[Federal Register: September 13, 2007 (Volume 72, Number 177)]
[Notices]
[Page 52400-52401]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se07-87]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56376)]
Order Granting a Conditional Exemption to Broker-Dealers From
Requirements in Rules 15c3-1 And 15c3-3 Under the Securities Exchange
Act of 1934 To Promptly Transmit Customer Checks for the Purchase of
Deferred Variable Annuity Contracts
September 7, 2007.
I. Background
The Securities and Exchange Commission (the ``Commission'') today
approved new National Association of Securities Dealers (``NASD'') \1\
Rule 2821.\2\ NASD Rule 2821 sets forth recommendation requirements
(including a suitability obligation), principal review and approval
requirements, and supervisory and training requirements with respect to
transactions in deferred variable annuities.
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\1\ 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).
\2\ See Exchange Act Release No. 56375 (Sep. 7, 2007).\
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According to the NASD, it designed the rule to address significant
and persistent sales-practice problems in sales of deferred variable
annuities. One component of Rule 2821 is a requirement that registered
principals perform a comprehensive and rigorous review of the
transactions. Specifically, Rule 2821(c) states, in part, that: ``Prior
to transmitting a customer's application for a deferred variable
annuity to the issuing insurance company for processing, but no later
than seven business days after the customer signs the application, a
registered principal shall review and determine whether he or she
approves of the purchase or exchange of the deferred variable
annuity.''
Many broker-dealers are subject to lower net capital requirements
under Securities Exchange Act of 1934 (``Exchange Act'') Rule 15c3-1
\3\ and are exempt from the requirement to establish and fund a
customer reserve account under Rule 15c3-3 \4\ because they do not
carry customer funds or securities. Some of these broker-dealers
receive checks from customers that are made out to third parties.
Pursuant to Rules 15c3-1 and 15c3-3, a broker-dealer is not deemed to
be carrying customer funds if it ``promptly transmits'' the checks to
the third parties.\5\ For purposes of Rules 15c3-1 and 15c3-3, the term
``promptly transmit'' means when ``such transmission or delivery is
made no later than noon of the next business day after the receipt of
such funds or securities.'' \6\
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\3\ 17 CFR 240.15c3-1. The purpose of Rule 15c3-1 is to ensure
that a broker or dealer at all times has sufficient liquid assets to
promptly satisfy the claims of customers if the broker or dealer
goes out of business.
\4\ 17 CFR 240.15c3-3. The purpose of Rule 15c3-3 is to protect
customers by assuring that broker-dealers do not use customers'
funds or securities to fund the broker-dealer's operations. Among
other things, Rule 15c3-3 requires that a broker-dealer make a
periodic computation of the amount of money it is holding that
constitutes customer funds or funds obtained from the use of
customer securities. If this amount exceeds the amount of money
customers owe the firm, the broker-dealer must deposit the excess in
a special reserve bank account for the exclusive benefit of the
firm's customers.
\5\ When it amended the net capital rule in 1992, the Commission
stated that a broker-dealer shall not be deemed to receive funds
from customers if it receives checks made payable to certain
entities other than itself (such as another broker-dealer or an
escrow agent) and promptly transmits such funds. Exchange Act
Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992).
\6\ See Exchange Act Release No. 31511 (Nov. 24, 1992), note 11,
and 17 CFR 240.15c3-1(c)(9).
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According to the NASD, a broker-dealer may need to hold customer
checks for more than one business day in order to comply with Rule
2821.
II. Discussion
The Commission has decided to exempt broker-dealers from any
additional requirements of Rules 15c3-1 or 15c3-3 due solely to a
failure to promptly transmit a check made payable to an insurance
company for the purchase of a deferred variable annuity product by noon
of the business day following the date the broker-dealer receives the
check from the customer, provided:
(i) The transaction is subject to the principal review requirements
of NASD Rule 2821 and a registered principal has reviewed and
determined whether he or she approves of the purchase or exchange of
the deferred variable annuity within seven business days in accordance
with that rule;
(ii) the broker-dealer promptly transmits the check no later than
noon of the business day following the date a registered principal
reviews and determines whether he or she approves of the purchase or
exchange of the deferred variable annuity; and
(iii) the broker-dealer maintains a copy of each such check and
creates a record of the date the check was received from the customer
and the date the check was transmitted to the insurance company if
approved, or returned to the customer if rejected.
The purpose of Rule 15c3-1 is to ensure that a broker or dealer at
all times has sufficient liquid assets to promptly satisfy the claims
of customers and other creditors if the broker or dealer goes out of
business. One purpose of Rule 15c3-3 is to protect customers by
assuring that broker-dealers do not use customers' funds or securities
to fund the broker-dealer's operations. The reasons these rules require
that a broker-dealer promptly forward checks is to reduce the risk that
a broker-dealer or an associated person
[[Page 52401]]
of a broker-dealer will convert or misuse customer funds or securities
and to assure that the price of the security the customer purchases has
not moved substantially from the date the customer decided to purchase
that security.
In the Approval Order for Rule 2821 we stated,
[Proposed Rule 2821] 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.
Further, we found that Rule 2821 is 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. Consequently, we approved NASD's proposed Rule 2821.
As we believe the NASD's Rule 2821 to be in the public interest but
a broker-dealer would be burdened with additional requirements under
Exchange Act Rules 15c3-1 and 15c3-3 were it to comply with Rule 2821,
we must balance the investor protections provided by Rules 15c3-1 and
15c3-3 with those provided by Rule 2821. For this reason, we have
specifically tailored the above-described exemption.
First, the exemption is specifically limited to situations where a
broker-dealer has failed to promptly transmit ``a check made payable to
an insurance company for the purchase of a deferred variable annuity
product,'' and ``the transaction is subject to the principal review
requirements of NASD Rule 2821 and a registered principal has reviewed
and determined whether he or she approves of the purchase or exchange
of the deferred variable annuity within seven business days in
accordance with that rule.'' In all other situations where a check is
received by a broker-dealer and is not promptly forwarded, the full
provisions of both Rule 15c3-1 and 15c3-3 still apply.
Second, the exemption requires a broker-dealer to promptly transmit
such checks no later than noon of the business day following the date a
registered principal reviews and determines whether he or she approves
of the purchase or exchange of the deferred variable annuity. This is
designed to assure that the broker-dealer holds the customer's check no
longer than is necessary to comply with Rule 2821.
Third, a broker-dealer must maintain a copy of each such check and
create a record of the date the check was received from the customer
and the date the check was transmitted to the insurance company if
approved, or returned to the customer if rejected. This requirement
will allow the broker-dealer's compliance and internal audit
departments, as well as Commission, self-regulatory organization, and
other examiners to verify that a broker-dealer is complying with the
provisions of this exemption.
For the foregoing reasons, the Commission finds that granting the
above-described exemption is necessary and appropriate in the public
interest, and is consistent with the protection of investors.
III. Conclusion
Accordingly, it is ordered, pursuant to Section 36 of the Exchange
Act \7\ that, a broker-dealer shall be exempt from any additional
requirements of Rules 15c3-1 or 15c3-3 due solely to a failure to
promptly transmit a check made payable to an insurance company for the
purchase of a deferred variable annuity product by noon of the business
day following the date the broker-dealer receives the check from the
customer, provided:
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\7\ Section 36 of the Exchange Act authorizes the Commission, by
rule, regulation, or order, to conditionally or unconditionally
exempt any person, security, or transaction, or any class or classes
of persons, securities, or transactions from any provision or
provisions of the Exchange Act or any rule or regulation thereunder,
to the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of investors.
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(i) The transaction is subject to the principal review requirements
of NASD Rule 2821 and a registered principal has reviewed and
determined whether he or she approves of the purchase or exchange of
the deferred variable annuity within seven business days in accordance
with that rule;
(ii) the broker-dealer promptly transmits the check no later than
noon of the business day following the date a registered principal
reviews and determines whether he or she approves of the purchase or
exchange of the deferred variable annuity; and
(iii) the broker-dealer maintains a copy of each such check and
creates a record of the date the check was received from the customer
and the date the check was transmitted to the insurance company if
approved, or returned to the customer if rejected.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-18023 Filed 9-12-07; 8:45 am]
BILLING CODE 8010-01-P