
(Jan. 31, 2007) (failing to properly supervise by permitting
producing branch managers to supervise themselves and by not
properly reviewing variable annuity sales and exchanges); Peter F.
Esposito, NASD Case No. 2005002689601 (Dec. 8, 2006) (submitting
falsified account information to his firm concerning the liquidation
of a variable annuity); Quick & Reilly, Inc., NASD Case No.
E102003158301 (Dec. 1, 2006) (failing to supervise variable annuity
sales); Waddell & Reed, Inc., NASD Case No. E062004029603 (Nov. 24,
2006) (failing to supervise sales of variable annuities where
unregistered persons were selling such products); David L. McFadden,
NASD Case No. E2005000226001 (Nov. 15, 2006) (fraudulent and
unsuitable sales of variable annuities, mutual funds, and exchange
traded fund shares); CCO Investment Services, Corp., NASD Case No.
E112005014002 (Oct. 16, 2006) (failing to, among other things,
supervise variable annuity sales); Daniel Carlos Lacey, NASD Case
No. E062004000201 (Aug. 11, 2006) (making unsuitable recommendations
regarding variable annuities exchanges); Michael K. Maunsell, NASD
Case No. 2005001939501 (Aug. 2, 2006) (making unsuitable variable
annuity recommendations); Carole G. Ferraro, NASD Case No.
E0520030291 (July 21, 2006) (making unsuitable recommendations
regarding variable annuities); Jerry Swicegood, NASD Case No.
2005002683001 (July 13, 2006) (falsifying documents related to
variable annuity exchanges); Eric J. Brown, NASD Case No.
E112003006903 (June 27, 2006) (making unsuitable recommendations and
false statements regarding variable annuities); Joseph Vitetta, NASD
Case No. E10200412250 (June 8, 2006) (making unsuitable
recommendation regarding a variable annuity, among other
violations); AmSouth Investment Services, Inc., NASD Case No.
E052004025802 (May 24, 2006) (failing to establish and maintain
reasonable supervisory system in connection with sales of variable
annuities and mutual funds); Charles Snyder, NASD Case No.
E112004042001 (May 2, 2006) (making unsuitable variable annuity
recommendations); Frank P. Grasse, No. EL120030533 (April 17, 2006)
(falsifying customer information on variable annuity applications);
Tyler M. Kerrigan, NASD Case No. E0520030355 (March 10, 2006)
(recommending unsuitable variable annuity transactions); Angelisa
Savage-Bryant, NASD Case No. E072004064201 (March 6, 2006)
(misrepresentation in connection with a variable annuity exchange);
Brian Carr, NASD Case No. E9B2003043802 (Feb. 22, 2006) (making
unsuitable variable annuity recommendations); John Babiarz, NASD
Case No. 2005002047301 (Feb. 10, 2006) (making unsuitable variable
annuity recommendations); Michael Lancaster, NASD Case No.
E8A20040995-01 (Nov. 30, 2005) (making unsuitable recommendations
regarding variable annuity subaccounts); Lawrence LaBine, NASD Case
No. C3A20040045 (Nov. 22, 2005) (unsuitable recommendations to five
customers involving variable annuity subaccounts and mutual funds);
Mansell R. Spedding, NASD Case No. E0220030907 (Sept. 21, 2005)
(unsuitable subaccount allocation recommendation for variable
annuity); Rita N. Raymer, NASD Case No. E0520030131 (Aug. 16, 2005)
(unsuitable recommendations of variable annuities); NY Life Sec.,
Inc., NASD Case No. E0520040104 (July 22, 2005) (failing to
adequately supervise sales of variable annuities and mutual funds);
Paul Olsen, NASD Case No. E3A20030539 (June 23, 2005) (negligently
failing to tell customers about fees associated with variable
annuity exchanges); Bambi Holzer, NASD Case No. E0220020787 (June
17, 2005) (negligently misrepresenting certain aspects of variable
annuities); Ilene L. Sonnenberg, NASD Case No. C0520050024 (May 11,
2005) (recommending unsuitable variable annuity); Raymond James &
Assocs., Inc., NASD Case No. C0520050020 (May 10, 2005) (finding
that registered representative made unsuitable recommendations and
firm failed to maintain and enforce written supervisory procedures
regarding sales of variable annuities); Issetten Hanif, NASD Case
No. C9B20040086 (Apr. 6, 2005) (unsuitable recommendations regarding
variable annuity and mutual fund exchanges); Lawrence Labine, NASD
Case No. E02020513 (Nov. 19, 2004) (unsuitable variable annuity
recommendation); Edward Sadowski, NASD Case No. C9B040102 (Nov. 17,
2004) (unsuitable variable annuity recommendation); James B.
Moorehead, NASD Case No. C05040073 (Nov. 11, 2004) (failing to
gather suitability information for variable annuity sales); Juan Ly,
NASD Case No. C07040094 (Nov. 9, 2004) (unsuitable variable annuity
switches and misrepresentations); Jenny Chin, NASD Case No.
E04030619 (Oct. 29, 2004) (misrepresentation and omissions regarding
variable annuities); Glenn W. Ward, NASD Case No. C05040075 (Oct.
14, 2004) (recommending unsuitable variable annuity); Bernard E.
Nugent, NASD Case No. C11040031 (Sept. 1, 2004) (unsuitable
recommendation involving the liquidation of mutual fund shares to
purchase a variable annuity); Samuel D. Hughes, NASD Case No.
C07040067 (Aug. 19, 2004) (unsuitable variable annuity switches,
unauthorized sub-account allocations, and misrepresentations);
SunAmerica Sec., Inc., NASD Case No. C05040051 (July 12, 2004)
(lacking adequate written supervisory procedures concerning review
of variable annuity and variable universal life contracts); Jamie
Engelking, NASD Case No. E3A020441 (July 2, 2004) (unsuitable
variable annuity recommendation); Pan-American Fin. Advisers, NASD
Case No. C05040034 (June 15, 2004) (failing to have adequate
supervisory procedures for variable annuity sales); Scott Weier,
NASD Case No. E04010714 (May 27, 2004) (unsuitable variable annuity
recommendations); Gregory Jurkiewicz, NASD Case No. E3A030436 (May
4, 2004) (unsuitable variable annuity recommendation); Michael H.
Tew, NASD Case No.C05040010 (Apr. 7, 2004) (unsuitable
recommendations regarding variable annuities); Steve Morgan, NASD
Case No. E3A020410 (Mar. 12, 2004) (unsuitable variable annuity
recommendation); Donald Lacavazzi, NASD Case No. C11040009 (Feb. 24,
2004) (recommending unsuitable variable annuity switching); Michael
Blandchard, NASD Case No. C11040005 (Feb. 16, 2004) (unsuitable
variable annuity recommendations); Prudential Inv. Mgmt. and
Prudential Equity Group, Inc., NASD Case No. C05040008 (Jan. 29,
2004) (failing to supervise and maintain accurate records relating
to variable annuity replacement sales); Waddell & Reed, Inc., NASD
Case No. CAF040002 (Jan. 14, 2004) (failing to ascertain suitability
of recommended variable annuity exchanges and failure to supervise).
NASD Enforcement actions are available at http://www.nasd.com/RegulatoryEnforcement/MonthlyDisciplinaryActions/index.htm
.
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[[Page 52413]]
Some commenters expressed the view that NASD must wait before
instituting rulemaking and show that a ``demonstrable problem''
exists.\155\ While we believe NASD's examinations and enforcement
actions over the years clearly demonstrate an entrenched problem in the
sales culture for these products, nothing in the Act requires NASD to
make such a showing. Rather, the Act requires the Commission to
determine that a proposed rule is consistent with the Act and consider
whether the proposed rule would promote efficiency, competition and
capital formation.\156\ So long as its proposed rules meet the
requirements of the Act, NASD can--and indeed should--be proactive in
addressing problems in the sale of securities.
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\155\ See supra note 33 and accompanying text.
\156\ 15 U.S.C. 78c(f).
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Some commenters also took the position that the proposed rule
should be subject to a cost/benefit analysis.\157\ The Act sets forth
what the Commission must consider in determining whether to approve a
proposed self-regulatory organization rule. It also sets forth
requirements that the self-regulatory organizations must meet. The Act
does not require a cost/benefit analysis with respect to proposed self-
regulatory organization rules that are filed with, and approved by, the
Commission.
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\157\ See supra notes 35-38 and accompanying text.
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As a practical matter, however, NASD considered the costs and
benefits of the rule as the rule was developed and modified, and NASD's
members were actively involved in shaping the proposed rule. As NASD
stated in its response to comments on Amendment No. 2 ``[i]ndustry
members are keenly aware of the potential costs and burdens that can
result from rulemaking and, as is often the case, they raised and NASD
considered such issues at multiple stages of the rulemaking
process.''\158\
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\158\ As discussed in detail above, in its response to comments
to Amendment No. 2, NASD noted the steps it went through as it
developed the proposed rule prior to filing it with the Commission.
It published the proposed rule in a Notice to Members and solicited
comment. The proposal also went to five NASD standing committees
(including two committees with subject matter expertise regarding
variable annuities) for consultation and comment. NASD considered
the public's and the committees' comments and modified the proposed
rule in response. The NASD Regulation, Inc. Board of Directors then
approved the proposed rule and the NASD Board of Governors had an
opportunity to review it. These NASD boards include members of the
broker-dealer and insurance industries. For detail on the
composition of the boards, see NASD's Response Letter.
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Accelerated Approval of Amendment Nos. 3 and 4
As set forth below, the Commission finds good cause to approve
Amendment Nos. 3 and 4 to the proposed rule, as amended, prior the
thirtieth day after the date of publication of the notice of Amendment
Nos. 3 and 4 in the Federal Register. The revisions and clarifications
in Amendment Nos. 3 and 4 were made in response to comments.
In Amendment No. 3, NASD modified the Recommendation Requirements
in paragraph (b) of the proposed rule. Amendment No. 2 required members
to have a reasonable basis to believe the customer has been informed of
the material features of a deferred variable annuity. NASD revised the
proposed rule to specify that a member must have a reasonable basis to
believe that a customer has been informed ``in general terms of the
various features'' of deferred variable annuities. NASD made this
change in response to comments to clarify that the customer need only
be informed about the features of deferred variable annuities in
general terms, rather than be informed about the specific features of
the deferred variable annuity the member might recommend.
In addition, in Amendment No. 3, NASD incorporated the factors that
a firm must consider when exchanging deferred variable annuities in the
recommendation requirements rather than in the principal review and
approval requirements, while maintaining a requirement that principals
consider these factors. NASD also eliminated two of the considerations
relating to exchanges in response to comments: the extent to which the
customer would benefit from the unique features of a deferred variable
annuity and the extent to which the customer's age or liquidity needs
make the investment inappropriate.
Moreover, in Amendment No. 3, NASD revised the proposed rule in
response to comments relating to the applicability of the proposed rule
to non-recommended transactions. NASD clarified that while principals
are to treat all transactions as recommended, a principal may authorize
the processing of a transaction if it determines that the transaction
was not recommended and that the customer affirms that he or she wants
to proceed after being informed of the reason why the registered
principal has not approved the transaction.
In Amendment No. 3, NASD also modified the supervisory procedures
provisions of the rule in response to comments that the term
``particularly high rates of effecting deferred variable annuity
exchanges'' was vague. NASD revised the proposed rule to require
implementation of surveillance procedures to review associated persons'
rates of effecting deferred variable annuity exchanges for consistency
with the proposed rule, other NASD rules and the federal securities
laws. NASD also clarified that members must have policies and
procedures reasonably designed to implement corrective measures to
address inappropriate exchanges.
In addition, in Amendment No. 3, NASD revised the required
timeframe for principal review, which it further revised in Amendment
No. 4. As amended by Amendment No. 4, the principal must review the
application prior to transmitting it to the issuing insurance company
for processing, but no later than seven business days after the
customer signs the application. This ``prior to transmittal'' standard
was also incorporated in Amendment No. 1, and the Commission received a
substantial number of comments on this standard. Although Amendment No.
1 did not explicitly limit the timeframe for principal review to no
more than seven days, provisions of Exchange Act Rule 15c3-3 would have
operated to limit the time in which broker-dealers could hold customer
funds. In light of NASD's requested exemption from Rule 15c3-3, the
seven-day limit on principal review in Amendment No. 4 would replace
that rule's time limitation for transactions subject to that exemption
with a more workable limit.
Thus, the Commission finds good cause to approve Amendment Nos. 3
and 4 to the proposed rule, as amended, prior to the thirtieth day
after the date of publication of the notice of Amendment Nos. 3 and 4
in the Federal Register.
V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 3 and 4, including whether the
proposed rule is consistent with the Act.\159\ Comments may be
submitted by any of the following methods:
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\159\ The Commission will consider the comments we previously
received. Commenters may reiterate or cross-reference previously
submitted comments.
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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 Number SR-NASD-2004-183 on the subject line.
[[Page 52414]]
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2004-183. 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-NASD-2004-183 and should be
submitted on or before October 4, 2007.
VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\160\ that the proposed rule, as amended (SR-NASD-2004-183), be,
and it hereby is, approved.
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\160\ 15 U.S.C. 78s(b)(2).
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-18022 Filed 9-12-07; 8:45 am]
BILLING CODE 8010-01-P