[Federal Register: February 6, 2008 (Volume 73, Number 25)]
[Notices]
[Page 7017-7018]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe08-92]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57228; File No. SR-FINRA-2007-040]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of Proposed Rule Change to
Delay Implementation of Certain FINRA Rule Changes Approved in SR-NASD-
2004-183
January 29, 2008.
I. Introduction
On December 21, 2007, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') (f/k/a 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to delay the effective date of paragraph (c) of
NASD Rule 2821 until August 4, 2008. The Commission published the
proposed rule change for comment in the Federal Register on January 3,
2008.\3\ The Commission received fourteen comments on the proposed rule
change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 57050 (Dec. 27, 2007); 73 FR
0531 (Jan. 3, 2008) (SR-FINRA-2007-040).
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II. Description of the Proposal
The Commission approved NASD Rule 2821 on September 7, 2007.\4\
Rule 2821 created recommendation requirements (including a suitability
obligation), principal review and approval requirements, and
supervisory and training requirements tailored specifically to
transactions in deferred variable annuities.
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\4\ See Order Approving FINRA's NASD Rule 2821 Regarding
Members' Responsibilities for Deferred Variable Annuities
(``Approval Order''), Securities Exchange Act Release No. 56375
(Sept. 7, 2007), 72 FR 52403 (Sept. 13, 2007) (SR-NASD-2004-183);
Corrective Order, Securities Exchange Act Release No. 56375A
(September 14, 2007), 72 FR 53612 (Sept. 19, 2007) (SR-NASD-2004-
183) (correcting the rule's effective date).
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On November 6, 2007, FINRA published Regulatory Notice 07-52, which
announced the Commission's approval of Rule 2821 and established May 5,
2008 as the effective date of the rule. FINRA is proposing to delay the
effective date of paragraph (c), which addresses principal review and
approval, until August 4, 2008.
According to FINRA, several firms requested that the effective date
of the rule be delayed to allow firms additional time to make necessary
systems changes. Firms also raised various concerns regarding paragraph
(c) of the rule. With respect to the timing of principal review, firms
stated that seven business days beginning from the time when the
customer signs the application may not allow for a thorough principal
review in all cases. These firms have asked that a different timing
mechanism be used. Firms also questioned whether broker-dealers that do
not make any recommendations to customers should be subject to
paragraph (c) of the Rule. And finally, firms asked FINRA to reconsider
its statement in Regulatory Notice 07-53 that Rule 2821(c) does not
permit the depositing of a customer's funds in an account at the
insurance company prior to completion of principal review.
FINRA staff believes it is prudent to give further consideration to
paragraph (c) of Rule 2821 and the interpretation addressed in the
Regulatory Notice to determine whether certain unintended and harmful
consequences might ensue upon the currently scheduled effective date of
May 5, 2008. If, based on this review, FINRA concludes that further
rulemaking is warranted, it stated that it will file a separate rule
change with the Commission.
III. Summary of Comments
The Commission received fourteen comments on the proposed rule
change. All commenters supported FINRA's proposal to extend the
effective date of the principal review and approval requirements
contained in paragraph (c) of Rule 2821 until August 4, 2008.\5\
Commenters agreed that additional time is needed to consider the impact
those requirements will have on member firms and for FINRA to consider
suggested alternatives.\6\
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\5\ See, e.g., Letters from Darrell Braman and Sarah McCafferty,
T. Rowe Prince Investment Services, Inc. (Jan. 23, 2008) (``T. Rowe
Price Letter''); Michael P. DeGeorge, General Counsel NAVA (Jan. 24,
2008) (``NAVA Letter''); Cifford Kirsch and Eric Arnold, Partners,
Sutherland Asbill & Brennan LLP on behalf of the Committee of
Annuity Insurers (Jan. 24, 2008) (``Comm. Annuity Insurers
Letter''); Stuart Kaswell, Partner, Dechert LLP on behalf of TIAA-
CREF (Jan. 24, 2008) (``Dechert Letter''); Heidi Stam, Managing
Director and General Counsel, Vanguard (Jan. 24, 2008) (``Vanguard
Letter''); David E. Stone, Vice President and Associate General
Counsel, Charles Schwab & Co., Inc. (Jan. 24, 2008) (``Schwab
Letter''); Heather Traeger, Assistant Counsel, Investment Company
Institute (Jan. 24, 2008) (``ICI Letter''); Dale E. Brown, President
and Chief Executive Officer, Financial Services Institute (Jan. 25,
2008) (``FSI Letter''); Carl B. Wilkerson, Vice President, American
Council of Life Insurers (Jan. 28, 2008) (``ACLI Letter''); Amal
Aly, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association (Jan. 29, 2008) (``SIFMA
Letter'').
One commenter stated, however, that waiting until August to
determine the principal review and approval standard could cost the
industry millions of dollars in unnecessary expenditures if FINRA
revises the rule. See Letter from Douglas A. Wright, CCO, The
Investment Center, Inc. (Jan. 14, 2008). This commenter believed a
delay in enacting Rule 2821(c) would be welcomed by most firms to
allow for systems upgrades, but firms do not want to begin paying
for one system only to have FINRA alter the rule. Id. Another
commenter addressed his broker-dealer's individual situation
regarding net capital obligations. See Letter from Jeremiah
O'Connell (Jan. 4, 2008).
\6\ See, e.g., Comm. Annuity Insurers Letter; Dechert Letter;
FSI Letter; SIFMA Letter; Vanguard Letter.
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In addition to supporting the extended effective date of paragraph
(c), commenters also expressed concerns and proposed alternatives with
respect to three aspects of the principal review and approval
requirements of paragraph (c). Some commenters suggested that FINRA
eliminate the principal review requirement for non-recommended
transactions.\7\ According to commenters, some broker-dealers do not
solicit purchases of deferred variable annuities and do not recommend
any transactions.\8\ For broker-dealers with this type of business
model, commenters believed principal review and approval is unnecessary
and does not further the purposes of the rule.\9\ One commenter stated
that an exemption from the principal review requirements only for those
broker-dealers that do not make any recommendations to customers would
disadvantage broker-dealers who have various business models, some
models allowing recommendations and others that do not.\10\ This
commenter suggested that FINRA require a broker-dealer that offers
recommendations to some customers and not to others to institute
policies and procedures ensuring that the broker-dealer perform a
principal review for recommended transactions.\11\
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\7\ See ACLI Letter; Dechert Letter; ICI Letter; NAVA Letter;
SIFMA Letter; Vanguard Letter.
\8\ See Dechert Letter; ICI Letter; NAVA Letter; T. Rowe Price
Letter; Vanguard Letter.
\9\ See Dechert Letter; ICI Letter; NAVA Letter; Vanguard
Letter. Some commenters emphasized that under these types of
business models, firms do not pay commissions. See Dechert Letter;
Vanguard Letter. One commenter also noted that its policies and
procedures prohibit registered representatives from recommending any
transactions. Vanguard Letter.
\10\ See Dechert Letter
\11\ Id.
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Six commenters also believed that FINRA should allow broker-dealers
to forward customer checks to the issuing insurance company and allow
the issuing insurance company to deposit customer funds into a suspense
account prior to the completion of principal
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review.\12\ Commenters stated customer funds could be held in these
accounts and would not result in the issuance of a contract until
principal review has been completed.\13\ Some commenters also stated
that customer funds could be refunded in the event a contract is not
issued.\14\
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\12\ See Letter from MaryAnn Lamendola, Chief Compliance
Officer, Chase Investment Services Corporation (Jan. 24, 2008)
(``Chase Letter''); ACLI Letter; Comm. of Annuity Insurers Letter;
Dechert Letter; NAVA Letter; SIFMA Letter. One of these commenters
believes that both the broker-dealer and the issuing insurance
company should be allowed to negotiate checks upon receipt. See
Dechert Letter. This commenter noted that customers may send back an
application and one check to cover a variable annuity and other
investment options, including mutual funds. Id. In this situation,
the commenter stated there is a conflict between NASD Rule 2830(m),
which requires the prompt purchase of mutual fund shares, and Rule
2821(c), which requires the broker-dealer to hold the customer's
check pending principal review. Id.
\13\ See ACLI Letter; Comm. of Annuity Insurers Letter; Dechert
Letter. One commenter noted this could be accomplished by the
broker-dealer developing controls to ensure that a variable annuity
is not issued until after the completion of principal review. Chase
Letter.
\14\ Id.
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Eight commenters suggested that FINRA revise the timing of
principal review requirement.\15\ Paragraph (c) requires a registered
principal to review a 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.\16\ Commenters
stated that beginning the seven business day review period from the
time when the customer signs the application is problematic because
often the customer signs and mails the application, leaving the broker-
dealer no control over the timing.\17\ Commenters also stated that they
have no control over which means a customer uses to mail an application
and how long it takes for that application to arrive at the broker-
dealer.\18\ Some commenters suggested that the principal review process
be required to be completed seven business days after the broker-dealer
has received an application ``in good order.'' \19\ Other commenters
suggested that the seven-day period should begin when the broker-dealer
receives the application and the broker-dealer reasonably deems the
application is complete.\20\
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\15\ See Letter from Barbara Gill, Deputy Director of Regulatory
Affairs, Stifel, Nicolaus & Company, Inc. (Jan. 22, 2008) (``Stifel
Letter''); Comm. of Annuity Insurers Letter; Dechert Letter; FSI
Letter; ICI Letter; NAVA Letter; SIFMA Letter; Schwab Letter.
\16\ See NASD Rule 2821(c).
\17\ See, e.g., Comm. of Annuity Insurers Letter; Dechert
Letter; SIFMA Letter; Stifel Letter.
\18\ Id.
\19\ See, e.g., ACLI Letter; ICI Letter; T. Rowe Price Letter.
\20\ See Comm. of Annuity Insurers Letter; Dechert Letter; FSI
Letter; NAVA Letter; Schwab Letter. Three commenters also specified
that the seven days should not begin to run until a complete
application is specifically received by the broker-dealer's Office
of Supervisory Jurisdiction. See Comm. of Annuity Insurers Letter;
Dechert Letter; SIFMA Letter.
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Two commenters requested that FINRA propose a single implementation
date for the entire rule.\21\ These commenters stated that establishing
two different compliance dates would create confusion when implementing
the proposed rule as well unnecessary and redundant system design
costs.\22\ Paragraph (d) requires members to establish supervisory
procedures reasonably designed to achieve compliance with the rule and
paragraph (e) require members to develop training policies and programs
to ensure compliance with the rule. One of these commenters believed
imposing two separate compliance dates would require broker-dealers to
provide duplicate sets of supervisory procedures to account for what
the rule requires on May 5, 2008 and for what it requires on August 4,
2008.\23\ It also stated broker-dealers would have to implement one
training program for the part of rule becoming effective on May 5, 2008
and another training program for principal review starting on August 4,
2008.\24\
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\21\ See ACLI Letter; Dechert Letter.
\22\ Id.
\23\ See Dechert Letter.
\24\ Id.
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IV. Discussion and Commission Findings
The Commission has reviewed carefully the proposed rule change and
the comments, and finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association. In
particular, the Commission finds that the proposed rule change is
consistent 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.\25\
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\25\ 15 U.S.C. 78o-3(b)(6).
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The proposed rule change does not change any of the substantive
provisions of Rule 2821. It allows broker-dealers additional time to
comply with one portion of the rule and provides FINRA with additional
time to further consider its members' concerns. It is consistent with
the requirements of the Act for FINRA to further consider paragraph (c)
of Rule 2821 and its related Regulatory Notice to determine whether any
unintended or harmful consequences might ensue upon the current
effective date.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-FINRA 2007-040) be, and it
hereby is, approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2074 Filed 2-5-08; 8:45 am]
BILLING CODE 8011-01-P